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OMB APPROVAL
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UNITED STATES OMB Number: 3235-0145
SECURITIES AND EXCHANGE COMMISSION Expires: October 31, 1994
WASHINGTON, D.C. 20549 Estimated average burden
hours per form.........14.90
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SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __________)*
20th Century Industries
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(Name of Issuer)
COMMON STOCK, WITHOUT PAR VALUE PER SHARE
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(Title of Class of Securities)
901272 20 3
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(CUSIP Number)
WAYLAND M. MEAD, ACTING GENERAL COUNSEL
AMERICAN INTERNATIONAL GROUP, INC.
70 PINE STREET, NYC, NY 10270 (212)770-5121
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(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications)
December 16, 1994
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(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box / /.
Check the following box if a fee is being paid with the statement /x/. (A fee
is not required only if the reporting person: (1) has a previous statement on
file reporting beneficial ownership of more than five percent of the class of
securities described in Item 1; and (2) has filed no amendment subsequent
thereto reporting beneficial ownership of five percent or less of such class.)
(See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are to
be sent.
*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities,
and for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities Exchange
Act of 1934 ("Act") or otherwise subject to the liabilities of that section of
the Act but shall be subject to all other provisions of the Act (however, see
the Notes).
2
SCHEDULE 13D
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CUSIP NO. 901272 20 3 Page of Pages
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
American International Group, Inc.
IRS No. 13-2592361
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
2 (b) / /
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / /
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Incorporated in the State of Delaware
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SOLE VOTING POWER
7
NUMBER OF -------------------------------------------------------------------------------------------
SHARES SHARED VOTING POWER
BENEFICIALLY 8 34,552,250
OWNED BY -------------------------------------------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
REPORTING 9
PERSON -------------------------------------------------------------------------------------------
WITH SHARED DISPOSITIVE POWER
10 34,552,250
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11 34,552,250
- --------------------------------------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / /
12
- --------------------------------------------------------------------------------------------------------------
PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 40.59%
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TYPE OF REPORTING PERSON*
14
HC, CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 2 of 7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
3
SCHEDULE 13D
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CUSIP NO. 901272 20 3 Page of Pages
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
American Home Assurance Company
IRS No. 13-5124990
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
2 (b) / /
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / /
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Incorporated in the State of New York
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SOLE VOTING POWER
7 9,124,125
NUMBER OF -------------------------------------------------------------------------------------------
SHARES SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY -------------------------------------------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
REPORTING 9 9,124,125
PERSON -------------------------------------------------------------------------------------------
WITH SHARED DISPOSITIVE POWER
10 9,124,125
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11
- --------------------------------------------------------------------------------------------------------------
CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / /
12
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 10.72%
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TYPE OF REPORTING PERSON*
14
IC, CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 2 of 7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
4
SCHEDULE 13D
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CUSIP NO. 901272 20 3 Page of Pages
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Commerce & Industry Insurance Company
IRS No. 31-1938623
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
2 (b) / /
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / /
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Incorporated in the State of New York
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SOLE VOTING POWER
7 3,530,450
NUMBER OF -------------------------------------------------------------------------------------------
SHARES SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY -------------------------------------------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
REPORTING 9 3,530,450
PERSON -------------------------------------------------------------------------------------------
WITH SHARED DISPOSITIVE POWER
10
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11 3,530,450
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / /
12
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 4.15%
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TYPE OF REPORTING PERSON*
14
IC, CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 2 of 7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
5
SCHEDULE 13D
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CUSIP NO. 901272 20 3 Page of Pages
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
New Hampshire Insurance Company
IRS No. 02-0172170
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
2 (b) / /
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / /
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Incorporated in the State of Pennsylvania
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SOLE VOTING POWER
7 5,295,675
NUMBER OF -------------------------------------------------------------------------------------------
SHARES SHARED VOTING POWER
BENEFICIALLY 8 --
OWNED BY -------------------------------------------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
REPORTING 9 5,295,675
PERSON -------------------------------------------------------------------------------------------
WITH SHARED DISPOSITIVE POWER
10 --
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11 5,295,675
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / /
12
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 6.22%
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TYPE OF REPORTING PERSON*
14
IC, CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 2 of 7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
6
SCHEDULE 13D
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CUSIP NO. 901272 20 3 Page of Pages
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NAME OF REPORTING PERSON
1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
National Union Fire Insurance Company of Pittsburgh, Pa.
IRS No. 25-0687550
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CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) / /
2 (b) / /
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SEC USE ONLY
3
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SOURCE OF FUNDS*
4
WC
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CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) / /
5
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CITIZENSHIP OR PLACE OF ORGANIZATION
6
Incorporated in the State of Pennsylvania
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SOLE VOTING POWER
7 702,000
NUMBER OF -------------------------------------------------------------------------------------------
SHARES SHARED VOTING POWER
BENEFICIALLY 8
OWNED BY -------------------------------------------------------------------------------------------
EACH SOLE DISPOSITIVE POWER
REPORTING 9 702,000
PERSON -------------------------------------------------------------------------------------------
WITH SHARED DISPOSITIVE POWER
10
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AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
11 702,000
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CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES* / /
12
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PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
13 0.82%
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TYPE OF REPORTING PERSON*
14
IC, CO
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*SEE INSTRUCTIONS BEFORE FILLING OUT!
INCLUDE BOTH SIDES OF THE COVER PAGE, RESPONSES TO ITEMS 1-7 2 of 7
(INCLUDING EXHIBITS) OF THE SCHEDULE, AND THE SIGNATURE ATTESTATION.
7
ITEM 1. SECURITY AND ISSUER.
This statement relates to the common stock, without par value ("Common
Stock"), of 20th Century Industries, a California corporation ("Company"). The
principal executive offices of the Company are located at 6301 Owensmouth
Avenue, Woodland Hills, California 91367.
ITEM 2. IDENTITY AND BACKGROUND.
(a) through (c). This statement is filed by American International Group,
Inc., a Delaware corporation ("AIG"), on behalf of itself and the following of
its wholly owned subsidiaries (collectively, the "AIG Subs"):
American Home Assurance Company, a New York corporation ("American Home");
Commerce & Industry Insurance Company, a New York corporation ("Commerce &
Industry");
National Union Fire Insurance Company of Pittsburgh, Pa., a Pennsylvania
corporation ("National Union"); and
New Hampshire Insurance Company, a Pennsylvania corporation ("New
Hampshire").
A copy of an Agreement of Joint Filing dated as of December 15, 1994 by and
among AIG, American Home, Commerce & Industry, National Union and New Hampshire
is attached hereto as Exhibit A.
On December 16, 1994 ("Closing Date"), AIG and the Company consummated the
transactions contemplated under the Investment and Strategic Alliance Agreement
dated as of October 17, 1994 ("Investment Agreement") between the Company and
AIG, at which time, for an aggregate purchase price of $216 million:
1. the Company sold, and the AIG Subs purchased,
a. 200,000 shares of the Company's Series A Convertible
Preferred Stock, stated value $1,000 per share ("Series A Preferred
Stock"), which are convertible into shares of Common Stock at a
conversion price of $11.33 (subject to customary antidilution
provisions), and
b. 16 million Series A Warrants ("Series A Warrants") to
purchase an aggregate of 16 million shares of Common Stock at an
exercise price of $13.50 per share (subject to customary antidilution
provisions and further adjustment as described below);
Page 6 of 19 Pages
8
2. the Company agreed to the issuance to the AIG Subs of Common Stock
upon conversion of the Series A Preferred Stock and upon exercise of the
Series A Warrants in accordance with their terms; and
3. the Company agreed to the issuance to AIG of additional shares of
Series A Preferred Stock ("Earthquake Shares") on the terms described below
at the election of the Company in the event gross losses and allocated loss
adjustment expenses of the Company associated with the January 17, 1994
Northridge, California earthquake ("Northridge Quake") exceed $850 million.
The exercise price per Series A Warrant will be subject to downward
adjustment due to adverse loss development with respect to the Northridge Quake.
In the event total incurred loss and allocated loss adjustment expenses of the
Company with respect to the Northridge Quake exceed $945 million, the exercise
price of the Series A Warrants shall be reduced by $0.08 per share for each
million dollars in excess of $945 million; provided, however, that the exercise
price of the Series A Warrants shall not thereby be reduced below $1.00; and
further provided that no adjustment to the exercise price shall be made with
respect to increases in total incurred loss and allocated loss adjustment
expenses reflected in the Company's financial statements following the 1995
year-end audited financial statements.
A conformed copy of the Investment Agreement generally setting forth the
terms of the Series A Preferred Stock and the Series A Warrants (hereinafter
collectively referred to as the "Company Securities"), the terms under which the
Earthquake Shares will be issued to AIG and the AIG Subs, and the further terms
of the transactions contemplated thereby is attached hereto as Exhibit B. A copy
of the form of the Series A Warrant is attached as Exhibit B to the Investment
Agreement. A copy of the Certificate of Determination for the Series A Preferred
Stock, as filed ("Certificate of Determination"), is attached as Exhibit C
hereto. A copy of the Certificate of Amendment of the Articles of Incorporation
of the Company, as filed ("Certificate of Amendment") is attached as Exhibit D
hereto. A copy of the Amended By-Laws of the Company ("By-Laws") is attached as
Exhibit E hereto. The descriptions set forth in this Form 13D are qualified in
their entirety by reference to the Investment Agreement, the Series A Warrant,
the Certificate of Determination, the Certificate of Amendment and the By-Laws
which are attached hereto. A copy of the Proxy Statement of the Company dated
November 15, 1994 ("Proxy Statement") is also attached as Exhibit F hereto.
AIG is a holding company which, through its subsidiaries, is primarily
engaged in a broad range of insurance and insurance-related activities in the
United States and abroad. AIG, through its subsidiaries, also conducts financial
services activities and
Page 7 of 19 Pages
9
agency and fee operations. Each of American Home, Commerce & Industry, National
Union and New Hampshire is a multiple line, insurance company which writes
substantially all lines of property and casualty insurance in each state of the
United States and abroad. The principal executive offices of AIG, Commerce &
Industry, National Union and New Hampshire are located at 70 Pine Street, New
York, New York 10270.
Starr International Company, Inc., a private holding company incorporated
in Panama ("SICO"), The Starr Foundation, a New York not-for-profit corporation
("The Starr Foundation"), and C.V. Starr & Co., Inc., a private holding company
incorporated in Delaware ("Starr"), have the right to vote approximately 16.0%,
3.7% and 2.4%, respectively, of the outstanding common stock of AIG. The
principal offices of SICO are located at 29 Richmond Road, Pembroke, Bermuda.
The principal offices of The Starr Foundation and Starr are located at 70 Pine
Street, New York, New York 10270. A list of the directors and officers ("Covered
Persons") of AIG, American Home, Commerce & Industry, National Union, New
Hampshire, SICO, The Starr Foundation and Starr, their business addresses and
principal occupations is attached hereto as Exhibit G. Each of the Covered
Persons is a citizen of the United States, except for Messrs. Manton, Milton and
Edmund Tse who are British subjects, Mr. Cohen who is a Canadian subject and Mr.
Joseph Johnson who is a Bermudian subject.
(d) through (e). During the last five years, none of AIG, SICO, The Starr
Foundation, Starr, American Home, Commerce & Industry, National Union and New
Hampshire, or any of the Covered Persons, has (i) been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to federal or state securities laws or finding any
violations with respect to such laws.
ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
Pursuant to the Investment Agreement, the AIG Subs purchased the Series A
Preferred Stock in the following proportions:
NUMBER OF DOLLAR AMOUNT
NAME OF AIG SUB SHARES PURCHASED OF PURCHASE
--------------- ---------------- --------------
American Home........................................ 100,000 $100.0 million
Commerce & Industry.................................. 40,000 $ 40.0 million
New Hampshire........................................ 60,000 $ 60.0 million
Page 8 of 19 Pages
10
National Union purchased all of the Series A Warrants issued pursuant to the
Investment Agreement for an aggregate purchase price of $16.0 million. Each of
the AIG Subs used its available working capital to purchase its portion of the
Company Securities.
During the period from May 20, 1991 through October 18, 1991, American Home
purchased 298,000 shares of Common Stock at an aggregate purchase price of
$5,939,712.50. During the period from February 28, 1991 through May 3, 1994,
National Union purchased 602,000 shares of Common Stock at an aggregate purchase
price of $10,789,510.00. Each of American Home and National Union used its
available working capital to purchase its portion of the above-described shares
of Common Stock.
ITEM 4. PURPOSE OF TRANSACTION.
The purpose of the acquisition of the Company Securities by the AIG Subs
was investment. A further discussion of the terms of the transaction is set
forth in the Investment Agreement, the Series A Warrant, the Certificate of
Determination, the Certificate of Amendment, the By-Laws and the Quota Share
Agreements, all of which are attached hereto and incorporated in their entirety
by reference.
a. ACQUISITION OF ADDITIONAL SECURITIES OF THE ISSUER
In addition to the purchase of the Company Securities on the Closing Date,
AIG may, after the Closing Date, receive or be required to purchase additional
shares of Series A Preferred Stock from the Company as follows:
1. Dividends payable with respect to the Series A Preferred Stock may,
at the Company's option, be paid in cash or in kind (whereby the holder
receives, in lieu of cash, shares of Series A Preferred Stock ("PIK
Shares") having a liquidation value equal to the dividends declared) during
the first three years after the Closing Date. Following the third
anniversary of the Closing Date, dividends will be payable only in cash.
2. If at any time the Company's gross losses and allocated loss
adjustment expenses associated with claims resulting from the Northridge
Earthquake exceed $850 million (such excess being referred to herein
as the "Excess Loss Amount"), AIG shall, if requested in writing by the
Company after the Closing Date, contribute to the capital of the Company,
in whole or in part, an amount ("AIG Contribution") up to the lesser of $70
million or the Excess Loss Amount. In consideration of the AIG
Contribution, the Company shall issue to AIG that number of fully paid and
nonassessable Earthquake Shares having an aggregate liquidation value equal
to (a) the amount of the AIG Contribution plus (b) an amount equal to the
product of (i) the AIG Contribution,
Page 9 of 19 Pages
11
(ii) 0.65 and (iii) the quotient of (A) the number of shares of Common
Stock beneficially owned or obtainable by AIG and its affiliates by virtue
of ownership of the shares of Series A Preferred Stock (including any
additional shares actually issued by virtue of the provision of the
Certificate of Determination governing the Series A Preferred Stock
permitting payment of dividends by the issuance of PIK Shares) and the
Series A Warrants and conversion or exercise thereof divided by (B) the sum
of (1) the total number of shares of Common Stock of the Company
outstanding on October 17, 1994 plus (2) the number of shares referred to
in (A); provided, however, that the aggregate liquidation value of any
Earthquake Shares issued pursuant to the foregoing provisions of the
Investment Agreement (without taking into account any Series A Preferred
Stock issuable as a dividend in kind on any outstanding Series A Preferred
Stock) shall not exceed $87.9725 million.
With respect to additional shares of capital stock of the Company which are not
described, AIG may or may not purchase such additional securities at such time
that it is permitted to do so.
b. EXTRAORDINARY CORPORATE TRANSACTION
Except as set forth in the Investment Agreement, no plans or proposals are
presently contemplated by AIG with respect to any extraordinary corporate
transaction involving the Company and/or its subsidiaries. Article VI of the
Investment Agreement provides that, for a period three years following the
Closing Date (or earlier in certain events), neither AIG nor any of its
subsidiaries will, without the prior approval of the company's Board of
Directors ("Board"):
(i) acquire, offer to acquire or agree to acquire (with certain stated
exceptions in Section 6.1(a) of the Investment Agreement) any outstanding
Common Stock or any other voting securities of the Company or commence any
tender offer or exchange offer to acquire beneficial ownership (as defined
in Rule 13D-3 under the Securities Exchange Act of 1934 ("Exchange Act")
without regard to the 60-day provision in paragraph (d)(1)(i) thereof) of
the Common Stock or any other voting securities of the Company,
(ii) become a member of a 13(d) group within the meaning of Rule 13d-3
under the Exchange Act (a "Group") with respect to any Common Stock or
voting securities of the Company, other than a Group composed solely of
itself and its affiliates, or encourage any other Group to acquire any
Common Stock or other voting securities of the Company (other than in
purchases from AIG),
(iii) solicit any proxies or shareholder consents or become a
participant (other than by voting), or encourage any
Page 10 of 19 Pages
12
person to become a participant, in a proxy or consent solicitation with
respect to any of the Company's securities (in each case other than
solicitations to holders of Series A Preferred Stock with respect to
matters as to which the Series A Preferred Stock are entitled to vote),
(iv) call any special meeting of shareholders,
(v) make any public proposal to shareholders with respect to any
extraordinary transaction involving the Company, including, but not limited
to, any business combination, restructuring, recapitalization, dissolution
or similar transaction, or
(vi) request in a manner that would require public disclosure of such
request by the Company or AIG that the Company amend any restrictions
set forth in (i) through (v) above.
Notwithstanding the foregoing, AIG and its subsidiaries have the right
under the Investment Agreement freely to acquire securities of the Company in
any manner whatsoever and engage in any of the activities proscribed above, in
the event that (i) an Insolvency Event (as defined in Section 6.1(c) of the
Investment Agreement) occurs; (ii) 60 days after the Company or any of its
subsidiaries is in default under any indebtedness or other borrowing incurred by
it unless such default is cured during such 60-day period; (iii) the Company or
any of its subsidiaries breaches the Investment Agreement, the Series A Warrant,
the Certificate of Determination, the Registration Rights Agreement
or the Quota Share Agreements in any material respect; (iv) any person not
affiliated with AIG acquires, offers to acquire or agrees to acquire beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act without regard to
the 60-day provision in paragraph (d) (1) (i) thereof) of 20% or more of the
outstanding shares of the Common Stock or any other class of the Company's
voting securities, or commences any tender or exchange offer seeking to
acquire any such ownership; (v) a third party engages in a proxy solicitation
for the purpose of removing directors of the Company elected by the Common
Stockholders or influencing the directors' management of the Company; or (vi)
a majority of the directors of the Company elected by the holders of Common
Stock vote to terminate or release AIG from compliance with any or all of the
restrictions set forth above.
In addition, the restrictions do not apply to Common Stock or shares of
other voting securities which as of October 17, 1994 are held or managed as part
of the investment portfolio by subsidiaries of AIG if such subsidiaries have
fiduciary obligations to third parties to take any of such actions.
c. SALE OR TRANSFER OF A MATERIAL AMOUNT OF ASSETS OF THE ISSUER OR ANY OF
ITS SUBSIDIARIES
On the Closing Date, New Hampshire entered into a Quota
Page 11 of 19 Pages
13
Share Reinsurance Agreement (collectively, the "Quota Share Agreements") with
each of the Company's insurance subsidiaries, 20th Century Insurance Company and
21st Century Casualty Company (collectively, the "Insurance Subs"), providing
for a five-year quota share reinsurance for 10% of each of the Insurance Subs'
policies incepting on and after January 1, 1995. At AIG's option, the agreements
may be renewed annually for four additional one-year terms following the initial
one-year term, with an annual reduction of 2% in the share percentage ceded to
New Hampshire. Copies of the Quota Share Agreements are attached as Exhibit C
to the Investment Agreement.
Section 5.1(b) of the Investment Agreement also provides that, following
the Closing Date, the Company and AIG may from time to time discuss additional
quota share arrangements. In particular, the Company and AIG may discuss an
arrangement whereby (i) the Insurance Subs cede such participation in excess of
the 10% participation pursuant to the Quota Share Agreements as results in an
agreed upon net premium-to-surplus ratio being achieved and (ii) in the event
the Insurance Subs' net premium-to-surplus ratio subsequently improves below
such specified ratio, with increases and reductions in the additional
participation made annually. Neither the Company nor AIG is obligated to enter
into any such arrangement.
In addition, Section 5.2 of the Investment Agreement provides that,
following the Closing Date, the Company and AIG will use their respective best
efforts to negotiate and mutually agree upon a joint venture agreement whereby
the Company and AIG will form a new subsidiary or subsidiaries to engage in the
Company's business in states outside of California.
d. ANY CHANGE IN THE PRESENT BOARD OF DIRECTOR OR MANAGEMENT OF THE ISSUER
As a result of their purchase of the Company Securities, the AIG Subs, as
holders of the Series A Preferred Stock voting as a separate class, are entitled
to elect two of the eleven directors of the Board (such number to be accordingly
adjusted together with increases or decreases in the number of directors on the
Board) (the "Applicable Number"); provided, however, that, until the next
meeting of the Board (to be held in May of 1995), the Board will consist of
twelve members of which the AIG Subs, as holders of the Series A Preferred Stock
voting as a separate class, are entitled to elect two of the twelve directors.
Section 8(b) of the Certificate of Determination also generally provides that
the number of directors elected by the Series A Preferred Stock shall be reduced
by the minimum number of directorships in order that the sum of (i) the
Applicable Number and (ii) the minimum whole number of directors elected
(through the application of cumulative voting) by
Page 12 of 19 Pages
14
shares of Common Stock (x) obtained upon conversion of the Series A Preferred
Stock or the exercise of the Series A Warrants and (y) held of record by the
holder (or subsidiaries thereof) not equal or exceed a majority of the total
number of directors of the Company.
e. ANY MATERIAL CHANGE IN THE PRESENT CAPITALIZATION OR DIVIDEND POLICY OF THE
ISSUER
In connection with the acquisition of the Company Securities by the AIG
Subs, the Company amended its articles of incorporation on the Closing Date to,
among other things, (i) effect an increase in the number of shares of Common
Stock which the Company is authorized to issue from 80 million shares to 110
million shares and (ii) provide for the creation and issuance of the Series A
Preferred Stock. In seeking the approval of the Department of Insurance of the
State of California ("DOI") to the transactions contemplated by the Investment
Agreement, AIG provided the DOI with written acknowledgement concerning the
discretion of the Board with respect to the payment, from time to time, of cash
interest on the Series A Preferred Stock.
f. ANY OTHER MATERIAL CHANGE IN THE ISSUER'S BUSINESS OR CORPORATE STRUCTURE
In the event that the Company needs to obtain additional capital financing
following any sale of the Earthquake Shares to AIG and any additional or revised
quota share reinsurance arrangements that the Insurance Subs and AIG may enter
into, Section 8.9 of the Investment Agreement provides that the Company shall be
required to develop a capital financing plan which is reasonably acceptable to
AIG.
No other plans or proposals are presently contemplated.
g. CHANGES IN THE ISSUER'S CHARTER, BY-LAWS OR INSTRUMENTS CORRESPONDING
THERETO OR OTHER ACTIONS WHICH MAY IMPEDE THE ACQUISITION OF CONTROL
OF THE ISSUER BY ANY PERSON
In connection with the acquisition of the Company Securities by the AIG
Subs, the Company amended its Certificate on the Closing Date to (i) effect an
increase in the number of shares of Common Stock which the Company is authorized
to issue to 110 million shares, (ii) provide for the creation of the Series A
Preferred Stock, and (iii) effect certain transfer restrictions on the capital
stock of the Company. The By-Laws of the Company were amended to reflect the
amendments to the Company's Certificate, the creation and issuance of the Series
A Preferred Stock and the consummation of the other transactions contemplated by
the Investment Agreement. A copy of the Certificate of Determination for the
Series A Preferred Stock, as filed, is attached as Exhibit C hereto. A copy of
the Certificate of
Page 13 of 19 Pages
15
Amendment of the Articles of Incorporation of the Company, as filed, is attached
as Exhibit D hereto. A copy of the Amended By-Laws of the Company is attached as
Exhibit E hereto.
Transfer Restrictions on Company Securities
The Company amended its Certificate on the Closing Date to effect transfer
restrictions ("Transfer Restrictions") designed to restrict direct and indirect
transfers of the Company's stock that may result in the imposition of limitation
on the use by the Company, for federal income tax purposes, of net operating
losses (including gross losses and allocated loss adjustment expenses related to
the Northridge Earthquake) and other tax attributes that are and will be
available to the Company to offset taxable income in future years. The
Certificate now generally restricts, until 38 months after the Closing Date (or
earlier in certain events), any direct or indirect transfer of "stock" (which
includes the Company Securities and any other interest treated as "stock" for
purposes of Section 382 of the International Revenue Code of 1986) of the
Company if the effect would be to increase the ownership of stock by any person
who during the preceding three-year period owned more than 4.75% of the
Company's stock, would otherwise increase the percentage of stock owned by a "5
percent shareholder" (as defined in the Code, substituting "4.75 percent" for "5
percent"), or otherwise would cause an "ownership change" of the Company within
the meaning of Section 382.
Transfers in violations of the Transfer Restrictions would be void ab
initio as to the purported transferee and the purported transferee would not be
recognized for any purpose as the owner of the shares ("Excess Stock") owned in
violation of the Transfer Restrictions. Excess Stock is automatically
transferred to a trustee for the benefit of a charitable beneficiary designated
by the Company, effective as of the close of business on the business day prior
to the date of the violative transfer.
The Transfer Restrictions do not apply to: (i) the sale to AIG of the
Series A Preferred Stock, (ii) the sale to AIG of the Series A Warrants, (iii)
the conversion by AIG of Series A Preferred Stock, (iv) the sale by AIG of
shares of Series A Preferred Stock or shares of Common Stock obtained upon
conversion thereof if the sale would not be a Prohibited Transfer under the
Investment Agreement but for AIG's ownership of Stock, in either case in
compliance with the Investment Agreement, (v) any Transfer effected by AIG
permitted by Section 6.1(b) of the Investment Agreement, (vi) any sale effected
by AIG of any securities of the Company acquired after the Closing Date, and
(vii) any transfer which would otherwise be prohibited by the Transfer
Restrictions if the Person to whom the shares will be transferred obtains prior
written approval of the Board, which approval shall be granted in its sole and
absolute discretion after considering all facts and
Page 14 of 19 Pages
16
circumstances, including but not limited to future events the occurrence of
which are deemed by the Board to be reasonably possible.
A full description of the Transfer Restrictions are attached as Exhibit F
to the Investment Agreement.
Restrictions on Additional Issuances of Capital Stock
The Investment Agreement further provides that the Company may not issue
additional shares of Common Stock or of another class of securities similar
thereto, or any securities, options, warrants or similar rights convertible,
exercisable, exchangeable or having other rights to acquire any such shares
(except of certain issuances of Common Stock pursuant to employee stock option
or employee benefit plans); provided, however, that following the end of the
38th month following the Closing Date (i.e., the period referred to in the
Transfer Restrictions), the Company may issue and sell shares of Common Stock in
a fully distributed public offering, so long as (i) the Company first provides
AIG prior notice of the Company's intent to make such an offering and (ii) the
Company provides AIG a prior opportunity, at AIG's election, either (A) to make
an offer to purchase the outstanding shares of Common Stock of the Company (with
the result that the public offering not proceed) or (B) to preemptively
participate in such Common Stock up to AIG's fully converted/exercised interest
in the Common Stock of the Company at the per share price received by the
Company (i.e., without underwriters' discount) in such public offering.
In addition to the charter and by-law amendments described above and the
other actions taken by the Company as described in this Form, the Company took
the following actions in connection with the issuance and sale of the Company
Securities which may impede the acquisition of control of the Company by any
other person other than AIG:
Voting Rights of the Series A Preferred Stock
The Company will not be entitled, without the approval of holders of a
majority of the outstanding shares of Series A Preferred Stock, to (i)
authorize, issue or sell any shares of any class or series of capital stock of
the Company ranking senior to the Common Stock as to dividend rights or rights
upon liquidation, winding up or dissolution, or any security convertible into,
or exchangeable for or possessing the right to acquire such shares, (ii) amend,
alter or repeal any provisions of its Certificate or Bylaws, (iii) enter into
any consolidation or merger with or into, or sell or convey all or
substantially all of the assets of the Company to, any person or entity or (iv)
make certain extraordinary dividends or other distributions to all holders of
Common Stock; as described in section 8(c)(4) of the Certificate of
Determination; provided, however, that, with respect to clause (iii), after the
third anniversary of the Closing Date, holders of the Series A Preferred Stock
will no longer have a special right to vote with
Page 15 of 19 Pages
17
respect to such transactions, but will vote together with the Common Stock, as a
single class, and will be entitled to a number of votes equal to the number of
shares of Common Stock into which such shares of Series A Preferred Stock are
convertible on the date the vote is taken or the consent is given.
Registration Rights Agreement
As of the Closing Date, the Series A Preferred Stock and the Series A
Warrants were not listed on any national securities exchange and the issuance of
the Series A Preferred Stock and the Series A Warrants will not be registered
with the SEC and therefore will be restricted securities. However, on the
Closing Date, the Company entered into a Registration Rights Agreement, pursuant
to which AIG or any transferee from AIG in a private transaction will be
entitled to certain additional rights with respect to the registration under the
Securities Act of 1933 of the shares of the Series A Preferred Stock or the
shares of the Series A Warrants purchased upon conversion or exercise of the
Series A Preferred Stock or the Series A Warrants. A copy of the Registration
Rights Agreement is attached as Exhibit H hereto.
h. CAUSING A CLASS OF SECURITIES OF THE ISSUER TO BE DELISTED FROM A NATIONAL
SECURITIES EXCHANGE OR TO CEASE TO BE AUTHORIZED TO BE QUOTED IN AN
INTER-DEALER QUOTATION SYSTEM OF A REGISTERED NATIONAL SECURITIES
ASSOCIATION
No plans or proposals are presently contemplated.
i. CAUSING A CLASS OF SECURITIES OF THE ISSUER TO BECOME ELIGIBLE FOR
TERMINATION OF REGISTRATION PURSUANT TO SECTION 12(G)(4) OF THE SECURITIES
EXCHANGE ACT OF 1934
No plans or proposals are presently contemplated.
j. ANY ACTION SIMILAR TO ANY OF THOSE ENUMERATED ABOVE
No additional plans or proposals are presently contemplated other than
those described elsewhere in this Form.
ITEM 5. INTEREST IN SECURITIES OF ISSUER.
(a) through (b). The information required by these paragraphs is set
forth in Items 7 through 11 and 13 of each of the cover pages of this Schedule
13D and is based upon the number of shares of Common Stock outstanding as of
November 1, 1994 (51,472,471) contained in the Proxy Statement, a copy of which
is attached hereto as Exhibit F.
(c). AIG, American Home, Commerce and Industry, National Union, New
Hampshire, SICO, The Starr Foundation and Starr, and to the best of each of
their knowledge, the Covered Persons, have
Page 16 of 19 Pages
18
not engaged in any transactions in the Common Stock within the past 60 days
other than those transactions described above occurring on the Closing Date
pursuant to the Investment Agreement.
(d) through (e). Not applicable.
ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS & RELATIONSHIPS WITH RESPECT TO
SECURITIES OF THE ISSUER.
Contracts, arrangements, understandings and relationships with respect to
securities of the Company consist of the Investment Agreement, the Series A
Warrant, the Certificate of Determination, the Certificate of Amendment, the
By-Laws, the Quota Share Agreements and the Registration Rights Agreement, each
of which is attached as an exhibit hereto and is incorporated in its entirety by
reference.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS.
(A) Agreement of Joint Filing dated as of December 15, 1994 by and among
American International Group, Inc., American Home Assurance Company,
Commerce & Industry Insurance Company, National Union Fire Insurance
Company of Pittsburgh, Pa. and New Hampshire Insurance Company.
(B) Investment and Strategic Alliance Agreement dated as of October 17,
1994 by and between 20th Century Industries and American International
Group, Inc.
(C) Certificate of Determination of 20th Century Industries for Series A
Convertible Preferred Stock, as filed with the Secretary of State of
the State of California.
(D) Certificate of Amendment of 20th Century Industries for Series A
Convertible Preferred Stock, as filed with the Secretary of State of
the State of California.
(E) By-Laws of 20th Century Industries, as in force on December 16, 1994.
(F) Proxy Statement of 20th Century Industries dated November 15, 1994.
(G) List of The Directors and Officers of American International Group,
Inc., American Home Assurance Company, Commerce & Industry Insurance
Company, National Union Fire Insurance Company of Pittsburgh, Pa., New
Hampshire Insurance Company, Starr International Company, Inc., The
Starr Foundation and C.V. Starr & Co., Inc., Their Business Addresses
and
Page 17 of 19 Pages
19
Principal Occupations.
(H) Registration Rights Agreement dated as of December 16, 1994 by and between
20th Century Industries and American International Group, Inc.
Page 18 of 19 Pages
20
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Dated: December 23, 1994
AMERICAN INTERNATIONAL GROUP, INC.
By: /s/ Edward E. Matthews
---------------------------------
Edward E. Matthews
Vice Chairman - Finance
AMERICAN HOME ASSURANCE COMPANY
By: /s/ Edward E. Matthews
---------------------------------
Edward E. Matthews
Senior Vice President - Finance
COMMERCE & INDUSTRY INSURANCE COMPANY
By: /s/ Edward E. Matthews
---------------------------------
Edward E. Matthews
Senior Vice President - Finance
NEW HAMPSHIRE INSURANCE COMPANY
By: /s/ Edward E. Matthews
---------------------------------
Edward E. Matthews
Vice President
NATIONAL UNION FIRE INSURANCE COMPANY
OF PITTSBURGH, PA.
By: /s/ Edward E. Matthews
---------------------------------
Edward E. Matthews
Senior Vice President - Finance
Page 19 of 19 Pages
21
EXHIBIT INDEX
(A) Agreement of Joint Filing dated as of December 15, 1994 by and among
American International Group, Inc., American Home Assurance Company,
Commerce & Industry Insurance Company, National Union Fire Insurance
Company of Pittsburgh, Pa. and New Hampshire Insurance Company.
(B) Investment and Strategic Alliance Agreement dated as of October 17,
1994 by and between 20th Century Industries and American International
Group, Inc.
(C) Certificate of Determination of 20th Century Industries for Series A
Convertible Preferred Stock, as filed with the Secretary of State of
the State of California.
(D) Certificate of Amendment of 20th Century Industries for Series A
Convertible Preferred Stock, as filed with the Secretary of State of
the State of California.
(E) By-Laws of 20th Century Industries, as in force on December 16, 1994.
(F) Proxy Statement of 20th Century Industries dated November 15, 1994.
(G) List of The Directors and Officers of American International Group,
Inc., American Home Assurance Company, Commerce & Industry Insurance
Company, National Union Fire Insurance Company of Pittsburgh, Pa., New
Hampshire Insurance Company, Starr International Company, Inc., The
Starr Foundation and C.V. Starr & Co., Inc., Their Business Addresses
and Principal Occupations.
(H) Registration Rights Agreement dated as of December 16, 1994 by and
between 20th Century Industries and American International Group, Inc.
1
EXHIBIT
A
2
EXHIBIT A
AGREEMENT OF JOINT FILING
In accordance with Rule 13D-1(f) under the Securities Exchange Act of 1934,
as amended, the undersigned hereby agree to the joint filing on behalf of each
of them of a Statement on Schedule 13D, or any amendments thereto, with respect
to the Common Stock, without par value, of 20th Century Industries and that this
Agreement be included as an Exhibit to such filing.
Each of the undersigned represents and warrants to the others that the
information about it contained in the Schedule 13D and any amendment thereto
will be, true, correct and complete in all material respects and in accordance
with all applicable laws. Each of the undersigned agrees to inform the others of
any changes in such information or of any additional information which would
require any amendment to the Schedule 13D and to promptly file such amendment.
Each of the undersigned agrees to indemnify the others for any losses,
claims, liabilities or expenses (including reasonable legal fees and expenses)
resulting from, or arising in connection with, the breach by such party of any
representations, warranties or agreements in this Agreement.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be an original and all of which together shall be deemed to
constitute one and the same Agreement.
IN WITNESS WHEREOF, each of the undersigned hereby execute this Agreement
as of December 15, 1994.
AMERICAN INTERNATIONAL GROUP COMMERCE & INDUSTRY INSURANCE
INC. COMPANY
By: /s/ Edward E. Matthews By: /s/ Edward E. Matthews
------------------------ -------------------------
Edward E. Matthews Edward E. Matthews
Vice Chairman - Finance S.V.P. - Finance
AMERICAN HOME ASSURANCE NEW HAMPSHIRE INSURANCE
COMPANY INC. COMPANY
By: /s/ Edward E. Matthews By: /s/ Edward E. Matthews
------------------------ -------------------------
Edward E. Matthews Edward E. Matthews
S.V.P. - Finance Vice President - Finance
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA.
By: /s/ Edward E. Matthews
------------------------
Senior Vice President
- Finance
1
Exhibit
B
2
CONFORMED COPY
INVESTMENT AND STRATEGIC ALLIANCE AGREEMENT
BETWEEN
20TH CENTURY INDUSTRIES
AND
AMERICAN INTERNATIONAL GROUP, INC.
DATED AS OF OCTOBER 17, 1994
3
TABLE OF CONTENTS
Page
----
ARTICLE I
SALE AND PURCHASE
OF SERIES A PREFERRED SHARES AND SERIES A WARRANTS
Section 1.1 Sale and Purchase............................................... 2
Section 1.2 The Closing..................................................... 2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 2.1 Representations and Warranties of the Company................... 3
(a) Corporate Organization and Qualification................................ 3
(b) Authorized Capital...................................................... 4
(c) Series A Preferred Shares and Warrants.................................. 5
(d) Corporate Authority..................................................... 5
(e) Insurance, Licenses, Permits and Filings................................ 5
(f) Non-Insurance Licenses and Permits...................................... 6
(g) Company Reports; Financial Statements; Statutory Statements............. 7
(h) Consents; No Violations................................................. 9
(i) Insurance Contracts and Rates........................................... 10
(j) Reinsurance............................................................. 10
(k) Loss Reserves; Solvency................................................. 11
(l) Title to Properties..................................................... 11
(m) Intangible Property and Computer Software............................... 12
(n) Absence of Undisclosed Liabilities...................................... 12
(o) Absence of Certain Changes.............................................. 12
(p) Litigation and Liabilities; Compliance with Laws........................ 13
(q) Environmental Matters................................................... 13
(r) Employee Benefits....................................................... 14
(s) Taxes................................................................... 17
(t) Insurance............................................................... 17
(u) Financial Advisors and Brokers.......................................... 18
(v) No Material Misstatement................................................ 18
(w) Labor Matters........................................................... 18
(x) Contracts............................................................... 18
(y) Investment Company...................................................... 19
(z) Exemption from Registration, Restrictions on Offer and Sale
of Same or Similar Securities......................................... 19
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Page
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Section 3.1 Representations and Warranties of the Investor.................. 19
(a) Corporate Organization and Qualification................................ 19
(b) Corporate Authority..................................................... 20
(c) Consents; No Violations................................................. 20
(d) Funds................................................................... 21
(e) Investment.............................................................. 21
(f) Actions and Proceedings................................................. 21
ARTICLE IV
PROCEEDS; ADVERSE QUAKE CONTRIBUTION
Section 4.1 Use of Proceeds................................................. 21
Section 4.2 Excess Loss Amount.............................................. 22
Section 4.3 Investor Contribution and Additional Shares; Adjustment to
Series A Warrants Exercise Price.............................. 22
ARTICLE V
STRATEGIC ALLIANCE AGREEMENTS
Section 5.1 Quota Share Agreement........................................... 23
Section 5.2 Joint Venture Agreement......................................... 23
ARTICLE VI
STANDSTILL AND TRANSFER RESTRICTIONS
Section 6.1 Standstill Agreement............................................ 24
Section 6.2 Transfers; Registration Rights.................................. 27
ARTICLE VII
INDEMNIFICATION
Section 7.1 Indemnification................................................. 28
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Page
----
ARTICLE VIII
COVENANTS
Section 8.1 Interim Operations of the Company and Conduct of Business....... 29
Section 8.2 Acquisition Proposals........................................... 31
Section 8.3 Company Stockholder Action...................................... 32
Section 8.4 Filings; Other Action........................................... 34
Section 8.5 Notification of Certain Matters................................. 35
Section 8.6 Publicity....................................................... 36
Section 8.7 Access.......................................................... 36
Section 8.8 Reservation of Shares........................................... 36
Section 8.9 Satisfactory Financing Plan..................................... 37
Section 8.10 Issuance of Additional Shares of Capital Stock.................. 37
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE INVESTOR
Section 9.1 Conditions to the Obligations of the Investor................... 38
(a) Accuracy of Representations and Warranties.............................. 38
(b) Performance............................................................. 38
(c) Absence of Order........................................................ 38
(d) No Legal Action......................................................... 38
(e) Stockholders' Approval.................................................. 38
(f) Department Approval..................................................... 39
(g) HSR Act................................................................. 39
(h) Lenders' Consent........................................................ 39
(i) Compliance Certificate.................................................. 39
(j) Other Required Consents................................................. 39
(k) Effectiveness of Consents............................................... 40
(l) Opinion of Counsel...................................................... 40
(m) Material Change in the Law.............................................. 40
(n) Auditor Letter.......................................................... 40
(o) Opinion of Actuary...................................................... 40
(p) Other Certificates...................................................... 41
(q) No Material Adverse Effect.............................................. 41
(r) Company Stock Ownership................................................. 41
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Page
----
ARTICLE X
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
Section 10.1 Conditions to the Obligations of
the Company.................................................. 41
(a) Accuracy of Representations and
Warranties............................................................ 41
(b) Performance............................................................. 41
(c) Absence of Order........................................................ 42
(d) No Legal Action......................................................... 42
(e) Stockholders' Approval.................................................. 42
(f) Department Approval..................................................... 42
(g) HSR Act................................................................. 42
(h) Lenders' Consent........................................................ 42
(i) Other Required Consents................................................. 42
(j) Effectiveness of Consents............................................... 43
(k) Opinion of Counsel...................................................... 43
(l) Compliance Certificate.................................................. 43
ARTICLE XI
MISCELLANEOUS
Section 11.1 Termination.................................................... 43
(a) Termination Period...................................................... 43
(b) Effect of Termination................................................... 44
Section 11.2 Successors and Assigns; No Third
Party Beneficiaries.......................................... 45
Section 11.3 Survival of Representations and
Warranties................................................... 45
Section 11.4 Entire Agreement............................................... 45
Section 11.5 Modification or Amendment...................................... 46
Section 11.6 Waiver......................................................... 46
Section 11.7 Governing Law.................................................. 46
Section 11.8 Consent to Jurisdiction; Service of
Process; Waiver of Jury Trial................................ 46
Section 11.9 Severability................................................... 46
Section 11.10 Specific Performance........................................... 47
Section 11.11 Captions....................................................... 47
Section 11.12 Counterparts................................................... 47
Section 11.13 Notices........................................................ 47
-iv-
7
EXHIBIT LIST
Exhibit A Form of Certificate of Determination for Series A Convertible Preferred
Stock
Exhibit B Form of Series A Warrant
Exhibit C Form of Quota Share Agreement
Exhibit D Form of Registration Rights Agreement
Exhibit E Form of Voting Agreement
Exhibit F Form of Term Sheet for Charter Amendment Relating to Transfer
Restrictions, etc.
Exhibit 9.1(1)(i) Form of Company General Counsel Opinion
Exhibit 9.1(1)(ii) Form of Company Special Counsel Opinion
Exhibit 10.1(k)(i) Form of Investor General Counsel Opinion
Exhibit 10.1(k)(ii) Form of Investor Special Counsel Opinion
-v-
8
INDEX OF DEFINED TERMS
Page
----
Acquisition Proposal.................................................................. 31
Acquisition Transaction............................................................... 31
Agreement............................................................................. 1
Annual Statements..................................................................... 8
Articles of Incorporation............................................................. 4
Balance Sheet......................................................................... 12
Charter Amendment..................................................................... 4
Closing............................................................................... 3
Closing Date.......................................................................... 3
Code.................................................................................. 15
Common Stock.......................................................................... 1
Company............................................................................... 1
Company Advisor....................................................................... 18
Company Group......................................................................... 29
Company Reports....................................................................... 7
Company Stockholders' Meeting......................................................... 33
Compensation and Benefit Plans........................................................ 9
Contracts............................................................................. 9
Credit Agreement...................................................................... 30
Department............................................................................ 6
Employees............................................................................. 14
Encumbrances.......................................................................... 2
Environmental Laws.................................................................... 14
ERISA................................................................................. 15
ERISA Affiliate....................................................................... 15
ERISA Affiliate Plan.................................................................. 15
Excess Loss Amount.................................................................... 22
Exchange Act.......................................................................... 33
GAAP.................................................................................. 8
Governmental Entity................................................................... 9
Group................................................................................. 24
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Page
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Hazardous Substance.......................................................... 14
HSR Act...................................................................... 34
Insolvency Event............................................................. 25
Insolvency Statute........................................................... 26
Insurance Licenses........................................................... 6
Investor..................................................................... 1
Investor Contribution........................................................ 22
Investor Group............................................................... 28
Insurance Subsidiary......................................................... 5
Letter of Intent............................................................. 1
Losses....................................................................... 28
Master JV Agreement.......................................................... 23
Material Adverse Effect...................................................... 4
Non-Insurance Licenses....................................................... 6
Northridge Earthquake........................................................ 12
Order........................................................................ 38
PBGC......................................................................... 15
Pension Plan................................................................. 15
Plans........................................................................ 14
Preferred Stock.............................................................. 4
Properties................................................................... 11
Proposals.................................................................... 33
Proxy Statement.............................................................. 33
Quota Share Agreements....................................................... 23
Recent 10-Qs................................................................. 7
Recent Quarterly Statements.................................................. 8
Registration Rights Agreement................................................ 28
Remaining Proceeds........................................................... 21
Representatives.............................................................. 36
Restricted Securities........................................................ 27
Rollback Judgment............................................................ 12
SAP.......................................................................... 8
-vii-
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Page
----
SEC........................................................................... 7
Securities Act................................................................ 3
Series A Certificate of Determination........................................ 1
Series A Preferred Shares.................................................... 1
Series A Warrants............................................................ 1
SERP......................................................................... 16
Stock Option Agreement....................................................... 1
Subsequent Reports........................................................... 7
Subsidiaries................................................................. 3
Warrant Certificate.......................................................... 1
-viii-
11
INVESTMENT AND STRATEGIC ALLIANCE AGREEMENT
INVESTMENT AND STRATEGIC ALLIANCE AGREEMENT (this "Agreement") made and
entered into this 17th day of October, 1994, by and between 20th Century
Industries, a corporation organized and existing under the laws of the State of
California (the "Company"), and American International Group, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
"Investor").
RECITALS
WHEREAS, the Company and the Investor have signed a letter of intent dated
as of September 26, 1994 (the "Letter of Intent") with respect to certain
transactions to be entered into by the Company and the Investor, including the
purchase by the Investor of certain securities of the Company pursuant to this
Agreement;
WHEREAS, in order to induce Investor to enter into this Agreement and the
other transactions contemplated by the Letter of Intent, the Company and the
Investor have signed a Stock Option Agreement dated as of September 26, 1994
(the "Stock Option Agreement") providing for the issuance by the Company to the
Investor of an option to purchase, under certain circumstances, up to 15% of the
outstanding shares of Common Stock, without par value (the "Common Stock"), of
the Company;
WHEREAS, the Company and the Investor have each determined to enter into
this Agreement pursuant to which the Investor has agreed to acquire, and the
Company has agreed to issue and sell, (a) 200,000 shares of Series A Convertible
Preferred Stock, stated value $1,000 per share, having the rights, preferences,
privileges and restrictions set forth in the form of Certificate of
Determination (the "Series A Certificate of Determination") attached hereto as
Exhibit A (the "Series A Preferred Shares"), and (b) 16,000,000 Series A
Warrants, each exercisable for one share of Common Stock, subject to adjustment,
having the terms set forth in the Warrant Certificate (the "Warrant
Certificate") attached hereto as Exhibit B (the "Series A Warrants"), of the
Company;
WHEREAS, the Company and the Investor are both, directly or indirectly,
engaged in the business of selling insurance and have determined that it is in
their mutual best interests to enter into a joint venture agreement, a
12
quota share reinsurance agreement, and other mutually beneficial arrangements;
WHEREAS, concurrently herewith certain stockholders of the Company are
entering into a voting agreement in the form attached as Exhibit E hereto, dated
as of the date hereof, with the Investor, pursuant to which such stockholders
are irrevocably agreeing to vote in favor of the transactions contemplated by
this Agreement and not to support as stockholders any transaction that would
give the Investor a right not to close the purchase of the Series A Preferred
Shares and Series A Warrants; and
WHEREAS, as the Company is currently under severe financial distress, the
Company and the Investor have mutually agreed to proceed to consummate the
transactions contemplated hereby as soon as practicable, subject to the
Company's and the Investor's respective rights specified herein to not
consummate this Agreement and the transactions contemplated hereby regardless of
the effect that nonconsummation would have on the financial condition of the
Company;
NOW, THEREFORE, for and in consideration of the mutual representations,
warranties, covenants and agreements contained herein, and intending to be
legally bound hereby, the parties hereto agree as follows:
ARTICLE I
SALE AND PURCHASE OF
SERIES A PREFERRED SHARES AND SERIES A WARRANTS
Section 1.1 Sale and Purchase. On the basis of the representations,
warranties, covenants and agreements contained herein, but subject to the terms
and conditions of this Agreement, at the Closing (as defined in Section 1.2
hereof) the Company agrees to issue and sell to the Investor, and the Investor
agrees to purchase from the Company, 200,000 Series A Preferred Shares, free and
clear of all liens, charges, encumbrances, security interests, equities,
options, restrictions (including restrictions on voting rights or rights of
disposition), claims or third party rights of any nature (collectively,
"Encumbrances"), at a purchase price of $1,000 per share and 16,000,000 Series A
Warrants, free and clear of all Encumbrances, at a purchase price of $1.00 per
warrant, for an aggregate purchase price of $216,000,000.
Section 1.2 The Closing. The closing of the sale and purchase of the
Series A Preferred Shares and the
-2-
13
Series A Warrants under this Agreement (the "Closing") shall take place at the
offices of Sullivan & Cromwell, 444 South Flower Street, Los Angeles, California
90071 on the fifth business day (the "Closing Date") following satisfaction or,
if permissible, waiver, of the conditions set forth in Articles IX and X, or
such other date, time and place as may be agreed by the parties. At the Closing,
the Company will deliver to the Investor certificates for the number of Series A
Preferred Shares and Series A Warrants being purchased against payment to the
Company of the purchase price therefor, by wire transfer in immediately
available funds to an account designated by the Company not less than two
business days in advance of the Closing, together with the other documents,
certificates and opinions to be delivered pursuant to Article IX of this
Agreement. The Series A Preferred Shares and Series A Warrants shall be acquired
by, and the certificates for the Series A Preferred Shares and Series A Warrants
so to be delivered shall be registered in the name of, the Investor or one or
more direct or indirect wholly-owned subsidiaries of the Investor designated by
the Investor and in the proportions designated by the Investor at least two
business days prior to the Closing Date. Such certificates shall bear a legend
to the effect that: the securities represented by the certificate have not been
registered under the Securities Act of 1933 (the "Securities Act"), or under the
blue sky or securities laws of any state; neither the securities represented by
the certificates nor any interest therein may be sold, transferred, pledged or
otherwise disposed of in the absence of registration under the Securities Act
and under the securities or blue sky laws of any applicable state, or exemptions
therefrom; and any such sale or disposition must be made in compliance with
applicable provisions of this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 2.1 Representations and Warranties of the Company. The Company
hereby represents and warrants to the Investor that:
(a) Corporate Organization and Qualification. Each of the Company and its
subsidiaries, all of which are listed on Schedule 2.1(A) hereto (collectively,
the "Subsidiaries"), is a corporation duly organized, validly existing and in
good standing under the laws of California and is in good standing as a foreign
corporation in each jurisdiction where the properties owned, leased or operated,
or the business conducted, by it require such qualification, except for
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14
such failure to so qualify or be in such good standing, which, when taken
together with all other such failures, would not have a material adverse effect
on the financial condition, regulatory condition, capital, properties, business,
results of operations or prospects of the Company and its Subsidiaries taken as
a whole, in each case considered on either a SAP (as defined in subsection
(g)(iii) of this Section 2.1 below) or GAAP (as defined in subsection (g)(ii) of
this Section 2.1 below) basis (a "Material Adverse Effect"). Each of the Company
and its Subsidiaries has the requisite corporate power and authority to carry on
its respective businesses as they are now being conducted. The Company has
provided to the Investor a complete and correct copy of the Company's Articles
of Incorporation (the "Articles of Incorporation") and By-Laws, each as amended
to date. The Company's Articles of Incorporation and By-Laws so delivered are in
full force and effect.
(b) Authorized Capital. After giving effect to the proposed amendment to
the Articles of Incorporation increasing the number of authorized shares of
Common Stock from 80,000,000 to 110,000,000 shares (as so amended and as amended
as provided in Section 8.3 hereof, the "Charter Amendment"), the authorized
capital stock of the Company will at the Closing consist of 110,000,000 shares
of Common Stock of which 51,472,471 are issued and outstanding as of the date
hereof, and 500,000 shares of preferred stock, par value $1.00 per share
("Preferred Stock"), of which no shares are issued and outstanding as of the
date hereof. All of the outstanding shares of Common Stock have been duly
authorized and are validly issued, fully paid and nonassessable. Other than
7,720,871 shares of Common Stock reserved for issuance pursuant to the Stock
Option Agreement, the Company has no shares of Common Stock or Preferred Stock
reserved for issuance, except for shares of Preferred Stock subject to issuance
pursuant to this Agreement, shares of Common Stock subject to issuance upon
conversion of the Series A Preferred Shares and exercise of the Series A
Warrants and 508,097 shares of Common Stock subject to issuance under existing
option plans and employee benefit plans as set forth on Schedule 2.1(B)(i). Each
of the outstanding shares of capital stock of each of the Subsidiaries is duly
authorized, validly issued, fully paid and nonassessable and, except as set
forth in Schedule 2.1(B)(ii) hereto, owned, either directly or indirectly, by
the Company, free and clear of all Encumbrances. Except to the extent set forth
above, there are no shares of capital stock of the Company authorized, issued or
outstanding, no preemptive rights and no outstanding subscriptions, options,
warrants, rights, convertible securities or other agreements
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or commitments of any character relating to the issued or unissued capital stock
or other equity securities of the Company or any of the Subsidiaries.
(c) Series A Preferred Shares and Warrants. The Series A Preferred Shares,
when issued in compliance with the provisions of this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and will be convertible
into Common Stock in accordance with the terms, and have the other rights,
preferences, privileges and restrictions, set forth in the Series A Certificate
of Determination attached hereto as Exhibit A. The issuance of the Series A
Preferred Shares is not subject to any preemptive rights or rights of first
refusal created by the Company. The Series A Warrants, when issued in compliance
with the provisions of this Agreement, will be duly authorized and validly
issued and enforceable according to the terms set forth in the Warrant
Certificate attached hereto as Exhibit B. The Common Stock issuable directly or
indirectly upon conversion of the Series A Preferred Shares and exercise of the
Series A Warrants has been duly and validly reserved for issuance and is not
subject to any preemptive rights or rights of first refusal created by the
Company, and upon conversion of the Series A Preferred Shares and exercise of
the Series A Warrants in accordance with the Series A Certificate of
Determination and the Warrant Certificate, respectively, will be duly
authorized, validly issued, fully paid and nonassessable.
(d) Corporate Authority. Subject only to the approval of the Company's
stockholders of the Proposals (as defined in Section 8.3), the Company has the
requisite corporate power and authority and has taken all corporate action
necessary in order to execute and deliver this Agreement and for it to
consummate the transactions contemplated hereby and to perform the acts
contemplated on its part hereunder and under the Series A Certificate of
Determination and Warrant Certificate. This Agreement has been approved by the
unanimous vote of the Company's Board of Directors present and, subject only to
the approval of the Proposals by the Company's stockholders, is a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
(e) Insurance, Licenses, Permits and Filings. Each Subsidiary which
engages in an insurance business (an "Insurance Subsidiary") is duly organized
and licensed as an insurance company in California and is duly licensed or
authorized as an insurer or reinsurer in any other jurisdiction where it is
required to be so licensed or authorized to conduct its business, or is subject
to no liability or
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disability that would have a Material Adverse Effect by reason of the failure to
be so licensed or authorized in any such jurisdiction. Since December 31, 1990,
the Company has made all required filings under applicable insurance holding
company statutes. Each of the Company and its Insurance Subsidiaries has all
other necessary authorizations, approvals, orders, consents, certificates,
permits, registrations or qualifications of and from the California Department
of Insurance (the "Department") and any other applicable insurance regulatory
authorities ("Insurance Licenses") to conduct their businesses as currently
conducted and all such Insurance Licenses are valid and in full force and
effect, except such Insurance Licenses which the failure to have or to be in
full force and effect individually or in the aggregate do not have a Material
Adverse Effect. Schedule 2.1(E) hereto lists each order and written
understanding or agreement of or with the Department currently in effect and
applicable to the Company or any of its Insurance Subsidiaries. None of the
Company or any of its Subsidiaries has received any notification (which
notification has not been withdrawn or otherwise resolved prior to the date of
this Agreement) from the Department or any other insurance regulatory authority
to the effect that any additional Insurance License from such insurance
regulatory authority is needed to be obtained by any of the Company or any of
its Subsidiaries in any case where it could be reasonably expected that (x) the
Company or any of its Subsidiaries would in fact be required either to obtain
any such additional Insurance License, or cease or otherwise limit writing
certain business and (y) obtaining such Insurance License or the limiting of
such business would have a Material Adverse Effect. Each Insurance Subsidiary is
in compliance with the requirements of the insurance laws and regulations of
California and the insurance laws and regulations of any other jurisdictions
which are applicable to such Insurance Subsidiary, and has filed all notices,
reports, documents or other information required to be filed thereunder or in
any such case is subject to no Material Adverse Effect by reason of the failure
to so comply or file.
(f) Non-Insurance Licenses and Permits. The Company and its Subsidiaries
have such authorizations, approvals, orders, consents, certificates, permits,
registrations or qualifications of and from appropriate governmental agencies
and bodies other than insurance regulatory authorities ("Non-Insurance
Licenses") as are necessary to own, lease or operate their properties and to
conduct their businesses as currently conducted and all such Non-Insurance
Licenses are valid and in full force and effect except such Non-Insurance
Licenses which the failure to have or to be in
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full force and effect individually or in the aggregate do not have a Material
Adverse Effect. The Company and its Subsidiaries are in compliance in all
material respects with their respective obligations under such Non-Insurance
Licenses, with such exceptions as individually or in the aggregate do not have a
Material Adverse Effect, and no event has occurred that allows, or after notice
or lapse of time would allow, revocation or termination of such Non-Insurance
Licenses.
(g) Company Reports; Financial Statements; Statutory Statements.
(i) The Company has delivered to the Investor (x) each registration
statement, report on Form 8-K, proxy statement, information statement or other
report or statement filed by it with the Securities and Exchange Commission (the
"SEC") since December 31, 1993 and prior to the date hereof, (y) the Company's
Annual Report on Form 10-K for the years ended December 31, 1991, 1992 and 1993,
and (z) the Company's Quarterly Reports on Form 10-Q for the periods ended March
31 and June 30, 1994 (the "Recent 10-Qs"), each in the form (including exhibits
and any amendments thereto) filed with the SEC (collectively, the "Company
Reports"). As of their respective dates and based on information available at
such respective dates, the Company Reports did not, and any registration
statement, report, proxy statement or information statement filed by the Company
with the SEC prior to the Closing Date ("Subsequent Reports") will not, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading.
(ii) Each of the consolidated balance sheets (including the related
notes and schedules) included in or incorporated by reference into the Company
Reports or any Subsequent Reports fairly presents, or will fairly present, as
the case may be, the consolidated financial position of the Company and its
Subsidiaries as of its date and based on information available at such date, and
each of the consolidated statements of income (or statements of results of
operations), stockholders' equity and cash flows (including any related notes
and schedules) included in or incorporated by reference into the Company Reports
or any Subsequent Reports fairly presents, or will fairly present, as the case
may be, the results of operations, retained earnings and cash flows, as the case
may be, of the Company and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to year-end
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audit adjustments normal in amount and effect), in each case in accordance with
generally accepted accounting principles ("GAAP") consistently applied during
the periods involved, except as may be noted therein. Other than the Company
Reports, as of the date hereof the Company has not filed or in its reasonable
opinion been required to file any other reports or statements with the SEC since
December 31, 1993.
(iii) On or prior to the date hereof, the Company and its Insurance
Subsidiaries have delivered to the Investor, true, complete and correct copies
of all Annual Statements filed by them with the Department for the years ended
December 31, 1993, 1992 and 1991, together with all exhibits and schedules
thereto (the "Annual Statements"). The Company and its Insurance Subsidiaries
have furnished to the Investor true, complete and correct copies of all
Quarterly Statements filed by them with the Department for the quarters ended
March 30, 1994 and June 30, 1994, together with all exhibits and schedules
thereto (the "Recent Quarterly Statements"). The Company and its Insurance
Subsidiaries have furnished to the Investor true, complete and correct copies of
all examination reports of the Department relating to the Company or either
Insurance Subsidiary and formal written responses thereto of the Company and its
Insurance Subsidiaries. The Annual Statements and the Recent Quarterly
Statements have been prepared in accordance with statutory accounting principles
and practices prescribed or permitted by the Department with respect to property
and casualty companies domiciled in California ("SAP") throughout the periods
involved and in accordance with the books and records of the Company and its
Insurance Subsidiaries, respectively. Each of the statutory financial statements
contained in the Annual Statements and the Recent Quarterly Statements fairly
and accurately presents and each of the financial statements contained in any
statements filed by the Company or the Insurance Subsidiaries with the
Department prior to the Closing Date will fairly and accurately present, as the
case may be, in all material respects, the assets, liabilities and capital and
surplus, of the Company and its Insurance Subsidiaries, as the case may be, as
of the dates thereof and based on information available as of the dates thereof
in accordance with SAP, subject, in the case of the Recent Quarterly Statements
and any subsequent Quarterly Statements, to normal year-end adjustments and any
other adjustments described therein.
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(h) Consents; No Violations.
(i) Other than the filing of the Series A Certificate of Determination
and the Charter Amendment, the filings referred to in Article VIII and any
filings with any taxing authorities, no notices, reports or other filings are
required to be made by the Company or any of its Subsidiaries with, nor are any
consents, registrations, approvals, permits or authorizations required to be
obtained by the Company or any of its Subsidiaries from, any governmental or
regulatory authority (including, but not limited to, any applicable insurance
regulatory authority), court, agency, commission or other entity, domestic or
foreign ("Governmental Entity"), in connection with the execution and delivery
of this Agreement by the Company, the consummation by the Company and its
Subsidiaries of the transactions contemplated hereby and the performance of the
acts contemplated on the part of the Company hereunder.
(ii) The execution and delivery of this Agreement by the Company do
not, and the consummation by the Company of the transactions contemplated hereby
and the performance of the acts contemplated on the part of the Company
hereunder will not, constitute or result in (1) a breach or violation of, or a
default under, the Articles of Incorporation, as amended by the Charter
Amendment, or By-Laws of the Company or the comparable governing instruments of
any of its Subsidiaries, (2) except as listed on Schedule 2.1(H) hereto, a
breach or violation of, a default under or an event triggering any payment or
other material obligation pursuant to, any of the Company's or the Subsidiaries'
existing bonus, deferred compensation, pension, retirement, profit-sharing,
thrift, savings, employee stock ownership, stock bonus, stock purchase,
restricted stock and stock option plans, all employment or severance contracts,
and all similar arrangements of the Company and its Subsidiaries (the
"Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (3) except as listed on Schedule 2.1(H) hereto, a breach, violation
or event triggering a right of termination of, or a default under, or the
acceleration of or the creation of an Encumbrance on assets (with or without the
giving of notice or the lapse of time or both) pursuant to any provision of any
agreement, lease of real or personal property, insurance or reinsurance policy
or agreement, contract, note, mortgage, indenture, arrangement or other
commitment or obligation, whether written or oral ("Contracts") of the Company
or any of its Subsidiaries or any law, rule, ordinance or regulation, agreement,
instrument or judgment, decree, order or award to which the Company or any of
its Subsidiaries is subject or any governmental or non-governmental
authorization, consent,
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approval, registration, franchise, license or permit under which the Company or
any of its Subsidiaries conducts any of its business, or (4) any other change in
the rights or obligations of any party under any of the Company's Contracts,
except, in the case of clauses (2), (3) or (4), for such breaches, violations,
defaults, events, accelerations or changes that, alone or in the aggregate,
would not have a Material Adverse Effect or prevent, materially delay or
materially burden the transactions and acts contemplated by this Agreement.
(i) Insurance Contracts and Rates. All insurance Contracts written or
issued by the Company or any of its Insurance Subsidiaries as now in force are
in all material respects, to the extent required under applicable law, on forms
approved by applicable insurance regulatory authorities or which have been filed
and not objected to by such authorities within the period provided for
objection, and such forms comply in all material respects with the insurance
statutes, regulations and rules applicable thereto. True, complete and correct
copies of such forms have been furnished or made available to Investor and there
are no other forms of insurance Contracts used in connection with the Company's
and its Insurance Subsidiaries' business. Premium rates established by the
Company or its Insurance Subsidiaries which are required to be filed with or
approved by insurance regulatory authorities have been so filed or approved, the
premiums charged conform thereto in all material respects, and such premiums
comply in all material respects with the insurance statutes, regulations and
rules applicable thereto.
(j) Reinsurance. Schedule 2.1(J) contains a list of all reinsurance or
coinsurance treaties or agreements, including retrocessional agreements, to
which the Company or any Insurance Subsidiary is a party or under which the
Company or any Insurance Subsidiary has any existing rights, obligations or
liabilities. All reinsurance and coinsurance treaties or agreements, including
retrocessional agreements, to which the Company or any Insurance Subsidiary is a
party or under which the Company or any Insurance Subsidiary has any existing
rights, obligations or liabilities are in full force and effect. Neither the
Company nor any Insurance Subsidiary, nor, to the knowledge of the Company, any
other party to a reinsurance or coinsurance treaty or agreement to which the
Company or any Insurance Subsidiary is a party, is in default in any material
respect as to any provision thereof, and no such agreement contains any
provision providing that the other party thereto may terminate such agreement by
reason of the transactions contemplated by this Agreement. The Company has not
received any notice to the
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effect that the financial condition of any other party to any such agreement is
impaired with the result that a default thereunder may reasonably be
anticipated, whether or not such default may be cured by the operation of any
offset clause in such agreement.
(k) Loss Reserves: Solvency. Except as set forth in Schedule 2.1(K), the
reserves for loss and loss adjustment expense liabilities set forth in any 1993
Annual Statement, in any Recent Quarterly Statement and in any subsequent
Quarterly Statement provided to Investor after the date hereof was or will be
determined in accordance with generally accepted actuarial standards and
principles consistently applied, is fairly stated in accordance with sound
actuarial principles and statutory accounting principles and meets the
requirements of the insurance statutes, laws and regulations of the State of
California. Except as disclosed in Schedule 2.1(K), the reserves for loss and
loss adjustment expense liabilities reflected in any 1993 Annual Statement, in
any Recent Quarterly Statements and in any subsequent Quarterly Statement
provided to Investor after the date hereof and established on the books of the
Company for all future insurance and reinsurance losses, claims and expenses
make or will make a reasonable provision for all unpaid loss and loss adjustment
expense obligations of the Company and its Insurance Subsidiaries under the
terms of its policies and agreements. The Company and each of its Insurance
Subsidiaries owns assets which qualify as admitted assets under California state
insurance laws in an amount at least equal to the sum of all of their respective
required insurance reserves and minimum statutory capital and surplus as
required by Sections 700.01 through 700.05 of the California Insurance Code. The
value of the assets of the Company and its Subsidiaries at their present fair
saleable value is greater than their total liabilities, including contingent
liabilities, and the Company and its Subsidiaries have assets and capital
sufficient to pay their liabilities, including contingent liabilities, as they
become due.
(l) Title to Properties. The Company and its Subsidiaries have sufficient
title to all material properties (real and personal) owned by the Company and
its Subsidiaries which are necessary for the conduct of the business of the
Company and its Subsidiaries (the "Properties") as currently conducted, free and
clear of any Encumbrance that may materially interfere with the conduct of the
business of the Company and its Subsidiaries, taken as a whole, and to the best
of the Company's knowledge, after due inquiry, all material properties held
under lease by the Company or its Subsidiaries are held under valid, subsisting
and enforceable leases.
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(m) Intangible Property and Computer Software. The Company and its
Subsidiaries own or have valid rights to use such trademarks, trade names,
copyrights and computer software as are necessary for the conduct of the
business of the Company and its Subsidiaries as now being conducted, which, if
not owned or possessed would, individually or in the aggregate, have a Material
Adverse Effect. The Company has not received written notice (which notice has
not been withdrawn or otherwise resolved prior to the date of this Agreement)
that the Company or any of its Subsidiaries is infringing any trademark, trade
name registration, copyright or any application pending therefor.
(n) Absence of Undisclosed Liabilities. Except as disclosed on Schedule
2.1(N), the Company (x) had at June 30, 1994 no liabilities or obligations of
any nature (whether accrued, absolute, fixed, contingent, liquidated or
unliquidated or otherwise and whether due or to become due, and whether or not
required by GAAP to be set forth on the Balance Sheet, but excluding the
reserves referred to in Section 2.1(k) which are the subject of such section),
except as and to the extent of the amounts specifically reflected or reserved
against on the balance sheet included in the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994 (the "Balance Sheet") or in the notes
thereto (which reserves (other than the reserves referred to in Section 2.1(K),
which are the subject of such section) are, in accordance with GAAP, adequate,
appropriate and reasonable) and (y) has not incurred since the date of the
Balance Sheet any liabilities or obligations of any nature (whether accrued,
absolute, fixed, contingent, liquidated or unliquidated or otherwise and whether
due or to become due, and whether or not required by GAAP to be set forth on a
balance sheet, but excluding the reserves referred to in Section 2.1(k) which
are the subject of such section) except for current liabilities not in excess of
current liabilities on the Balance Sheet which were incurred since the date of
the Balance Sheet in the ordinary course of business and consistent with past
practice; provided, however, this representation and warranty shall not extend
to any individual liability or obligation of an amount less than $2 million
provided that the aggregate of such liabilities and obligations does not exceed
$10 million.
(o) Absence of Certain Changes. Except with respect to incurred loss and
loss adjustment expense liabilities arising out of the earthquake centered in
Northridge, California, on January 17, 1994 (the "Northridge Earthquake") and
the judgment of the Supreme Court of California of August 18, 1994 with respect
to the Company's rollback liability (the "Rollback Judgment"), neither the
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Company nor any of its Subsidiaries has sustained since the date of the latest
audited financial statements provided to the Investor any loss or interference
with, or other change with respect to, its business that has had or is
reasonably likely to have a Material Adverse Effect. Except with respect to
incurred loss and loss adjustment expenses arising out of the Northridge
Earthquake, since the date of the latest financial statements prior to the date
hereof, there has not been (w) any catastrophe or any impending catastrophe
which, in the Company's judgment, may result in gross underwriting losses in
excess of $25 million pursuant to insurance coverage written by the Company's
Subsidiaries, (x) any material addition, or any development involving a
prospective material addition, to the Company's consolidated liabilities for
unpaid losses and loss adjustment expenses or (y) any change in the authorized
capital stock of the Company or any of its Subsidiaries or any increase in the
consolidated long-term debt of the Company.
(p) Litigation and Liabilities; Compliance with Laws.
(i) Except to the extent disclosed in Company Reports or set forth in
Schedule 2.1(P), there are no civil, criminal, administrative, arbitral or other
regulatory actions, suits, claims, hearings, investigations or proceedings
pending or, to the knowledge of the Company, threatened against the Company or
any of its Subsidiaries that, alone or in the aggregate, are reasonably likely
to have a Material Adverse Effect.
(ii) Except with respect to the Rollback Judgement and the
correspondence of the Department dated June 9, 1994, the Company and its
Subsidiaries are in compliance with all applicable statutes, rules, regulations,
orders and restrictions of any Governmental Entity having jurisdiction over the
conduct of their respective businesses or the ownership of their respective
properties, except where the failure to so comply, alone or in the aggregate,
would not have a Material Adverse Effect. Neither the Company nor any Subsidiary
has received a notice (which notice has not been withdrawn or otherwise resolved
prior to the date of this Agreement) to the effect that its operations are not
in compliance with any such statutes, rules, regulations, orders or
restrictions, except where the failure to so comply is not reasonably likely to
have a Material Adverse Effect.
(q) Environmental Matters. Except as set forth in the Company Reports, (A)
none of the Company or any of the Subsidiaries have received any communication
that
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alleges that the Company or any Subsidiary is not in compliance, or faces
liability or costs pursuant to, any Environmental Laws (as defined below)
including the rules and regulations relating thereto, (B) the Company and the
Subsidiaries hold, and are in compliance with, all permits, licenses and
governmental authorizations required for the Company and the Subsidiaries to
conduct their respective businesses under Environmental Laws, and are in
compliance with all Environmental Laws, except for any noncompliance which,
individually or in the aggregate, would not have a Material Adverse Effect and
(C) there are no circumstances or conditions involving the Company, its
Subsidiaries, their operations or the Properties that could result in liability
or costs under any Environmental Law which individually or in aggregate would
have a Material Adverse Effect and all environmental investigations, studies,
audits, tests, reviews or other analyses relating to the Company or the
Properties in the possession of the Company or known by the Company to exist
have been delivered to the Investor prior to the date hereof. As used in this
Agreement, the term "Environmental Laws" includes the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the Resource
Conservation and Recovery Act, as amended, the Clean Water Act, as amended, the
Clean Air Act, as amended, and the Toxic Substance Control Act, as amended, and
all other Federal, state foreign or local laws, rules, regulations, permits,
authorizations, approvals, consents, orders, judgments, decrees, injunctions and
requirements relating to (x) the protection of the environment, human health or
safety, or (y) relating to Hazardous Substances. "Hazardous Substance" means any
substance listed, defined, designated or classified as hazardous, toxic,
radioactive or dangerous, or otherwise regulated, under any Environmental Law.
(r) Employee Benefits.
(i) The Company Reports and Schedule 2.1(R) accurately describe all
Compensation and Benefit Plans and any applicable "change of control" or similar
provisions in any such Compensation and Benefit Plans in which any employee or
former employee or director or former director of the Company or any of its
Subsidiaries (the "Employees") participates or to which any such Employees are a
party or which are applicable to any of them. The Compensation and Benefit Plans
and all other benefit plans, contracts or arrangements (regardless of whether
they are funded or unfunded or foreign or domestic) covering Employees
(collectively, the "Plans"), including, but not limited to, "employee benefit
plans" within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended
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("ERISA"), are listed in Schedule 2.1(R). True and complete copies of all Plans,
including, but not limited to, trust instruments and/or insurance contracts, if
any, forming a part of any Plans, and all amendments thereto have been made
available to the Investor. Neither the Company nor any of its Subsidiaries has
any formal plan or commitment, whether legally binding or not, to create any
additional Plan or modify or change any existing Plan that would affect any
Employee.
(ii) Each Plan has been operated and administered in all material respects
in accordance with its terms and with applicable law, including, but not limited
to, ERISA and the Internal Revenue Code of 1986, as amended (the "Code"). Each
Plan which is an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA ("Pension Plan") and which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service, and the Company is not aware of any circumstances
likely to result in revocation of any such favorable determination letter. There
is no material pending or, to the best knowledge of the Company, threatened
legal action, suit or claim relating to the Plans. Neither the Company nor any
of its Subsidiaries has engaged in a transaction with respect to any Plan that,
assuming the taxable period of such transaction expired as of the date hereof,
could subject the Company or any of its Subsidiaries to a tax or penalty imposed
by either Section 4975 of the Code or Section 502(i) of ERISA in an amount which
would be material.
(iii) No liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by the Company or any Subsidiary with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or any single-employer plan of any entity (an "ERISA Affiliate") which is
considered one employer with the Company under Section 4001 of ERISA or Section
414 of the Code (an "ERISA Affiliate Plan"). None of the Company, its
Subsidiaries or any ERISA Affiliate has contributed to or had the obligation to
contribute to a "multiemployer plan" (within the meaning of Section 3(37) of
ERISA) since September 26, 1980. No notice of a "reportable event", within the
meaning of Section 4043 of ERISA for which the 30-day reporting requirement has
not been waived, has been required to be filed for any Pension Plan or by any
ERISA Affiliate Plan within the 12-month period ending on the date hereof. The
Pension Benefit Guaranty Corporation (the "PBGC") has not instituted proceedings
to terminate any Pension Plan or ERISA Affiliate Plan and no
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condition exists that presents a material risk that such proceedings will be
instituted.
(iv) All contributions required to be made under the terms of any Plan or
ERISA Affiliate Plan have been timely made or adequate reserves in respect
thereof have been established on the books of the Company. Neither any Pension
Plan nor any ERISA Affiliate Plan has an "accumulated funding deficiency"
(whether or not waived) within the meaning of Section 412 of the Code or Section
302 of ERISA and all required payments to the PBGC with respect to each Pension
Plan or ERISA Affiliate Plan have been made on or before their due dates.
Neither the Company nor its Subsidiaries has provided, or is required to
provide, security to any Pension Plan or to any ERISA Affiliate Plan pursuant to
Section 401(a)(29) of the Code.
(v) The funded status of the Company's Pension Plan and Supplemental
Executive Retirement Plan (the "SERP"), as of the last day of the most recent
plan year ended prior to the date hereof, is accurately set forth on the basis
of reasonable actuarial assumptions in the Company's Annual Report on Form 10-K
for the year ended December 31, 1993, and with respect to each ERISA Affiliate
Plan, as of the last day of the most recent plan year ended prior to the date
hereof, the actuarially determined present value of all "benefit liabilities",
within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis
of the actuarial assumptions contained in the plan's most recent actuarial
valuation), did not exceed the then current value of the assets of any such
ERISA Affiliate Plan, and, to the knowledge of the Company after reasonable
inquiry, there has been no material change in the financial condition of such
Pension Plan, SERP or ERISA Affiliate Plan since the last day of the most recent
Pension Plan, SERP or ERISA Affiliate Plan year. The Company has delivered to
the Investor true and complete copies of the most recent actuarial report and
Form 5500 with respect to each Pension Plan covering employees of the Company or
any of its Subsidiaries.
(vi) Except as set forth on Schedule 2.1(R), neither the Company nor any of
its Subsidiaries has any obligations for retiree health and life benefits under
any Plan other than with respect to requirements under Section 4980B of the
Code. There are no restrictions on the rights of the Company or the Subsidiaries
to amend or terminate any such Plan without incurring any liability thereunder.
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(vii) Except as set forth on Schedule 2.1(R), the consummation of the
transactions contemplated by this Agreement will not (i) entitle any Employee to
severance pay, unemployment compensation or any other payment or (ii) accelerate
the time of any payment or vesting of any rights or increase the amount of any
compensation due any employee.
(s) Taxes. (i) Except to the extent set forth in Schedule 2.1(S), (a) all
material federal, state, local and foreign tax returns and tax reports
(including declarations of estimated tax) that are required to be filed by the
Company or any of its Subsidiaries have been duly filed, (b) all taxes shown to
be due on such tax returns and reports have been paid in full, except for any
taxes with respect to which a failure to pay would not have a Material Adverse
Effect, (c) no federal or state income tax returns are being or have been
examined by the Internal Revenue Service or the California Franchise Tax Board
or the period of assessment of the tax in respect of which such tax returns were
required to be filed has expired, (d) any deficiencies asserted or assessments
made as a result of any such examination have been paid in full, (e) no issues
that have been raised by the relevant taxing authority in connection with the
examination of any such tax return are currently pending, and (f) no waivers of
statutes of limitation have been given or requested by or with respect to any
tax of the Company or any of its Subsidiaries.
(ii) The purchase of the Series A Preferred Shares and Series A Warrants in
and of themselves will not create an obligation of the Company or any of its
Subsidiaries to make a payment to an individual that would be a "parachute
payment" to a "disqualified individual" as those terms are defined in Section
280G of the Code without regard to whether such payment is reasonable
compensation for personal services performed or to be performed in the future.
(t) Insurance. All policies of insurance, including liability, property
and casualty, worker's compensation and other similar forms of insurance under
which the Company or any of its Subsidiaries are named as policyholder or
beneficiary, are valid, outstanding and enforceable policies, and will not in
any way be affected by, or terminate or lapse by reason of, the transactions
contemplated by this Agreement. The insurance policies to which the Company and
its Subsidiaries are parties are sufficient for compliance with all material
requirements of law and of all material agreements to which the Company or any
Subsidiary is a party. To the Company's knowledge, the Company and
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its Subsidiaries presently have, and will have at the Closing Date, insurance
with respect to their properties, assets and business covering risks of a
character usually insured by corporations engaged in the same or similar
business as the Company and its Subsidiaries against loss or damage of the kinds
customarily insured against by such corporations.
(u) Financial Advisors and Brokers. Other than Smith Barney Inc. (the
"Company Advisor"), no investment banker, broker or finder is entitled to any
financial advisory, brokerage or finder's fee or other similar payment from the
Company or any of its Subsidiaries in connection with any transaction
contemplated hereby based on agreements, arrangements or undertakings made by
the Company or any of its Subsidiaries or any of their directors, officers or
employees. The Company has provided the Investor with a true and complete copy
of the Company's engagement letter with the Company Advisor and such letter has
not been amended or modified in any respect.
(v) No Material Misstatement. No exhibit, schedule or certificate
furnished by or on behalf of the Company to the Investor in connection with this
Agreement (taken as a whole as of the date thereof, or if undated the date
furnished to the Investor) contains any material misstatement of fact or omits
to state any material fact necessary to make the statements, in light of the
circumstances under which they are made by the Company, not misleading. Any
assumptions, projections, forecasts or other estimates of future results
included therein were prepared by the Company in good faith on a basis believed
by it to be reasonable and in a manner consistent with similar projections,
forecasts or other estimates previously prepared by the Company.
(w) Labor Matters. No material labor disturbance by the employees of the
Company or any of its Subsidiaries exists or, to the best knowledge of the
Company, after due inquiry, is threatened.
(x) Contracts. All of the Company and its Subsidiaries' material Contracts
that are required to be described in the Company Reports or to be filed as
exhibits thereto are described in the Company Reports or filed as exhibits
thereto and are in full force and effect. Except for breaches or defaults that
may exist under the Credit Agreement, neither the Company nor any of its
Subsidiaries nor, to the best knowledge of the Company, any other party is in
breach of or default under any such Contracts except
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for such breaches and defaults as in the aggregate have not had and would not
have a Material Adverse Effect.
(y) Investment Company. The Company is not an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(z) Exemption from Registration: Restrictions on Offer and Sale of Same or
Similar Securities. Assuming the representations and warranties of the Investor
set forth in Section 3(e) hereof are true and correct in all material respects,
the offer and sale of the Series A Preferred Shares and Series A Warrants made
pursuant to this Agreement will be exempt from the registration requirements of
the Securities Act. Neither the Company nor any person acting on its behalf has,
in connection with the offering of the Series A Preferred Shares and Series A
Warrants, engaged in (x) any form of general solicitation or general advertising
(as those terms are used within the meaning of Rule 502(c) under the Securities
Act), (y) any action involving a public offering within the meaning of Section
4(2) of the Securities Act, or (z) any action which would require the
registration of the offering and sale of the Series A Preferred Shares or Series
A Warrants pursuant to this Agreement under the Securities Act or which would
violate applicable state securities or "blue sky" laws. The Company has not made
and will not make, directly or indirectly, any offer or sale of Series A
Preferred Shares or Series A Warrants or of securities of the same or a similar
class as the Series A Preferred Shares and Series A Warrants if as a result the
offer and sale of Series A Preferred Shares and Series A Preferred Warrants
contemplated hereby could fail to be entitled to exemption from the registration
requirements of the Securities Act. As used herein, the terms "offer" and "sale"
have the meanings specified in Section 2(3) of the Securities Act.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Section 3.1 Representations and Warranties of the Investor. The Investor
represents and warrants to the Company that:
(a) Corporate Organization and Qualification. The Investor is a
corporation duly organized and validly existing under the laws of Delaware.
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(b) Corporate Authority. The Investor has the requisite
corporate power and authority and has taken all corporate action necessary in
order to execute and deliver this Agreement and for it to consummate the
transactions contemplated hereby and to perform the acts contemplated on its
part hereunder. This Agreement is a valid and binding agreement of the
Investor enforceable against the Investor in accordance with its terms.
(c) Consents; No Violations.
(i) Other than the filings contemplated in Section 8.4, no notices,
reports or other filings are required to be made by the Investor with, nor
are any consents, registrations, approvals, permits or authorizations
required to be obtained by the Investor from, any Governmental Entity in
connection with the execution and delivery of this Agreement by the
Investor, the consummation by the Investor of the transactions contemplated
hereby and the performance of the acts contemplated on the part of the
Investor hereunder.
(ii) The execution and delivery of this Agreement by the Investor do
not, and the consummation of the transactions contemplated hereby and the
performance of the acts contemplated on the part of the Investor hereunder
will not, constitute or result in (1) a breach or violation of, or a
default under, the Articles of Incorporation or By-laws of the Investor or
(2) a breach, violation or event triggering a right of termination of, or a
default under, the acceleration of or the creation of an Encumbrance on
assets (with or without the giving of notice or the lapse of time or both)
pursuant to any provision of any Contracts of the Investor or any law,
rule, ordinance or regulation or agreement, instrument, judgment, decree,
order or award to which the Investor or any of its subsidiaries is subject
or any governmental or non-governmental permit or license, authorization,
consent, approval, registration, franchise, license or permit under which
the Investor or any of its subsidiaries conducts any of its business, or
(3) any other change in the rights or obligations of any party under any of
the Investor's Contracts, except, in the case of clauses (2) or (3), for
such breaches, violations, defaults or accelerations that, alone or in the
aggregate, are not reasonably likely to prevent, materially delay or
materially burden the transactions and acts contemplated by this Agreement.
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(d) Funds. The Investor has or will have on the Closing Date the funds
necessary to consummate the purchase of the Series A Preferred Shares and Series
A Warrants, as contemplated by Section 1.1 hereof.
(e) Investment. The Investor is acquiring the Series A Preferred Shares
and Series A Warrants, and any Common Shares into which the Series A Preferred
Shares and Series A Warrants may be converted, for its own account for
investment and not with a view to, or for sale in connection with, any public
distribution thereof in violation of the Securities Act.
(f) Actions and Proceedings. There are no actions, suits, claims or legal,
administrative or arbitration proceedings or investigations pending or, to the
knowledge of the Investor, threatened against the Investor, which have or could
have a material adverse effect on the ability of the Investor to consummate the
transactions contemplated hereby.
ARTICLE IV
PROCEEDS; ADVERSE QUAKE CONTRIBUTION
Section 4.1 Use of Proceeds. The Company shall, and hereby agrees that it
will, use the proceeds of the issuance and sale of the Series A Preferred Shares
and Series A Warrants described in Section 1.1 as follows:
(i) The amount necessary for each of the Company's Insurance
Subsidiaries to satisfy capital requirements imposed by the Department
shall be contributed as common equity to each Insurance Subsidiary;
(ii) Second, any amount of net proceeds remaining after the
contribution required in (i) above is made (the "Remaining Proceeds") shall
be retained by the Company and shall be invested by the Company in
investment securities in accordance with the Company's customary investment
policies; and
(iii) At such time as the Board of Directors of the Company shall deem
proper, and for such uses as the Board deems appropriate, the Remaining
Proceeds may be withdrawn from the investments described in (ii) above and
used in accordance with the Board's determinations.
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Section 4.2 Excess Loss Amount. In the event that the Company's and its
Subsidiaries' total incurred loss and allocated loss adjustment expenses
associated with claims resulting from the Northridge Earthquake exceed
$850,000,000, the amount by which such losses and allocated expenses exceed
$850,000,000 shall be considered the "Excess Loss Amount."
Section 4.3 Investor Contribution and Additional Shares; Adjustment to
Series A Warrants Exercise Price. If at any time (before or after the Closing
Date) there shall be any Excess Loss Amount as defined above, the Investor
shall, if requested in writing by the Company after the Closing Date (and
subject to the Closing hereunder), contribute to the capital of the Company at
the request of the Company, in whole or in part, an amount up to the lesser of
(i) $70,000,000 or (ii) the Excess Loss Amount (the "Investor Contribution"). In
consideration of the Investor Contribution, the Company shall issue to the
Investor that number of fully paid and nonassessable Series A Preferred Shares
having an aggregate liquidation value equal to (x) the amount of the Investor
Contribution plus (y) an amount equal to the product of, (1) the Investor
Contribution, (2) 0.65 and (3) the quotient of (I) the number of shares of
Common Stock beneficially owned or obtainable by the Investor and its affiliates
by virtue of ownership of the Series A Preferred Shares (including any
additional shares actually issued by virtue of the provision permitting payment
of dividends in kind on the Series A Preferred Shares) and the Series A Warrants
and conversion or exercise thereof divided by (II) the sum of (A) the total
number of shares of Common Stock of the Company outstanding at the date of this
Agreement plus (B) the number of shares referred to in (I); provided, however,
that the aggregate liquidation value of any Series A Preferred Shares issued
pursuant to this sentence (without taking into account any Series A Preferred
Shares issuable as a dividend in kind on any outstanding Series A Preferred
Shares) shall not exceed $87.9725 million. The amount represented as "(y)" in
the above formula is designed to represent Investor's proportional share of the
Company's after-tax loss resulting from the Excess Loss Amount. Successive
contributions under this Section 4.3 for partial amounts reflecting development
over time shall be permitted, with minimum cash contributions prior to the final
contribution being for no less than $10 million.
In the event that the Excess Loss Amount exceeds $95,000,000, the exercise
price of the Series A Warrants shall be reduced as provided in the Series A
Warrants.
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ARTICLE V
STRATEGIC ALLIANCE AGREEMENTS
Section 5.1 Quota Share Agreement. (a) At the Closing, subsidiaries of
the Investor and each of the Company's Insurance Subsidiaries shall enter into
quota share reinsurance treaties with respect to all policies of the Company's
Insurance Subsidiaries incepting on or after the Closing Date (the "Quota Share
Agreements") substantially in the form attached hereto as Exhibit C. The
participation thereunder shall be 10% for the first five years as specified
therein.
(b) Following the Closing Date, the Company and the Investor may from time
to time discuss additional quota share arrangements. In particular, the Company
and the Investor may discuss an arrangement whereby (i) the Company's Insurance
Subsidiaries cede such participation in excess of the 10% participation pursuant
to the Quota Share Agreements as results in an agreed upon net
premium-to-surplus ratio being achieved and (ii) in the event the Company's net
premium-to-surplus ratio subsequently improves below such specified ratio, the
increased participation pursuant to (i) shall thereafter be reduced to achieve
the specified ratio, with increases and reductions in the additional
participation made annually. Neither the Company nor the Investor is obligated
to enter into any such arrangement.
Section 5.2 Joint Venture Agreement. After the Closing Date, the Company
and the Investor shall use their respective best efforts to negotiate and
mutually agree upon a master joint venture agreement (the "Master JV Agreement")
whereby the Company and the Investor will form a new subsidiary or subsidiaries
to engage in the Company's business in states outside California mutually agreed
from time to time by the parties, thereby enhancing the Company's expansion
plans envisioned prior to the Northridge Earthquake. The overall venture, and/or
each local venture established pursuant to the Master JV Agreement, will have a
name to be agreed by the parties which will include reference to a portion of
the name of each of the parties. The ownership interests and capital
contributions of the parties in the specific ventures established pursuant to
the Master JV Agreement will be as mutually agreed, reflecting the knowledge,
skills, human resources, technology and other capacities of the parties brought
to the particular venture, and in particular reflecting the Company's special
distribution capabilities.
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ARTICLE VI
STANDSTILL AND TRANSFER RESTRICTIONS
Section 6.1 Standstill Agreement. (a) The Investor covenants and agrees
with the Company that for a period of three years following the Closing Date (if
the Closing occurs), neither the Investor nor any of its subsidiaries will,
without the prior approval of the Company's Board of Directors, (i) acquire,
offer to acquire or agree to acquire (other than (v) in accordance with the
terms of this Agreement, the Series A Warrant, the Series A Certificate of
Determination and the Stock Option Agreement, (w) as a result of a stock split,
stock dividend or other recapitalization by the Company, (x) upon the execution
of unsolicited buy orders by any affiliate of the Investor that is a registered
broker-dealer for the account of its customer, (y) as to subsidiaries of the
Investor engaged in investment activities in the ordinary course, acquisitions
up to an aggregate of 1% of the outstanding Common Stock (excluding the 900,000
shares of Common Stock already owned by Investor) or of any other class of
voting securities in the ordinary course and without an intent to influence the
management or control of the Company, or (z) in a transaction in which the
Investor or an affiliate of the Investor acquires a previously unaffiliated
business entity that owns voting securities of the Company) any outstanding
Common Stock or any other voting securities of the Company or commence any
tender or exchange offer seeking to acquire beneficial ownership (as defined in
Rule 13d-3 without regard to the 60-day provision in paragraph (d)(1)(i)
thereof) of the Common Stock or any other voting securities of the Company, (ii)
become a member of a 13(d) group, within the meaning of Rule 13d-5 under the
Exchange Act (a "Group"), with respect to any Common Stock or voting securities
of the Company, other than a Group composed solely of itself and its affiliates,
or encourage any other Group to acquire any Common Stock or other voting
securities of the Company (other than in purchases from the Investor), (iii)
solicit any proxies or stockholder consents or become a participant (other than
by voting), or encourage any person to become a participant, in a proxy or
consent solicitation with respect to any of the Company's securities (in each
case other than solicitations to holders of Series A Preferred Shares with
respect to matters as to which the Series A Preferred Shares are entitled to
vote), (iv) call any special meeting of stockholders, (v) make any public
proposal to stockholders with respect to any extraordinary transaction involving
the Company, including, but not limited to, any business combination,
restructuring, recapitalization, dissolution, or similar transaction or
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(vi) request in a manner that would require public disclosure of such request by
the Company or the Investor that the Company amend any restrictions contained in
this Section 6.1(a); provided, however, the foregoing restrictions shall not
apply with respect to Common Stock or shares of other voting securities held as
of the date of this Agreement or managed as of the date of this Agreement as
part of an investment portfolio by subsidiaries of the Investor if, and only to
the extent, the Investor's subsidiaries have fiduciary obligations to third
parties to take any of such actions. In the event the Investor becomes aware
(including, but not limited to, by notice from the Company) that an affiliate
(as defined under the Securities Exchange Act of 1934) (other than a subsidiary)
of Investor has taken any action that would be prohibited of the Investor by the
foregoing, the Investor shall, to the extent it has the authority, right and
power to do so, promptly cause such action to cease and, if practicable, to be
reversed in order to effectuate the intent of the foregoing.
(b) Notwithstanding the foregoing, the Investor shall have the right freely
to acquire additional securities of the Company in any manner whatsoever and
engage in any of the activities proscribed under Section 6.1(a), in the event
that (i) an Insolvency Event, as such term is defined below, occurs; (ii) sixty
days after the Company or any of its Subsidiaries is in default under any
indebtedness or other borrowing incurred by it unless such default is cured
during such 60-day period; (iii) the Company or any of its Subsidiaries breaches
this Agreement, the Stock Option Agreement, the Warrant Certificate, the Series
A Certificate of Determination, the Registration Rights Agreement, the Quota
Share Agreements or the Voting Agreement in any material respect; (iv) any
person not affiliated with the Investor acquires, offers to acquire or agrees to
acquire, beneficial ownership (as defined in Rule 13d-3 without regard to the
60-day provision in paragraph (d)(1)(i) thereof) of twenty percent or more of
the outstanding shares of the Common Stock or any other class of the Company's
voting securities, or commences any tender or exchange offer seeking to acquire
any such ownership; (v) a third party engages in a proxy solicitation for the
purpose of removing directors of the Company elected by the Common Stockholders
or influencing the directors' management of the Company; or (vi) a majority of
the directors of the Company who were elected by the holders of Common Stock
vote to terminate or release the Investor from compliance with any or all of the
restrictions contained in Section 6.1(a).
(c) An "Insolvency Event" shall be deemed to have occurred (i) if the
Company or any of its Subsidiaries shall
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commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy" as now or hereafter in effect, or under any state
insurance insolvency, liquidation, rehabilitation or similar statute or any
successor statutes thereto ("Insolvency Statutes"); (ii) an involuntary case is
commenced against the Company or any of its Subsidiaries under an Insolvency
Statute; (iii) a custodian is appointed for, or takes charge of, all or any
substantial part of this property of the Company or any of its Subsidiaries;
(iv)(a) the Company or any of its Subsidiaries or (b) any other person,
including any insurance regulator, commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution
or similar law of any jurisdiction, whether now or hereafter in effect, relating
to the Company or such Subsidiary; (v) any insurance regulator shall take
material action with respect to the Company or any of its Subsidiaries (other
than merely requiring the Company to prepare a financial plan) pursuant to the
terms of any applicable Risk-Based Capital insurance regulatory requirements;
(vi) the Company or any of its Subsidiaries is adjudicated insolvent or
bankrupt; (vii) any order of relief or other order approving any such case or
proceeding is entered; (viii) the Company or any of its Subsidiaries suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; (ix) the
Company or any of its Subsidiaries makes a general assignment for the benefit of
creditors; (x) the Company or any Subsidiary shall fail to pay, or shall state
that it is unable to pay, or shall be unable to pay, its debts, generally as
they become due; (xi) the Company or any of its Subsidiaries shall call a
meeting of its creditors with a view to arranging a composition or adjustment of
its debts; (xii) the Company or any of its Subsidiaries shall by any act or
failure to act indicate its consent to, approval of or acquiescence in any of
the foregoing; or (xiii) any corporate action is taken by the Company or any of
its Subsidiaries for the purpose of effecting any of the foregoing; provided,
however, in the case of clauses (ii), (iii), (iv)(b), (v) and (vii), an
"Insolvency Event" shall occur only in the event the Company is unable to cause
such involuntary case, appointment, proceeding or action to be dismissed or
withdrawn by the 90th day after the commencement thereof.
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Section 6.2 Transfers; Registration Rights.
(a) The Investor agrees that no Series A Preferred Shares, Series A
Warrants or any Common Stock received upon conversion or exercise of Series
A Preferred Shares or Series A Warrants (together "Restricted Securities")
shall be sold or otherwise transferred except in compliance with this
Section 6.2.
(b) At any time the Series A Preferred Shares and the Common Stock
issuable upon conversion thereof may be transferred, in whole or in part,
in transactions not requiring registration under the Securities Act (i) to
affiliates of the Investor or (ii) commencing one year following the
Closing Date, in amounts not less than $50 million, to third persons
reasonably acceptable to the Company. The Investor (or its transferees) may
also effect sales of Series A Preferred Shares and Common Stock issued or
issuable upon conversion thereof (i) in underwritten offerings effected
pursuant to the registration rights granted by the Registration Rights
Agreement (as defined in Section 6.2(e) hereof) or (ii) commencing one year
following the Closing Date, to the extent available, pursuant to Rule 144
under the Securities Act.
(c) At any time the Series A Warrants and the Common Stock issuable
upon exercise thereof may be transferred, in whole or in part, in
transactions not requiring registration under the Securities Act, (i) to
affiliates of the Investor and (ii) in amounts not less than 2,000,000
Series A Warrants (or the equivalent underlying shares of Common Stock), to
any third person reasonably acceptable to the Company. The Investor (or its
transferees) may also effect sales of Common Stock issued or issuable upon
exercise of the Series A Warrants (i) in underwritten offerings effected in
connection with the registration rights granted by the Registration Rights
Agreement (as defined in Section 6.2(e) hereof) or (ii) commencing one year
following the Closing Date, to the extent available, pursuant to Rule 144
under the Securities Act.
(d) If the Investor or any of its affiliates notifies the Company in
writing that it wishes to transfer any Restricted Securities to a third
person pursuant to the first sentence of Section 6.2(b) or the first
sentence of Section 6.2(c) above, that person shall be deemed to be
reasonably acceptable to the Company unless the Company, within 10 days
after its receipt of such written notice, notifies the Investor that the
proposed transferee is not acceptable to the Company and setting forth in
reasonable detail the reasons therefor.
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(e) The Company shall at the Closing enter into a registration rights
agreement substantially in the form set forth as Exhibit D hereto (the
"Registration Rights Agreement") relating to the Series A Preferred Shares and
the Common Stock issued or issuable upon conversion or exercise of the Series A
Preferred Shares and the Series A Warrants, and shall at all times comply with
its obligations under the Registration Rights Agreement.
(f) In the event the Investor transfers any Restricted Securities to an
affiliate, the Investor shall notify the affiliate of the transfer restrictions
set forth herein and shall be responsible for any breach by such affiliate of
such provisions. In the event the Investor transfers any Restricted Securities
to a third party pursuant to the first sentence of Section 6.2(b) or the first
sentence of Section 6.2(c) above, and such transfer is not objected to pursuant
to Section 6.2(d) above, the third party shall enter into an agreement with the
Company agreeing to be bound by the transfer restrictions of this Article VI and
succeeding to the registration rights with respect to the Restricted Securities
transferred provided in the Registration Rights Agreement. As it does with
respect to the Common Stock, the Company will maintain a ledger of the ownership
of the Series A Preferred Shares and the Series A Warrants upon which transfers
shall be effected, and, upon transfer, the Company shall issue new certificates
evidencing the Restricted Securities transferred at no cost to the transferor or
transferee.
ARTICLE VII
INDEMNIFICATION
Section 7.1 Indemnification. (a) The Company hereby agrees to indemnify,
defend and hold harmless the Investor, its subsidiaries and affiliates and their
respective directors, officers, employees and agents and the successors and
assigns of any of them (collectively, the "Investor Group"), from, against and
in respect of any damages, claims, losses, charges, actions, suits, proceedings,
deficiencies, taxes, interest, penalties, and costs and expenses (including
without limitation settlement costs and attorneys' fees and other expenses for
investigating or defending any actions) ("Losses") imposed on, sustained,
incurred or suffered by or asserted against any such member of the Investor
Group, directly or indirectly, relating to or arising out of any breach of any
representation or warranty of the Company contained in this Agreement for the
period for which such representation or
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warranty survives or for any breach of any agreement or covenant of the Company
contained herein, in the Stock Option Agreement, the Series A Certificate of
Determination, the Warrant Certificate or the other agreements contemplated
hereby; provided, however, that the Company shall not have any liability under
this paragraph (a) unless the aggregate of all Losses relating thereto for which
the Company would be liable exceeds on a cumulative basis an amount equal to
$7.5 million, and then only to the extent of any such excess.
(b) The Investor hereby agrees to indemnify, defend and hold harmless the
Company, its Subsidiaries and affiliates and their respective directors,
officers, employees and agents and the successors and assigns of any of them
(collectively, the "Company Group"), from, against and in respect of any Losses
imposed on, sustained, incurred or suffered by or asserted against any such
member of the Company Group, directly or indirectly, relating to or arising out
of any breach of any representation or warranty of the Investor contained in
this Agreement for the period for which such representation or warranty
survives; provided, however, that the Investor shall not have any liability
under this paragraph (b) unless the aggregate of all Losses relating thereto for
which the Investor would be liable exceeds on a cumulative basis an amount equal
to $7.5 million, and then only to the extent of any such excess.
ARTICLE VIII
COVENANTS
Section 8.1 Interim Operations of the Company and Conduct of
Business. Prior to the Closing, the business and operations of the Company and
its Subsidiaries, including, without limitation, underwriting, accounting and
loss reserving practices and procedures, shall be conducted only in the ordinary
and usual course and, to the extent consistent therewith, each of the Company
and its Subsidiaries shall have used its reasonable efforts to preserve its
business organization intact and maintain its existing relations with customers,
suppliers, employees and business associations. In addition, without the prior
written consent of the Investor, neither the Company nor any of its Subsidiaries
shall during the period prior to the Closing:
(a) enter into, modify, renew, terminate or commute any reinsurance
treaties or retrocession agreements, certificates or arrangements;
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(b) incur capital expenditures in an amount in excess of $2,000,000;
(c) declare or pay any dividends or declare or make any other distributions
of any kind to its stockholders or make any direct or indirect redemption,
retirement, purchase or other acquisition of any shares of its capital stock;
(d) purchase or sell investment assets outside the Company's existing
normal investment policies, or change such investment policies;
(e) incur any indebtedness outside the normal course;
(f) pledge assets, except as required pursuant to the Credit Agreement,
dated as of June 30, 1994, by and among the Company, Union Bank, The First
National Bank of Chicago and other lenders party thereto (the "Credit
Agreement");
(g) waive material rights under any Contracts to which the Company or any
of its Subsidiaries is subject;
(h) increase or modify existing wage, salary, bonus or severance payments,
or increase any other direct or indirect compensation, for or to any of its
officers, directors, employees, consultants, agents or other representatives, or
enter into any commitment or agreement to make or pay the same, except in the
normal course of business;
(i) make any change in its accounting methods or practices, including,
without limitation, any change with respect to the methods for establishment of
reserve items, or make any change in the depreciation or amortization policies
or rates adopted by it, except as required by law, GAAP or SAP;
(j) amend, modify or waive any rights under the Credit Agreement or the
arrangements contemplated thereby;
(k) undertake any new transactions or enter any new Contracts with any of
its affiliates; without limitation of the foregoing, make any loan or advance to
its shareholders or to any of its directors, officers or employees, consultants,
agents or other representatives (other than advances made in the ordinary course
of business);
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(l) except for this Agreement, issue, sell, grant or purchase any shares of
its capital stock, or warrants, options or other securities convertible,
exchangeable or otherwise entitled to subscribe to any shares of its capital
stock, or enter into any Contracts or commitments to issue, sell, grant or
purchase any such securities (except as required in accordance with employee
options or employee benefit plans outstanding on the date of this Agreement);
(m) except for the Charter Amendment, amend its Articles of Incorporation
or By-Laws or merge with or into or consolidate with any other person; subdivide
or in any way reclassify any shares of its capital stock or change or agree to
change in any manner the rights of its outstanding capital stock or the
character of its business; or make any acquisition of all or a substantial part
of the assets, properties, securities or business of any other person; or
(n) enter into any other Contract or other transaction that materially
increases the liabilities of the Company or that, by reason of its size or
otherwise, is not in the ordinary course of business; take any action that would
impair the Company's ability to perform this Agreement or any of the
transactions contemplated hereby; or authorize or enter into a Contract to take
any of the actions referred to in paragraphs (a) through (n) above.
Section 8.2 Acquisition Proposals. Prior to the Closing, the Company
agrees that neither the Company nor any of its Subsidiaries nor any of the
respective officers, directors or employees of the Company or any of its
Subsidiaries shall, and the Company shall direct and use its best efforts to
cause its and its Subsidiaries, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by the
Company or any of its Subsidiaries) not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making of any proposal or offer
(including, without limitation, any proposal or offer to stockholders of the
Company) with respect to a merger, consolidation, share exchange, business
combination, purchase of all or a significant portion of the assets of the
Company or any of its Subsidiaries, purchase of all or any portion of the
capital stock of the Company or any of its Subsidiaries or securities
convertible, exchangeable, exercisable or having any other rights to acquire any
of such capital stock, tender offer or exchange offer, or any reinsurance
agreement outside the ordinary course of business (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal" and any such
transaction being referred to as an "Acquisition Transaction") or engage in any
discussions or negotia-
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tions concerning, or provide any confidential information or data to, any person
relating to an Acquisition Proposal, or otherwise facilitate any effort or
attempt to make or implement an Acquisition Proposal and the Company and its
Subsidiaries shall not enter into any agreement or letter of intent with respect
to any Acquisition Transaction. Notwithstanding the foregoing, in the event the
Company receives an unsolicited request for confidential information or data
from a third party that has made a bona fide proposal (subject to due diligence
and other usual conditions) to enter into an Acquisition Transaction, the
Company may provide confidential information or data to such third party if the
Board of Directors of the Company reasonably determines, after consulting with
its outside legal counsel, (i) that such third party is capable (financially,
legally and otherwise) of completing the transaction described in the
Acquisition Proposal and (ii) that their fiduciary duty to stockholders requires
such. With respect to any activities, discussions or negotiations with any
parties conducted on or prior to the date hereof with respect to any of the
foregoing, the Company will immediately cease such and cause such to be
terminated and will request the return of any confidential information provided
to such parties. The Company will take the necessary steps to inform the
individuals or entities referred to in the first sentence hereof of the
obligations undertaken in this Section. The Company will notify the Investor
promptly if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, the Company. The Company shall provide
the Investor with copies of any confidential information the Company provides to
third parties in connection with an Acquisition Proposal, and the Company shall
provide the Investor with any information, including copies of any proposal,
term sheet or any other document or information provided by a third party to the
Company in connection with an Acquisition Proposal. In the event the Investor
provides the Company with an additional proposal following the decision of the
Board of Directors of the Company, in the exercise of its fiduciary duty, to
provide confidential information to any third party pursuant to the second
sentence of this Section 8.2, the Company may disclose the Investor's additional
proposal to such third party.
Section 8.3 Company Stockholder Action. (a) As promptly as practicable
after the date hereof, the Company shall convene a meeting of holders of Common
Stock at which holders of Common Stock will be asked to vote upon the approval
of such holders for, among other matters, (i) an amendment to the Company's
Articles of Incorporation to
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increase the number of authorized shares of Common Stock from 80,000,000 to
110,000,000, (ii) an amendment to the Company's Articles of Incorporation to
reflect various restrictions on the transferability of shares consistent with
the terms set forth on Exhibit F hereto and (iii) this Agreement and
consummation of the transactions contemplated hereby, including issuance of the
Series A Preferred Shares and the Series A Warrants to the Investor (together,
the "Proposals"). The Company shall promptly prepare and file with the SEC
pursuant to the Securities Exchange Act of 1934 (the "Exchange Act") and the
rules and regulations promulgated thereunder, and as promptly as practicable
after receipt of comments from the SEC staff with respect thereto and any
required or appropriate amendments thereto shall mail to stockholders of the
Company, a proxy statement (such proxy statement, as amended or supplemented, is
herein referred to as the "Proxy Statement") in connection with the meeting of
the Company's stockholders referred to above (the "Company Stockholders'
Meeting"). The Proposals shall provide that none shall be approved unless all
are approved. The Proxy Statement shall contain the recommendation of the Board
of Directors of the Company that its stockholders approve the Proposals;
provided, however, that such recommendation may be excluded, or if included, may
be withdrawn, in the event the Board of Directors determines that its fiduciary
duty so requires. The Company shall notify the Investor promptly of the receipt
by it of any comments from the SEC or its staff and of any request by the SEC
for amendments or supplements to the Proxy Statement or for additional
information, and will supply the Investor with copies of all correspondence
between it and its representatives, on the one hand, and the SEC or the members
of its staff or any other governmental officials, on the other hand, with
respect to the Proxy Statement.
(b) The Proxy Statement, as of its date and at the date of the Company
Stockholders' Meeting, will not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they will
be made, not misleading; provided, however, that the foregoing shall not apply
to the extent that any such untrue statement of a material fact or omission to
state a material fact was made by the Company in reliance upon and in conformity
with written information concerning the Investor furnished to the Company by the
Investor specifically for use in the Proxy Statement. The Proxy Statement shall
not be filed, and no amendment or supplement to the Proxy Statement will be made
by the Company, without consultation with the Investor and its counsel.
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(c) The Investor represents, warrants and covenants that (i) it will
provide to the Company for inclusion in the Proxy Statement all information
concerning the Investor reasonably necessary for the preparation of such proxy
statement, and (ii) that such information will not contain any material
misstatement of fact or omit to state any material fact necessary to make the
statements, in light of circumstances under which they are made, not misleading.
Section 8.4 Filings; Other Action. (a) Subject to the terms and conditions
herein provided, the Company and the Investor shall take all reasonable steps
necessary or appropriate, and shall use all commercially reasonable efforts, to:
(i) promptly make their respective filings and thereafter make any other
required submissions under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act") with respect to the transactions contemplated by this
Agreement; (ii) promptly make all required filings with or submissions to the
Department necessary to obtain the approval of the Department of the
transactions and acts contemplated by this Agreement; (iii) promptly make any
other regulatory filings, notices or applications required in connection with
the consummation of the transactions and acts contemplated by this Agreement;
(iv) promptly seek the necessary consents of, or give any required notices to,
the lenders under the Credit Agreement and other third parties with respect to
the transactions contemplated by this Agreement; (v) use reasonable efforts
promptly to cause the satisfaction of all conditions set forth in Articles IX
and X of this Agreement, subject to the proviso set forth below; (vi) cooperate
and consult reasonably with the other party in connection with, and keep the
other party reasonably informed with respect to, the foregoing; and (vii) use
all reasonable efforts to promptly take, or cause to be taken, all other actions
and do, or cause to be done, all other things necessary, proper or appropriate
under applicable laws and regulations to consummate and make effective the
transactions and acts contemplated by this Agreement as soon as practicable;
provided, however, that the foregoing shall not be deemed to impose any
requirement on the Investor or the Company to make any concession to the
Department as a condition to the approval by the Department of all the
transactions and acts contemplated by this Agreement that, in its sole judgment,
it considers inadvisable.
(b) Without limiting the generality of paragraph (a) above, each of the
Company and the Investor will supply the other with all information concerning
itself and its subsidiaries and their respective financial condition,
properties, business or results of operations that is neces-
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sary or appropriate in seeking any necessary regulatory approval of the
transactions and acts contemplated by this Agreement. Such information shall not
contain any material misstatement of fact or omit to state any material fact
necessary to make the statements, in light of the circumstances under which they
were made, not misleading. Each of the Investor and the Company shall advise the
other party prior to the Closing if any of the information supplied to the other
party hereunder that underlies any representation made to any regulatory
authority with respect to the first party and its Subsidiaries shall have
changed, or if any such information was inaccurate, to an extent that could
reasonably be expected to result, upon disclosure of accurate revised
information to the relevant regulatory authority, in the withdrawal by such
regulatory authority of its approval of the transactions contemplated by this
Agreement.
(c) Each of the Company and the Investor shall use best efforts to agree
upon amendments to the Company's By-laws necessary to reflect the transactions
and acts contemplated by this Agreement as soon as practicable, and the Board of
Directors of the Company shall adopt such amendments effective as of (and
conditioned upon) the Closing.
Section 8.5 Notification of Certain Matters. Prior to the Closing Date,
the Company shall give prompt notice to the Investor of: (i) any notice of, or
other communication relating to, a default or event that, with notice or lapse
of time or both, would become a default, received by the Company or any of its
Subsidiaries subsequent to the date of this Agreement and prior to the Closing
Date, under any Contract material to the financial condition, properties,
businesses, or results of operations of the Company and its Subsidiaries taken
as a whole (including the Credit Agreement), or to the interest of stockholders
in the Company, to which the Company or any of its Subsidiaries is a party or is
subject, or any circumstances of which the Company is aware that are reasonably
likely to result in such a default or event; (ii) the occurrence of any Material
Adverse Effect; (iii) any breach by the Company of any of its representations,
warranties, covenants or agreements contained in this Agreement or any
circumstance that is reasonably likely to result in any such representation or
warranty being materially untrue, or any such covenant or agreement not being
performed or complied with, or any condition to closing not being fulfilled as
of the Closing Date; or (iv) the Company's obtaining of knowledge that the
Department will take any action with respect to the Company or any Subsidiary
before or after the Closing which would be
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inconsistent with this Agreement and the arrangements contemplated hereby or
which could have a Material Adverse Effect. Each of the Company and the Investor
shall give prompt notice to the other party of any notice or other communication
from any third party alleging that the consent of such third party is or may be
required in connection with the transactions or acts contemplated by this
Agreement.
Section 8.6 Publicity. Prior to the Closing Date, except (i) as required
or expressly permitted by this Agreement or otherwise agreed between the
parties, (ii) as may be necessary in order to give the notices to obtain the
regulatory approvals required hereunder, (iii) as necessary to consult with
attorneys, accountants, employees, or other advisors retained in connection with
the transactions contemplated hereby, (iv) as required by court order or
otherwise mandated by law or stock exchange requirements, or by Contract to
which the Company or the Investor or any of their respective Subsidiaries is a
party, or (v) in connection with disclosure documents prepared by the Company,
the Investor or a Subsidiary of either, neither party shall issue any news
release or other public notice or communication or otherwise make any disclosure
to third parties concerning this Agreement or the transactions contemplated
hereby without the prior consent of the other party, such consent not to be
unreasonably withheld. Even in cases where such prior consent is not required
each party will give prior notice to the other of, and consult with the other
(to the extent practicable in the circumstances) regarding, the contents of such
releases.
Section 8.7 Access. Upon reasonable notice, the Company shall (and shall
cause each of its Subsidiaries to) afford the Investor's officers, employees,
counsel, accountants and other authorized representatives ("Representatives")
access, during normal business hours both before and after the Closing Date, to
its properties, books, Contracts and records and personnel and advisers (who
will be instructed by the Company to cooperate) and, the Company shall (and
shall cause each of its Subsidiaries to) furnish promptly to the Investor all
information concerning its business, properties and personnel as the Investor or
its Representatives may reasonably request, provided that no investigation
pursuant to this Section 8.7 shall affect or be deemed to modify any
representation or warranty made by the Company. The Investor's right of access
under this Section 8.7 shall terminate when it owns no Restricted Securities.
Section 8.8 Reservation of Shares. The Company shall at all times reserve
and keep available, out of its authorized and unissued stock, solely for the
purpose of
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effecting the conversion of Series A Preferred Shares and the exercise of Series
A Warrants, such number of shares of its Common Stock free of preemptive rights
as shall from time to time be sufficient to effect the conversion of all Series
A Preferred Shares and the exercise of all Series A Warrants from time to time.
Section 8.9 Satisfactory Financing Plan. In the event the Company needs
to obtain additional capital following any additional capital contribution
pursuant to Section 4.3 hereof or additional quota share arrangements the
subject of Section 5.1(b) hereof, the Company shall develop a capital financing
plan which is reasonably acceptable to the Investor.
Section 8.10 Issuance of Additional Shares of Common Stock. The Company
may not issue additional shares of Common Stock or of another class of
securities similar thereto, or any securities, options, warrants or similar
rights convertible, exercisable, exchangeable or having other rights to acquire
any such shares; provided, however, that the Company may issue a customary and
appropriate number of shares of Common Stock pursuant to employee stock option
plans or employee benefit plans approved by the Board of Directors; and
provided, further, however, following the end of the thirty-eighth (38th) month
following the Closing Date (i.e., the period referred to in Section 1(a) of the
Transfer Restrictions attached as Exhibit F hereto designed in light of Section
382 of the Internal Revenue Code, as amended), the Company may issue and sell
shares of Common Stock in a fully distributed public offering, so long as (i)
the Company first provides the Investor prior notice of the Company's intent to
make such an offering and (ii) the Company provides the Investor a prior
opportunity, at the Investor's election, either (x) to make an offer to purchase
the outstanding shares of Common Stock of the Company (with the result that the
public offering not proceed) or (y) to preemptively participate in such Common
Stock offering up to the Investor's fully converted/exercised interest in the
Common Stock of the Company at the per share price received by the Company
(i.e., without underwriters' discount) in such public offering. For purposes of
the foregoing, the Investor's fully converted/exercised interest in the Common
Stock shall equal the quotient of (I) the number of shares of Common Stock
beneficially owned or obtainable by the Investor and its affiliates by virtue of
ownership of the Series A Preferred Shares (including any additional shares
actually issued by virtue of the provision permitting payment of dividends in
kind on the Series A Preferred Shares) and the Series A Warrants and conversion
or exercise thereof divided by (II) the sum of (A) the total number of
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shares of Common Stock of the Company then outstanding plus (B) the number of
shares referred to in (I).
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE INVESTOR
Section 9.1 Conditions to the Obligations of the Investor. The obligation
of the Investor to purchase the Series A Preferred Shares and Series A Warrants
at the Closing is subject to the fulfillment of the following conditions
precedent, or the waiver thereof by the Investor, on or before the Closing Date:
(a) Accuracy of Representations and Warranties. The representations and
warranties of the Company contained herein shall be true and correct in all
material respects as of the Closing Date as though made on and as of the Closing
Date.
(b) Performance. The Company and its Subsidiaries shall have performed and
complied in all material respects with all agreements and conditions contained
in this Agreement required to be performed or complied with by the Company or
its Subsidiaries prior to or at the Closing.
(c) Absence of Order. There shall not have been issued and be in effect
(whether temporary, preliminary or permanent) any order, decree, judgment or
injunction (collectively, an "Order") of any court or tribunal of competent
jurisdiction which prohibits the consummation of the transactions contemplated
in this Agreement or imposes any material restriction on Investor or the Company
in connection with the transactions contemplated by this Agreement or with
respect to the business operations of the Company either prior to or subsequent
to the Closing Date;
(d) No Legal Action. No action, suit, investigation or other proceeding
relating to the transactions contemplated hereby shall have been instituted or
threatened before any Governmental Entity which the Investor determines in its
reasonable discretion presents a substantial risk of the restraint or
prohibition of the transactions contemplated hereby or the obtaining of material
damages or other material relief in connection therewith.
(e) Stockholders' Approval. The Proposals shall have been approved by the
requisite vote of the Company's stockholders.
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(f) Department Approval. The Department shall have approved in a form
that is satisfactory to the Investor in good faith in its sole discretion
all transactions and acts contemplated by this Agreement (including the
exercise of conversion, exercise and other rights under the Series A
Preferred Stock and Series A Warrants). In addition, the Investor shall be
satisfied, in good faith in its sole discretion, as to the status with the
Department of any issues arising out of or related to the Rollback Judgment
or the Company's obligations relating to Proposition 103, the Company's
solvency plan, the rates applicable to the Company's insurance products,
the arrangements relating to the Credit Agreement or the dividends payable
by the Insurance Subsidiaries;
(g) HSR Act. Any waiting period (and any extension thereof)
applicable to the consummation of the transactions contemplated by this
Agreement (other than the transactions contemplated by the Master JV
Agreement) under the HSR Act shall have expired or been terminated.
(h) Lenders' Consent. The Company and the lenders under the Credit
Agreement shall have entered into a definitive amendment to the Credit
Agreement, effective upon consummation of this Agreement, amending the
Credit Agreement such that this Agreement and the transactions contemplated
thereby are permitted under the Credit Agreement as so amended and whereby
no default, or event which could result in a default, exists under the
Credit Agreement as so amended.
(i) Compliance Certificate. The Company shall have delivered to the
Investor a certificate, executed by the Chief Executive Officer and the
President of the Company, dated the Closing Date, certifying as to the
fulfillment of the conditions specified in subsections 9.1(a), (b), (e),
(h) and (j).
(j) Other Required Consents. The Company shall have received, made,
or obtained all required consents, approvals, authorizations, orders,
notices, filings, registrations or qualifications of, to or with (x) any
other Governmental Entity having jurisdiction over the Company, its
business or its properties, and (y) any party to a Contract or other
agreement with the Company or its Subsidiaries, required in connection with
the transactions and acts contemplated by this Agreement, except where the
failure to do so does not have a Material Adverse Effect or a material
adverse effect on the financial condition, properties, business or results
of operations of the Investor and its subsidiaries taken as a whole and
does not materially and
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adversely interfere with the transactions and acts contemplated by this
Agreement.
(k) Effectiveness of Consents. All consents, registrations, approvals,
permits or authorizations of any Governmental Entity required in connection with
the transactions and acts contemplated by this Agreement shall be in full force
and effect, and no circumstances shall have changed or exist that would, if
known to any Governmental Entity, be reasonably likely to result in the
withdrawal of its consent, registration, approval, permit or authorization.
(l) Opinion of Counsel. The Investor shall have received (i) a written
opinion from John Bollington, Esq., General Counsel of the Company, dated the
Closing Date, addressed to the Investor, in a form reasonably acceptable to the
Investor as to the matters attached hereto as Exhibit 9.1(1)(i), and (ii) a
written opinion from Gibson, Dunn & Crutcher, special counsel for the Company,
dated the Closing Date, addressed to the Investor, in a form reasonably
acceptable to the Investor as to the matters attached hereto as Exhibit
9.1(1)(ii).
(m) Material Change in the Law. There shall not have been any newly
adopted or proposed legislation, regulation or rule that would have a Material
Adverse Effect.
(n) Auditor Letter. The Company shall provide a letter to Investor from
the Company's auditors stating that, following their review of the Company's
books and records completed not later than five days prior to the Closing Date,
they confirm that there have been no material increases or decreases in
specified balance sheet and income statement items, as mutually agreed, from the
date of the last financial statements provided the Investor.
(o) Opinion of Actuary. The Company shall have delivered an opinion of
actuary executed by the Chief Actuary of the Company, as of the most recently
completed monthly period for which actuarial information is available prior to
the Closing Date, opining that as of such date the reserves for loss and loss
adjustment expense reflected on the balance sheet of the Company and its
Subsidiaries have been established in conformity with generally accepted
actuarial principles and practices consistently applied, that such reserves were
established in conformity with the requirements of the Department and that such
reserves make a reasonable provision for all unpaid loss and loss adjustment
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51
expense obligations of the Company under the terms of its policies and
agreements.
(p) Other Certificates. The Company shall have furnished to Investor such
executed and conformed copies of such other opinions and certificates, letters
and documents as Investor may reasonably request and as are customary for
transactions such as those contemplated by this Agreement.
(q) No Material Adverse Effect. Since the date of this Agreement, nothing
has occurred which has had, or is reasonably likely to have, a material adverse
effect on the financial condition, regulatory condition, capital, properties,
business, results of operations or prospects of the Company or its Subsidiaries
taken as a whole, in each case considered on either a SAP or GAAP basis (it
being understood that additional incurred losses and allocated loss adjustment
expenses arising out of the Northridge Earthquake shall not be taken into
account in determining the foregoing).
(r) Company Stock Ownership. No person or Group shall have (x) acquired,
or commenced a tender offer to acquire, 33 1/3% or more of the Common Stock or
(y) initiated or announced a proxy solicitation of the holders of Common Stock
with the intent of removing one or more of the current members of the Company's
board of directors or senior management or alter management of the Company.
ARTICLE X
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
Section 10.1 Conditions to the Obligations of the Company. The obligation
of the Company to issue and sell the Series A Preferred Shares and Series A
Warrants at the Closing is subject to the fulfillment of the following
conditions, or the waiver by the Company on or before the Closing Date:
(a) Accuracy of Representations and Warranties. The representations and
warranties of the Investor contained herein shall be true and correct in all
material respects as of the Closing Date except when made only as of a specified
earlier date.
(b) Performance. The Investor shall have performed and complied in all
material respects with all agreements and conditions contained in this Agreement
required to
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52
be performed or complied with by the Investor prior to or at the Closing.
(c) Absence of Order. There shall not have been issued and be in effect
(whether temporary, preliminary or permanent) an Order of any court or tribunal
of competent jurisdiction which prohibits the consummation of the transactions
contemplated in this Agreement or imposes any material restriction on the
Company in connection with the transactions contemplated by this Agreement or
with respect to the business operations of the Company either prior to or
subsequent to the Closing Date;
(d) No Legal Action. No action, suit, investigation or other proceeding
relating to the transactions contemplated hereby shall have been instituted or
threatened before any Governmental Entity which the Company determines in its
reasonable discretion presents a substantial risk of the restraint or
prohibition of the transactions contemplated hereby or the obtaining of material
damages or other material relief in connection therewith.
(e) Stockholders' Approval. The Proposals shall have been approved by the
requisite votes of the Company's stockholders.
(f) Department Approval. The Department shall have approved all
transactions and acts contemplated by this Agreement.
(g) HSR Act. Any waiting period (and any extension thereof) applicable to
the consummation of the transactions contemplated by this Agreement (other than
the transactions contemplated by the Master JV Agreement) under the HSR Act
shall have expired or been terminated.
(h) Lender's Consent. The Company and the lenders under the Credit
Agreement shall have entered into a definitive amendment to the Credit
Agreement, effective upon consummation of this Agreement, amending the Credit
Agreement such that this Agreement and the transactions contemplated thereby are
permitted under the Credit Agreement as so amended and whereby no default, or
event which could result in a default, exists under the Credit Agreement as so
amended.
(i) Other Required Consents. The Company shall have received, made, or
obtained all required consents, approvals, authorizations, orders, notices,
filings, registrations or qualifications of, to or with (x) any other
Governmental Entity having jurisdiction over the Company,
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53
its business or its properties, and (y) any party to a Contract or other
agreement with the Company or its Subsidiaries, required in connection with the
transactions and acts contemplated by this Agreement, except where the failure
to do so does not have a Material Adverse Effect.
(j) Effectiveness of Consents. All consents, registrations, approvals,
permits or authorizations of any Governmental Entity required in connection with
the transactions and acts contemplated by this Agreement shall be in full force
and effect, and no circumstances shall have changed or exist that would, if
known to any Governmental Entity, be reasonably likely to result in the
withdrawal of its consent, registration, approval, permit or authorization.
(k) Opinion of Counsel. The Company shall have received (i) a written
opinion of Wayland M. Mead, Esq., Acting General Counsel of the Investor, dated
the Closing Date, addressed to the Company, in a form reasonably acceptable to
the Investor as to the matters attached hereto as Exhibit 10.1(k)(i), and (ii) a
written opinion from Sullivan & Cromwell, special counsel to the Investor, dated
the Closing Date, addressed to the Company, in a form reasonably acceptable to
the Investor as to the matters attached hereto as Exhibit 10.1(k)(ii).
(l) Compliance Certificate. The Investor shall have delivered to the
Company a certificate, executed by a senior officer of the Investor, dated the
Closing Date, certifying as to the fulfillment of the conditions specified in
subsections 10.1(a) and 10.1(b).
ARTICLE XI
MISCELLANEOUS
Section 11.1 Termination.
(a) Termination Period. This Agreement may be terminated and the purchase
contemplated hereby may be abandoned at any time prior to the Closing:
(i) By the mutual written consent of the Company and the Investor; or
(ii) By either the Investor or the Company if (x) the Closing shall
not have occurred on or prior to April 1, 1995, or (y) at a meeting duly
convened therefor or at any adjournment thereof the approvals of the
- 43 -
54
Company's stockholders referred to in Section 8.3 shall not have been
obtained, provided that the party seeking to terminate pursuant to this
clause (ii) shall not be in material breach of this Agreement; or
(iii) By the Investor, if (w) the Department formally shall have
declined to approve (by order or other official determination, after
pursuit by the Investor of all practical remedies before the Department)
the transactions and acts contemplated by this Agreement in a manner that
is satisfactory to the Investor in good faith in its sole discretion, (x)
the Company shall have breached in any material respect any of its
representations or warranties, or the covenants or agreements contained in
this Agreement, which breach is not cured within ten days after notice from
the Investor to the Company specifying such breach, (y) the Board of
Directors of the Company shall have withdrawn or modified in a manner
adverse to the Investor its approval or recommendation of the transactions
contemplated hereby, or the Board of Directors of the Company, upon request
by the Investor, shall fail to reaffirm such approval or recommendation, or
shall have resolved to do any of the foregoing or (z) prior to the mailing
of the Proxy Statement, the Company has not resolved its outstanding issues
with its Bank Lenders or terms that are satisfactory to the Investor in its
reasonable discretion; or
(iv) By the Company, (w) if the Department formally shall have
declined to approve (by order or other official determination, after
pursuit by the Company of all practical remedies before the Department) the
transactions and acts contemplated by the Agreement or (x) if the Investor
shall have breached in any material respect any of the representations or
warranties, or covenants or agreements, contained in this Agreement, which
breach is not cured within ten days after notice from the Company to the
Investor specifying such breach;
(b) Effect of Termination. In the event of termination of this
Agreement as provided in subsection (a), this Agreement shall forthwith become
null and void and there shall be no liability or further obligation on the part
of any party hereto or any of its respective directors, officers, employees or
representatives except that nothing herein shall relieve any party from
liability for any prior willful breach hereof and unless this Agreement is
properly terminated by the Company pursuant to Section 11.1(a)(iv) above, the
Company shall promptly pay the Investor the
- 44 -
55
amount of $1.5 million in cash to reimburse the Investor for the fees, expenses
and other costs associated with this Agreement and the transactions contemplated
hereby.
Section 11.2 Successors and Assigns: No Third Party Beneficiaries. The
provisions of this Agreement shall be binding upon, and inure to the benefit of,
the respective successors and assigns of the parties hereto, but (except as
expressly provided in this Agreement) neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned (a) by the Company
under any circumstances or (b) by the Investor without the prior written consent
of the Company, except to direct or indirect wholly-owned subsidiaries of the
Investor, provided that the Investor shall remain liable for the performance by
any such subsidiaries of its obligations pursuant to this Agreement. In
addition, prior or subsequent to the Closing Date, the Investor shall have the
right to designate American Home Assurance Company and New Hampshire Insurance
Company (two wholly-owned subsidiaries), in such proportion as the Investor
shall determine in its sole discretion, to acquire and hold title to all or part
of the Series A Preferred Shares, Series A Warrants or Common Shares issued
directly or indirectly upon the conversion thereof and to assume all rights and
obligations of the Investor under this Agreement; upon such subsidiaries'
execution and delivery of an instrument reasonably acceptable to the Company
whereby such subsidiaries assume such rights and obligations, the Investor shall
be released therefrom. Nothing in this Agreement, express or implied, is
intended to confer upon any person other than the parties hereto and their
respective permitted successors and assigns any rights, remedies or obligations
under or by reason of this Agreement.
Section 11.3 Survival of Representations and Warranties. All
representations and warranties included in this Agreement shall survive the
Closing and the issuance and sale of the Series A Preferred Shares and Series A
Warrants for a period of two years from the Closing Date; provided that
representations and warranties applicable to federal, state, local and other
taxes shall survive until the applicable statute of limitations has expired.
Section 11.4 Entire Agreement. This Agreement and all exhibits and
schedules hereto, taken together with the Stock Option Agreement, embodies the
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and thereof and supersede all prior agreements and
understandings relating to such subject matter. The listing of an item on any
schedule shall not be
- 45 -
56
taken to indicate that it is reasonably likely to have a Material Adverse
Effect.
Section 11.5 Modification or Amendment. At any time prior to the Closing
Date or thereafter, the parties hereto may modify or amend this Agreement, by
written agreement executed and delivered by duly authorized officers of the
respective parties.
Section 11.6 Waiver. The conditions to each of the parties' obligations to
consummate the transactions contemplated hereby and to perform the acts
contemplated on its part hereunder are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law. No failure or delay by any party in insisting upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
in exercising any right or remedy consequent upon breach thereof shall
constitute a waiver of any such breach or of any other covenant, duty, agreement
or condition, any such waiver being made only by a written instrument executed
and delivered by the waiving party.
Section 11.7 Governing Law. This Agreement will be construed and enforced
in accordance with, and governed by, the laws of the State of California.
Section 11.8 Consent to Jurisdiction; Service of Process; Waiver of Jury
Trial. (a) The parties to this Agreement hereby irrevocably submit to the
exclusive jurisdiction of any Federal court located in Los Angeles, California
over any suit, action or proceeding arising out of or relating to this
Agreement. The parties hereby irrevocably waive, to the fullest extent permitted
by applicable law, any objection which they may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in such court.
The parties agree that, to the fullest extent permitted by applicable law, a
final and non-appealable judgment in any such suit, action, or proceeding
brought in such court shall be conclusive and binding upon the parties.
(b) The parties hereby irrevocably waive any rights they may have in any
court, state or federal, to a trial by jury in any case of any type that relates
to or arises out of this Agreement or the transactions contemplated herein.
Section 11.9 Severability. Should any part of this Agreement, the Series A
Certificate of Determination, the Series A Warrants, the Quota Share Agreements
or the
- 46 -
57
Registration Rights Agreement for any reason be declared invalid, such decision
shall not affect the validity of any remaining portion, which remaining portion
shall remain in full force and effect as if this Agreement, any such Certificate
of Determination, the Series A Warrants, the Quota Share Agreements or the
Registration Rights Agreement had been executed with the invalid portion thereof
eliminated, so long as the economic or legal substance of the transactions
contemplated hereby is not affected in a manner adverse to any party. Upon any
such determination, the parties shall negotiate in good faith in an effort to
agree to a suitable and equitable substitute provision to effect the original
intent of the parties.
Section 11.10 Specific Performance. Damages in the event of breach of
certain provisions of this Agreement by a party hereto may be difficult or
impossible to ascertain, and it is therefore agreed that each such person, in
addition to and without limiting any other remedy or right it may have, will
have the right to an injunction or other equitable relief in any court of
competent jurisdiction (subject to Section 11.8) enjoining any such breach and
enforcing specifically the terms and provisions hereof, and the parties hereby
waive any and all defenses they may have on the ground of lack of jurisdiction
or competence of the court to grant such an injunction or other equitable
relief.
Section 11.11 Captions. The Article, Section and paragraph captions herein
and table of contents hereto are for convenience of reference only, do not
constitute part of this Agreement and shall not be deemed to limit or otherwise
affect any of the provisions hereof.
Section 11.12 Counterparts. For the convenience of the parties hereto,
this Agreement may be executed by facsimile and in any number of counterparts,
each such counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
Section 11.13 Notices. Any notice, request, instruction or other document
to be given hereunder by any party to the other shall be in writing and shall be
deemed to have been duly given on the date of delivery (i) if delivered
personally or by facsimile transmission, (ii) if delivered by Federal Express or
other next-day courier service, or (iii) if delivered by registered or certified
mail, return receipt requested, postage prepaid. All notices hereunder shall be
delivered as set forth below, or to such other person or at such other address
as may be designated in writing by the party to receive such notice.
- 47 -
58
(a) If to the Investor:
American International Group, Inc.
70 Pine Street
New York, New York 10270
Attention: General Counsel
Facsimile: (212) 785-1584
with a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Andrew S. Rowen, Esq.
Facsimile: (212) 558-3588
(b) If to the Company:
20th Century Industries
6301 Owensmouth Avenue
Woodland Hills, CA 91367
Attention: Chief Executive Officer
General Counsel
Facsimile: (818) 715-6223
with a copy to:
Gibson, Dunn & Crutcher
333 South Grand Avenue
46th Floor
Los Angeles CA 90071-3197
Attention: Peter F. Ziegler
Jonathan K. Layne
Facsimile: (213) 229-7520
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
20TH CENTURY INDUSTRIES
By: /s/ Neil H. Ashley
-------------------
Name: Neil H. Ashley
Title: CEO
- 48 -
59
AMERICAN INTERNATIONAL GROUP, INC.
By: /s/ Robert M. Sandler
------------------------------
Name: Robert M. Sandler
Title: SVP
- 49 -
60
SCHEDULE 2.1 (A)
SUBSIDIARIES OF 20TH CENTURY INDUSTRIES
1. 20th Century Insurance Company, a California Corporation.
2. 21st Century Casualty Company, a California Corporation.
3. 21st Century Industries, a California Corporation.
4. 21st Century Insurance Company, a California Corporation.
5. 21st Century Indemnity Company, a California Corporation.
All of the above are duly organized corporations, validly existing under
the laws of California. Only 20th Century Industries, 20th Century Insurance
Company, and 21st Century Casualty Company are registered with the State of
California Insurance Commissioner pursuant to the Insurance Holding Company
System Regulatory Act, California Insurance Code, Section 1215.4.
61
SCHEDULE 2.1(B)
RESTRICTIONS ON AUTHORIZED CAPITAL
2.1 (B)(i)
PLAN RESERVED COMMON STOCK
---- ---------------------
Restricted Shares Plan 334,409
401(k) 173,688
=======
508,097
2.1 (B)(ii)
The stock of 20th Century Insurance Company and 21st Century Casualty Company
are pledged under the Credit Agreement, dated June 30, 1994, between 20th
Century Industries and various lenders.
The California Department of Insurance authorized the stock pledges to lenders.
Any subsequent efforts by the lenders to exercise control over 20th Century
Insurance Company or 21st Century Casualty Company requires the Department's
approval. The stock of 21st Century Casualty Company is restricted whereby it
cannot be transferred without prior written consent of the California Insurance
Commissioner.
62
SCHEDULE 2.1 (E)
ORDERS AND AGREEMENTS OF OR WITH
THE CALIFORNIA DEPARTMENT OF INSURANCE
1. The California Department of Insurance, on May 8, 1992, ordered
the rate rollback, under Proposition 103, amounting to approximately
$78,300,000 plus 10% simple interest since May 8, 1989.
2. The California Department of Insurance, on June 9, 1994,
ordered 20th Century Insurance Company and 21st Century Casualty
Company to cease and desist from writing earthquake coverage and to
withdraw, as agreed, from the homeowners and condominium lines of
business.
3. Effective July 1, 1994, 20th Century Insurance Company and
21st Century Casualty Company entered into an inter-company
reinsurance agreement in which 21st Century ceded 100% of all
policies to 20th Century Insurance Company. The Department of
Insurance approved the transaction and reserves the right to review
any material changes.
4. The California Department of Insurance, on September 14, 1994,
approved, under stated conditions, a 6% rate increase for automobile
insurance, effective October 4, 1994.
5. Correspondence from the California Department of Insurance,
dated June 9, 1994, confirmed a 17% rate increase for homeowner
insurance, effective August 1, 1994, and the maintenance of a
$250,000,000 surplus.
63
SCHEDULE 2.1 (H)
CONSENTS: NO VIOLATIONS
SECTION BREACH, VIOLATION, DEFAULT ACCELERATION
OR EVENT TRIGGERING A MATERIAL
OBLIGATION
*2.1(h)(ii)(2) Supplemental Executive Retirement Plan
Restricted Shares Plan
2.1(h)(ii)(3) Bank Credit Agreement
2.1(h)(ii)(4) None
* See Schedule 2.1(R) for pertinent sections of Plans.
64
SCHEDULE 2.1 (J)
REINSURANCE
LIST IS ATTACHED
65
SCHEDULE 2.1 (J) LIST
20TH CENTURY INSURANCE COMPANY/21ST CENTURY CASUALTY
SUMMARY OF REINSURANCE PROGRAM
AS OF 09/30/94
TYPE OF CONTRACT/COVERAGE REINSURER'S NAME TERMS
- ------------------------- ---------------- -----
PROPERTY LINES:
- ---------------
1. First layer catastrophe Various domestic reinsurers $16,680,000 Net Annual
excess of loss (17.02500%) Prem 7/1/84 -- 8/20/95
Various foreign reinsurers
(63.6050%)
Various London market
reinsurers (8.6050%)
Lloyd's of London Underwriters
(12.6750%)
2. Second layer catastrophe Various domestic reinsurers $11,400,000 Net Annual
excess of loss (14.90920%) Prem 7/1/94 -- 6/30/96
Various foreign reinsurers
(60.10000%)
Various London market
reinsurers (2.9684%)
Lloyd's of London Underwriters
(17.0224%)
3. Super Property Catastrophe National Indemnity Company $21,750,000 Premium
excess of loss 8/18/94 -- 2/18/95
4. Excess of loss General Reinsurance Corp. Continuous
(20th only)
CASUALTY LINES:
- ---------------
5. Quota share -- Various admitted Companies
Personal excess (15.0%)
liability (20th only) Scor Reinsurance Company
(15.0%)
Underwriters Reinsurance
Company (30.0%) Continuous
OTHER:
- ------
6. 100% Quota share 20th Century Insurance 7/1/94 to
21st Casualty to Company Unlimited Duration
20th Century
66
SCHEDULE 2.1 (K) RESERVES
- --------------------------------------------------------------------------------
SCHEDULE 2.1 (K)
RESERVES
Loss and loss expense relating to the Northridge Earthquake
67
SCHEDULE 2.1 (N) ABSENCE OF UNDISCLOSED LIABILITIES
Subsequent to the June 30, 1994 balance sheet date, the Company has
incurred an additional liability of $88.9 million related to the Proposition 103
refund order upheld by the California Supreme Court on August 18, 1994. This
brings the total liability related to Proposition 103 to $120.8 million, to be
fully recognized at the September 30, 1994 balance sheet date.
68
SCHEDULE 2.1 (P)
LITIGATION AND LIABILITIES
NONE
69
SCHEDULE 2.1 (R)
COMPENSATION AND BENEFIT PLANS
List and Description of Plans:
1. Pension Plan -- a non contributory defined benefit plan for all
regular employees.
2. Savings and Security Plan -- a 401(k) deferred compensation and
401(a) profit sharing plan for employees who have completed one
year of service with the Company and who choose to participate.
3. Supplemental Executive Retirement Plan -- a non-qualified defined
benefit plan for employees nominated by the Chief Executive
Officer and approved by the Board of Directors.
4. Restricted Shares Plan -- An incentive plan for key employees (as
designated by the Key Employee Incentive Committee) which grants
restricted shares of the Company's stock to the designated
employee. The stock vests at 20 per cent per year over a 5-year
period.
5. Executive Medical Plan -- A plan for key employees for
non-reimbursed medical and health-related expenses, to a maximum
reimbursement of $5,000 per year.
Change of Control Provisions:
Exhibit A -- Pension Plan, Article XIV, Merger of Company: Merger of Plan.
Exhibit B -- Savings and Security Plan 401(k), Article XII, Merger of Company; Merger
of Plan.
Exhibit C -- Supplemental Executive Retirement Plan, 2. Definitions, (d) "Change in
Control" and 4. Change in Control.
Exhibit D -- SERP Trust Agreement, Section 12, Amendment or Termination, and Section
15, Binding Effect.
Exhibit E -- Restricted Shares Plan Agreement, Paragraph 16.
Retiree Health and Life Benefits under any other Plan:
The Company has agreed to pay Mr. Louis W. Foster, who retired on
January 1, 1994, an annual retirement benefit of $500,000 for the shorter
of the following two periods: (I) 15 years, or (II) the length of life of
Mr. Foster, or his wife, if she survives him. If Mr. Foster predeceases his
wife, certain death benefits payable to her from insurance policies
maintained by the Company will offset some or all of the retirement
benefits payable to her under the terms of this agreement.
70
Pension Plan
benefits, (2) reduces or eliminates an early retirement benefit or
retirement-type subsidy, or (3) eliminates an optional form of benefit with
respect to benefits attributable to service performed before the amendment
became effective. However, the restriction on affecting retirement-type
subsidies applies only with respect to Participants who satisfy (either
before or after the amendment) the preamendment conditions for entitlement
to the subsidy. For purposes of this provision, a "retirement-type subsidy"
shall have the meaning ascribed to such terms by Section 411(d)(6) of the
Code.
(d) No amendment shall adversely change the vesting schedule with
respect to the future accrual of benefits for any Participant unless each
Participant with five (5) or more one-year Periods of Service is permitted
to elect to have the vesting schedule which was in effect before the
amendment used to determine his/her vested benefit.
13.2 Retroactive Amendments. Notwithstanding any provisions of this
Article XIII to the contrary, to the extent allowable under applicable law the
Plan may be amended prospectively or retroactively (as provided in Section
401(b) of the Code as amended by Section 1023 of ERISA) to make the Plan conform
to any provision of ERISA, the Code provisions dealing with employees' trusts,
or any regulation under either of such statutes.
ARTICLE XIV
MERGER OF COMPANY: MERGER OF PLAN
14.1 Effect of Reorganization or Transfer of Assets. In the event of a
consolidation, merger, sale, liquidation, or other transfer of the operating
assets of the Company to any other company, the ultimate successor or successors
to the business of the Company shall automatically be deemed to have elected to
continue this Plan in full force and effect in the same manner as if the Plan
had been adopted by resolution of its board of directors unless the
successor(s), by resolution of its board of directors, shall elect not to so
continue this Plan in effect, in which case the Plan shall automatically be
deemed terminated as of the applicable effective date set forth in the board
resolution.
14.2 Merger Restriction. Notwithstanding any other provision in this
Article, this Plan shall not in whole or in part merge or consolidate with, or
transfer its assets or liabilities to, any other plan unless each affected
Participant in this Plan would receive a benefit immediately after the merger,
consolidation, or transfer (if the Plan then terminated) which is equal to or
greater than the benefit he/she would have been entitled to receive immediately
before the merger, consolidation, or transfer (if the Plan had then terminated).
ARTICLE XV
PLAN TERMINATION AND DISCONTINUANCE OF CONTRIBUTIONS
15.1 Plan Termination.
(a) (i) Subject to the following provisions of this Section 15.1, 20th
Century Industries may terminate the Plan and the Trust Agreement at any
time by an instrument in writing executed in the name of 20th Century
Industries by an officer or officers duly authorized to execute such an
instrument, and delivered to the Trustee.
30
2.1(R) EXHIBIT A
71
ARTICLE XII
MERGER OF COMPANY; MERGER OF PLAN
12.1 Effect of Reorganization or Transfer of Assets.
In the event of a consolidation, merger, sale, liquidation, or other
transfer of the operating assets of the Company to any other company, the
ultimate successor or successors to the business of the Company shall
automatically be deemed to have elected to continue this Plan in full force and
effect, in the same manner as if the Plan had been adopted by resolution of its
board of directors, unless the successor(s), by resolution of its board of
directors, shall elect not to so continue this Plan in effect, in which case the
Plan shall automatically be deemed terminated as of the applicable effective
date set forth in the board resolution.
12.2 Merger Restriction.
Notwithstanding any other provision in this Article, this Plan shall
not in whole or in part merge or consolidate with, or transfer its assets or
liabilities to any other plan unless each affected Participant in this Plan
would receive a benefit immediately after the merger, consolidation, or transfer
(if the Plan then terminated) which is equal to or greater than the benefit
he/she would have been entitled to receive immediately before the merger,
consolidation, or transfer (if the Plan had then terminated).
62
2.1(R) EXHIBIT B
72
Supplemental Executive Retirement
Plan
(d) "Change in Control" means, after the effective date of this
Plan:
(i) There shall be consummated (A) any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Company's common stock
would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of the Company's common stock
immediately prior to the merger have the same proportionate ownership of
common stock of the surviving corporation immediately after the merger,
or (B) any sale, lease, exchange or other transfer (in one transaction or
a series of related transactions) of all, or substantially all, of the
assets of the Company; or
(ii) The stockholders of the Company approve a plan or proposal for
the liquidation or dissolution of the Company; or
(iii) Any "person" (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) other
than a person owned by or directly or indirectly managed by the Company,
shall become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 25 percent or more of the
Company's outstanding common stock; or
(iv) During any period of two consecutive years, individuals who at
the beginning of such period constitute the entire Board of Directors of
the Company shall cause for any reason to constitute a majority thereof
unless the election, or the nomination for election by the Company's
stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(e) "Code" means the Internal Revenue Code of 1986, as in effect
on the date of execution of this Plan document and as thereafter amended from
time to time.
(f) "Committee" means the 20th Century Industries Company
Nonqualified Supplemental Benefit Committee.
2
2.1(R) EXHIBIT C
73
Participant equal to the Retirement Income Benefit as calculated under Sections
3(a)(i), (ii) and (iii), but reduced by five percent (5%) for each year
retirement occurs prior to the Participant attaining age sixty-five (65).
4. Change in Control
(a) Termination of Employment Within Three Years After a Change
in Control
If such Participant's employment terminates for any reason within
three years after a Change in Control but prior to his/her Normal Retirement
Date, such Participant shall be entitled to a Retirement Income Benefit in the
form on a monthly benefit commencing on the first day of the month, following
such termination of employment, payable to the Participant for one hundred
eighty months (180) which is calculated in accordance with Section 3(a) and
reduced to reflect early retirement in accordance with Section 3(c).
(b) Termination of Employment at any Time After Change in Control
If such Executive's employment terminates at any time after a
Change in Control, but prior to his/her Normal Retirement Date, such Executive
shall be entitled to a Retirement Income Benefit payable on the first day of
the month following such termination of employment, in the form of a lump sum
distribution actuarially determined to be the present value of the amount
calculated in accordance with Section 3(a) and reduced to reflect early
retirement in accordance with Section 3(c); unless such termination of
employment is by the Company for Cause, as defined in Paragraph (i) below, or
by the Executive other than for Good Reason, as defined in Paragraph (ii) below.
(i) Termination by the Company of an Executive's employment for
"Cause" shall mean termination upon (A) the willful and continued failure by the
Executive to substantially perform his/her duties with the Company (other than
any such failure resulting from his/her incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a notice
of termination, by the Executive for Good Reason, as defined in Paragraph (ii)
below), after a written demand for substantial performance is delivered to the
Executive by the Board of Directors, which demand specifically identifies the
manner in which the Board
6
74
SERP Trust
Company as they are incurred. If not paid by the Company, the Trustee may pay
such amount from the Trust Fund (or may resign and pay its reasonable costs of
resignation from the Trust Fund). If such amounts are paid from the Trust Fund,
the Company shall reimburse all such amounts, plus interest at 6% per annum.
Section 11. Replacement of Trustee.
The Trustee may be removed at any time by the Company or may resign, in
which case a new trustee shall be appointed by the Company.
Section 12. Amendment or Termination.
(a) The Trust hereby created shall be irrevocable. The Company hereby
expressly waives all rights and powers, whether alone or in conjunction with
others, (regardless of when or from what source, the Company may heretofore or
hereafter have acquired such rights or powers) to alter, amend, revoke, or
terminate the Trust created by this Trust Agreement or any of the terms of this
Trust, in whole or in part, except as set forth in the following sentence. If
this Trust is submitted to the Internal Revenue Service for a ruling and (i) if
the Internal Revenue Service requires an amendment of the Trust for a favorable
ruling, than the Trust may be amended by the Company and the Trustee in
accordance with the amendments required by the Internal Revenue Service or (ii)
if the Internal Revenue Service fails to give such a favorable ruling, then the
Company may revoke this Trust.
12
2.1(R) EXHIBIT D
75
SERP Trust
Section 15. Binding Effect.
This Trust Agreement shall be binding upon the successors in interest of
each of the respective parties hereto. The Company agrees that it will not
merge, consolidate, or otherwise be acquired by any other business entity unless
and until the surviving business entity shall expressly assume and confirm in
writing the obligations of the company under this Trust Agreement.
Section 16. Gender and Number.
Throughout this Trust Agreement, the masculine gender shall be deemed to
include the feminine and the singular may include the plural, unless the context
clearly indicates to contrary.
14
76
Restricted Shares Plan Agreement
shall require the Company to issue or transfer such shares unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
14. In connection with the shares awarded hereunder, it shall be a
condition precedent to the Company's obligation to evidence the removal of any
restrictions or transfer or lapse of any risk of forfeiture that the Employee
make arrangements satisfactory to the Company to insure that the amount of any
federal or other withholding tax required to be withheld with respect to such
sale or transfer on such removal or lapse is made available to the Company for
timely payment of such tax.
15. The Employee represents that he or she is having the shares issued to
him or her for his or her own account and not with a view to or for sale in
connection with any distribution of the shares.
16. Notwithstanding any other provision of this Agreement including, but
not limited to, paragraphs 3, 4 and 5 hereof, all shares which have been granted
pursuant to this Agreement which have not been delivered to the Employee because
of the expiration date of the Restrictions shall vest in the Employee
immediately before a "change of control" of the Company, as defined herein, free
and clear of any restrictions, except the restrictions imposed by paragraphs 12
through 15 hereof. "Change of control" is hereby defined as follows:
(i) the election to the board of directors of a majority of directors
not nominated by the prior board of directors;
(ii) the merger of the Company with or into any other corporation not
controlled by the Company immediately before the merger;
(iii) the sale of a majority of the assets of the Company to persons,
firms or corporations not controlled by the Company immediately before the
sale;
2.1(R) EXHIBIT E
77
Restricted Shares Plan Agreement
(iv) the acquisition of a majority of the shares of the Company by
persons not shareholders of the Company as of the date of this Agreement in
one transaction or series of transactions;
(v) the liquidation or dissolution of the Company;
(vi) any other transaction or reorganization similar to the foregoing
which in the opinion of the Committee constitutes a "change of control" of
the nature described in subparagraphs (i) through (v) hereof.
However, if in the opinion of the Committee the vesting of the shares
immediately before a change of control is not in the best interests of the
Company or its shareholders, shares that have not been delivered to the Employee
because of the expiration date of the Restrictions shall remain subject to the
Restrictions imposed by paragraphs 3, 4 and 5 hereof. Upon the shares vesting in
the Employee pursuant to this paragraph, share certificate(s) shall be delivered
to the Employee pursuant to the procedures set forth in paragraphs 4 and 5
hereof.
Executed at the place and on the date first above written.
20TH CENTURY INDUSTRIES
By /s/ LOUIS W. FOSTER
------------------------------
Louis W. Foster, Chairman
By /s/ JOHN R. BOLLINGTON
-----------------------------
John R. Bollington, Secretary
--------------------------------
"Employee"
78
20TH CENTURY INDUSTRIES & SUBSIDIARIES
SCHEDULE 2.1(S)
ITEM s(i)(c)
FEDERAL INCOME TAX RETURNS WHICH HAVE NOT BEEN EXAMINED BY THE INTERNAL
REVENUE SERVICE AND FOR WHICH THE PERIOD OF ASSESSMENT HAS NOT YET EXPIRED:
RETURNS FOR THE YEARS 1991, 1992, 1993.
THE LAST IRS EXAMINATION WAS COMPLETED OCTOBER 23, 1991 (DATE OF LETTER
FROM DISTRICT DIRECTOR WITH COPY OF EXAMINATION REPORT, FORM 4549-A) WITH NO
CHANGES. IT COVERED THE YEARS: 1981 THROUGH 1986, AND 1988.
STATE INCOME TAX RETURNS WHICH HAVE NOT BEEN EXAMINED BY THE CALIFORNIA
FRANCHISE TAX BOARD AND FOR WHICH THE PERIOD OF ASSESSMENT HAS NOT YET EXPIRED:
RETURNS FOR THE YEARS 1990, 1991, 1992, 1993.
ITEM s(i)(a)
CALIFORNIA PREMIUM TAX -- YEARS 1989 AND 1990
A DEFICIENCY ASSESSMENT WAS ISSUED BY THE CALIFORNIA STATE BOARD OF
EQUALIZATION ON OCTOBER 8, 1993, AS FOLLOWS:
YEAR DUE DATE GROSS PREMIUMS RATE TAX INTEREST*
- ---- -------- -------------- ----- ------- ---------
1989 4/1/90 19,992,089 2.37% 473,813 217,164
1990 4/1/91 14,751,589 2.46% 362,889 115,520
AMOUNT DUE 836,702 332,684
* INTEREST TO OCTOBER 31, 1993.
THE DEFICIENCY ARISES BECAUSE THE COMPANY DID NOT PAY PREMIUM TAX ON
PREMIUMS WHICH WERE TO BE REBATED TO OUR POLICYHOLDERS UNDER PROP 103. THE
DEPARTMENT OF INSURANCE CONTENDS WE SHOULD HAVE PAID THE PREMIUM TAX ON THOSE
PREMIUMS BECAUSE WE DID NOT PAY THOSE REBATES BUT ONLY ACCRUED THE LIABILITY. WE
TIMELY FILED A PETITION OF REDETERMINATION WITH THE SBE ON NOVEMBER 5, 1993, AND
HAVE NOT HEARD ANYTHING FURTHER. IF WE LOSE THE APPEAL WE WOULD HAVE TO PAY
ADDITIONAL INTEREST AS WELL AS A 10% PENALTY OF $83,670.
79
EXHIBIT
A
80
EXHIBIT A
CERTIFICATE OF DETERMINATION
OF
20TH CENTURY INDUSTRIES
__________________ and ___________________ certify that:
1. They are the president and the secretary, respectively, of 20TH
CENTURY INDUSTRIES, a California corporation (the "Corporation").
2. The authorized number of shares of Series A Convertible
Preferred Stock, par value $1.00 per share, is 265,000, none of which has been
issued.
3. The Board of directors of the Corporation has duly adopted the
following resolution:
WHEREAS, the articles of incorporation authorize the Preferred Stock of
the Corporation to be issued in series and authorize the Board of Directors to
determine the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and to fix the
number of shares and designation of any such series, now therefore it is
RESOLVED, that the Board of Directors does hereby establish a series of
Preferred Stock as follows:
Section 1. Designation and Rank. The series created and provided
for hereby is designated as the Series A Convertible Preferred Stock. Each
share of the Series A Convertible Preferred Stock shall be identical in all
respects with each other share of the Seried A Convertible Preferred Stock.
Shares of the Series A Convertible Preferred Stock shall have a liquidation
preference of $1,000 per share (the "Stated Value"). The Series A Convertible
Preferred Stock shall rank prior to the Corporation's Common Stock and to all
other classes and series of equity securities of the Corporation now or
hereafter authorized, issued or outstanding (the Common Stock and such other
classes and series of equity securities collectively may be referred to herein
as the "Junior Stock"), other than any classes or series of equity securities
of the Corporation ranking on a parity with (the "Parity Stock") or senior to
(the "Senior Stock") the Series A Convertible Preferred Stock as to dividend
rights and rights upon liquidation, winding up or dissolution of the
Corporation. The Series A Convertible Preferred Stock shall be junior to all
outstanding debt of the Corporation. The Series A Convertible Preferred Stock
shall be subject to creation of Senior Stock, Parity Stock and Junior Stock to
81
the extent not prohibited by the Corporation's Articles of Incorporation,
subject to the approval of the holders of the outstanding shares of Series A
Convertible Preferred Stock to the extent required pursuant to Section 8 hereof.
Section 2. Number. The number of authorized shares of the Series A
Convertible Preferred Stock shall initially consist of 265,000 shares of which
200,000 are to be issued initially. The Corporation shall not issue any of the
authorized shares of Series A Convertible Preferred Stock after the initial
issuance of 200,000 shares other than (i) pursuant to the provisions of Section
3(b) hereof, (ii) pursuant to Section 4.3 of the Investment and Strategic
Alliance Agreement, dated as of October 17, 1994, between the Company and
American International Group, Inc. (the "Investment Agreement"), in the event
the Company elects to require the contribution of additional capital to the
Company or (iii) otherwise upon the approval of the holders of the outstanding
shares of Series A Convertible Preferred Stock pursuant to Section 8(c) hereof.
Subject to any required approval of the holders of the outstanding shares of
Series A Convertible Preferred Stock pursuant to Section 8(c) hereof, the number
of authorized shares of the Series A Convertible Preferred Stock may be
increased by the further resolution duly adopted by the Board of Directors of
the Corporation or a duly authorized committee thereof and the filing of an
officers' certificate pursuant to the provisions of the California General
Corporation Law. The number of authorized shares of the Series A Convertible
Preferred Stock shall not at any time be decreased below the aggregate number of
such shares then outstanding and contingently issuable pursuant to Section 3(b)
hereof or Section 4.3 of the Investment Agreement.
Section 3. Dividends.
(a) General. For the purposes of this Section 3, each ____________
_______, _______, ________ and _________ on which any Series A Convertible
Preferred Stock shall be outstanding shall be deemed to be a "Dividend Due
Date." The holders of Series A Convertible Preferred Stock shall be entitled to
receive, if, when and as declared by the Board of Directors out of funds legally
available therefor, cumulative dividends at the rate of $90.00 per year on each
share of Series A Convertible Preferred Stock and no more, calculated on the
basis of a year of 360 days consisting of twelve 30-day months, payable
quarterly on each Dividend Due Date, with respect to the quarterly period ending
on the day immediately preceding such Dividend Due Date (except that if any such
date is not a Business Day, then such dividend shall be payable on the next
Business Day following such Dividend Due Date, provided that, for the
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purposes of computing such dividend payment, no interest or sum in lieu of
interest shall accrue from such Dividend Due Date to the next Business Day
following such Dividend Due Date). For purposes hereof, the term Business Day
shall mean any day (except a Saturday or Sunday or any day on which banking
institutions are authorized or required to close in The City of New York, New
York or Los Angeles, California). Dividends on each share of Series A
Convertible Preferred Stock shall accrue and be cumulative from and after the
date of issuance of such share of Series A Convertible Preferred Stock. The
amount of dividends payable per share for each full dividend period shall be
computed by dividing by four the $90.00 annual rate. The record date for the
payment of dividends on the Series A Convertible Preferred Stock shall in no
event be more than sixty (60) days nor less than fifteen (15) days prior to a
Dividend Due Date. Such dividends shall be payable in the form determined in
accordance with subparagraph (b) below. Any such dividend payable in shares of
Series A Convertible Preferred Stock shall be payable by delivery to such
holders, at their respective addresses as they appear in the stock register, of
certificates representing the appropriate number of duly authorized, validly
issued, fully paid and nonassessable shares of Series A Convertible Preferred
Stock.
(b) Form of Dividends. Dividends payable on any Dividend Due Date
occurring prior to ______________, 1997 shall, if declared by the Board of
Directors of the Corporation or any duly authorized committee thereof and
regardless of when actually paid, be payable in shares of Series A Convertible
Preferred Stock or, at the election of the Corporation contained in a resolution
of the Board of Directors or such committee, in substitution in whole or in part
for such shares of Series A Convertible Preferred Stock, in cash. The number of
shares of Series A Convertible Preferred Stock so payable on any Dividend Due
Date as a dividend per share of Series A Convertible Preferred Stock shall be
equal to the product of one share of Series A Convertible Preferred Stock
multiplied by a fraction of which the numerator is the amount of dividends that
would have been payable on such share if such dividend were being paid in cash
on such Dividend Due Date and the denominator is the Stated Value of such share.
Dividends payable on any Dividend Due Date on or after ________________, 1997
shall, if declared by the Board of Directors of the Corporation or any duly
authorized committee thereof, be payable in cash. Notwithstanding the foregoing,
no fractional shares of Series A Convertible Preferred Stock, and no certificate
or scrip or other evidence thereof, shall be issued, and any holder of Series A
Convertible Preferred Stock who would otherwise be entitled to receive a
fraction
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of a share of Series A Convertible Preferred Stock in accordance with this
paragraph (b) (after taking into account all shares of Series A Convertible
Preferred Stock then held by such holder) shall be entitled to receive, in lieu
thereof, cash in an amount equal to such fraction multiplied by the Stated
Value. In no event shall the election by the Corporation to pay dividends, in
whole or in part, in cash preclude the Corporation from making a different
election with respect to all or a portion of the dividends to be paid on the
Series A Convertible Preferred Stock on any subsequent Dividend Due Date. Any
additional shares of Series A Convertible Preferred Stock issued pursuant to
this paragraph (b) shall be governed by this resolution and shall be subject in
all respects to the same terms as the shares of Series A Convertible Preferred
Stock originally issued hereunder. All dividends (whether payable in cash or in
whole or in part in shares of Series A Convertible Preferred Stock) paid
pursuant to this paragraph (b) shall be paid in equal pro rata proportions of
such cash and/or shares of Series A Convertible Preferred Stock except as
otherwise provided for the payment of cash in lieu of fractional shares.
(c) Dividend Preference. On each Dividend Due Date all dividends which
shall have accrued on each share of Series A Convertible Preferred Stock
outstanding on such Dividend Due Date shall accumulate and be deemed to become
"due." Any dividend which shall not be paid on the Dividend Due Date on which it
shall become due shall be deemed to be "past due" until such dividend shall be
paid or until the share of Series A Convertible Preferred Stock with respect to
which such dividend became due shall no longer be outstanding, whichever is the
earlier to occur. No interest, sum of money in lieu of interest, or other
property or securities shall be payable in respect of any dividend payment or
payments which are past due. Dividends paid on shares of Series A Convertible
Preferred Stock in an amount less than the total amount of such dividends at the
time accumulated and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding.
If a dividend upon any shares of Series A Convertible Preferred Stock, or
any other outstanding preferred stock of the Corporation ranking on a parity
with the Series A Convertible Preferred Stock as to dividends, is in arrears,
all dividends or other distributions declared upon each series of such stock
(other than dividends paid in Junior Stock) may only be declared pro rata so
that in all cases the amount of dividends or other distributions declared per
share of each such series bear to each other the same ratio that the accumulated
and unpaid dividends per
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share on the shares of each such series bear to each other. Except as set forth
above, if a dividend upon any shares of Series A Convertible Preferred Stock, or
any other outstanding stock of the Corporation ranking on a parity with the
Series A Convertible Preferred Stock as to dividends, is in arrears: (i) no
dividends, in cash, stock or other property, may be paid or declared and set
aside for payment or any other distribution made upon any stock of the
Corporation ranking junior to the Series A Convertible Preferred Stock as to
dividends (other than dividends or distributions in Junior Stock); (ii) no stock
of the Corporation ranking on a parity with the Series A Convertible Preferred
Stock as to dividends may be (A) redeemed pursuant to a sinking fund or
otherwise, except (1) by means of a redemption pursuant to which all outstanding
shares of the Series A Convertible Preferred Stock and all stock of the
Corporation ranking on a parity with the Series A Convertible Preferred Stock as
to dividends are redeemed or pursuant to which a pro rata redemption is made
from all holders of the Series A Convertible Preferred Stock and all stock of
the Corporation ranking on a parity with the Series A Convertible Preferred
Stock as to dividends (in each case, only so long as the Series A Convertible
Preferred Stock is otherwise redeemable pursuant hereto), the amount allocable
to each series of such stock being determined on the basis of the aggregate
liquidation preference of the outstanding shares of each series and the shares
of each series being redeemed only on a pro rata basis, or (2) by conversion of
such stock ranking on a parity with the Series A Convertible Preferred Stock as
to dividends into, or exchange of such stock for, Junior Stock or (B) purchased
or otherwise acquired for any consideration by the Corporation except (1)
pursuant to an acquisition made pursuant to the terms of one or more offers to
purchase all of the outstanding shares of the Series A Convertible Preferred
Stock and all stock of the Corporation ranking on a parity with the Series A
Convertible Preferred Stock as to dividends (which offers shall describe such
proposed acquisition of all such Parity Stock), which offers shall each have
been accepted by the holders of more than 50% of the shares of each series or
class of stock receiving such offer outstanding at the commencement of the first
of such purchase offers, or (2) by conversion of such stock ranking on a parity
with the Series A Convertible Preferred Stock as to dividends into, or exchange
of such stock for, Junior Stock; and (iii) no stock ranking junior to the Series
A Convertible Preferred Stock as to dividends may be redeemed, purchased, or
otherwise acquired for consideration (including pursuant to sinking fund
requirements) except by conversion into or exchange for Junior Stock.
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The Corporation shall not permit any Subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under this Section 3 and Section 7
below, purchase or otherwise acquire such shares at such time and in such
manner. As used herein, "Subsidiary" means a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by the
Corporation or by one or more other Subsidiaries, or by the Corporation and one
or more other Subsidiaries.
Section 4. Redemption.
(a) Optional Redemption. The Corporation, at its option, may redeem the
shares of the Series A Convertible Preferred Stock, as a whole or from time to
time in part, on any Business Day set by the Board of Directors (the "Redemption
Date") at a redemption price per share equal to $3,000.00 plus an amount equal
to accrued and unpaid dividends thereon (whether or not earned or declared) to
the Redemption Date (subject to the right of the holder of record on the record
date for the payment of a dividend to receive the dividend due on the
corresponding Dividend Due Date, or the next Business Day thereafter, as the
case may be); provided, however, that, on and after the fifth anniversary of the
date on which Series A Preferred Shares were first issued by the Corporation
(the "Issuance Anniversary Date"), in the event that the closing price (as
defined in Section 6(e)(viii)) of the Common Stock for 30 consecutive Trading
Days ending not more than five days prior to the date of the notice of
redemption is at least 180% of the Conversion Price then in effect, the
Corporation may so redeem such shares at the following redemption price per
share if redeemed during the twelve-month period beginning on the Issuance
Anniversary Date in the year indicated below:
REDEMPTION
YEAR PRICE
---- ----------
1999..................... $1,050
2000..................... 1,040
2001..................... 1,030
REDEMPTION
YEAR PRICE
---- ----------
2002..................... $1,020
2003..................... 1,010
and if redeemed at any time on or after the Issuance Anniversary Date in 2004 at
$1,000 per share, plus, in each case, an amount equal to all accrued and unpaid
dividends thereon (whether or not earned or declared) to the Redemption Date
(subject to the right of the holder of record on the record date for the payment
of a dividend to
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receive the dividend due on the corresponding Dividend Due Date, or the next
Business Day thereafter, as the case may be). The applicable amount payable upon
redemption as provided in the immediately preceding sentence is hereinafter
referred to as the "Redemption Price."
(b) Notice, etc. (i) Notice of every redemption of shares of Series A
Convertible Preferred Stock pursuant to this Section 4 shall be mailed by first
class mail, postage prepaid, addressed to the holders of record of the shares to
be redeemed at their respective last addresses as they shall appear on the stock
register of the Corporation. Such mailing shall be at least 30 days and not more
than 60 days prior to the Redemption Date. Each such notice of redemption shall
specify the Redemption Date, the Redemption Price, the place or places of
payment, that payment will be made upon the later of the Redemption Date or
presentation and surrender of the shares of Series A Convertible Preferred
Stock, that on and after the Redemption Date, dividends will cease to accumulate
on such shares and that the right of holders to convert such shares, as provided
in Section 6 hereof, shall terminate at the close of business on the Business
Day immediately preceding the Redemption Date.
(ii) In case of redemption of a part only of the shares of Series A
Convertible Preferred Stock at the time outstanding, the redemption shall be pro
rata. The Board of Directors shall have full power and authority, subject to the
provisions herein contained, to prescribe the terms and conditions upon which
shares of the Series A Convertible Preferred Stock shall be redeemed from time
to time.
(iii) If such notice of redemption shall have been duly given and if on or
before the Redemption Date specified therein the funds necessary for such
redemption shall have been deposited by the Corporation with the bank or trust
company hereinafter referred to in trust for the pro rata benefit of the holders
of the shares called for redemption, then, notwithstanding that any certificate
for shares so called for redemption shall not have been surrendered for
cancellation, from and after the Redemption Date, all shares so called for
redemption shall no longer be deemed to be outstanding, dividends shall cease to
accrue thereon and all rights with respect to such shares shall forthwith cease
and terminate, except only the right of the holders thereof to receive from such
bank or trust company at any time on and after the Redemption Date the funds so
deposited, without interest. The aforesaid bank or trust company shall be
organized and in good standing under the laws of the United States of America or
of any State, shall have capital, surplus and undivided profits aggregating at
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least $500,000,000 according to its last published statement of financial
condition, and shall be identified in the notice of redemption. Any interest
accrued on such funds shall be paid to the Corporation from time to time. Any
funds so set aside or deposited, as the case may be, and unclaimed at the end of
three years from such Redemption Date shall, to the extent permitted by law, be
released or repaid to the Corporation, after which repayment the holders of the
shares so called for redemption shall look only to the Corporation for payment
thereof.
(c) Status of Redeemed Shares. Shares of the Series A Convertible
Preferred Stock which have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock of the Corporation,
without designation as to series, until such shares are once more designated as
part of a particular series by or on behalf of the Board of Directors.
Section 5. No Sinking Fund. The shares of Series A Convertible Preferred
Stock, shall not be subject to mandatory redemption or the operation of any
purchase, retirement, or sinking fund.
Section 6. Conversion Privilege.
(a) Conversion Right. The holder of any share of Series A Convertible
Preferred Stock shall have the right, at such holder's option (but if such share
is called for redemption, then in respect of such share only to and including,
but not after, the close of business on the Business Day immediately preceding
the applicable Redemption Date, provided that no default by the Corporation in
the payment of the applicable Redemption Price shall have occurred and be
continuing on the Redemption Date) to convert such share on any Business Day
into that number of fully paid and non-assessable Common Shares, without par
value ("Common Stock"), of the Corporation (calculated as to each conversion to
the nearest 1/100th of a share of Common Stock) obtained by dividing $1,000.00
by the Conversion Price then in effect. The "Conversion Price" shall initially
be equal to $11.33 and shall be subject to adjustment from time to time as set
forth below.
(b) Conversion Procedures. Any holder of shares of Series A Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates for such shares of Series A
Convertible Preferred Stock at the office of the Corporation or any transfer
agent for the Series A Convertible Preferred Stock (the "Transfer Agent"), which
certificate or certificates, if the Corporation shall so require, shall be
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duly endorsed to the Corporation or in blank, or accompanied by proper
instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects so to
convert such shares of Series A Convertible Preferred Stock and specifying the
name or names in which a certificate or certificates for Common Stock are to be
issued.
The Corporation covenants that it will, as soon as practicable after such
deposit of certificates for Series A Convertible Preferred Stock accompanied by
the written notice of conversion and compliance with any other conditions herein
contained, deliver to the person for whose account such shares of Series A
Convertible Preferred Stock were so surrendered, or to his nominee or nominees,
certificates for the number of full shares of Common Stock to which he shall be
entitled as aforesaid, together with a cash adjustment of any fraction of a
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Series A Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Series A Convertible Preferred Stock shall
be treated for all purposes as the record holder or holders of such Common Stock
on such date; provided, however, that the Corporation shall not be required to
convert any shares of Series A Convertible Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series A Convertible Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books as if the surrender had been made on the date of
such reopening, and the conversion shall be at the Conversion Price in effect on
such date.
(c) Certain Adjustments for Dividends. In the case of any share of Series
A Convertible Preferred Stock which is surrendered for conversion after any
record date established by the Board with respect to the payment of a dividend
on the Series A Convertible Preferred Stock and on or prior to the opening of
business on the next succeeding Dividend Due Date (or, if such Dividend Due Date
is not a Business Day, before the close of business on the next Business Day
following such Dividend Due Date), the dividend due on such date shall be
payable on such date to the holder of record of such share as of such preceding
record date notwithstanding such conversion. Shares of Series A Convertible
Preferred Stock surrendered for conversion during the period from the close of
business on any record date established by the Board with respect to the payment
of
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a dividend on the Series A Convertible Preferred Stock immediately preceding any
Dividend Due Date to the opening of business on such Dividend Due Date (or, if
such Dividend Due Date is not a Business Day, before the opening of business on
the next Business Day following such Dividend Due Date) shall, except in the
case of shares of Series A Convertible Preferred Stock which have been called
for redemption on a Redemption Date within such period, be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Corporation in an amount equal to the dividend payable on such Dividend Due Date
on the shares of Series A Convertible Preferred Stock being surrendered for
conversion. The dividend with respect to a share of Series A Convertible
Preferred Stock called for redemption on a Redemption Date during the period
from the close of business on any record date established by the Board with
respect to the payment of a dividend on the Series A Convertible Preferred Stock
next preceding any Dividend Due Date to the opening of business on such Dividend
Due Date (or, if such Dividend Due Date is not a Business Day, before the
opening of business on the next Business Day following such Dividend Due Date)
shall be payable on such Dividend Due Date (or, if such Dividend Due Date is not
a Business Day, on the next Business Day following such Dividend Due Date) to
the holder of record of such share on such record date notwithstanding the
conversion of such share of Series A Convertible Preferred Stock after such
record date and prior to the opening of business on such Dividend Due Date (or,
if such Dividend Due Date is not a Business Day, before the opening of business
on the next Business Day following such Dividend Due Date), and the holder
converting such share of Series A Convertible Preferred Stock need not include a
payment of such dividend amount upon surrender of such share of Series A
Convertible Preferred Stock for conversion. Except as provided in this
paragraph, no payment or adjustment shall be made upon any conversion on account
of any dividends accrued on shares of Series A Convertible Preferred Stock
surrendered for conversion or on account of any dividends on the Common Stock
issued upon conversion.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series A
Convertible Preferred Stock. If more than one certificate representing shares of
Series A Convertible Preferred Stock shall be surrendered for conversion at one
time by the same holder, the number of full shares issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series A Convertible Preferred Stock so surrendered. Instead of any fractional
share of Common Stock which would otherwise be issuable upon conversion of
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any shares of Series A Convertible Preferred Stock, the Corporation will pay a
cash adjustment in respect of such fractional interest in an amount equal to the
same fraction of the Current Market Price per share of the Common Stock.
(e) Anti-Dilution Adjustments. The Conversion Price shall be adjusted from
time to time as follows:
(i) In case the Corporation shall pay or make a dividend in shares of
Common Stock on any class of capital stock of the Corporation, the
Conversion Price in effect immediately prior to the opening of business on
the next Business Day following the date fixed for determination of
shareholders entitled to receive such dividend shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares
constituting such dividend, such reduction to become effective immediately
prior to the opening of business on the next Business Day following the
date fixed for such determination. For the purposes of this clause (i), the
number of shares of Common Stock at any time outstanding shall include
shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock.
(ii) In case the Corporation shall hereafter issue rights, options or
warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (such rights, options or warrants not
being available on an equivalent basis to holders of the Series A
Convertible Preferred Stock upon conversion) at a price per share less than
the Current Market Price of the Common Stock on the date fixed for the
determination of shareholders entitled to receive such rights, options or
warrants (other than pursuant to a dividend reinvestment plan), (A) the
Conversion Price in effect immediately prior to the opening of business on
the next Business Day following the date fixed for such determination shall
be reduced by multiplying the Conversion Price in effect immediately prior
to the close of business on the date fixed for the determination of holders
of Common Stock entitled to receive such rights, options or warrants by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock which the aggregate
of the offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such Current Market
Price and the denominator shall be the number of shares of Common
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Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately
prior to the opening of business on the next Business Day following the
date fixed for such determination. For the purposes of this clause (ii),
the number of shares of Common Stock at any time outstanding shall include
shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock; and (B) if any such rights, options or
warrants expire or terminate without having been exercised or are exercised
for a consideration different from that utilized in the computation of any
adjustment or adjustments on account of such rights, options or warrants,
the Conversion Price with respect to any Series A Preferred Shares not
previously converted into Common Stock shall be readjusted such that the
Conversion Price would be the same as would have resulted had such
adjustment been made without regard to the issuance of such expired or
terminated rights, options or warrants or based upon the actual
consideration received upon exercise thereof, as the case may be, which
readjustment shall become effective upon such expiration, termination or
exercise, as applicable; provided, however, that all readjustments in the
Conversion Price based upon any expiration, termination or exercise for a
different consideration of any such right, option or warrant, in the
aggregate, shall not cause the Conversion Price to exceed the Conversion
Price immediately prior to the time such rights, options or warrants were
initially issued (without regard to any other adjustments of such number
under this Section 6(e) that may have been made since the date of the
issuance of such rights, options or warrants).
(iii) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion
Price in effect immediately prior to the opening of business on the next
Business Day following the day upon which such subdivision becomes
effective shall be proportionately reduced, and, conversely, in case
outstanding shares of Common Stock shall each be combined into a smaller
number of shares of Common Stock, the Conversion Price in effect
immediately prior to the opening of business on the next Business Day
following the day upon which such combination becomes effective shall be
proportionately increased.
(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its indebtedness
or assets (including securities, but excluding any rights, options or
warrants referred to in clause (ii) of this Section 6(e), any dividend or
distribution paid exclusively in cash and any
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dividend referred to in clause (i) of this Section 6(e)), the Conversion
Price shall be adjusted so that the same shall equal the price determined
by multiplying the Conversion Price in effect immediately prior to the
close of business on the date fixed for the determination of shareholders
entitled to receive such distribution by a fraction of which (A) the
numerator shall be the Current Market Price at the close of business on the
date fixed for such determination less the then fair market value of the
portion of the assets or evidences of indebtedness so distributed
applicable to one share of Common Stock (the amount calculated pursuant to
this clause (A) being hereinafter referred to as the "Adjusted Market
Price") and (B) the denominator shall be such Current Market Price, such
adjustment to become effective immediately prior to the opening of business
on the next Business Day following the date fixed for the determination of
shareholders entitled to receive such distribution.
(v) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash that
is distributed and adjusted for as part of a distribution referred to in
clause (iv) of this Section 6(e)) in an aggregate amount that, combined
together with (I) the aggregate amount of any other distributions to all
holders of its Common Stock made exclusively in cash within the 12 months
preceding the date of payment of such distribution and in respect of which
no adjustment pursuant to this clause (v) or clause (vi) of this Section
6(e) has been made and (II) the aggregate of any cash plus the fair market
value as of the last time tender could have been made pursuant to such
tender offer, as it may have been amended (such time, the "Expiration
Time") of consideration payable in respect of any tender offer by the
Corporation or any of its Subsidiaries for all or any portion of the Common
Stock concluded within the 12 months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to this clause
(v) or clause (vi) of this Section 6(e) has been made, exceeds 10% of the
product of the Current Market Price per share of the Common Stock on the
date for the determination of holders of shares of Common Stock entitled to
receive such distribution times the number of shares of Common Stock
outstanding on such date, then, and in each such case, immediately after
the close of business on such date for determination, the Conversion Price
shall be reduced so that the same shall equal the price determined by
multiplying the Conversion Price in effect immediately prior to the close
of business on the date fixed for determination of the shareholders
entitled to receive such distribution by a fraction (i) the numerator of
which shall be equal to the Current Market Price per share of the Common
Stock on the
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date fixed for such determination less an amount equal to the quotient of (x)
the excess of such combined amount over such 10% and (y) the number of shares
or Common Stock outstanding on such date for determination and (ii) the
denominator of which shall be equal to the Current Market Price per share of
the Common Stock as of such date for determination.
(vi) In case a tender offer (the "Tender Offer") made by the
Corporation or any Subsidiary for all or any portion of the Common Stock shall
expire and the Tender Offer (as amended upon the expiration thereof) shall
require the payment to shareholders based on the acceptance (up to any maximum
specified in the terms of the tender offer) of Purchased Shares (as defined
below) of an aggregate of the cash plus other consideration having a fair
market value (as determined by the Board of Directors) as of the Expiration
Time of such tender offer that combined together with (I) the aggregate of the
cash plus the fair market value (as determined by the Board of Directors) of
consideration payable in respect of any other tender offer (determined as of
the Expiration Time of such other tender offer) by the Corporation or any
Subsidiary for all or any portion of the Common Stock expiring within the 12
months preceding the expiration of the Tender Offer and in respect of which no
asjustment pursuant to clause (v) of this Section 6(e) or this clause (vi) has
been made and (II) the aggregate amount of any distributions to all holders of
the Corporation's Common Stock made exclusively in cash within 12 months
preceding the expiration of the Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this Section 6(e) or this clause (vi) has
been made, exceeds 10% of the product of the Current Market Price per share of
the Common Stock as of the Expiration Time of the Tender Offer times the number
of shares of Common Stock outstanding (including any tendered shares) at the
Expiration Time of the Tender Offer, then, and in each such case, immediately
prior to the opening of business on the day after the date of the Expiration
Time of the Tender Offer, the Conversion Price shall be adjusted so that the
same shall equal the price determined by multiplying the Conversion Price
immediately prior to close of business on the date of the Expiration Time of
the Tender Offer by a fraction (i) the numerator of which shall be equal to
(A) the product of (I) the Current Market Price per share of the Common Stock
as of the Expiration Time of the Tender Offer and (II) the number of shares of
Common Stock outstandindg (including any tendered shares) at the Expiration Time
of the Tender Offer less (B) the amount of cash plus the the fair market value
(determined as aforesaid) of the aggregate consideration payable to
shareolders based on the acceptance (up to any maximum specified in the terms of
the Tender Offer) of
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Purchased Shares as defined below, and (ii) the denominator of which shall be
equal to the product of (A) the Current Market Price per share of the Common
Stock as of the Expiration Time of the Tender Offer and (B) the number of shares
of Common Stock outstanding (including any tendered shares) as of the Expiration
Time of the Tender Offer less the number of all shares validly tendered and not
withdrawn as of the Expiration Time of the Tender Offer, and accepted for
purchase up to any maximum (the shares deemed so accepted up to any such
maximum, being referred to as the "Purchased Shares").
(vii) The reclassification of Common Stock into securities other than
Common Stock shall be deemed to involve (a) a distribution of such securities
other than Common Stock to all holders of Common Stock (and the effective date
of such reclassification shall be deemed to be "the date fixed for the
determination of shareholders entitled to receive such distribution" and the
"date fixed for such determination" within the meaning of clause (iv) of this
Section 6(e)), and (b) a subdivision or combination, as the case may be, of the
number of shares of Common Stock outstanding immediately prior to such
reclassification into the number of shares of Common Stock outstanding
immediately thereafter (and the effective date of such reclassification shall be
deemed to be "the day upon which such subdivision becomes effective" or "the day
upon which such combination becomes effective", as the case may be, and "the day
upon which such subdivision or combination becomes effective" within the meaning
of clause (iii) of this Section 6(e) above).
(viii) For the purpose of any computation under clause (ii),(iv), (v), (vi)
or (vii) of this Section 6(e), the current market price per share of Common
Stock (the "Current Market Price") on any day shall be deemed to be the average
of the daily closing prices per share for the ten consecutive Trading Days
ending on the earlier of the day in question and the day before the Ex Date (as
defined below) with respect to the issuance, payment or distribution or the date
of the expiration of the tender offer requiring such computation. For this
purpose, the term "Ex Date", when used with respect to any issuance or
distribution, shall mean the first date on which the Common Stock trades regular
way on the applicable securities exchange or in the applicable securities market
without the right to receive such issuance or distribution. "Trading Day" means
each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on
which the Common Stock is not traded on the applicable securities exchange or on
the applicable securities market. The closing price ("closing price") for each
day shall be the reported last sale price regular way
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or, in case no such reported sale takes place on such day, the average of the
reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if the Common Stock is not listed or admitted to trading
on such Exchange, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading or, if not listed or admitted to
trading on any national securities exchange, on the Nasdaq National Market or,
if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market, the average of the
closing bid and asked prices in the over-the-counter market as furnished by any
New York Stock Exchange member firm reasonably selected from time to time by the
Board for that purpose.
(f) No adjustment in the Conversion Price shall be required unless such
adjustment (plus any adjustments not previously made by reason of this Section
6(f)) would require an increase or decrease of at least one percent in such
Conversion Price; provided, however, that any adjustments which by reason of
this Section 6(f) is not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
shall be made to the nearest cent or to the nearest 1/100 of a share of Common
Stock, as the case may be.
(g) Whenever the Conversion Price is adjusted as herein provided:
(i) the Corporation shall compute the adjusted Conversion Price in
accordance with Section 6(e) and shall prepare a certificate signed by the
treasurer of the Corporation setting forth the adjusted Conversion Price and
showing in reasonable detail the facts upon which such adjustment is based, and
such certificate shall forthwith be filed with any Transfer Agent; and
(ii) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be required, and as
soon as practicable after it is required, such notice shall be mailed by the
Corporation to all holders of Series A Convertible Preferred Stock at their last
addresses as they shall appear in the security register.
(h) In case:
(i) the Corporation shall declare a dividend or other distribution
on its Common Stock (other than a dividend payable exclusively in cash that
would not cause an
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adjustment to the Conversion Price to take place pursuant to Section 6(e)
above); or
(ii) the Corporation or any Subsidiary shall make a tender offer for
the Common Stock (other than a tender offer that would not cause an
adjustment to the Conversion Price pursuant to clause (v) or (vi) of
Section 6(e)); or
(iii) the Corporation shall authorize the granting to all holders of
its Common Stock of rights, options or warrants to subscribe for or
purchase any shares of capital stock of any class; or
(iv) of any reclassification of the Common Stock of the Corporation
(other than a subdivision or combination of its outstanding shares of
Common Stock), or of any consolidation, merger or share exchange to which
the Corporation is a party and for which approval of any shareholders of
the Corporation is required, or of the sale or transfer of all or
substantially all of the assets of the Corporation; or
(v) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with any Transfer Agent, and
shall cause to be mailed to all holders of the Series A Convertible
Preferred Stock at their last addresses as they shall appear in the
security register, at least 20 days (or 10 days in any case specified in
clause (i) or (ii) above) prior to the effective date hereinafter
specified, a notice stating (x) the date on which a record has been taken
for the purpose of such dividend, distribution or grant of rights, options
or warrants, or, if a record is not to be taken, the date as of which the
identity of the holders of Common Stock of record entitled to such
dividend, distribution, rights, options or warrants was determined, or (y)
the date on which such reclassification, consolidation, merger, share
exchange, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property deliverable
upon such reclassification, consolidation, merger, share exchange, sale,
transfer, dissolution, liquidation or winding up. Neither the failure to
give such notice nor any defect therein shall affect the legality or
validity of the proceedings described in clauses (i) through (v) of this
Section 6(h).
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(i) Nonassessability of Common Stock. The Corporation covenants
that all shares of Common Stock which may be issued upon conversion of Series
A convertible Preferred Stock will upon issue be fully paid and nonassessable.
(j) Reservation of Shares; Transfer tax; Etc. The Corporation shall
at all times reserve and keep available, out of its authorized and unissued
stock, solely for the purpose of effecting the conversion of the Series A
Convertible Preferred Stock, such number of shares of its Common Stock, free
from preemptive rights, as shall from time to time be sufficient to effect the
conversion of all shares of Series A Convertible Preferred Stock from time to
time outstanding. The Corporation shall from time to time, in accordance with
the laws of the State of California, increase the authorized number of shares
of Common Stock if at any time the number of shares of Common Stock not
outstanding shall not be sufficient to permit the conversion of all the then
outstanding shares of Series A Convertible Preferred Stock.
If any shares of Common Stock required to be reserved for purposes of
conversion of the Series A Convertible Preferred Stock hereunder require
registration with or approval of any governmental authourity under any Federal
or State law before such shares may be issued upon conversion, the Corporation
covenants that it will in good faith and as expeditiously as possible endeavor
to cause such shares to be duly registered or approved, as the case may be. If
the Common Stock is listed on the New York Stock Exchange or any other national
securities exchange, the Corporation covenants that it will, if permitted by
the rules of such exchange, list and keep listed on such exchange, upon
official notice of issuance, all shares of Common Stock issuable upon conversion
of the Series A Convertible Preferred Stock.
The Corporation covenants that it will pay any and all issue or other
taxes that maybe payable in respect of any issue or delivery of shares of
Connon Stock on conversion of the Series A Convertible Preferred Stock. The
Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issue or delivery of Commom
Stock (or other securities or assets) in a name other than that in which the
shares of Series A Convertible Preferred Stock so converted were registered,
and no such issue or delivery shall be made unless and until the person
requesting such issue has paid to the Corporaton the amount of such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
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Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value of the Common Stock, if any, the
Corporation covenants that it will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and non-assessable shares of Common Stock at the
Conversion Price as so adjusted.
(k) Other Changes in Conversion Price. The Corporation may, but shall not
be obligated to, make such decreases in the Conversion Price, in addition of
those required or allowed by this Section 6, as shall be determined by it, as
evidenced by a resolution of the Board, to be advisable in order to avoid or
diminish any income tax to holders of Common Stock resulting from any dividend
or distribution of any capital stock of the Corporation or issuance of rights,
options or warrants to purchase or subscribe for any such stock or from any
event treated as such for income tax purposes.
Section 7. Liquidation Rights.
(a) Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of outstanding shares of the Series A Convertible Preferred Stock shall
be entitled, before any payment or distribution shall be made on Junior Stock,
to be paid in full an amount equal to the Stated Value per share, plus an amount
equal to all accrued but unpaid dividends (whether or not earned or declared),
and no more. After payment of the full amount of such liquidation distribution,
the holders of the Series A Convertible Preferred Stock shall not be entitled to
any further participation in any distribution of assets of the Corporation.
(b) Insufficient Assets. (i) If, upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the assets of the
Corporation, or proceeds thereof, distributable among the holders of the shares
of the Series A Convertible Preferred Stock and any other stock of the
Corporation ranking, as to liquidation, dissolution or winding up, on a parity
with the Series A Convertible Preferred Stock (collectively, "Liquidation Parity
Stock"), shall be insufficient to pay in full the preferential amount set forth
in subparagraph (a) above and liquidating payments on all Liquidation Parity
Stock, then assets of the Corporation remaining after the distribution to
holders of any Senior Stock then outstanding of the full amounts to which they
may be entitled, or the proceeds thereof, shall be distributed among the holders
of the
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Series A Convertible Preferred Stock and all such Liquidation Parity Stock
ratably in accordance with the respective amount which would be payable on such
shares of Series A Convertible Preferred Stock and any such Liquidation Parity
Stock if all amounts payable thereon were paid in full (which, in the case of
such other stock, may include accumulated dividends).
(ii) In the event of any such liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, unless and until payment in full
is made to the holders of all outstanding shares of the Series A Convertible
Preferred Stock of the liquidation distribution to which they are entitled
pursuant to subparagraph (a) above, no dividend or other distribution shall be
made to the holders of any Junior Stock and no purchase, redemption or other
acquisition for any consideration by the Corporation shall be made in respect of
any Junior Stock, other than any such dividend or distribution consisting solely
of, or purchase, redemption or acquisition for consideration consisting solely
of, shares of Junior Stock.
(c) Definition. Neither the consolidation nor the merger of the
Corporation into or with another corporation or corporations shall be deemed to
be a liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 7.
Section 8. Voting Rights.
(a) No Vote Except as Provided. Except as otherwise expressly provided
herein or required by law, no holder of shares of Series A Convertible Preferred
Stock shall have or possess any right to notice of shareholders' meetings or any
vote (whether at such a meeting or in writing without a meeting) with respect to
any shares of Series A Convertible Preferred Stock held by such holder on any
matter.
(b) Election of Directors. At any meeting of shareholders for the election
of directors of the Corporation (or, in lieu thereof, by the unanimous written
consent of the outstanding shares of Series A Convertible Preferred Stock), the
holders of Series A Convertible Preferred Stock shall have the right, voting or
consenting separately as a series, to the exclusion of the holders of the
Corporation's Common Stock or any other series of Preferred Stock or any other
class or series of capital stock of the Corporation, to elect the Applicable
Number (as hereinafter defined) of directors of the Corporation (each a "Series
A Director"). Any Series A Director may be removed by, and (except as provided
elsewhere in this paragraph (b))
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shall not be removed without cause (or, except to the extent required by law,
with cause) except by, the vote or consent of the holders of record of a
majority of the outstanding shares of Series A Convertible Preferred Stock,
voting or consenting separately as a series, at a meeting of the shareholders or
of the holders of the shares of Series A Convertible Preferred Stock called for
that purpose or pursuant to a written consent of the Series A Convertible Stock,
as the case may be. Any vacancy in the office of a Series A Director may be
filled only by the vote or consent of the holders of the outstanding shares of
Series A Convertible Preferred Stock, voting or consenting separately as a
series, at a meeting of the shareholders or of the holders of the shares of
Series A Convertible Preferred Stock called for that purpose or pursuant to a
written consent of the Series A Convertible Preferred Stock, as the case may be
or, in the case of a vacancy created by removal of a Series A Director, as
provided above, at the same meeting at which such removal shall be voted or by
written consent of a majority of the outstanding shares of Series A Convertible
Preferred Stock. In no instance shall the Board of Directors of the Corporation
have the power to fill any vacancy in the office of a Series A Director.
Whenever holders of the Series A Convertible Preferred Stock shall cease to be
entitled to elect the then established Applicable Number of directors, then and
in any such case such Series A Director or Directors as shall be designated by
majority vote of the holders of the Series A Convertible Preferred Stock shall,
without any further action, immediately cease to be a director of the
Corporation. As used herein, the Applicable Number at any time shall mean the
smallest whole number that is greater than or equal to the product of (i) 2/11
and (ii) the total number of directors at such time (including the directors
that the holders of Series A Preferred Stock are entitled to elect at such
time); provided, however, the Applicable Number shall be reduced by the minimum
number of directorships in order that the sum of (i) the Applicable Number and
(ii) the minimum whole number of directors which can be elected (through the
application of cumulative voting) by shares of Common Stock (x) obtained upon
conversion of the Series A Convertible Preferred Stock or exercise of the Series
A Warrants and (y) held of record by the holder (or subsidiaries thereof) not
equal or exceed a majority of the total number of directors of the Company.
(c) Certain Actions. So long as any shares of the Series A Convertible
Preferred Stock shall remain outstanding, the consent of the holders of a
majority of the shares of the Series A Convertible Preferred Stock at the time
outstanding, acting as a separate series, given in person or by proxy, either in
writing without a meeting or
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by vote at any meeting called for the purpose, shall be necessary for
effecting or validating:
(i) The authorization, creation, issuance or sale of any shares of
any class or series of capital stock of the Corporation which shall rank
senior to the Common Stock of the Corporation which shall rank senior to
the Common Stock of the Corporation as to dividend rights or rights upon
liquidation, winding up or dissolution of the Corporation, whether such
capital stock shall constitute Senior Stock, Parity Stock (including Series
A Convertible Preferred Stock) or Junior Stock, or otherwise, or any
security convertible thereinto or exchangeable therefor or representing the
right to acquire any of the foregoing; provided, however, that no such
consent is or shall be necessary for the authorization, creation, issuance
or sale of (A) additional shares of Series A Convertible Stock issuable, at
the election of the Company, pursuant to Section 4.3 of the Investment
Agreement or (B) additional shares of Series A Convertible Preferred Stock
payable as a dividend in accordance with Section 3(b) above (including,
without limitation, such shares payable as a dividend upon additional
shares issued as contemplated by clause (A) of this paragraph (i));
(ii) Any amendment, alteration or repeal of any of the provisions of
the Articles of Incorporation or of the By-laws of the Corporation
(including any adoption of a Certificate of Determination of any series of
stock of the Corporation);
(iii) The merger or consolidation of the Corporation with or into, or
the sale or conveyance of all or substantially all of the assets of the
Corporation to, any person or entity (provided, however, that on and after
the third anniversary of the Issuance Anniversary Date, in lieu of the
right to vote on or consent with respect to the actions specified in this
paragraph (iii) as a separate series, the Series A Convertible Preferred
Stock shall have the right to vote or consent together with the Common
Stock, as a single class, and in any such vote or consent a holder of
shares of Series A Convertible Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock (rounded down
to the nearest share) into which such shares of Series A Convertible
Preferred Stock are convertible on the date the vote is taken or consent is
given); or
(iv) Any dividend or other distribution to all holders of its Common
Stock of cash or property or any purchase or acquisition by the Corporation
or any of its subsidiaries of its Common Stock in an aggregate amount that,
combined together with (A) the aggregate amount of any
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other such distributions to all holders of its Common Stock within the 12
months preceding the date of payment of such distribution and in respect of
which no vote was required pursuant to this paragraph (iv) and (B) the
aggregate of any cash plus the fair market value of consideration payable
in respect of any purchase or acquisition by the Corporation or any of its
subsidiaries for all or any portion of the Common Stock concluded within
the 12 months preceding the date of payment of such distribution and in
respect of which no vote was required pursuant to this paragraph (iv),
exceeds 15% of the product of the Current Market Price per share of the
Common Stock of the Corporation on the date for the determination of
holders of shares of Common Stock entitled to receive such distribution
times the number of shares of Common Stock outstanding on such date;
provided, however, that no such consent of the holders of the Series A
Convertible Preferred Stock shall be required if, at or prior to the time
when any such action of the type referred to in subparagraphs (i), (ii),
(iii) and (iv) of this Section 8 is to take effect, provision is made for
the redemption of all shares of the Series A Convertible Preferred Stock at
the time outstanding and deposit of the aggregate Redemption Price is made
pursuant to Section 4(b)(iii).
Section 9. Preemptive Rights. In the event the Company intends to
issue and sell shares of Common Stock in a public offering as contemplated
by Section 8.10 of the Investment Agreement, the Company shall first
provide the holders of Series A Convertible Preferred Stock 60 day's prior
written notice of such intent. At the holder's election, each holder of
Series A Convertible Preferred Stock has the preemptive right to
participate in such Common Stock offering up to the holder's fully
converted/exercised interest in the Common Stock of the Company at the per
share price received by the Company (i.e., without underwriters' discount)
in such public offering. For purposes of the foregoing, the holder's fully
converted/exercised interest in the Common Stock shall equal the quotient
of (I) the number of shares of Common Stock beneficially owned or
obtainable by the holder and its affiliates by virtue of ownership of the
Series A Preferred Shares (including any additional shares actually issued
by virtue of the provision permitting payment of dividends in kind on the
Series A Preferred Shares) and the Series A Warrants and conversion or
exercise thereof divided by (II) the sum of (A) the total number of shares
of Common Stock of the Company then outstanding plus (B) the number of
shares referred to in (I). This preemptive right shall terminate when this
security is not held by American International Group, Inc. or subsidiaries
or affiliates thereof.
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Section 10. Exclusion of Other Rights. Except as may otherwise be required
by law, the shares of Series A Convertible Preferred Stock shall not have any
preferences or relative, participating, optional or other special rights, other
than those specifically set forth in this resolution (as such resolution may be
amended from time to time) and in the Articles of Incorporation of the
Corporation, as amended. Without limitation of the foregoing, the shares of
Series A Convertible Preferred Stock shall have no preemptive or subscription
rights.
Section 11. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
Section 12. Severability of Provisions. If any right, preference or
limitation of the Series A Convertible Preferred Stock set forth in this
resolution (as such resolution may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other rights, preferences and limitations set forth in this
resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation herein
set forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
* * *
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______________ declares under penalty of perjury under the laws of the State of
California that he [she] has read the foregoing certificate and knows the
contents thereof and that the same is true of his [her] own knowledge.
Dated:
/s/
----------------------------------
______________ declares under penalty of perjury under the laws of the State of
California that he [she] has read the foregoing certificate and knows the
contents thereof and that the same is true of his [her] own knowledge.
Dated:
/s/
----------------------------------
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EXHIBIT
B
106
EXHIBIT B
[Form of Warrant Certificate]
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS. THE
TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
CONDITIONS SPECIFIED IN THE INVESTMENT AND STRATEGIC ALLIANCE AGREEMENT (THE
"AGREEMENT"), DATED AS OF OCTOBER 17, 1994, BY AND AMONG 20TH CENTURY INDUSTRIES
(THE "COMPANY") AND AMERICAN INTERNATIONAL GROUP, INC. ("INVESTOR"). A COPY OF
SUCH CONDITIONS WILL BE FURNISHED BY THE COMPANY TO THE HOLDER HEREOF UPON
WRITTEN REQUEST AND WITHOUT CHARGE. THESE SECURITIES MAY NOT BE RESOLD OR
TRANSFERRED UNLESS SUCH CONDITIONS ARE COMPLIED WITH AND UNLESS REGISTERED OR
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS.
16,000,000
SERIES A WARRANTS
to Purchase
One*
Share
of
Common Stock (no par value)
of
20th CENTURY INDUSTRIES
Price: $13.50* per share
- ---------------
* Subject to adjustment on the Closing Date to reflect any antidilution
adjustment that would have occurred pursuant to the terms of the Series A
Warrant had the Series A Warrant been issued on the date of the Investment
Agreement.
107
This certifies that, for value received, American International Group,
Inc., a Delaware corporation (the "Investor"), or its registered assigns (each,
a "Holder") is entitled to purchase, subject to the provisions of these Series
A Warrants and the Investment Agreement (as defined below), from 20th Century
Industries, a corporation duly organized and existing under the laws of the
State of California (the "Company"), at any time on or after the Effective Date
(as defined below) and on or before the Expiration Date (as defined below), one*
(the "Warrant Number") fully paid and nonassessable share of Common Stock, no
par value (the "Common Stock"), of the Company at an exercise price of $13.50*
per share (the "Exercise Price") pursuant to each of the 16,000,000 Series A
Warrants evidenced hereby. The Warrant Number and the Exercise Price are subject
to adjustment from time to time as set forth in Section 7 and Section 8. These
warrants are the Series A Warrants referred to in Section 1.1 of the Investment
and Strategic Alliance Agreement, dated as of October 17, 1994, by and between
the Company and the Investor (the "Investment Agreement").
As used herein, the term Effective Date means, with respect to all or a
portion of these Series A Warrants, as the case may be, the first anniversary of
the Closing
- ---------------
* Subject to adjustment as described in note * on cover page.
108
Date; provided, however, that in the event that the Investor makes a
contribution to the capital of the Company pursuant to Section 4.3 of the
Investment Agreement prior to the first anniversary of the Closing Date, the
Effective Date shall be the second anniversary of the Closing Date; provided,
however, the Effective Date may be accelerated to be an earlier date in the
event the Company's Board of Directors approve such; and provided, further,
however, the Effective Date shall be accelerated to such date that the Investor
is entitled to acquire additional securities of the Company pursuant to Section
6.1(B) of the Investment Agreement prior to the third anniversary of the Closing
Date thereunder.
As used herein, the term Expiration Date means, with respect to all or a
portion of these Series A Warrants, as the case may be, the thirteenth
anniversary of the Closing Date.
Section 1. Definitions. Except as otherwise specified herein, defined terms
herein, which may be identified by the capitalization of the first letter of
each principal word thereof, have the meanings assigned to them in the
Investment Agreement.
Section 2. Exercise of Series A Warrants. Subject to the provisions hereof,
these Series A Warrants may be exercised, at any time on or after the Effective
Date and on or before the Expiration Date, by presentation and
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surrender hereof to the Company at the office or agency of the Company
maintained for that purpose pursuant to Section 9 (the "Warrant Office") with
the purchase Form substantially in the form annexed hereto as Exhibit A (the
"Purchase Form") and accompanied by payment to the Company, for the account of
the Company, of the Exercise Price for the number of shares specified in such
Purchase Form. These Series A Warrants may be exercised in whole or in part and,
if exercised in part, the unexercised Series A Warrants may be exercised on a
subsequent date or dates on or before the Expiration Date. The Company shall
keep at the Warrant Office a register for the registration and registration of
transfer of Series A Warrants. The Exercise Price for the number of shares of
Common Stock specified in the Purchase Form shall be payable in United States
dollars by bank check or wire transfer of immediately available funds to an
account designated by Company for this purpose.
Upon receipt by the Company of any of this Warrant at the Warrant Office,
in proper form for exercise, the Holder shall be deemed to be the holder of
record of the shares of Common Stock issuable upon such exercise,
notwithstanding that the stock transfer books of the Company shall then be
closed or that certificates representing such shares of Common Stock shall not
then be actually delivered to the Holder. The Company shall issue certificate(s)
for the shares of Common Stock issuable upon exercise and, if
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exercised in part, a new warrant certificate representing the remaining
unexercised Series A Warrants, and deliver such to the Holder. The Company shall
pay all expenses, and any and all stamp or similar taxes that may be payable in
connection with the preparation, issuance and delivery of stock certificates and
any new warrant certificate under this Section 2 (collectively, "Taxes");
provided, however, that the Company shall not be required to pay any Taxes which
may be payable in respect of any transfer involved in the issue and delivery of
shares of Common Stock in a name other than that of the Holder. No issuance or
delivery to a party other than a Holder shall be made unless and until that
party has paid to the Company such Taxes or has established to the satisfaction
of the Company that Taxes have been paid.
All shares of Common Stock issued upon exercise of these Series A Warrants
shall be duly authorized and validly issued, fully paid and nonassessable.
Section 3. Reservation of Shares; Preservation of Rights of Holder. The
Company hereby agrees that there shall be reserved for issuance and delivery
upon exercise of these Series A Warrants, free from preemptive rights, the
number of shares of authorized but unissued shares of Common Stock, or other
stock or securities deliverable pursuant to paragraph (i) of Section 7, as shall
be required for issuance or delivery upon exercise of these Series A
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Warrants. The Company further agrees that it will not, by amendment of its
Articles of Incorporation or through reorganization, consolidation, merger,
dissolution or sale of assets, or by any other voluntary act, avoid or seek to
avoid the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company. Without
limiting the generality of the foregoing, the Company agrees that before taking
any action which would cause an adjustment reducing the Exercise Price below the
then par value of Common Stock issuable upon exercise hereof, the Company will
from time to time take all such action which may be necessary in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock at the Exercise Price as so adjusted.
Section 4. Fractional Shares. The Company shall not be required to issue
fractional shares of Common Stock upon exercise of these Series A Warrants but
shall pay for such fraction of a share in cash or by certified or official bank
check at the Exercise Price.
Section 5. Loss of Series A Warrants. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of these Series A Warrants, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of these Series A Warrants, if mutilated, the Company will execute
and deliver new
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Series A Warrants of like tenor and date. Any new Series A Warrants executed and
delivered shall constitute an additional contractual obligation on the part of
the Company, whether or not the Series A Warrants so lost, stolen, destroyed or
mutilated shall be at any time enforceable by anyone.
Section 6. Rights of the Investor. Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company.
Section 7. Antidilution Provisions. The Exercise Price and the Warrant
Number shall be subject to adjustment from time to time as provided in this
Section 7 and in Section 8.
(a) In case the Company shall pay or make a dividend or other distribution
on any class of capital stock of the Company in Common Stock, the Exercise Price
in effect immediately prior to the opening of business on the next Business Day
following the date fixed for determination of stockholders entitled to receive
such dividend or other distribution shall be reduced by multiplying such
Exercise Price by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination and the denominator shall be the sum of such number of
shares and the total number of shares constituting such dividend or other
distribution, such reduction to become effective
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immediately prior to the opening of business on the next Business Day following
the date fixed for such determination. For the purposes of this paragraph (a),
the number of shares of Common Stock at any time outstanding shall include
shares issuable in respect of scrip certificates issued in lieu of fractions of
shares of Common Stock.
(b) In case the Company shall hereafter issue rights, options or warrants
to all holders of its Common Stock entitling them to subscribe for or purchase
shares of Common Stock (such rights, options or warrants not being available on
an equivalent basis to Holders of the Series A Warrants upon exercise) at a
price per share less than the Current Market Price (as defined in subsection (k)
of this Section 7) of the Common Stock on the date fixed for the determination
of shareholders entitled to receive such rights, options or warrants (other than
pursuant to a dividend reinvestment plan), (A) the Exercise Price in effect
immediately prior to the opening of business on the next Business Day following
the date fixed for such determination shall be reduced by multiplying the
Exercise Price in effect immediately prior to the close of business on the date
fixed for the determination of holders of Common Stock entitled to receive such
rights, options or warrants by a fraction of which the numerator shall be the
number of shares Common Stock outstanding at the close of business
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on the date fixed for such determination plus the number of shares of Common
Stock which the aggregate of the offering price of the total number of shares of
Common Stock so offered for subscription or purchase would purchase at such
Current Market Price and the denominator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately prior
to the opening of business on the next Business Day following the date fixed for
such determination. For the purposes of this clause 7(b), the number of shares
of Common Stock at any time outstanding shall include shares issuable in respect
of scrip certificates issued in lieu of fractions of shares of Common Stock, and
(B) if any such rights, options or warrants expire or terminate without having
been exercised or are exercised for a consideration different from that utilized
in the computation of any adjustment or adjustments on account of such rights,
options or warrants, the Exercise Price with respect to any Series A Warrants
not theretofore exercised shall be readjusted such that the Exercise Price would
be the same as would have resulted had such adjustment been made without regard
to the issuance of such expired or terminated rights, options or warrants or
based upon the actual consideration received upon exercise thereof, as the case
may be, which readjustment shall become
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effective upon such expiration, termination or exercise, as applicable;
provided, however, that all readjustments in the Exercise Price based upon any
expiration, termination or exercise for a different consideration of any such
right, option or warrant, in the aggregate, shall not cause the Exercise Price
to exceed the Exercise Price immediately prior to the time such rights, options
or warrants were initially issued (without regard to any other adjustments of
such number under this clause 7(b) that may have been made since the date of the
issuance of such rights, options or warrants).
(c) In case the outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock, the Exercise Price in effect
immediately prior to the opening of business on the next Business Day following
the day upon which such subdivision becomes effective shall be proportionately
reduced, and, conversely, in case outstanding shares of Common Stock shall each
be combined into a smaller number of shares of Common Stock, the Exercise Price
in effect immediately prior to the opening of business on the next Business Day
following the day upon which such combination becomes effective shall be
proportionately increased.
(d) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock evidences of its indebtedness or assets (including
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securities, but excluding any rights, options or warrants referred to in clause
(b) of this Section 7, any dividend or distribution paid exclusively in cash and
any dividend referred to in clause (a) of this Section 7), the Exercise Price
shall be adjusted so that the same shall equal the price determined by
multiplying the Exercise Price in effect immediately prior to the close of
business on the date fixed for the determination of shareholders entitled to
receive such distribution by a fraction of which (A) the numerator shall be the
Current Market Price at the close of business on the date fixed for such
determination less the then fair market value of the portion of the assets or
evidences of indebtedness so distributed applicable to one share of Common Stock
(the amount calculated pursuant to this clause (A) being hereinafter referred to
as the "Adjusted Market Price") and (B) the denominator shall be such Current
Market Price, such adjustment to become effective immediately prior to the
opening of business on the next Business Day following the date fixed for the
determination of shareholders entitled to receive such distribution.
(e) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock cash (excluding any cash that is distributed and
adjusted for as part of a distribution referred to in clause (d) of this Section
7) in an aggregate amount that, combined together with (A) the aggregate amount
of any other
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distributions to all holders of its Common Stock made exclusively in cash within
the 12 months preceding the date of payment of such distribution and in respect
of which no adjustment pursuant to this clause (e) or clause (d) of this Section
7 has been made and (B) the aggregate of any cash plus the fair market value as
of the last time tender could have been made pursuant to such tender offer, as
it may have been amended (such time, the "Expiration Time") of consideration
payable in respect of any tender offer by the Company or any of its subsidiaries
for all or any portion of the Common Stock concluded within the 12 months
preceding the date of payment of such distribution and in respect of which no
adjustment pursuant to this clause (e) or clause (f) of this Section 7 has been
made, exceeds 10% of the product of the Current Market Price per share of the
Common Stock on the date for the determination of holders of shares of Common
Stock entitled to receive such distribution times the number of shares of Common
Stock outstanding on such date, then, and in each such case, immediately after
the close of business on such date for determination, the Exercise Price shall
be reduced so that the same shall equal the price determined by multiplying the
Exercise Price in effect immediately prior to the close of business on the date
fixed for determination of the shareholders entitled to receive such
distribution by a fraction (A) the numerator of which shall be equal to the
Current Market Price per share
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of the Common Stock on the date fixed for such determination less an amount
equal to the quotient of (x) the excess of such combined amount over such 10%
and (y) the number of shares of Common Stock outstanding on such date for
determination and (B) the denominator of which shall be equal to the Current
Market Price per share of the Common Stock as of such date for determination.
(f) In case a tender offer (a "Tender Offer") made by the Company or any of
its subsidiaries for all or any portion of the Common Stock shall expire (the
"Expiration Time") and the Tender Offer (as amended upon the expiration thereof)
shall require the payment to shareholders based on the acceptance (up to any
maximum specified in the terms of the Tender Offer) of Purchased Shares (as
defined below) of an aggregate of the cash plus other consideration having a
fair market value (as determined by the Board of Directors) as of the Expiration
Time of such Tender Offer that combined together with (A) the aggregate of the
cash plus the fair market value (as determined by the Board of Directors) of
consideration payable in respect of any other tender offer (determined as of the
Expiration Time of such other tender offer) by the Company or any of its
subsidiaries for all or any portion of the Common Stock expiring within the 12
months preceding the expiration of the Tender Offer and in respect of which no
adjustment pursuant to clause (e) of this Section 7 or this
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clause (f) has been made and (B) the aggregate amount of any distributions to
all holders of the Common Stock made exclusively in cash within 12 months
preceding the expiration of the Tender Offer and in respect of which no
adjustment pursuant to clause (e) of this Section 7 or this clause (f) has been
made, exceeds 10% of the product of the Current Market Price per share of the
Common Stock as of the Expiration Time of the Tender Offer multiplied by the
number of shares of Common Stock outstanding (including any tendered shares) at
the Expiration Time of the Tender Offer, then, and in each such case,
immediately prior to the opening of business on the next Business Day after the
date of the Expiration Time of the Tender Offer, the Exercise Price shall be
adjusted so that the same shall equal the price determined by multiplying the
Exercise Price immediately prior to close of business on the date of the
Expiration Time of the Tender Offer by a fraction (A) the numerator of which
shall be equal to (x) the product of (i) the Current Market Price per share of
the Common Stock as of the Expiration Time of the Tender Offer and (ii) the
number of shares of Common Stock outstanding (including any tendered shares) at
the Expiration Time of the Tender Offer less (y) the amount of cash plus the
fair market value (determined as aforesaid) of the aggregate consideration
payable to shareholders based on the acceptance (up to any maximum specified in
the terms of the Tender Offer) of
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Purchased Shares as defined below, and (B) the denominator of which shall be
equal to the product of (x) the Current Market Price per share of the Common
Stock as of the Expiration Time of the Tender Offer and (y) the number of shares
of Common Stock outstanding (including any tendered shares) as of the Expiration
Time of the Tender Offer less the number of all shares validly tendered and not
withdrawn as of the Expiration Time of the Tender Offer, and accepted for
purchase up to any maximum. For purposes of this Section 7, the term "Purchased
Shares" shall mean such shares as are deemed so accepted up to any such maximum.
(g) The reclassification (including any reclassification upon a
consolidation or merger in which the Company is the continuing corporation, but
not including any transactions for which an adjustment is provided in paragraph
(i) below) of Common Stock into securities other than Common Stock shall be
deemed to involve (A) a distribution of such securities other than Common Stock
to all holders of Common Stock (and the effective date of such reclassification
shall be deemed to be "the date fixed for the determination of shareholders
entitled to receive such distribution" and the "date fixed for such
determination" within the meaning of clause (d) of this Section 7, and (B) a
subdivision or combination, as the case may be, of the number of shares of
Common Stock outstanding immediately prior to such reclassification into the
number of shares of
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Common Stock outstanding immediately thereafter (and the effective date of such
reclassification shall be deemed to be "the day upon which such subdivision
becomes effective" or "the day upon which such combination becomes effective",
as the case may be, and "the day upon which such subdivision or combination
becomes effective" within the meaning of clause (c) of this Section 7 above).
(h) The Company may make such reductions in the Exercise Price, in addition
to those required by paragraphs (a), (b), (c), (d), (e), (f) and (g) of this
Section 7, as it considers to be advisable in order that any event treated for
Federal income tax purposes as a dividend of stock or stock rights shall not be
taxable to the recipients.
(i) In case of any consolidation of the Company with, or merger of the
Company into, any other person, any merger of another person into the Company
(other than a merger which does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of the Common Stock) or any sale
or transfer of all or substantially all of the assets of the Company, at the
election of the Holder of Series A Warrants represented hereby, the person
formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, shall execute and deliver to the Holder a new
warrant certificate, satisfactory in form and substance to the Holder, providing
that the Holder shall have the right
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thereafter, during the period such Series A Warrants shall be outstanding to
exercise such Series A Warrants into the kind and amount (if any) of securities,
cash and other properly receivable upon such consolidation, merger, sale or
transfer by a holder of the number of shares of Common Stock of the Company into
which such Series A Warrants might have been converted immediately prior to such
consolidation, merger, sale or transfer. If the holders of the Common Stock may
elect from choices the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer, then for the
purpose of this Section 7 the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer shall be
deemed to be the choice specified by the Holder, which specification shall be
made by the Holder by the later of (A) 20 Business Days after Holder is provided
with a final version of all information required by law or regulation to be
furnished to holders of Common Stock concerning such choice, or if no such
information is required, 20 Business Days after the Company notified the Holder
of all material facts concerning such specifications and (B) the last time at
which holders of Common Stock are permitted to make their specification known to
the Company. If the Holder fails to make any specification, the Holder's choice
shall be deemed to be whatever choice is made by a plurality of holders of
Common
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Stock not affiliated with the Company or the other person to the merger or
consolidation. Such new Series A Warrants shall provide for adjustments which,
for events subsequent to the effective date of such new Series A Warrants, shall
be as nearly equivalent as may be practicable to the adjustments provided for in
this Section 7 and Section 8. The above provisions of this paragraph (i) shall
similarly apply to successive consolidations, mergers, sales or transfers.
(j) Whenever there shall be any change in the Exercise Price hereunder,
then there shall be an adjustment (to the nearest thousandth of a share) in the
Warrant Number, which adjustment shall become effective at the time such change
in the Exercise Price becomes effective and shall be made by multiplying the
Warrant Number in effect immediately before such change in the Exercise Price by
a fraction of the numerator of which is the Exercise Price immediately before
such change and the denominator of which is the Exercise Price immediately after
such change.
(k) For the purpose of any computation under clause (b), (d), (e), (f) or
(g) of this Section 7, the current market price per share of Common Stock (the
"Current Market Price") on any day shall be deemed to be the average of the
daily closing prices per share for the ten consecutive Trading Days (as defined
below) ending on the earlier of the day in question and the day before the
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Ex Date (as defined below) with respect to the issuance, payment or distribution
or the date of the expiration of the tender offer requiring such computation.
For this purpose, the term "Ex Date", when used with respect to any issuance or
distribution, shall mean the first date on which the Common Stock trades regular
way on the applicable securities exchange or in the applicable securities market
without the right to receive such issuance or distribution. "Trading Day" means
each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on
which the Common Stock is not traded on the applicable securities exchange or on
the applicable securities market. The closing price for each day shall be the
reported last sale price regular way or, in case no such reported sale takes
place on such day, the average of the reported closing bid and asked prices
regular way, in either case on the New York Stock Exchange or, if the Common
Stock is not listed or admitted to trading on such Exchange, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, on the NASDAQ National Market or, if the Common Stock is not listed or
admitted to trading on any national securities exchange or quoted on the NASDAQ
National Market, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
reasonably selected from
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time to time by the Board for that purpose. For purposes of Section 7, the term
"Business Day" shall mean any day except a Saturday, Sunday or any day on which
banking institutions are authorized or required to close in the city of New
York, New York or Los Angeles, California.
(1) No adjustment in the Exercise Price shall be required unless such
adjustment (plus any adjustments not previously made by reasons of this Section
7(1)) would require an increase or decrease of at least 1% in such Exercise
Price; provided, however, that any adjustments which by reason of this Section
7(1) are not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this Section 7(1) shall be
made to the nearest cent or to the nearest 1/100 of a share of Common Stock, as
the case may be. Notwithstanding the foregoing, any adjustment required by this
Section 7(1) shall be made no later than the earlier of three years from the
date of the transaction which mandates such adjustment or the expiration of the
right to exercise the Series A Warrants or a portion thereof.
(m) Whenever the Exercise Price is adjusted as herein provided:
(A) the Company shall compute the adjusted Exercise Price in
accordance with Section 7 and shall prepare a certificate signed by the
treasurer of the Company setting forth the
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adjusted Exercise Price and showing in reasonable detail the facts upon
which such adjustment is based, and such certificate shall forthwith be
filed with any transfer agent; and
(B) a notice stating that the Exercise Price has been adjusted and
setting forth the adjusted Exercise Price shall forthwith be required, and
as soon as practicable after it is required, such notice shall be mailed by
the Company to all Holders of Series A Warrants at their last addresses as
they shall appear in the register required to be kept pursuant to Section 2
hereof.
(n) In case:
(A) the Company shall declare a dividend or other distribution on its
Common Stock (other than a dividend payable exclusively in cash that would
not cause an adjustment to the Exercise Price to take place pursuant to
Section 7 above);
(B) the Company or any of its subsidiaries shall make a tender offer
for the Common Stock (other than a tender offer that would not cause an
adjustment to the Exercise Price pursuant to clause (e) or (f) of Section
7);
(C) the Company shall authorize the granting to all Holders of its
Common Stock of rights,
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options or warrants to subscribe for or purchase any shares of capital
stock of any class;
(D) of any reclassification of the Common Stock (other than a
subdivision or combination of its outstanding shares of Common Stock), or
of any consolidation, merger or share exchange to which the Company is a
party and for which approval of any shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the
assets of the Company; or
(E) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then the Company shall cause to be filed with any warrant agent, and shall cause
to be mailed to all Holders of the Series A Warrants at their last addresses as
they shall appear in the register required to be kept for that purpose by
Section 2 hereof, at least 20 days (or 10 days in any case specified in clause
(A) or (B) above) prior to the effective date hereinafter specified, a notice
stating (x) the date on which a record has been taken for the purpose of such
dividend, distribution or grant of rights, options or warrants, or, if a record
is not to be taken, the date as of which the identity of the holders of Common
Stock of record entitled to such dividend, distribution,
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rights, options or warrants was determined, or (y) the date on which such
reclassification, consolidation, merger, share exchange, sale, transfer,
dissolution, liquidation or winding up is expected to become effective,
and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution,
liquidation or winding up. Neither the failure to give such notice nor any
defect therein shall affect the legality or validity of the proceedings
described in clauses (A) through (E) of this Section 7(n).
Section 8. Excess Loss Amount Adjustment. In the event that the
Excess Loss Amount (as defined in Section 4.2 of the Investment Agreement)
exceeds $95,000,000, the Exercise Price per share shall be reduced by an amount
equal to $.08 for each $1,000,000 of Excess Loss Amount in excess of
$95,000,000; provided, however, that the Exercise Price shall not hereby be
reduced to less than $1.00; provided, further, however, that no reduction in
the Exercise Price shall be made as a result of any increase in the aggregate
Excess Loss Amount reported in any financial statements following the 1995
year-end financial statements of the Company. The aggregate Excess Loss Amount
shall be
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calculated on the earlier of (i) any exercise of the Series A Warrants or (ii)
otherwise, a quarterly basis and the appropriate reduction in the Exercise Price
shall then be made.
Section 9. Maintenance of Warrant Office. The Company will maintain an
office or agency in Los Angeles, California, where these Series A Warrants may
be presented or surrendered for split-up, combination, registration of transfer,
or exchange and where notices and demands to or upon the Company in repect of
these Series A Warrants may be served.
Section 10. Assignments of Transfers. Transfers and assignments of these
Series A Warrants are subject to the prohibitions on transfer set forth in the
Investment Agreement and applicable state and federal securities laws.
Section 11. Notices. Notices under these Series A Warrants to the Company
and the Investor shall be provided in the manner, and to the addresses of the
Company and the Investor, set forth in the Investment Agreement.
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Section 12. Governing Law. These Series A Warrants shall be governed by,
and interpreted in accordance with, the laws of the State of California, without
regard to principles of conflicts of law.
20TH CENTURY INDUSTRIES
[Seal]
By
---------------------
ATTEST:
- ----------------------------------
Secretary
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PURCHASE FORM
The undersigned hereby irrevocably elects to exercise ____________ Series
A Warrants to purchase ______________ shares of Common Stock, no par value, of
20th Century Industries, and hereby makes payment of the Exercise Price of
$______________.
Dated: ___________________________________, 19____.
Instructions for Registration of Stock
Name _____________________________________________________________________
(please typewrite or print in block letters)
Address __________________________________________________________________
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EXHIBIT
C
133
EXHIBIT C
QUOTA SHARE REINSURANCE AGREEMENT
BETWEEN
20TH CENTURY INSURANCE COMPANY
(HEREINAFTER REFERRED TO AS THE "COMPANY")
and
(HEREINAFTER REFERRED TO AS THE "REINSURER")
PREAMBLE
The Reinsurer hereby agrees to reinsure the Company in respect of the Company's
net liability under all policies, contracts and binders of insurance
(hereinafter referred to as "policies") issued during the term of this Agreement
subject to the following terms and conditions:
ARTICLE I
TERM
This Agreement shall be effective from 12:01 A.M., pacific standard time,
January 1, 1995 and shall remain continuously in force through December 31,
1999. The Reinsurer has the option to renew this agreement annually for four
additional years by notifying the company prior to December 31, 1999 or prior to
the expiration date of any reinsurer.
ARTICLE II
PARTICIPATION
The Company shall cede and the Reinsurer shall accept 10% of the Company's net
liability for losses on policies effective during the term of this Agreement. As
consideration, the Reinsurer shall receive a 10% share of the net written
premiums, less ceding commission as described in Article III, generated by such
policies. In the event the Reinsurer elects to renew this Agreement for annual
periods following December 31, 1998 the participation shall be 8% on the first
renewal, 5% on the second renewal, 4% on the third renewal and 2% on the fourth
renewal.
ARTICLE III
COMMISSION
The Reinsurer shall allow the Company's commission of 10.8% of the ceded written
premium for policies with effective dates from January 1, 1995 and through
December 31, 1995. For policies with effective dates in each subsequent
underwriting year, the
134
QUOTA SHARE REINSURANCE AGREEMENT
20TH CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 2
commission shall be equal to the rate of the Company's incurred underwriting
expenses (as recorded in the Company's statutory statement) to net written
premium for the prior calendar year.
ARTICLE IV
REPORTS AND ACCOUNTS
1. The Company shall furnish within forty-five days after the close of each
calendar quarter an account reflecting the following separately for each
underwriting year:
A. Net written premium ceded during the quarter (credited).
B. Commission on the ceded premium (debited).
C. Net paid losses (debited).
D. Net paid adjustment expenses (debited).
E. Net outstanding Losses.
F. Net unearned premium.
If the balance of A through D is a credit such amount shall be remitted with
the account. If the balance of A through D is a debit, the Reinsurer shall
remit such amount within 15 days of receipt of the account. Accounts by line
of business shall also be provided by the Company including the
aforementioned information.
ARTICLE V
DEFINITION
Underwriting year shall mean all policies with effective dates from 12:01 AM,
pacific standard time, January 1st through December 31st of each calendar year.
Net written premium or net losses shall mean the gross amount less deductions
for all other reinsurance.
CURRENCY
All premium and loss payments hereunder shall be in United States currency.
ARTICLE VI
ACCESS TO RECORDS
The Reinsurer or its duly appointed representatives shall have free access at
all reasonable times to such books and records of those Divisions, Departments
and Branch Offices of the Company which are directly involved with the subject
matter business of this Agreement as shall reflect premium and loss transactions
of the Company for the purpose of obtaining any and all information concerning
this
135
QUOTA SHARE REINSURANCE AGREEMENT
20TH CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 3
Agreement or the subject matter hereof. All non-public information provided in
the course of the inspection shall be kept confidential by the Reinsurer as
against third parties.
ARTICLE VII
INSOLVENCY
In the event of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver, conservator or
statutory successor. Immediately upon demand, on the basis of the liability of
the Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor of the
Company has failed to pay all or a portion of any claim. It is agreed, however,
that the liquidator, receiver, conservator or statutory successor of the Company
shall give written notice to the Reinsurer of the pendancy of a claim against
the Company which would involve a possible liability on the part of the
Reinsurer, indicating the policy or bond reinsured, within a reasonable time
after such claim is filed in the conservation or liquidation proceeding or in
the receivership. It is further agreed that during the pendancy of such claim
the Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
that it may deem available to the Company or its liquidator, receiver,
conservator, or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to the approval of the Court, against the Company
as part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely as a result of
the defense undertaken by the Reinsurer.
ARTICLE VIII
ARBITRATION
A. All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two arbitrators, one to be
chosen by each party, and in the event of the arbitrators failing to agree,
to the decision of an umpire to be chosen by the arbitrators. The arbitrators
and umpire shall be disinterested active or retired executive officials of
fire or casualty insurance or reinsurance companies or Underwriters at
Lloyd's, London. If either of the parties fails to appoint an arbitrator
within one month after being required by the other party in writing to do so,
or if the arbitrators fail to appoint an umpire within one month of a request
in writing by either of them to do so, such arbitrator or umpire, as the case
may be, shall at the request of either party be appointed by a Justice of the
Supreme Court of the State of New York.
B. The arbitration proceeding shall take place in the city in which the
Company's Head Office is located. The applicant shall submit its case within
one month after the appointment of the court of arbitration, and the
respondent shall submit its reply within one month after the receipt of the
claim. The arbitrators and umpire are relieved from all judicial formality
and may abstain from following the strict rules of law. They shall settle any
dispute under the Agreement according to an equitable rather than a strictly
legal interpretation of the terms.
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QUOTA SHARE REINSURANCE AGREEMENT
20TH CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 4
C. Their written decision shall be provided to both parties within ninety days
of the close of arbitration and shall be final and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall jointly and
equally share with the other the exercises of the umpire and of the
arbitration.
E. This Article shall survive the termination of this Agreement.
ARTICLE IX
ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not relieve either party hereto
from any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified
immediately upon discovery.
ARTICLE X
LOSS & LOSS ADJUSTMENT EXPENSE
A. The Company alone and at its full discretion shall adjust, settle or
compromise all claims and losses. All such adjustments, settlements, and
compromises, shall be binding on the Reinsurer in proportion to its
participation. The Company shall likewise at its sole discretion commence,
continue, defend, compromise, settle or withdraw from actions, suits or
proceedings and generally do all such matters and things relating to any
claim or loss as in its judgment may be beneficial or expedient, and all
payments made and costs and expenses incurred in connection therewith or in
taking legal advice therefor shall be shared by the Reinsurer
proportionately. The Reinsurer shall, on the other hand, benefit
proportionately from all reductions of losses by salvage, compromise or
otherwise.
ARTICLE XI
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company where the ultimate net loss includes
any extra contractual obligations. The term "extra contractual obligations" is
defined as those liabilities not covered under any other provision of the
Contract and which arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an offer
of settlement or in the preparation of the defense or in the trail of any action
against it's insured or reinsured or in the preparation of prosecution of an
appeal consequent upon such action. The Reinsurer's liability for extra
contractual obligations shall not exceed their participation of the maximum
limit of liability on the policy from which the extra contractual obligation
arises.
The date on which any extra contractual obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original disaster
and/or casualty.
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QUOTA SHARE REINSURANCE AGREEMENT
20TH CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 5
However, this Article shall not apply where the loss has been incurred due to
fraud or a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XII
OFFSET
Each party hereto shall have, and may exercise at any time and from time to
time, the right to offset any undisputed balance or balances, whether on account
of premiums, or on account of losses or otherwise, due from such party to the
other party hereto under this Agreement.
ARTICLE XIII
TERMINATION
Either party may terminate this Agreement with thirty days notice in the event
that:
1. One party should at any time become insolvent, or suffer any impairment of
capital, or file a petition in bankruptcy, or go into liquidation or
rehabilitation, or have a receiver appointed, or be acquired or controlled
by any other insurance company or organization or,
2. Any law or regulation of any Federal or any State or any Local Government of
any jurisdiction in which the Company is doing business should render
illegal the arrangements made herein, or
3. With the agreement of the other party.
In the event of termination, the Reinsurer shall refund to the Company the
applicable unearned premium minus the ceding commission and shall continue to
remain liable for all losses occurring prior to the date of termination.
However, if this Contract shall terminate while a loss occurrence covered
hereunder is in progress, it is agreed that, subject to the other conditions of
this Contract, the Reinsurer is responsible for its proportion of the entire
loss.
ARTICLE XIV
TAX
In consideration of the terms under which this Agreement is issued, the Company
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than Income or Profits Tax returns, to any State or Territory of
the United States or to the District of Columbia.
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QUOTA SHARE REINSURANCE AGREEMENT
20TH CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
In ________________________________ this ______________ day of ___________ 199 .
20TH CENTURY INSURANCE COMPANY
By: _________________________________ Title:____________________________________
and in ____________________________ this ______________ day of ___________ 199 .
139
QUOTA SHARE REINSURANCE AGREEMENT
between
21ST CENTURY CASUALTY COMPANY
(hereinafter referred to as the "Company")
and
(hereinafter referred to as the "Reinsurer")
PREAMBLE
The Reinsurer hereby agrees to reinsure the Company in respect of the Company's
net liability under all policies, contracts and binders of insurance (hereafter
referred to as "policies") issued during the term of this Agreement subject to
the following terms and conditions:
ARTICLE I
TERM
This Agreement shall be effective from 12:01 AM, pacific standard time, January
1, 1995 and shall remain continuously in force through December 31, 1999. The
Reinsurer has the option to renew this agreement annually for four additional
years by notifying the company prior to December 31, 1999 or prior to the
expiration date of any renewal.
ARTICLE II
PARTICIPATION
The Company shall cede and the Reinsurer shall accept 10% of the Company's net
liability for losses on policies effective during the term of this Agreement. As
consideration, the Reinsurer shall receive a 10% share of the net written
premiums, less ceding commission as described in Article III, generated by such
policies. In the event the Reinsurer elects to renew this Agreement for annual
periods following December 31, 1999 the participation shall be 8% on the first
renewal, 6% on the second renewal, 4% on the third renewal and 2% on the fourth
renewal.
ARTICLE III
COMMISSION
The Reinsurer shall allow the Company a commission of 10.8% of the ceded written
premium for policies with effective dates from January 1, 1995 and through
December 31, 1995. For policies with effective dates in each subsequent
underwriting year, the
140
QUOTA SHARE REINSURANCE AGREEMENT
21ST CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 2
commission shall be equal to the rate of the Company's incurred underwriting
expenses (as recorded in the Company's statutory statement) to net written
premium for the prior calendar year.
ARTICLE IV
REPORTS AND ACCOUNTS
1. The Company shall furnish within forty-five days after the close of each
calendar quarter an account reflecting the following separately for each
underwriting year.
A. Net written premium ceded during the quarter (credited).
B. Commission on the ceded premium (debited).
C. Net paid losses (debited).
D. Net paid adjustment expenses (debited).
E. Net outstanding Losses.
F. Net unearned premium.
If the balance of A through D is a credit such amount shall be remitted with
the account. If the balance of A through D is a debit, the Reinsurer shall
remit such amount within 15 days of receipt of the account. Accounts by line
of business shall also be provided by the Company including the
aforementioned information.
ARTICLE V
DEFINITION
Underwriting year shall mean all policies with effective dates from 12:01 AM,
pacific standard time, January 1st through December 31st of each calendar year.
Net written premium or net losses shall mean the gross amount less deductions
for all other reinsurance.
CURRENCY
All premium and loss payments hereunder shall be in United States currency.
ARTICLE VI
ACCESS TO RECORDS
The Reinsurer or its duly appointed representatives shall have free access at
all reasonable times to such books and records of those Divisions, Departments
and Branch Offices of the Company which are directly involved with the subject
matter business of this Agreement as shall reflect premium and loss transactions
of the Company for the purpose of obtaining any and all information concerning
this
141
QUOTA SHARE REINSURANCE AGREEMENT
21ST CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 3
Agreement or the subject matter hereof. All non-public information provided in
the course of the inspection shall be kept confidential by the Reinsurer as
against third parties.
ARTICLE VII
INSOLVENCY
In the event of the insolvency of the Company, this reinsurance shall be payable
directly to the Company, or to its liquidator, receiver, conservator or
statutory successor, immediately upon demand, on the basis of the liability of
the Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor of the
Company has failed to pay all or a portion of any claim. It is agreed, however,
that the liquidator, receiver, conservator or statutory successor of the Company
shall give written notice to the Reinsurer of the pendency of a claim against
the Company which would involve a possible liability on the part of the
Reinsurer, indicating the policy or bond reinsured, within a reasonable time
after such claim is filed in the conservation or liquidation proceeding or in
the receivership. It is further agreed that during the pendency of such claim
the Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or defenses
that it may deem available to the Company or its liquidator, receiver,
conservator, or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to the approval of the Court, against the Company
as part of the expense of conservation or liquidation to the extent of a pro
rata share of the benefit which may accrue to the Company solely as a result of
the defense undertaken by the Reinsurer.
ARTICLE VIII
ARBITRATION
A. All disputes or differences arising out of the interpretation of this
Agreement shall be submitted to the decision of two arbitrators, one to be
chosen by each party, and in the event of the arbitrators failing to agree,
to the decision of an umpire to be chosen by the arbitrators. The arbitrators
and umpire shall be disinterested active or retired executive officials of
fire or casualty insurance or reinsurance companies or Underwriters at
Lloyd's, London. If either of the parties fails to appoint an arbitrator
within one month after being required by the other party in writing to do so,
or if the arbitrators fail to appoint an umpire within one month of a request
in writing by either of them to do so, such arbitrator or umpire, as the case
may be, shall at the request of either party be appointed by a Justice of the
Supreme Court of the State of New York.
B. The arbitration proceeding shall take place in the city in which the
Company's Head Office is located. The applicant shall submit its case within
one month after the appointment of the court of arbitration, and the
respondent shall submit its reply within one month after the receipt of the
claim. The arbitrators and umpire are relieved from all judicial formality
and may abstain from following the strict rules of law. They shall settle any
dispute under the Agreement according to an equitable rather than a strictly
legal interpretation of its terms.
142
QUOTA SHARE REINSURANCE AGREEMENT
21ST CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 4
C. Their written decision shall be provided to both parties within ninety days
of the close of arbitration and shall be final and not subject to appeal.
D. Each party shall bear the expenses of his arbitrator and shall jointly and
equally share with the other the expenses of the umpire and of the
arbitration.
E. This Article shall survive the termination of this Agreement.
ARTICLE IX
ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not relieve either party hereto
from any liability which would attach to it hereunder if such delay, omission or
error had not been made, provided such delay, omission or error is rectified
immediately upon discovery.
ARTICLE X
LOSS & LOSS ADJUSTMENT EXPENSE
A. The Company alone and at its full discretion shall adjust settle or
compromise all claims and losses. All such adjustments, settlements, and
compromises, shall be binding on the Reinsurer in proportion to its
participation. The Company shall likewise at its sole discretion commence,
continue, defend, compromise, settle or withdraw from actions, suits or
proceedings and generally do all such matters and things relating to any
claim or loss as in its judgment may be beneficial or expedient, and all
payments made and costs and expenses incurred in connection therewith or in
taking legal advice therefor shall be shared by the Reinsurer
proportionately. The Reinsurer shall, on the other hand, benefit
proportionately from all reductions of losses by salvage, compromise or
otherwise.
ARTICLE XI
EXTRA CONTRACTUAL OBLIGATIONS
This Agreement shall protect the Company where the ultimate net loss includes
any extra contractual obligations. The term "extra contractual obligations" is
defined as those liabilities not covered under any other provision of the
Contract and which arise from the handling of any claim on business covered
hereunder, such liabilities arising because of, but not limited to, the
following: failure by the Company to settle within the policy limit, or by
reason of alleged or actual negligence, fraud or bad faith in rejecting an
offer of settlement or in the preparation of the defense or in the trail of
any action against it's insured or reinsured or in the preparation of
prosecution of an appeal consequent upon such action. The Reinsurer's liability
for extra contractual obligations shall not exceed their participation of the
maximum limit of liability on the policy from which the extra contractual
obligation arises.
The date on which any extra contractual obligation is incurred by the Company
shall be deemed, in all circumstances, to be the date of the original disaster
and/or casualty.
143
QUOTA SHARE REINSURANCE AGREEMENT
21ST CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 5
However, this Article shall not apply where the loss has been incurred due to
fraud or a member of the Board of Directors or a corporate officer of the
Company acting individually or collectively or in collusion with any individual
or corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XII
OFFSET
Each party hereto shall have, and may exercise at any time and from time to
time, the right to offset any undisputed balance or balances, whether on
account of premiums or on account of losses or otherwise, due from such party
to the other party hereto under this Agreement.
ARTICLE XIII
TERMINATION
Either party may terminate this Agreement with thirty days notice in the event
that:
1. One party should at any time become insolvent, or suffer any impairment of
capital, or file a petition in bankruptcy, or go into liquidation or
rehabilitation, or have a receiver appointed, or be acquired or controlled by
any other insurance company or organization or,
2. Any law or regulation of any Federal or any State or any Local Government of
any jurisdiction in which the Company is doing business should render illegal
the arrangements made herein, or
3. With the agreement of the other party.
In the event of termination, the Reinsurer shall refund to the Company the
applicable unearned premium minus the ceding commission and shall continue to
remain liable for all losses occurring prior to the date of termination.
However, if this Contract shall terminate while a loss occurrence covered
hereunder is in progress, it is agreed that, subject to the other conditions of
this Contract, the Reinsurer is responsible for its proportion of the entire
loss.
ARTICLE XIV
TAX
In consideration of the terms under which this Agreement is issued, the Company
undertakes not to claim any deduction of the premium hereon when making tax
returns, other than Income or Profits Tax returns, to any State or Territory of
the United States or to the District of Columbia.
144
QUOTA SHARE REINSURANCE AGREEMENT
21ST CENTURY/NATIONAL UNION
EFFECTIVE OCTOBER 1, 1994 PAGE 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives.
in _________________________ this _______________ day of ________________ 199 .
21ST CENTURY CASUALTY COMPANY
By: __________________________________ Title: _________________________________
and in _____________________ this _______________ day of ________________ 199 .
145
EXHIBIT
D
146
EXHIBIT D
REGISTRATION RIGHTS AGREEMENT
BETWEEN
20TH CENTURY INDUSTRIES
AND
AMERICAN INTERNATIONAL GROUP, INC.
---------------------------------------------------
Dated: As of November , 1994
---------------------------------------------------
147
TABLE OF CONTENTS
PAGE
----
ARTICLE I
CERTAIN DEFINITIONS
1.1 Business Day.................................................................. 1
1.2 Closing Date.................................................................. 1
1.3 Common Stock.................................................................. 1
1.4 Eligible Securities........................................................... 2
1.5 Holder........................................................................ 2
1.6 Person........................................................................ 2
1.7 Registration Expenses......................................................... 2
1.8 SEC........................................................................... 3
1.9 Securities Act................................................................ 3
1.10 Series A Preferred Shares..................................................... 3
1.11 Series A Warrants............................................................. 4
ARTICLE II
EFFECTIVENESS
2.1 Effectiveness of Registration Rights.......................................... 4
ARTICLE III
DEMAND REGISTRATION
3.1 Notice........................................................................ 4
3.2 Registration Expenses......................................................... 6
ARTICLE IV
PIGGYBACK REGISTRATION
4.1 Notice and Registration....................................................... 6
4.2 Registration Expenses......................................................... 9
i
148
PAGE
----
ARTICLE V
REGISTRATION PROCEDURES
5.1 Registration and Qualification................................................ 9
5.2 Underwriting.................................................................. 13
5.3 Blackout Periods.............................................................. 14
5.4 Withdrawals................................................................... 15
ARTICLE VI
PREPARATION; REASONABLE INVESTIGATION
6.1 Preparation; Reasonable Investigation......................................... 16
ARTICLE VII
INDEMNIFICATION AND CONTRIBUTION
7.1 Indemnification and Contribution.............................................. 17
ARTICLE VIII
TRANSFER OF REGISTRATION RIGHTS
8.1 Transfer of Registration Rights............................................... 18
ARTICLE IX
UNDERWRITTEN OFFERINGS
9.1 Selection of Underwriters..................................................... 18
ARTICLE X
RULE 144
10.1 Rule 144...................................................................... 19
ii
149
PAGE
----
ARTICLE XI
MISCELLANEOUS
11.1 Captions...................................................................... 19
11.2 Severability.................................................................. 19
11.3 Governing Law................................................................. 20
11.4 Consent to Jurisdiction; Service of Process; Waiver of Jury Trial............. 20
11.5 Specific Performance.......................................................... 20
11.6 Modification and Amendment.................................................... 21
11.7 Counterparts.................................................................. 21
11.8 Entire Agreement.............................................................. 21
11.9 Notices....................................................................... 21
11.10 Successors to Company, Etc. .................................................. 21
iii
150
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT is made as of the __ day of November,
1994 (this "Agreement"), among 20th Century Industries, a California corporation
(the "Company"), and American International Group, Inc., a Delaware corporation
(the "Investor").
W I T N E S S E T H:
WHEREAS, the Company has agreed to issue and sell, and the Investor has
agreed to purchase, pursuant to the Investment and Strategic Alliance Agreement,
dated October 17, 1994 (the "Investment Agreement"), between the Company and
Investor, certain unregistered Series A Preferred Shares and Series A Warrants
of the Company.
WHEREAS, in order to induce Investor to enter into the Investment
Agreement, the Company desires to grant to Investor, as provided herein, certain
registration rights with respect to the Series A Preferred Shares the shares of
Common Stock issuable to the Investor upon conversion of the Series A Preferred
Shares and the shares of Common Stock issuable to the Investor upon exercise of
the Series A Warrants.
NOW, THEREFORE, in consideration of the mutual covenants and undertakings
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and subject to and on the terms
and conditions herein set forth, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS.
1.1. "Business Day" means any Day on which the New York Stock Exchange is
open for trading.
1.2. "Closing Date" means the date of this Agreement.
1.3. "Common Stock" means the Common Stock, no par value, of the Company,
and any securities of the Company or any successor which may be issued on or
after the date hereof in respect of, or in exchange for, shares of Common Stock
pursuant to merger, consolidation, stock split, stock dividend, recapitalization
of the Company or otherwise.
151
1.4. "Eligible Securities" means Series A Preferred Shares, any shares of
Common Stock issuable upon any conversion of Series A Preferred Shares and any
shares of Common Stock issuable upon exercise of the Series A Warrants, in each
case whether held by either the Investor or any direct or indirect transferee of
the Investor.
As to any proposed offer or sale of Eligible Securities, such securities
shall cease to be Eligible Securities with respect to such proposed offer or
sale when (i) a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement or (ii) all of such securities are permitted to be distributed
concurrently pursuant to Rule 144 (or any successor provision to such Rule)
under the Securities Act or are otherwise freely transferable to the public
without registration pursuant to Section 4(1) of the Securities Act. In the
event the Company prepares a registration statement pursuant to Article 3 or 4
hereof which becomes effective and the Holder fails to dispose of Eligible
Securities pursuant to said registration statement, the securities shall remain
Eligible Securities but the Holder shall be responsible for assuming that
portion of the Registration Expenses in connection with such registration as
equals the portion of Eligible Securities originally to be sold pursuant to such
registration which were to be sold by such Holder.
1.5. "Holder" means the Investor and each of the Investor's respective
successive successors and assigns who acquire Eligible Securities, directly or
indirectly, from the Investor or from any successive successor or assign of the
Investor.
1.6. "Person" means an individual, a partnership (general or limited),
corporation, joint venture, business trust, cooperative, association or other
form of business organization, whether or not regarded as a legal entity under
applicable law, a trust (inter vivos or testamentary), an estate of a deceased,
insane or incompetent person, a quasi-governmental entity, a government or any
agency, authority, political subdivision or other instrumentality thereof, or
any other entity.
1.7. "Registration Expenses" means all expenses incident to the Company's
performance of or compliance with the registration requirements set forth in
this Agreement including, without limitation, the following: (a) the fees,
disbursements and expenses of the Company's counsel(s) and
D-2
152
accountants in connection with the registration of Eligible Securities to be
disposed of under the Securities Act; (b) all expenses in connection with the
preparation, printing and filing of the registration statement, any preliminary
prospectus or final prospectus, any other offering document and amendments and
supplements thereto and the mailing and delivering of copies thereof to the
underwriters and dealers; (c) the cost of printing or producing any agreement(s)
among underwriters, underwriting agreement(s) and blue sky or legal investment
memoranda, any selling agreements and any other documents in connection with the
offering, sale or delivery of Eligible Securities to be disposed of; (d) all
expenses in connection with the qualification of Eligible Securities to be
disposed of for offering and sale under state securities laws, including the
fees and disbursements of counsel for the underwriters in connection with such
qualifications and in connection with any blue sky and legal investment surveys;
(e) the filing fees incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of the sale of Eligible
Securities to be disposed of; and (f) fees and expenses incurred in connection
with the listing of Eligible Securities on each securities exchange on which
securities of the same class are then listed; provided, however, that
Registration Expenses with respect to any registration pursuant to this
Agreement shall not include (x) underwriting discounts or commissions
attributable to Eligible Securities, (y) transfer taxes applicable to Eligible
Securities or (z) SEC filing fees with respect to shares of Common Stock to be
sold by the Holder thereof.
1.8. "SEC" means the Securities and Exchange Commission.
1.9. "Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
1.10. "Series A Preferred Shares" means all shares of Series A Convertible
Preferred Stock, stated value $1,000 per share, issued pursuant to the
Investment Agreement (including shares issued with respect to payments of
dividends in kind) and having the rights, preferences, privileges and
restrictions set forth in the form of Certificate of Determination attached to
the Investment Agreement as Exhibit B, and any securities of the Company or any
successor which may be issued on or after the date hereof in respect of, or in
exchange for, the Series A Preferred Shares pursuant to a merger, consolidation,
stock
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split, stock dividend, recapitalization of the Company or otherwise.
1.11. "Series A Warrants" means the 16,000,000 Series A Warrants, having
the terms set forth in the Warrant Certificate attached to the Investment
Agreement as Exhibit C, and any securities of the Company or any successor which
may be issued on or after the date hereof in respect of, or in exchange for, the
Series A Warrants pursuant to a merger, consolidation, stock split, stock
dividend, recapitalization of the Company or otherwise.
ARTICLE II
EFFECTIVENESS.
2.1. Effectiveness of Registration Rights. The registration rights
pursuant to Articles 3 and 4 hereof shall become effective on the Closing Date
and terminate when there cease to be Eligible Securities.
ARTICLE III
DEMAND REGISTRATION.
3.1. Notice. At any time or from time to time following the first
anniversary of the Closing Date, upon written notice from any Holder or Holders
requesting that the Company effect the registration under the Securities Act of
all or part of the Eligible Securities held by them pursuant to Section 3.1(d)
below, which notice shall specify the number and class of Eligible Securities
intended to be registered and the intended method or methods of disposition of
such Eligible Securities, the Company will use reasonable efforts to effect (at
the earliest possible date) the registration, under the Securities Act, of such
Eligible Securities for disposition in accordance with the intended method or
methods of disposition stated in such request, provided that:
(a) the Company shall be obligated to register the Eligible Securities
upon receipt of a registration request only if the Eligible Securities to
be registered have a fair market value, at both the time of receipt of the
request and the filing of the Registration Statement, of at least (i) $50
million, in any case where the Eligible Securities to be registered consist
of Series A Preferred Shares or shares of Common Stock obtained or
obtainable upon conversion of
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the Series A Preferred Shares or (ii) $25 million in any case where the
Eligible Securities to be registered consist of shares of Common Stock
obtained or obtainable upon exercise of the Series A Warrants;
(b) if, following receipt of a registration request pursuant to this
Article 3 but prior to the filing of a registration statement or the
effective date of a registration statement filed in respect of such
request, (i) the Board of Directors of the Company, in its reasonable
judgment and in good faith, resolves that (a) the filing of a registration
statement or a sale of Eligible Securities pursuant thereto would
materially interfere with any significant acquisition, corporate
reorganization or other similar transactions involving the Company or (b)
the filing of a registration statement or a sale of Eligible Securities
pursuant thereto would require disclosure of material information that the
Company has a bona fide material business purpose for preserving as
confidential or (c) the Company is unable to comply with SEC requirements,
and (ii) the Company gives the Holders having made such request written
notice of such determination (which notice shall include a copy of such
resolution), the Company shall, notwithstanding the provisions of this
Article 3, be entitled to postpone for up to 90 days the filing or
effectiveness of any registration statement otherwise required to be
prepared and filed by it pursuant to this Article 3; provided, however,
that the Company shall not be entitled to postpone such filing or
effectiveness if, within the preceding twelve months, it had effected a
postponement pursuant to this clause (b) and, following such postponement,
the Eligible Securities to be sold pursuant to the postponed registration
were not sold (for any reason);
(c) if the Company shall have previously effected a registration with
respect to Eligible Securities pursuant to Article 4 hereof, the Company
shall not be required to effect a registration pursuant to this Article 3
until a period of one hundred and eighty (180) days shall have elapsed from
the effective date of the most recent such previous registration; and
(d) the intended method or methods of disposition shall not include a
"shelf registration" whereby shares of Common Stock are sold from time to
time in multiple transactions.
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3.2. Registration Expenses. With respect to the registrations requested
pursuant to this Article 3, the Company shall pay all Registration Expenses.
ARTICLE IV
PIGGYBACK REGISTRATION.
4.1. Notice and Registration. If the Company proposes to register Eligible
Securities or any other securities issued by it ("Other Securities") (whether
proposed to be offered for sale by the Company or any other Person) on a form
and in a manner which would permit registration of Eligible Securities for sale
to the public under the Securities Act, it will give prompt written notice to
all Holders of its intention to do so, including the identities of any Holders
exercising registration rights pursuant to Article 3 hereof. Such notice shall
specify, at a minimum, the number and class of Eligible Securities or Other
Securities so proposed to be registered, the proposed date of filing of such
registration statement, any proposed means of distribution of such Eligible
Securities or Other Securities, any proposed managing underwriter or
underwriters of such Eligible Securities or Other Securities and a good faith
estimate by the Company of the proposed maximum offering price thereof, as such
price is proposed to appear on the facing page of such registration statement.
Upon the written request of any Holder delivered to the Company within 5
Business Days after the giving of any such notice (which request shall specify
the number of Eligible Securities intended to be disposed of by such Holder and
the intended method of disposition thereof) the Company will use reasonable
efforts to effect, in connection with the registration of the Other Securities,
the registration under the Securities Act of all Eligible Securities which the
Company has been so requested to register by such Holder (the "Selling
Stockholder"), to the extent required to permit the disposition (in accordance
with the intended method or methods thereof as aforesaid) of Eligible Securities
so to be registered, provided that:
(a) if, at any time after giving such written notice of its intention
to register any Other Securities and prior to the effective date of the
registration statement filed in connection with such registration, the
Company shall be unable to or shall determine for any reason not to
register the Other Securities the Company may, at its election, give
written notice of such determination to such Holder and thereupon the
Company shall be relieved of its
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obligation to register such Eligible Securities in connection with the
registration of such Other Securities (but not from its obligation to pay
Registration Expenses to the extent incurred in connection therewith as
provided in Section 4.2), without prejudice, however, to the rights (if
any) of such Holder immediately to request that such registration be
effected as a registration under Article 3;
(b) In the event that the Company proposes to register Eligible
Securities or Other Securities for purposes of a primary offering, and any
managing underwriter shall advise the Company and the Selling Stockholders
in writing that, in its opinion, the inclusion in the registration
statement of some or all of the Eligible Securities sought to be registered
by such Selling Stockholders creates a substantial risk that the price per
unit the Company will derive from such registration will be materially and
adversely affected or that the primary offering would otherwise be
materially and adversely affected, then the Company will include in such
registration statement such number of Eligible Securities or Other
Securities as the Company and such Selling Stockholders are so advised can
be sold in such offering without such an effect (the "Primary Maximum
Number"), as follows and in the following order of priority: (i) first,
such number of Eligible Securities or Other Securities in the primary
offering as the Company, in its reasonable judgment and acting in good
faith and in accordance with sound financial practice, shall have
determined and (ii) second, if and to the extent that the number of
Eligible Securities or Other Securities to be registered under clause (i)
is less than the Primary Maximum Number, Eligible Securities of each
Selling Stockholder, pro rata in proportion to the number sought to be
registered by such Selling Stockholder relative to the number sought to be
registered by all the Selling Stockholders;
(c) In the event that the Company proposes to register Eligible
Securities or Other Securities for purposes of a secondary offering, upon
the request or for the account of any holder thereof (each a "Requesting
Stockholder"), and any managing underwriter shall advise the Requesting
Stockholder or Stockholders and the Selling Stockholders in writing that,
in its opinion, the inclusion in the registration statement of some or all
of the Eligible Securities or Other Securities sought to be registered by
the Requesting
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Stockholders and of the Eligible Securities sought to be registered by the
Selling Stockholders creates a substantial risk that the price per unit
that such Requesting Stockholder or Stockholders and such Selling
Stockholders will derive from such registration will be materially and
adversely affected or that the secondary offering would otherwise be
materially and adversely affected, the Company will include in such
registration statement such number of Eligible Securities or Other
Securities as the Requesting Stockholders and the Selling Stockholders are
so advised can reasonably be sold in such offering, or can be sold without
such an effect (the "Secondary Maximum Number"), as follows and in the
following order of priority: (i) first, the number of Eligible Securities
sought to be registered by the Selling Stockholders and (ii) second, if and
to the extent that the number of Eligible Securities to be registered under
clause (i) is less than the Secondary Maximum Number, such number of
Eligible Securities or Other Securities sought to be registered by such
Requesting Stockholder or Stockholders;
(d) In the event that the Company proposes to register Eligible
Securities or Other Securities for purposes of a combined offering, and any
managing underwriter shall advise the Company, the Requesting Stockholder
or Stockholders and the Selling Stockholders in writing that, in its
opinion, the inclusion in the registration statement of some or all of the
Eligible Securities sought to be registered by the Selling Stockholders
creates a substantial risk that the price per unit the Company will derive
from such registration will be materially and adversely affected or that
the combined offering would otherwise be materially and adversely affected,
then the Company will include in such registration statement such number of
Eligible Securities or Other Securities as the Company, the Requesting
Stockholders and the Selling Stockholders are so advised can be sold in
such offering without such an effect (the "Combined Maximum Number"), as
follows and in the following order of priority: (i) first, such number of
Eligible Securities or Other Securities in the primary offering as the
Company, in its reasonable judgment and acting in good faith and in
accordance with sound financial practice, shall have determined and (ii)
second, if and to the extent that the number of Eligible Securities or
Other Securities sought to be registered under clause (i) is less than
Combined Maximum Number, Eligible Securities or Other Securities sought to
be registered by each Selling Stockholder, pro rata, if necessary, in
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proportion to the number sought to be registered by such Selling
Stockholder relative to the number sought to be registered by all Selling
Stockholders and (iii) third, if and to the extent that the number of
Eligible Securities or Other Securities sought to be registered under
clauses (i) and (ii) is less than the Combined Maximum Number, Eligible
Securities or Other Securities sought to be registered by each other such
Person pro rata in proportion to the value of the Eligible Securities or
Other Securities sought to be registered by all such parties;
(e) The Company shall not be required to effect any registration of
Eligible Securities under this Article 4 incidental to the registration of
any of its securities in connection with mergers, acquisitions, exchange
offers, subscription offers, dividend reinvestment plans or stock options
or other employee benefit plans; and
(f) The Company shall not be required to register any Eligible
Securities or Other Securities if the intended method or methods of
distribution for the Eligible Securities is from time to time in multiple
transactions.
No registration of Eligible Securities effected under this Article 4 shall
relieve the Company of its obligation (if any) to effect registrations of
Eligible Securities pursuant to Article 3.
4.2. Registration Expenses. The Company (as between the Company and
any Holder) shall be responsible for the payment of all Registration Expenses
in connection with any registration pursuant to this Article 4.
ARTICLE V
REGISTRATION PROCEDURES.
5.1. Registration and Qualification. If and whenever the Company is
required to use reasonable efforts to effect the registration of any Eligible
Securities under the Securities Act as provided in Articles 3 and 4, the Company
will as promptly as is practicable:
(a) prepare, file and use reasonable efforts to cause to become
effective a registration statement under the Securities Act regarding the
Eligible Securities to be offered, provided that such reasonable
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efforts obligation shall not require the Company to yield to an SEC
accounting or other comment which it is discussing, resisting or otherwise
addressing in good faith and which the Board of Directors of the Company
determines that such discussing, resisting or addressing is materially in
the best interests of the Company;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect to the
disposition of all Eligible Securities until the earlier of such time as
all of such Eligible Securities have been disposed of in accordance with
the intended methods of disposition by the Holders set forth in such
registration statement or the expiration of six (6) months after such
Registration Statement becomes effective;
(c) furnish to all Holders and to any underwriter (which term for
purposes of this Agreement shall include a person deemed to be an
underwriter within the meaning of Section 2(11) of the Securities Act and
any placement agent or sales agent) of such Eligible Securities one
executed copy each and such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including all exhibits), such number of copies of the prospectus included
in such registration statement (including each preliminary prospectus and
any summary prospectus), in conformity with the requirements of the
Securities Act, such documents incorporated by reference in such
registration statement or prospectus, and such other documents as any
Holder or such underwriter may reasonably request;
(d) use reasonable efforts to register or qualify all Eligible
Securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as any Holder or any
underwriter of such Eligible Securities shall reasonably request, and do
any and all other acts and things which may be necessary or advisable to
enable any Holder or any underwriter to consummate the disposition in such
jurisdictions of the Eligible Securities covered by such registration
statement, except the Company shall not for any such purpose be
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required to qualify generally to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified, or to subject itself to
taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction;
(e) promptly notify the selling Holders of Eligible Securities and the
managing underwriter or underwriters, if any, thereof and confirm such
advice in writing, (i) when such registration statement or the prospectus
included therein or any prospectus amendment or supplement or
post-effective amendment has been filed, and, with respect to such
registration statement or any post-effective amendment, when the same has
become effective, (ii) of any comments by the SEC and by the Blue Sky or
securities commissioner or regulator of any state with respect thereto or
any request by the SEC for amendments or supplements to such registration
statement or prospectus or for additional information, (iii) of the
issuance by the SEC of any stop order suspending the effectiveness of such
registration statement or the initiation or threatening of any proceedings
for that purpose, (iv) if at any time the representations and warranties of
the Company contemplated by Section 5.1(h) or Section 5.2(b) hereof cease
to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Eligible Securities for sale in any jurisdiction or
the initiation or threatening of any proceeding for such purpose, or (vi)
at any time when a prospectus is required to be delivered under the
Securities Act, that such registration statement, prospectus, prospectus
amendment or supplement or post-effective amendment, or any document
incorporated by reference in any of the foregoing, contains an untrue
statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing;
(f) use its reasonable efforts to obtain the withdrawal of any order
suspending the effectiveness of such registration statement or any
post-effective amendment thereto at the earliest practicable date, provided
that such reasonable efforts obligation shall not require the Company to
yield to a material SEC accounting or other comment which it is discussing,
resisting or otherwise addressing in good faith and which the Board of
Directors of the Company determines
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that such discussing, resisting or addressing is materially in the best
interests of the Company;
(g) use its reasonable efforts to obtain the consent or approval of
each governmental agency or authority, whether federal, state or local,
which may be required to effect such registration or the offering or sale
in connection therewith or to enable the Holders to offer, or to consummate
the disposition of, the Eligible Securities, provided that such reasonable
efforts obligation shall not require the Company to yield to a material
accounting or other comment issued by such governmental agency or authority
which it is discussing, resisting or otherwise addressing in good faith and
which the Board of Directors of the Company determines that such
discussing, resisting or addressing is materially in the best interests of
the Company;
(h) whether or not an agreement of the type referred to in Section 5.2
hereof is entered into and whether or not any portion of the offering
contemplated by such registration statement is an underwritten offering or
is made through a placement or sales agent or any other entity, (i) make
such representations and warranties to the Holders and the underwriters, if
any, thereof in form, substance and scope as are customarily made in
connection with an offering of common stock or other equity securities
pursuant to any appropriate agreement and/or to a registration statement
filed on the form applicable to such registration; (ii) obtain opinions of
inside and outside counsel to the Company in customary form and covering
such matters, of the type customarily covered by such opinions, as the
managing underwriters, if any, and as the Holders may reasonably request;
(iii) obtain a "cold comfort" letter or letters from the independent
certified public accountants of the Company addressed to the Holders and
the underwriters, if any, thereof, dated (I) the effective date of such
registration statement and (II) the date of the closing under the
underwriting agreement relating thereto, such letter or letters to be in
customary form and covering such matters of the type customarily covered,
from time to time, by letters of such type and such other financial matters
as the managing underwriters, if any, and as the Holders may reasonably
request; (iv) deliver such documents and certificates, including officers'
certificates, as may be reasonably requested by the Holders and the
placement or sales agent, if any, therefor and the managing underwriters,
if any, thereof to evidence the
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accuracy of the representations and warranties made pursuant to clause (i)
above and the compliance with or satisfaction of any agreements or
conditions contained in the underwriting agreement or other agreement
entered into by the Company; and (v) undertake such obligations relating to
expense reimbursement, indemnification and contribution as are provided in
Article 7 hereof;
(i) comply with all applicable rules and regulations of the SEC, and
make generally available to its securityholders, as soon as practicable but
in any event not later than eighteen months after the effective date of
such registration statement, an earning statement of the Company and its
subsidiaries complying with Section 11(a) of the Securities Act (including,
at the option of the Company, Rule 158 thereunder); and
(j) use its best efforts to list prior to the effective date of such
registration statement, subject to notice of issuance, the Eligible
Securities covered by such registration statement on any securities
exchange on which securities of the same class are then listed or, if such
class is not then so listed, to have the Eligible Securities accepted for
quotation for trading on the NASDAQ National Market System (or a comparable
interdealer quotation system then in effect).
The Company may require any Holder to furnish the Company such information
regarding such Holder and the distribution of such securities as the Company may
from time to time reasonably request in writing and as shall be required by law
or by the SEC in connection with any registration.
5.2 Underwriting. (a) If requested by the underwriters for any
underwritten offering of Eligible Securities pursuant to a registration
requested hereunder, the Company will enter into an underwriting agreement with
such underwriters for such offering, such agreement to contain such
representations and warranties by the Company and such other terms and
provisions as are then customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation, indemnities
and contribution and the provision of opinions of counsel and accountants'
letters to the effect and to the extent provided in Section 5.1(h). The Holders
on whose behalf Eligible Securities are to be distributed by such underwriters
shall be parties to any such underwriting agreement. Such agreement shall
contain such representations
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and warranties by the Holders and such other terms and provisions as are then
customarily contained in underwriting agreements with respect to secondary
distributions, including, without limitation, indemnities and contribution to
the effect and to the extent provided in Article 7. The representations and
warranties by, and the other agreements on the part of, the Company to and for
the benefit of such underwriters shall also be made to and for the benefit of
such Holders of Eligible Securities.
(b) In the event that any registration pursuant to Article 4 hereof
shall involve, in whole or in part, an underwritten offering, the Company may
require Eligible Securities requested to be registered pursuant to Article 4 to
be included in such underwriting on the same terms and conditions as shall be
applicable to the Other Securities being sold through underwriters under such
registration. In such case, the Holders of Eligible Securities on whose behalf
Eligible Securities are to be distributed by such underwriters shall be parties
to any such underwriting agreement. Such agreement shall contain such
representations and warranties by the Holders and such other terms and
provisions as are then customarily contained in underwriting agreements with
respect to secondary distributions, including, without limitation, indemnities
and contribution to the effect and to the extent provided in Article 7. The
representations and warranties in such underwriting agreement by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of such holders of
Eligible Securities.
5.3 Blackout Periods. (a) At any time when a registration statement
effected pursuant to Article 3 hereunder relating to Eligible Securities is
effective, upon written notice from the Company to all Holders that either:
(i) the Board of Directors of the Company, in its reasonable judgment
and in good faith, resolves that such Holder's or Holders' sale of Eligible
Securities pursuant to the registration statement would materially
interfere with any significant acquisition, corporate reorganization or
other similar transaction involving the Company (a "Transaction Blackout");
or
(ii) (A) the Company determines in good faith, based upon the advice
of outside counsel to the Company, that such Holder's or Holders' sale of
Eligible Securities pursuant to the registration statement would require
disclosure of material information and the Company's Board of Directors, in
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its reasonable judgment and in good faith, resolves that the Company has a
bona fide business purpose for preserving such information confidential or
(B) the Company determines, after taking into account the advice of outside
counsel and/or independent accountants, that the Company is unable to
comply with SEC requirements (an "Information Blackout"),
Such Holder or Holders shall suspend sales of Eligible Securities pursuant to
such registration statement until the earlier of:
(X) (i) in the case of a Transaction Blackout, the earliest of (A) one
month after the completion of such acquisition, corporate reorganization or
other similar transaction, (B) promptly after abandonment of such
acquisition, corporate reorganization or other similar transaction and (C)
three months after the date of the Company's written notice of such
Transaction Blackout, or
(ii) in the case of an Information Blackout, the earlier of (A) the
date upon which such material information is disclosed to the public or
ceases to be material and (B) 90 days after the Company makes such good
faith determination, and
(Y) such time as the Company notifies such Holder or Holders that
sales pursuant to such registration statement may be resumed (the number of
days from such suspension of sales by such Holder or Holders until the day
when such sales may be resumed hereunder is hereinafter called a "Sales
Blackout Period");
provided, that the Company may not impose a Transaction Blackout within 30 days
after the initial effectiveness of any registration statement of equity
securities prepared pursuant to a request hereunder.
5.4. Withdrawals. Any Holder having notified or directed the Company
to include any or all of his or its Eligible Securities in a registration
statement pursuant to Article 3 or 4 hereof shall have the right to withdraw
such notice or direction with respect to any or all of the Eligible Securities
designated for registration thereby by giving written notice to such effect to
the Company at least two business days prior to the anticipated effective date
of such registration statement. In the event of any such withdrawal, the
Company shall amend such registration statement and take such other actions as
may be necessary so
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that such Eligible Securities are not included in the applicable registration
and not sold pursuant thereto, and such Eligible Securities shall continue to be
Eligible Securities in accordance herewith; the Withdrawing Holder shall be
responsible for assuming that portion of the Company's expenses in connection
with such registration as equals the portion of Eligible Securities originally
to be sold pursuant to such registration which were to be sold by Withdrawing
Holder. No such withdrawal shall affect the obligations of the Company with
respect to Eligible Securities not so withdrawn, provided, however, that in the
case of a registration pursuant to Article 3 hereof, if such withdrawal shall
reduce the total number of the Eligible Securities to be registered so that the
requirements set forth in Section 3.1(a) are not satisfied, then the Company
shall, prior to the filing of such registration statement or, if such
registration statement (including any amendment thereto) has theretofore been
filed, prior to the filing of any further amendment thereto, give each Holder of
Eligible Securities so to be registered notice, referring to this Agreement, of
such fact and, within ten business days following the giving of such notice,
either the Company or the Holders of a majority of such Eligible Securities may,
by written notice to each Holder of such Eligible Securities or the Company, as
the case may be, elect that such registration statement not be filed or, if it
has theretofore been filed, that it be withdrawn.
ARTICLE VI
PREPARATION; REASONABLE INVESTIGATION.
6.1. Preparation; Reasonable Investigation. In connection with the
preparation and filing of each registration statement registering Eligible
Securities under the Securities Act, the Company will give all Holders and the
underwriters, if any, and their respective counsel and accountants, such
reasonable and customary access to its books and records and such opportunities
to discuss the business of the Company with its directors, officers, employees,
counsel and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of any Holder and such
underwriters or their respective counsel, to conduct a reasonable investigation
within the meaning of the Securities Act.
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ARTICLE VII
INDEMNIFICATION AND CONTRIBUTION.
7.1 Indemnification and Contribution. (a) In the event of any registration
of any Eligible Securities hereunder, the Company will enter into customary
indemnification arrangements to indemnify and hold harmless all selling Holders,
their directors and officers (if any), each Person who participates as an
underwriter in the offering or sale of such securities, each officer and
director of each underwriter, and each Person, if any, who controls such seller
or any such underwriter within the meaning of the Securities Act against any
losses, claims, damages, liabilities and expenses, joint or several, to which
such Person may be subject under the Securities Act or otherwise insofar as such
losses, claims, damages, liabilities or expenses (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in any registration
statement under which such securities were registered under the Securities Act,
any preliminary prospectus or final prospectus included therein, or any
amendment or supplement thereto, or any document incorporated by reference
therein, or (ii) any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and the Company will periodically reimburse each such Person for
any legal or any other expenses reasonably incurred by such Person in connection
with investigating or defending any such loss, claim, liability, action or
proceeding; provided that the Company shall not be liable in any such case to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or omission or alleged omission made in such registration statement,
any such preliminary prospectus or final prospectus, amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any selling holder or such underwriter for use in the preparation
thereof. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any Holder or any such person and shall
survive the transfer of such securities by such selling Holder. The Company also
shall agree to provide provision for contribution as shall be reasonably
requested by such selling Holder or any underwriters in circumstances where such
indemnity is held unenforceable.
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(b) All selling Holders, by virtue of exercising their registration rights
hereunder, agree and undertake to enter into customary indemnification
arrangements to indemnify and hold harmless (in the same manner and to the same
extent as set forth in clause (a) of this Article 7) the Company, each director
of the Company, each officer of the Company who shall sign such registration
statement, each Person who participates as an underwriter in the offering or
sale of such securities, each officer and director of each underwriter, each
Person, if any, who controls the Company or any such underwriter within the
meaning of the Securities Act, with respect to any statement in or omission from
such registration statement, any preliminary prospectus or final prospectus
included therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with written information
concerning such Holder furnished by it to the Company. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of the Company or any such director, officer or controlling Person and
shall survive the transfer of the registered securities by any Holder. Holders
also shall agree to provide provision for contribution as shall be reasonably
requested by the Company or any underwriters in circumstance where such
indemnity is held unenforceable. The indemnification and contribution
obligations of any Holder shall in every case be limited to the aggregate
proceeds received (net of any underwriting fees and expenses and other
transaction costs) by such Holder in such registration.
ARTICLE VIII
TRANSFER OF REGISTRATION RIGHTS.
8.1. Transfer of Registration Rights. Any Holder may transfer the
registration rights granted hereunder to any other Person only in connection
with a Transfer permitted pursuant to Article VI of the Investment Agreement to
such Person of Eligible Securities held by such Holder.
ARTICLE IX
UNDERWRITTEN OFFERINGS.
9.1. Selection of Underwriters. If any of the Eligible Securities covered
by any registration statement filed pursuant to Article 3 hereof, or pursuant to
Article 4 hereof in connection with a secondary offering, are to be sold
pursuant to an underwritten offering, the managing
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underwriter or underwriters thereof shall, in the case of any registration
statement filed pursuant to Article 3 hereof, be designated after consultation
with the Company by the Holder or Holders demanding registration, provided that
such designated managing underwriter or underwriters is or are reasonably
acceptable to the Company and, in the case of any registration statement
pursuant to Article 4 hereof, by the Person originating the registration.
ARTICLE X
RULE 144.
10.1. Rule 144. The Company covenants to and with each Holder of Eligible
Securities that to the extent it shall be required to do so under the Exchange
Act, the Company shall use its best efforts to timely file the reports required
to be filed by it under the Exchange Act or the Securities Act (including, but
not limited to, the reports under Section 13 and 15(d) of the Exchange Act
referred to in subparagraph (c)(1) of Rule 144 adopted by the SEC under the
Securities Act) and the rules and regulations adopted by the SEC thereunder, and
shall use its best efforts to take such further action as any Holder may
reasonably request, all to the extent required from time to time to enable the
Holders to sell Eligible Securities without registration under the Securities
act within the limitations of the exemption provided by Rule 144 under the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC. Upon the request of any Holder
of Eligible Securities, the Company shall deliver to such Holder a written
statement as to whether it has complied with such requirements.
ARTICLE XI
MISCELLANEOUS.
11.1. Captions. The captions or headings in this Agreement are for
convenience and reference only, and in no way define, describe, extend or limit
the scope or intent of this Agreement.
11.2. Severability. If any clause, provision or section of this Agreement
shall be invalid, illegal or unenforceable, the invalidity, illegality or
unenforceability of such clause, provision or section shall not affect the
enforceability or validity any of the
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remaining clauses, provisions or sections hereof to the extent permitted by
applicable law.
11.3. Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of California without giving
effect to conflicts of law principles.
11.4. Consent to Jurisdiction; Service of Process; Waiver of Jury
Trial. (a) The parties to this Agreement hereby irrevocably submit to the
exclusive jurisdiction of any Federal court located in Los Angeles, California
over any suit, action or proceeding arising out of or relating to this
Agreement. The parties hereby irrevocably waive, to the fullest extent permitted
by applicable law, any objection which they may now or hereafter have to the
laying of venue of any such suit, action or proceeding brought in such court.
The parties agree that, to the fullest extent permitted by applicable law, a
final and nonappealable judgment in any such, action, or proceeding brought in
such court shall be conclusive and binding upon the parties.
(b) The parties hereby irrevocably waive any rights they may have in any
court, state or federal, to a trial by jury in any case of any type that relates
to or arises out of this Agreement or the transactions contemplated herein.
11.5. Specific Performance. The Company acknowledges that it would be
impossible to determine the amount of damages that would result from any breach
by it of any of the provisions of this Agreement and that the remedy at law for
any breach, or threatened breach, of any of such provisions would likely be
inadequate and, accordingly, agrees that each Holder shall, in addition to any
other rights or remedies which it may have, be entitled to seek such equitable
and injunctive relief as may be available from any court of competent
jurisdiction to compel specific performance of, or restrain the Company from
violating any of, such provisions. In connection with any action or proceeding
for injunctive relief, the Company hereby waives the claim or defense that a
remedy at law alone is adequate and agrees, to the maximum extent permitted by
law, to have each provision of this Agreement specifically enforced against it,
without the necessity of posting bond or other security against it, and consents
to the entry of injunctive relief against it enjoining or restraining any breach
or threatened breach of this Agreement.
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11.6. Modification and Amendment. This Agreement may not be changed,
modified, discharged or amended, except by an instrument signed by all of the
parties hereto.
11.7. Counterparts. This Agreement may be executed in counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
11.8. Entire Agreement. This Agreement constitutes the entire agreement
and understanding among the parties and supersedes any prior understandings
and/or written or oral agreements among them respecting the subject matter
herein.
11.9. Notices. All notices, requests, demands, consents and other
communications required or permitted to be given pursuant to this Agreement
shall be in writing and delivered by hand, by overnight courier delivery service
or by certified mail, return receipt requested, postage prepaid. Notices shall
be deemed given when actually received, which shall be deemed to be not later
than the next Business Day if sent by overnight courier or after five Business
Days if sent by mail.
11.10. Successors to Company, Etc. This Agreement shall be binding upon,
and inure to the benefit of, the Company's successors and assigns.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused
this Agreement to be executed as of the day and year first above written.
20TH CENTURY INDUSTRIES
By:
-------------------------------
Name:
Title:
AMERICAN INTERNATIONAL GROUP, INC.
By:
-------------------------------
Name:
Title:
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EXHIBIT
E
173
EXECUTION COPY
EXHIBIT E
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of October 17, 1994, among the
undersigned stockholders (the "Stockholders") of 20th Century Industries, a
California corporation (the "Company"), and American International Group, Inc.,
a Delaware corporation (the "Investor").
WHEREAS, concurrently with the execution of this Agreement, the Company and
the Investor have entered into an Investment and Strategic Alliance Agreement
(as the same may be amended from time to time, the "Investment Agreement"),
providing for the issuance and sale by the Company, and the purchase by the
Investor, of (i) 200,000 shares of Series A Convertible Preferred Stock, par
value $1,000 per share, and (ii) 16,000,000 Series A Warrants, each exercisable
for one share of Common Stock, no par value (the "Common Stock"), of the
Company;
WHEREAS, in order to induce the Investor to enter into the Investment
Agreement, the Stockholders wish to agree (i) to vote the Shares (as defined
below) and any other such shares of capital stock of the Company owned by them
so as to facilitate consummation of the transactions contemplated by the
Investment Agreement, (ii) not to transfer or otherwise dispose of any of the
Shares, or any other shares of capital stock of the Company acquired hereafter
and prior to the Expiration Date (as defined below) and (iii) to deliver an
irrevocable proxy to vote the Shares to the Investor.
NOW, THEREFORE, for good and valuable consideration, the receipt,
sufficiency and adequacy of which is hereby acknowledged, the parties hereto
agree as follows:
1. Representations of Stockholders. Each of the Stockholders represents
and warrants (each as to himself or itself) to the Investor that (a) such
Stockholder lawfully owns the shares of Common Stock set forth opposite such
Stockholder's name on Exhibit A (such Stockholder's "Shares") free and clear of
all liens, claims, charges, security interests or other encumbrances and, except
for this Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character to which such Stockholder is a
party relating to the pledge, disposition or voting of any shares of capital
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stock of the Company and there are no voting trusts or voting agreements with
respect to such Shares, (b) such Stockholder does not own any shares of Common
Stock other than such Shares and does not have any options (other than employee
stock options), warrants or other rights to acquire any additional shares of
capital stock of the Company or any security exercisable for or convertible into
shares of capital stock of the Company, and (c) such Stockholder has full power
and authority to enter into, execute and deliver this Agreement and to perform
fully such Stockholder's obligations hereunder. This Agreement has been duly
executed and delivered and constitutes the legal, valid and binding obligation
of such Stockholder in accordance with its terms.
2. Agreement to Vote Shares. Each of the Stockholders agrees during the
term of this Agreement to vote such Stockholder's Shares and any New Shares (as
defined in Section 6 hereof), and to cause any holder of record of such Shares
or New Shares to vote, (i) in favor of adoption and approval of the Proposals
(as defined in the Investment Agreement) at any meeting of the stockholders of
the Company at which such matters are considered and at every adjournment
thereof, (ii) against any action or agreement that would compete with, impede,
interfere with or attempt to discourage the Proposals or inhibit the timely
consummation of the Proposals, and (iii) against any merger, consolidation,
business combination, reorganization, recapitalization, liquidation or sale or
transfer of any material assets of the Company or its subsidiaries. Each
Stockholder agrees to deliver to the Investor upon request a proxy substantially
in the form attached hereto as Exhibit B, which proxy shall be irrevocable
during the term of this Agreement to the extent permitted under California law.
3. No Voting Trusts. During the term of this Agreement, each of the
Stockholders agrees that such Stockholder will not, nor will such Stockholder
permit any entity under such Stockholder's control to, deposit any of such
Stockholder's Shares in a voting trust or subject any of their Shares to any
arrangement with respect to the voting of such Shares other than agreements
entered into with the Investor.
4. No Proxy Solicitations. During the term of this Agreement, each of the
Stockholders agrees that such Stockholder will not, nor will such Stockholder
permit any entity under such Stockholder's control to, (a) solicit proxies or
become a "participant" in a "solicitation" (as such terms are defined in
Regulation 14A under the 1934 Act)
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in opposition to or competition with the Proposals or otherwise encourage or
assist any party in taking or planning any action which would compete with,
impede, interfere with or attempt to discourage the Proposals or inhibit the
timely consummation of the Proposals, (b) directly or indirectly encourage,
initiate or cooperate in a stockholders' vote or action by consent of the
Company's stockholders in opposition to or in competition with the Proposals, or
(c) become a member of a "group" (as such term is used in Section 13(d) of the
1934 Act) with respect to any voting securities of the Company for the purpose
of opposing, competing with or impeding the consummation of the Proposals;
provided, that the foregoing shall not restrict any director of the Company from
taking any action as a director that such director reasonably believes after
consultation with outside counsel is necessary to satisfy such director's
fiduciary duty to stockholders of the Company.
5. Transfer and Encumbrance. On or after the date hereof and during the
term of this Agreement, each of the Stockholders agrees not to transfer, sell,
offer, exchange, pledge or otherwise dispose of or encumber any of such
Stockholder's Shares or New Shares (other than the disposition in market
transactions of New Shares acquired upon exercise of any employee stock
options); provided, however, each Stockholder may sell, transfer, exchange,
pledge or otherwise dispose of or encumber up to 2% of such Stockholder's Shares
(it being understood that any such sales must comply with the requirements of
the federal securities laws, as to which the Stockholders have been advised, and
for which the Stockholders have full responsibility and liability, without any
liability on behalf of the Company or the Investor).
6. Additional Purchases. Each of the Stockholders agrees that such
Stockholder will not purchase or otherwise acquire beneficial ownership of any
shares of Company Common Stock after the execution of this Agreement ("New
Shares"), nor will any Stockholder voluntarily acquire the right to vote or
share in the voting of any shares of Company Common Stock other than the Shares,
unless such Stockholder agrees to deliver to the Investor immediately after such
purchase or acquisition an irrevocable proxy substantially in the form attached
hereto as Exhibit B with respect to such New Shares. Each of the Stockholders
also severally agrees that any New Shares acquired or purchased by him or her
shall be subject to the terms of this Agreement to the same extent as if they
constituted Shares.
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7. Specific Performance. Each party hereto acknowledges that it will be
impossible to measure in money the damage to the other party if a party hereto
fails to comply with any of the obligations imposed by this Agreement, that
every such obligation is material and that, in the event of any such failure,
the other party will not have an adequate remedy at law or damages. Accordingly,
each party hereto agrees that injunctive relief or other equitable remedy, in
addition to remedies at law or damages, is the appropriate remedy for any such
failure and will not oppose the granting of such relief on the basis that the
other party has an adequate remedy at law. Each party hereto agrees that it will
not seek, and agrees to waive any requirement for, the securing or posting of a
bond in connection with any other party's seeking or obtaining such equitable
relief.
8. Entire Agreement. This Agreement supersedes all prior agreements,
written or oral, among the parties hereto with respect to the subject matter
hereof and contains the entire agreement among the parties with respect to the
subject matter hereof. This Agreement may not be amended, supplemented or
modified, and no provisions hereof may be modified or waived, except by an
instrument in writing signed by all the parties hereto. No waiver of any
provisions hereof by any party shall be deemed a waiver of any other provisions
hereof by any such party, nor shall any such waiver be deemed a continuing
waiver of any provision hereof by such party.
9. Notices. All notices, requests, claims, demands or other communications
hereunder shall be in writing and shall be deemed given when delivered
personally, upon receipt of a transmission confirmation if sent by telecopy or
like transmission and on the next business day when sent by Federal Express,
Express Mail or other reputable overnight courier service to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
If to the Investor:
American International Group, Inc.
70 Pine Street
New York, New York 10270
Attention: General Counsel
Telecopy: (212) 785-1584
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With a copy to:
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Attention: Andrew S. Rowen
Telecopy: (212) 558-3588
If to a Stockholder, to the address or telecopy number set forth for such
Stockholder on the signature page hereof:
With a copy to:
Gibson, Dunn & Crutcher
333 South Grand Avenue
46th Floor
Los Angeles, CA 90071-3197
Attention: Peter F. Ziegler
Jonathan K. Layne
Telecopy: (213) 229-7520
10. Miscellaneous.
(a) This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
California, without reference to its conflicts of law principles.
(b) If any provision of this Agreement or the application of such provision
to any person or circumstances shall be held invalid or unenforceable by a court
of competent jurisdiction, such provision or application shall be unenforceable
only to the extent of such invalidity or unenforceability and the remainder of
the provision held invalid or unenforceable and the application of such
provision to persons or circumstances, other than the party as to which it is
held invalid, and the remainder of this Agreement, shall not be affected.
(c) This Agreement may be executed by facsimile in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
(d) This Agreement shall terminate upon the earliest to occur of (i) the
conclusion of the Company's
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meeting of stockholders held for the purpose of voting on the Proposals (or, if
adjourned, the conclusion of any subsequent reconvened meeting held for such
purpose), and (ii) the date on which the Investment Agreement is terminated in
accordance with its terms.
(e) Each party hereto shall execute and deliver such additional documents
as may be necessary or desirable to effect the transactions contemplated by this
Agreement.
(f) All Section headings herein are for convenience of reference only and
are not part of this Agreement, and no construction or reference shall be
derived therefrom.
(g) The obligations of the Stockholders set forth in this Agreement shall
not be effective or binding upon any Stockholder until after such time as the
Investment Agreement is executed and delivered by the Company and the Investor,
and the parties agree that there is not and has not been any other agreement,
arrangement or understanding between the parties hereto with respect to the
matters set forth herein. The obligations of each Stockholder who executes and
delivers this Agreement shall be effective and binding regardless of the failure
of other Stockholders to execute and deliver this Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first written above.
AMERICAN INTERNATIONAL
GROUP, INC.
By:
-------------------
THE STOCKHOLDERS:
----------------------
Louis W. Foster
----------------------
John B. DeNault
----------------------
Neil H. Ashley
----------------------
James O. Curley
----------------------
Rex J. Bates
----------------------
Stanley M. Burke
----------------------
John B. DeNault, III
----------------------
R. Scott Foster, M.D.
----------------------
Rachford Harris
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----------------------
Wayne F. Horning
----------------------
Arthur H. Voss
----------------------
Paul S. Castellani
----------------------
William L. Mellick
----------------------
John R. Bollington
----------------------
Richard A. Andre
----------------------
Margaret Chang
----------------------
Teresa K. Colpo
----------------------
William G. Crain
----------------------
William M. Dailey, Jr.
----------------------
Richard A. Dinon
----------------------
Paul F. Farber
----------------------
Richard L. Hill
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-----------------
Charles I. Petit
-----------------
Dean E. Stark
-----------------
Rickard F. Schutt
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(EXHIBIT A)
20TH CENTURY INDUSTRIES
LIST OF STOCKHOLDERS, DIRECTORS AND OFFICERS
NAME # SHARES
---- --------
LOUIS W. FOSTER 4,725,696
JOHN B. DENAULT 4,362,000
NEIL H. ASHLEY 78,747
JAMES O. CURLEY 34,540
REX J. BATES 360,000
STANLEY M. BURKE 16,000
JOHN B. DENAULT, III 1,570,700
R. SCOTT FOSTER, M.D. 318,996
RACHFORD HARRIS 972,313
WAYNE F. HORNING 555,418
ARTHUR H. VOSS 441,000
PAUL S. CASTELLANI 32,202
WILLIAM L. MELLICK 39,800
JOHN R. BOLLINGTON 48,685
RICHARD A. ANDRE 11,493
MARGARET CHANG 57,635
TERESA K. COLPO 3,725
WILLIAM G. CRAIN 29,767
WILLIAM M. DAILEY, JR. 13,960
RICHARD A. DINON 14,280
PAUL F. FARBER 6,560
183
NAME # SHARES
---- --------
RICHARD L. HILL 4,792
CHARLES I. PETIT 5,575
DEAN E. STARK 3,938
RICKARD F. SCHUTT 4,167
----------
TOTAL (as of Oct. 1, 1994) 13,711,939
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(EXHIBIT B)
FORM OF PROXY
The undersigned, for consideration received, hereby appoints Robert
Sandler, Howard Smith and Richard D'Alessandri, and each of them, my proxies,
with power of substitution and resubstitution, to vote all shares of Common
Stock, no par value (the "Common Stock"), of 20th Century Industries, a
California corporation (the "Company"), owned by the undersigned at the Annual
or special meeting of stockholders of the Company, and at any adjournment
thereof, to be held for the purpose of considering and voting upon proposals to
approve and adopt the Proposals (as defined in the Investment and Strategic
Alliance Agreement, dated as of October 17, 1994, between the Company and
American International Group, Inc., a Delaware corporation ("Investor")), and
consummation by the Company of all of the transactions contemplated thereby,
including the issuance and sale by the Company of certain securities (the
"Proposals"), FOR such Proposals and AGAINST any action or agreement that would
compete with, impede, interfere with or attempt to discourage the Proposals or
inhibit the timely consummation of the Proposals and any merger, consolidation,
business combination, reorganization, recapitalization, liquidation or sale or
transfer of any material assets of the Company or its subsidiaries. This proxy
is coupled with an interest, revokes all prior proxies granted by the
undersigned, is irrevocable and shall terminate at such time as the Voting
Agreement, dated as of October 17, 1994, among the Investor and certain
stockholders of the Company, including the undersigned, a copy of such Agreement
being attached hereto and incorporated herein by reference, terminates in
accordance with its terms.
Dated__________________________ , 1994
--------------------------------------
(Signature of Stockholder)
--------------------------------------
(Signature of Stockholder)
185
EXHIBIT
F
186
EXHIBIT F
TRANSFER RESTRICTIONS
(DEFINITIONS IN PARAGRAPH 13)
1. Until the earliest to occur of (a) the end of the thirty-eighth (38th) month
following the closing of the Investor's purchase of the Series A Preferred
Stock, (b) the first day of the first taxable year following the taxable
year (or years) in which the Income Tax Net Operating Loss Carryover has
been reduced to zero, or (c) the effective date of the repeal of Section 382
without a successor provision that places restrictions on the Income Tax Net
Operating Loss Carryover based on changes of ownership of the Company's
Stock, any Transfer of Stock or an Option shall be deemed a "Prohibited
Transfer" if (x) such Transfer would increase the Percentage of the Stock
Owned by any Person or Public Group that (or whose Stock is or by virtue of
such Transfer would be attributed to any Person or Public Group that),
either after giving effect to the attribution rules (including the option
attribution rules) of Section 382 or without regard to such attribution
rules, Owns, by virtue of such Transfer would Own, or has at any time since
the date three years prior to the Closing Date Owned, more than 4.75% of the
outstanding Stock (the "Limit"), or would otherwise be treated as a 5%
Shareholder or (y) the Transfer would cause an "ownership change" within the
meaning of Section 382. With respect to the Series A Preferred Stock and the
Common Stock, the Limit shall be equal to 4.75% of each class. The Stock or
Option sought to be transferred in the Prohibited Transfer shall be deemed
"Excess Stock." In the event the Purported Transferee Owns Stock both
actually or constructively, the transfer restrictions will provide an
ordering mechanism for determining which shares are deemed Excess Stock,
which generally will select Stock actually Owned first, subject to Board of
Director discretion to select another method for determining the Excess
Stock in that situation.
2. A Prohibited Transfer shall be void ab initio as to the Purported Transferee
in the Prohibited Transfer and such Purported Transferee shall not be
recognized as the owner of the Excess Stock for any purpose and shall not be
entitled to any rights as a stockholder of the Company arising from the
ownership of Excess Stock, including, but not limited to, the right to vote
such Excess Stock or to receive dividends or other
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distributions in respect thereof or, in the case of Options, to receive
Stock in respect of their exercise. Any Excess Stock shall automatically be
transferred to Trustee in trust for the benefit of the Charitable
Beneficiary, effective as of the close of business on the business day
prior to the date of the Prohibited Transfer, and shall be subject to the
provisions of paragraphs 3 and 4 hereof; provided, however, that if the
transfer to the Trust is deemed ineffective for any reason, such Excess
Stock shall nevertheless be surrendered to the Trustee, and the Trustee
shall have rights consistent with those of the Trustee as described in
paragraphs 3 and 4. This paragraph 2 shall not apply to a Prohibited
Transfer described in paragraph 8.
3. A holder of Excess Stock shall immediately surrender the Certificates
therefor to the Trustee of the trust. In addition, the Purported Transferee
shall surrender to the Trustee any dividends and other distributions
received with respect to the Excess Stock ("Prohibited Distributions"). The
Trustee shall have all the rights of the owner of the Excess Stock,
including the right to vote, receive dividends, and receive proceeds from
liquidation. The Purported Transferee and the Company will have the
obligation to notify the Trustee of a Prohibited Transfer.
4. Upon receipt of the Excess Stock, the Trustee shall take such actions as it
deems necessary to dispose of the Excess Stock in an arm's-length
transaction that would not constitute a Prohibited Transfer. Upon the
disposition of such Excess Stock, the Trustee shall remit to the Purported
Transferee an amount of the proceeds of such sale not to exceed the
Purported Transferee's cost incurred to acquire such Excess Stock, or, if
such Excess Stock was acquired for less than fair market value, the fair
market value of the Excess Stock on the date of the Prohibited Transfer, in
each case less all costs incurred by the Company, the Trustee and the
Transfer Agent in enforcing the provisions. In the event the Purported
Transferee has disposed of the Excess Stock otherwise than in accordance
with this paragraph, such Purported Transferee shall be deemed to have
disposed of such Excess Stock as an agent for the Trustee, and shall be
required to return to the Trustee the proceeds from such sale, together with
any Prohibited Distributions theretofore received by the Purported
Transferee with respect to such Excess Stock, subject to retention of an
amount of such sale proceeds not to exceed the amount that such Purported
Transferee would have
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received from the Trustee if the Trustee had obtained and resold the Excess
Stock at any time during the period beginning on the date the Purported
Transferee acquired such Excess Stock and the date of such disposition by
the Purported Transferee, assuming for this purpose that the Trustee would
have sold the Excess Stock for an amount equal to the lowest-quoted trading
price of such Excess Stock during such period. The Trustee shall transfer
any proceeds (after deducting an amount equal to the expenses incurred by
the Company or the Trustee in enforcing these restrictions) to the
Charitable Beneficiary. Neither the Trustee, the Company nor any other party
shall claim an income tax deduction with respect to such contribution and
neither the Trustee nor the Company shall benefit in any way from the
enforcement of these transfer restrictions, except insofar as these
restrictions protect the Company's Income Tax Net Operating Loss Carryover.
Neither the Transfer Agent nor the Company shall have any liability to a
Purported Transferee or Purported Transferor for any loss arising from or
related to a Prohibited Transfer.
5. The transfer restrictions will not apply to: (a) the sale to the Investor of
the Series A Preferred Stock, (b) the sale to the Investor of the Series A
Warrants, (c) the conversion by the Investor of Series A Preferred Stock,
(d) the sale by the Investor of shares of Series A Preferred Stock or shares
of Common Stock obtained upon conversion thereof if the sale would not be a
Prohibited Transfer but for the Investor's ownership of Stock, in either
case in compliance with the Investment Agreement, (e) any Transfer effected
by the Investor permitted by Section 6.1(b) of the Investment Agreement, (f)
any sale effected by the Investor of any securities of the Company acquired
after the Closing Date under the Investment Agreement, and (g) any Transfer
with respect to which the Person who would otherwise be the Purported
Transferee obtains prior written approval of the Board of Directors of the
Company, which approval shall be granted in its sole and absolute discretion
after considering all facts and circumstances, including but not limited to
future events the occurrence of which are deemed by the Board of Directors
of the Company to be reasonably possible.
6. The Transfer Agent shall not register any Transfer of Stock on the Company's
stock transfer records if it has knowledge that such Transfer is a
Prohibited Transfer. The Transfer Agent shall have the right, prior and as a
condition to registering any Transfer of Stock on the Company's stock
transfer records, to request any
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transferee of the Stock to submit an affidavit, on a form agreed to by the
Transfer Agent and the Company, stating the number of shares of each class
of Stock Owned by the transferee (and by Persons who would Own the
transferee's Stock) before the proposed Transfer and that would, if effect
were given to the Transfer, be Owned by the transferee (and by Persons who
would Own the prospective transferee's Stock) after the proposed Transfer.
If either (a) the Transfer Agent does not receive such affidavit, or (b)
such affidavit evidences that the Transfer was a Prohibited Transfer, the
Transfer Agent shall notify the Company and shall not enter the Prohibited
Transfer into the Company's stock transfer records, and the Transfer Agent,
the Trustee and the Company shall take such steps as provide in these
restrictions in order to dispose of the Excess Stock purportedly Owned by
such Purported Transferee. In addition, the Company, shall take such other
steps as the Board of Directors of the Company determines to be helpful in
ensuring compliance with the transfer restrictions. If the Transfer Agent,
for whatever reason, enters a Prohibited Transfer in the Company's stock
transfer records, such Transfer shall be nonetheless void and, in
accordance with the foregoing restrictions, such Transfer shall have no
force and effect and the Company's stock transfer records shall be revised
to so provide.
7. If a Purported Transferee fails to surrender Excess Stock or Prohibited
Distributions, or proceeds from the sale of Excess Stock, to the Trustee as
required, then, as soon as practicable after demand therefor is made by the
Company, the Trustee or the Transfer Agent, the Company will initiate legal
proceedings to compel such actions and for compensatory damages on account
of any failure to take such actions.
8. Except as otherwise provided in Section 5 hereof, special provisions will
apply to a Transfer if the effect is to reduce the Ownership by a 5%
Shareholder and increase the ownership of a Public Group in order to ensure
that the Excess Stock will not be treated as having been sold and will
continue to be owned by the Purported Transferor.
9. Any person who knowingly violates the restrictions shall be liable to the
Company for, and shall indemnify and hold the Company harmless against, any
and all damages suffered as a result of such violation, including but not
limited to damages resulting from a reduction in or elimination of the
Company's ability to utilize its Income Tax Net Operating Loss Carryover,
and attorneys'
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and accountants' fees incurred in connection with such violation.
10. All certificates or other instruments evidencing Ownership of Stock shall
bear a conspicuous legend describing the restrictions.
11. The Company will take such further actions that it deems necessary or
appropriate in order to ensure that the transfer restrictions will be
enforced.
12. If any part of the restrictions is judicially determined to be invalid or
otherwise unenforceable, such invalidity or unenforceability shall not
affect the remainder of the restrictions, which shall be thereafter
interpreted as if the invalid or unenforceable part were not contained
herein, and, to the maximum extent possible, in a manner consistent with
preserving the ability of the Company to utilize to the greatest extent
possible the Income Tax Net Operating Loss Carryover.
13. Definitions:
"Charitable Beneficiary" shall mean an organization described in Section
170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended and as it
may be amended from time to time hereafter.
"5% Shareholder" shall mean any Person who is a "5-percent shareholder" of
the Company within the meaning of Section 382.
"Income Tax Net Operating Loss Carryover" shall mean the net operating loss,
capital loss, net unrealized built-in loss, general business credit,
alternative minimum tax credit and foreign tax credit carryovers to which
the Company is entitled under the Code and Regulations, at any time during
which the restrictions are in force.
"Option" shall mean any interest that could give rise to the ownership of
Stock and that is an option, contract, warrant, convertible instrument, put,
call, stock subject to a risk of forfeiture, pledge of stock or any interest
that is similar to any of such interests or any other interest that would be
treated, under Paragraph (d)(9) of Treasury Regulation Section 1.382-4, in
the same manner as an option, whether or not any of such interests is
subject to contingencies.
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"Own," and all derivations of the word "Own" shall mean any direct or
indirect, actual or beneficial interest, including, except as otherwise
provided, a constructive ownership interest under the attribution rules
(including the option attribution rules) of Section 382. In determining
whether a Person Owns an amount of Stock in excess of the Limit, Options
Owned by such Person (or other Persons whose Ownership of Stock is or would
be attributable under Section 382 to such Person) shall be treated as
exercised (and the Stock that would be acquired by such exercise as
outstanding) and Options Owned by other Persons shall be treated as not
exercised (and the Stock that would be acquired if such options Owned by
other Persons were exercised shall be treated as not outstanding), in case
without regard to whether such treatment would result in an ownership change
within the meaning of Section 382.
"Percentage" or "%" shall mean percentage by value.
"Person" shall mean any individual (other than a Public Group treated as an
individual under Section 382) or any "entity" as that term is defined in
Regulations Section 1.382-3(a).
"Public Group" shall have the meaning assigned to such term in the
applicable Regulations under Section 382. Any Transfer or attempted Transfer
of Stock to an individual or entity whose Stock is included in determining
the Percentage of Stock Owned by a Public Group for purposes of Section 382
shall be treated as a Transfer or attempted Transfer to such Public Group.
"Purported Transferee" shall mean a person who acquires Excess Stock in a
Prohibited Transfer or any subsequent transferee of such Excess Stock.
"Purported Transferor" shall mean a person who Transfers Excess Stock in a
Prohibited Transfer.
"Regulations" shall mean Treasury Regulations, including proposed or
temporary regulations, promulgated under the Code, as the same may be
amended from time to time. References herein to specific provisions of
proposed or temporary Regulations shall include the analogous provisions of
final Regulations or other successor Regulations.
"Section 382" shall mean Section 382 of the Code and the Regulations
promulgated thereunder.
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"Stock" shall mean the Common Stock, the Series A Preferred Stock, and any
interest in the Company that would be treated as stock under Section 382,
without regard to clauses (ii)(B) and (iii)(B) of paragraph (f)(18) of
Temporary Treasury Regulation Section 1.382-2T (but only if, in determining
the Ownership by any Person of Stock, the uniform treatment of such interest
as Stock or as not Stock, as the case may be, would increase such Person's
Percentage Ownership of Stock), and shall also include any Stock the
ownership of which may be acquired by the exercise of an Option.
"Transfer" shall mean any direct or indirect disposition, whether by sale,
exchange, merger, consolidation, transfer, assignment, conveyance,
distribution, pledge, inheritance, gift, mortgage, the creation of any
security interest in, or lien or encumbrance upon, or any other disposition
of any kind and in any manner, whether voluntary or involuntary, knowing or
unknowing, by operation of law or otherwise. Notwithstanding any
understandings or agreements to which an Owner of Stock is a party, any
arrangement, the effect of which is to transfer any or all of the rights
arising from Ownership of Stock, shall be treated as a Transfer. A Transfer
shall also include the creation, grant, exercise, conversion, Transfer or
other disposition of or with respect to an Option.
"Transfer Agent" means the Person responsible for maintaining the books and
records in which are recorded the ownership and transfer of shares of Stock
or any Person engaged by the Company for the purpose of fulfilling the
duties required to be fulfilled by the Transfer Agent hereunder.
"Trustee" means the trustee of the Trust appointed by the Company, provided
that the Trustee shall be a Person unaffiliated with the Company, any 5%
Shareholder, and any Person purchasing or disposing of Stock in a Prohibited
Transfer.
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EXHIBIT 9.1(l)(i)
OPINION OF GENERAL COUNSEL TO THE COMPANY
[LETTERHEAD OF 20TH CENTURY]
1. Each of the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the State of California, and has
the requisite corporate power and authority to own its respective properties and
to carry on its respective businesses as presently conducted. All of the
outstanding shares of capital stock of each Subsidiary are validly issued, fully
paid and non-assessable and are owned by the Company free and clear of any lien,
charge or encumbrance except as provided by the Credit Agreement or as described
in the Investment Agreement.
2. Each of the Subsidiaries is duly licensed as an insurance company in the
State of California and has filed all notices, reports, documents or other
information, has obtained all authorizations, approval, orders, consents,
licenses, certificates, permits, registrations or qualifications, and has
performed all such other actions, required to conduct an insurance business in
the State of California, except for failures as would not adversely affect the
business, operations or financial condition of such Subsidiaries or affect the
validity or enforceability of the Investment Agreement, the Certificate of
Determination, the Series A Warrant Certificate, the Registration Rights
Agreement or the Quota Share Agreement ("the Related Agreements") or the
transactions contemplated thereby.
3. Except as set forth on Schedule 2.1(P) to the Investment Agreement,
there are no legal or governmental proceedings pending or, to the best of such
counsel's knowledge, threatened to which the Company or any of the Subsidiaries
is a party which, individually or in the aggregate, would have a Material
Adverse Effect.
4. Each of the Subsidiaries has all requisite corporate power and authority
to execute, deliver and perform the obligations set forth in the Quota Share
Agreements to which it is a party. The Quota Share Agreements have been duly
authorized by all necessary corporate action and have been duly and validly
executed and delivered by the Subsidiaries on the date
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hereof. The execution, delivery and performance of the Investment Agreement and
Related Agreements (as applicable) and the consummation of the transactions
contemplated thereby by the Company or its Subsidiaries will not (i) result in a
breach or violation of any statute, rule or regulation binding on the
Subsidiaries, including, but not limited to, regulations and statutes applying
to insurance companies or (ii) result in a breach or violation of the terms,
conditions or provisions of any writ or injunction of any court or Governmental
Entity applicable to the Subsidiaries. Each of the Quota Share Agreements
constitutes the valid and legally binding obligation of the Subsidiaries,
enforceable in accordance with its terms, except as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws of
general application now or hereafter in effect relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances or preferential transfers and by
general principles of equity, whether considered in a proceeding in law or
equity (including the possible unavailability of specific performance or
injunctive relief and the general discretion of the court or tribunal
considering the matter).
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EXHIBIT 9.1(l)(ii)
OPINIONS OF SPECIAL COUNSEL TO THE COMPANY
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of California, and has the requisite
corporate power and authority to own its properties and to carry on its
businesses as presently conducted. The holders of the outstanding shares of
Common Stock, no par value per share (the "Common Stock"), of the Company have
duly authorized (i) an amendment to the Company's Articles of Incorporation
increasing its authorized shares of Common Stock and adopting certain transfer
restrictions and (ii) the Company's and its Subsidiaries' (as applicable)
entering into the Investment Agreement, the Series A Warrant Certificate and the
Registration Rights Agreement (the "Related Agreements") and the Certificate of
Determination, and said amendment has been filed with the Secretary of State of
the State of California.
2. The outstanding shares of Common Stock are duly authorized, validly
issued, fully paid and non-assessable. All Series A Preferred Shares issuable
pursuant to the Investment Agreement (initially, upon payment of dividends in
kind and upon further adverse development with respect to the Northridge
Earthquake) are duly authorized, and when issued pursuant to the Investment
Agreement and Certificate of Determination, will be validly issued, fully paid
and non-assessable. The Series A Warrants are duly authorized and, when issued,
will be validly issued and constitute valid and legally binding obligations of
the Company enforceable in accordance with their terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general application now or hereafter in effect relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances or preferential transfers and by
general principles of equity, whether considered in a proceeding in law or
equity (including the possible unavailability of specific performance or
injunctive relief and the general discretion of the court or tribunal
considering the matter). The Company has duly authorized and reserved sufficient
shares of Common Stock for issuance upon conversion of all Series A Preferred
Shares, upon full exercise of the Stock Option Agreement and upon full exercise
of the Series A Warrants and, if and when delivered, such shares of
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Common Stock will be validly issued, fully paid and non-assessable.
3. Holders of the outstanding shares of Common Stock are not entitled to
any preemptive or other rights to subscribe for any Series A Preferred Shares or
Series A Warrants or for the shares of Common Stock obtainable thereunder by
operation of law or pursuant to the Company's Articles of Incorporation or
By-Laws.
4. The Company has all requisite corporate power and authority to execute,
deliver and perform the obligations set forth in the Investment Agreement and
the Related Agreements (other than the Series A Warrants) to which it is a
party. The Investment Agreement and Related Agreements have been duly authorized
by all necessary corporate action and have been duly and validly executed and
delivered by the Company on the date hereof. The execution, delivery and
performance of the Investment Agreement and Related Agreements and the
consummation of the transactions contemplated thereby by the Company will not
(i) conflict with, or result in a breach of, the Company's or its Subsidiaries'
Articles of Incorporation or By-laws, (ii) result in a breach or violation of
any statute, rule or regulation binding on the Company or (iii) result in a
breach or violation of the terms, conditions or provisions of any writ or
injunction of any court or Governmental Entity applicable to the Company. Each
of the Investment Agreement and Related Agreements to which the Company is a
party (other than the Series A Warrants) constitutes the valid and legally
binding obligation of the Company, enforceable in accordance with its terms,
except (a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws of general application now or hereafter in
effect relating to or affecting creditors' rights, including, without
limitation, the effect of statutory or other laws regarding fraudulent
conveyances or preferential transfers and by general principles of equity,
whether considered in a proceeding in law or equity (including the possible
unavailability of specific performance or injunctive relief and the general
discretion of the court or tribunal considering the matter), and (b) such
counsel expresses no opinion as to the legality, binding effect or
enforceability of any provisions of the Investment
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Agreement or the Registration Rights Agreement regarding rights of
indemnification or contribution that may be limited by federal or state
securities laws or considerations of public policy.
5. Each of the Company and the Subsidiaries has filed all notices, reports,
documents or other information ("Notices") required to be filed with any
Governmental Entity in connection with, and has obtained all authorizations,
approvals, orders, consents, licenses, certificates, permits, registrations or
qualifications ("Approvals") necessary to be obtained from any Governmental
Entity in connection with, the execution, delivery and performance of the
Investment Agreement and the Related Agreements and the consummation of the
transactions contemplated thereby, including, without limitation, such Notices
and Approvals required to be filed with, or obtained from, the California
Insurance Department.
6. The Proxy Statement complies in form in all material respects to the
requirements of the Exchange Act and the rules and regulations thereunder
(except as to the financial statements and other financial data, or as to
material relating to, or supplied by, AIG or any of its Subsidiaries, included
therein, as to which we express no opinion).
7. To the best of such counsel's knowledge, no action, suit, investigation
or other proceeding ("Action") to which the Company or either of the
Subsidiaries is or is threatened to be made a party relating to the Investment
Agreement, the Related Agreements or the transactions contemplated thereby has
been instituted or threatened before any Governmental Entity which Action
presents a substantial risk of restraining or prohibiting the consummation of
such transactions or obtaining material damages or other material relief in
connection therewith.
8. Assuming the correctness of the representations of the Investor and the
Company contained in Sections 2.1(z) and 3.1(e) of the Investment Agreement, the
sale of the Series A Preferred Shares and the Series A Warrants to AIG on the
Closing Date are exempt from registration under the Securities Act.
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9. In addition, such counsel shall state that such counsel has participated
in conferences with representatives of the Company, the Company's investment
bankers and your counsel at which the contents of the Proxy Statement and
related matters were discussed. Such counsel has not independently verified the
accuracy, completeness or fairness of the statements contained in the Proxy
Statement, and such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of such statements;
however, based upon such counsel's participation in the aforesaid conferences,
such counsel has no reason to believe that the Proxy Statement (except as to the
financial statements and other financial data, or as to material relating to,
and supplied by, AIG or any of its subsidiaries, included therein, as to which
such counsel expresses no opinion), as of its date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading, or that the Proxy Statement, as of the time of the approval of
stockholders of the Company required in connection with the Transactions,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
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EXHIBIT 10(k)(i)
OPINIONS OF ACTING GENERAL COUNSEL TO THE INVESTOR
1. American Home Assurance Company and New Hampshire Insurance Company (the
"Subsidiaries") are corporations duly organized, validly existing and in good
standing under the laws of the states of _________________________.
2. Each of the Subsidiaries has all requisite corporate power and authority
to execute, deliver and perform the obligations set forth in the Quota Share
Agreements to which it is a party. The Quota Share Agreements have been duly
authorized by all necessary corporate action and have been duly and validly
executed and delivered by the Subsidiaries. The execution, delivery and
performance of the Investment Agreement and Related Agreements and the
consummation of the transactions contemplated thereby by AIG or its Subsidiaries
will not (i) result in a breach or violation of any statute, rule or regulation
binding on AIG or the Subsidiaries, including, but not limited to, regulations
and statutes applying to insurance companies, or (ii) result in a breach or
violation of the terms, conditions or provisions of any contract to which AIG or
any of the Subsidiaries is a party or any writ or injunction of any court of
Governmental Agency applicable to AIG or the Subsidiaries. Each of the Quota
Share Agreements constitutes the valid and legally binding obligation of the
Subsidiaries, enforceable in accordance with its terms, except (a) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws of general application now or hereafter in effect relating to or affecting
creditors' rights, including, without limitation, the effect of statutory or
other laws regarding fraudulent conveyances or preferential transfers and by
general principles of equity, whether considered in a proceeding in law or
equity (including the possible unavailability of specific performance or
injunctive relief and the general discretion of the court or tribunal
considering the matter), and (b) such counsel expresses no opinion as to the
legality, binding effect or enforceability of any provisions of the Investment
Agreement or the Registration Rights Agreement regarding rights of
indemnification or contribution that may be limited by federal or state
securities laws or considerations of public policy.
3. Each of AIG and the Subsidiaries has filed all notices, reports,
documents or other information ("Notices") required to be filed with any
Governmental Entity in connection with, and has obtained all authorizations,
approvals, orders, consents, licenses,
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certificates, permits, registrations or qualifications ("Approvals") necessary
to be obtained from any Governmental Entity in connection with the execution,
delivery and performance of the Investment Agreement and the Related Agreements
and the consummation of the transactions contemplated thereby.
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EXHIBIT 10(k)(ii)
OPINIONS OF SPECIAL COUNSEL TO THE INVESTOR
1. AIG is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware.
2. AIG has all requisite corporate power and authority to execute, deliver
and perform the obligations set forth in the Investment Agreement and the
Related Agreements to which it is a party. The Investment Agreement and Related
Agreements have been duly authorized by all necessary corporate action and have
been duly and validly executed and delivered by AIG. The execution, delivery and
performance of the Investment Agreement and Related Agreements and the
consummation of the transactions contemplated thereby by AIG will not conflict
with, or result in a breach of, AIG's or American Home Assurance Company's or
New Hampshire Insurance Company's (the "Subsidiaries") Certificates of
Incorporation or By-Laws. Each of the Investment Agreement and the Related
Agreements to which AIG is a party constitutes the valid and legally binding
obligation of AIG enforceable in accordance with its terms, except (a) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws of general application now or hereafter in effect relating to
or affecting creditors' rights, including, without limitation, the effect of
statutory or other laws regarding fraudulent conveyances or preferential
transfers and by general principles of equity, whether considered in a
proceeding in law or equity (including the possible unavailability of specific
performance or injunctive relief and the general discretion of the court or
tribunal considering the matter), and (b) such counsel expresses no opinion as
to the legality, binding effect or enforceability of any provisions of the
Investment Agreement or the Registration Rights Agreement regarding rights of
indemnification or contribution that may be limited by federal or state
securities laws or considerations of public policy.
3. To the best of such counsel's knowledge, no action, suit, investigation
or other proceeding ("Action") to which AIG or either of the Subsidiaries is or
is threatened to be made a party relating to the Investment Agreement, the
Related Agreements or the transactions contemplated thereby has been instituted
or threatened
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before any Governmental Entity which Action presents a substantial risk of
restraining or prohibiting AIG's or such Subsidiaries' consummation of such
transactions.
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before any Governmental Entity which Action presents a
substantial risk of restraining or prohibiting AIG's or such
Subsidiaries' consummation of such transactions.
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EXHIBIT
C
2
CERTIFICATE OF DETERMINATION
OF
20TH CENTURY INDUSTRIES
Neil H. Ashley and John R. Bollington certify that:
1. They are the chief executive officer and the secretary, respectively, of
20TH CENTURY INDUSTRIES, a California corporation (the "Corporation").
2. The authorized number of shares of Series A Convertible Preferred Stock,
par value $1.00 per share, is 376,126, none of which has been issued.
3. The Board of Directors of the Corporation has duly adopted the following
resolution:
WHEREAS, the articles of incorporation authorize the Preferred Stock of the
Corporation to be issued in series and authorize the Board of Directors to
determine the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and to fix the number
of shares and designation of any such series, now therefore it is
RESOLVED, that the Board of Directors does hereby establish a series of
Preferred Stock as follows:
Section 1. Designation and Rank. The series created and provided for
hereby is designated as the Series A Convertible Preferred Stock. Each share of
the Series A Convertible Preferred Stock shall be identical in all respects with
each other share of the Series A Convertible Preferred Stock. Shares of the
Series A Convertible Preferred Stock shall have a liquidation preference of
$1,000 per share (the "Stated Value"). The Series A Convertible Preferred Stock
shall rank prior to the Corporation's Common Stock and to all other classes and
series of equity securities of the Corporation now or hereafter authorized,
issued or outstanding (the Common Stock and such other classes and series of
equity securities collectively may be referred to herein as the "Junior Stock"),
other than any classes or series of equity securities of the Corporation ranking
on a parity with (the "Parity Stock") or senior to (the "Senior Stock") the
Series A Convertible Preferred Stock as to dividend rights and rights upon
liquidation, winding up or dissolution of the Corporation. The Series A
Convertible Preferred Stock shall be junior to all outstanding debt of the
Corporation. The Series A Convertible Preferred Stock shall be subject to
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
prohibited by the Corporation's Articles of Incorporation, subject to the
approval of the holders of the outstanding shares of Series A Convertible
Preferred Stock to the extent required pursuant to Section 8 hereof.
Section 2. Number. The number of authorized shares of the Series A
Convertible Preferred Stock shall initially consist of 376,126 shares of which
200,000
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are to be issued initially. The Corporation shall not issue any of the
authorized shares of Series A Convertible Preferred Stock after the initial
issuance of 200,000 shares other than (i) pursuant to the provisions of Section
3(b) hereof, (ii) pursuant to section 4.3 of the Investment and Strategic
Alliance Agreement, dated as of October 17, 1994, between the Company and
American International Group, Inc. (the "Investment Agreement"), in the event
the Company elects to require the contribution of additional capital to the
Company or (iii) otherwise upon the approval of the holders of the outstanding
shares of Series A Convertible Preferred Stock pursuant to Section 8(c) hereof.
Subject to any required approval of the holders of the outstanding shares of
Series A Convertible Preferred Stock pursuant to Section 8(c) hereof, the number
of authorized shares of the Series A Convertible Preferred Stock may be
increased by the further resolution duly adopted by the Board of Directors of
the Corporation or a duly authorized committee thereof and the filing of an
officers' certificate pursuant to the provisions of the California General
Corporation Law. The number of authorized shares of the Series A Convertible
Preferred Stock shall not at any time be decreased below the aggregate number of
such shares then outstanding and contingently issuable pursuant to Section 3(b)
hereof or Section 4.3 of the Investment Agreement.
Section 3. Dividends.
(a) General. For the purposes of this Section 3, each December 16,
March 16, June 16 and September 16 (commencing March 16, 1995) on which any
Series A Convertible Preferred Stock shall be outstanding shall be deemed to be
a "Dividend Due Date." The holders of Series A Convertible Preferred Stock
shall be entitled to receive, if, when and as declared by the Board of
Directors out of funds legally available therefor, cumulative dividends at the
rate of $90.00 per year on each share of Series A Convertible Preferred Stock
and no more, calculated on the basis of a year of 360 days consisting of twelve
30-day months, payable quarterly on each Dividend Due Date, with respect to the
quarterly period ending on the day immediately preceding such Dividend Due Date
(except that if any such date is not a Business Day, then such dividend shall
be payable on the next Business Day following such Dividend Due Date (except
that if any such date is not a Business Day, then such dividend shall be
payable on the next Business Day following such Dividend Due Date, provided
that, for the purposes of computing such dividend payment, no interest or sum
in lieu of interest shall accrue from such Dividend Due Date to the next
Business Day following such Dividend Due Date). For purposes hereof, the term
Business Day shall mean any day (except a Saturday or Sunday or any day on
which banking institutions are authorized or required to close in the City of
New York, New York or Los Angeles, California). Dividends on each share of
Series A Convertible Preferred Stock shall accrue and be cumulative from and
after the date of issuance of such share of Series A Convertible Preferred
Stock. The amount of dividends payable per share for each full dividend period
shall be computed by dividing by four the $90.00 annual rate. The record date
for the payment of dividends on the Series A Convertible Preferred Stock shall
in no event be more than sixty (60) days nor less than fifteen (15) days prior
to a Dividend Due Date. Such dividends shall be payable in the form determined
in accordance with subparagraph (b) below. Any such dividend payable in shares
of Series A Convertible Preferred Stock shall be payable by delivery to such
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holders, at their respective addresses as they appear in the stock register, of
certificates representing the appropriate number of duly authorized, validly
issued, fully paid and nonassessable shares of Series A Convertible Preferred
Stock.
(b) Form of Dividends. Dividends payable on any Dividend Due Date
occurring prior to December 16, 1997 shall, if declared by the Board of
Directors of the Corporation or any duly authorized committee thereof and
regardless of when actually paid, be payable in shares of Series A Convertible
Preferred Stock or, at the election of the Corporation contained in a resolution
of the Board of Directors or such committee, in substitution in whole or in part
for such shares of Series A Convertible Preferred Stock, in cash. The number of
shares of Series A Convertible Preferred Stock so payable on any Dividend Due
Date as a dividend per share of Series A Convertible Preferred Stock shall be
equal to the product of one share of Series A Convertible Preferred Stock
multiplied by a fraction of which the numerator is the amount of dividends that
would have been payable on such share if such dividend were being paid in cash
on such Dividend Due Date and the denominator is the Stated Value of such share.
Dividends payable on any Dividend Due Date on or after March 16, 1998 shall, if
declared by the Board of Directors of the Corporation or any duly authorized
committee thereof, be payable in cash. Notwithstanding the foregoing, no
fractional shares of Series A Convertible Preferred Stock, and no certificate or
scrip or other evidence thereof, shall be issued, and any holder of Series A
Convertible Preferred Stock who would otherwise be entitled to receive a
fraction of a share of Series A Convertible Preferred Stock in accordance with
this paragraph (b) (after taking into account all shares of Series A Convertible
Preferred Stock then held by such holder) shall be entitled to receive, in lieu
thereof, cash in an amount equal to such fraction multiplied by the Stated
Value. In no event shall the election by the Corporation to pay dividends, in
whole or in part, in cash preclude the Corporation from making a different
election with respect to all or a portion of the dividends to be paid on the
Series A Convertible Preferred Stock on any subsequent Dividend Due Date. Any
additional shares of Series A Convertible Preferred Stock issued pursuant to
this paragraph (b) shall be governed by this resolution and shall be subject in
all respects to the same terms as the shares of Series A Convertible Preferred
Stock originally issued hereunder. All dividends (whether payable in cash or in
whole or in part in shares of Series A Convertible Preferred Stock) paid
pursuant to this paragraph (b) shall be paid in equal pro rata proportions of
such cash and/or shares of Series A Convertible Preferred Stock except as
otherwise provided for the payment of cash in lieu of fractional shares.
(c) Dividend Preference. On each Dividend Due Date all dividends which
shall have accrued on each share of Series A Convertible Preferred Stock
outstanding on such Dividend Due Date shall accumulate and be deemed to become
"due." Any dividend which shall not be paid on the Dividend Due Date on which it
shall become due shall be deemed to be 'past due' until such dividend shall be
paid or until the share of Series A Convertible Preferred Stock with respect to
which such dividend became due shall no longer be outstanding, whichever is the
earlier to occur. No interest, sum of money in lieu of interest, or other
property or securities shall be payable
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in respect of any dividend payment or payments which are past due. Dividends
paid on shares of Series A Convertible Preferred Stock in an amount less than
the total amount of such dividends at the time accumulated and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding.
If a dividend upon any shares of Series A Convertible Preferred Stock, or
any other outstanding preferred stock of the Corporation ranking on a parity
with the Series A Convertible Preferred Stock as to dividends, is in arrears,
all dividends or other distributions declared upon each series of such stock
(other than dividends paid in Junior Stock) may only be declared pro rata so
that in all cases the amount of dividends or other distributions declared per
share of each such series bear to each other the same ratio that the accumulated
and unpaid dividends per share on the shares of each such series bear to each
other. Except as set forth above, if a dividend upon any shares of Series A
Convertible Preferred Stock, or any other outstanding stock of the Corporation
ranking on a parity with the Series A Convertible Preferred Stock as to
dividends, in in arrears: (i) no dividends, in cash, stock or other property,
may be paid or declared and set aside for payment or any other distribution made
upon any stock of the Corporation ranking on a parity with the Series A
Convertible Preferred Stock as to dividends may be (A) redeemed pursuant to a
sinking fund or otherwise, except (1) by means of a redemption pursuant to which
all outstanding shares of the Series A Convertible Preferred Stock and all stock
of the Corporation ranking on a parity with the Series A Convertible Preferred
Stock as to dividends are redeemed or pursuant to which a pro rata redemption is
made from all holders of the Series A Convertible Preferred Stock and all stock
of the Corporation ranking on a parity with the Series A Convertible Preferred
Stock as to dividends (in each case, only so long as the Series A Convertible
Preferred Stock is otherwise redeemable pursuant hereto), the amount allocable
to each series of such stock being determined on the basis of the aggregate
liquidation preference of the outstanding shares of each series and the shares
of each series being redeemed only on a pro rata basis, or (2) by conversion of
such stock ranking on a parity with the Series A Convertible Preferred Stock as
to dividends into, or exchange of such stock for, Junior Stock or (B) purchased
or otherwise acquired for any consideration by the Corporation except (1)
pursuant to an acquisition made pursuant to the terms of one or more offers to
purchase all of the outstanding shares of the Series A Convertible Preferred
Stock and all stock of the Corporation ranking on a parity with the Series A
Convertible Preferred Stock as to dividends (which offers shall describe such
proposed acquisition of all such Parity Stock), which offers shall each have
been accepted by the holders of more than 50% of the shares of each series or
class of stock receiving such offer outstanding at the commencement of the first
of such purchase offers, or (2) by conversion of such stock ranking on a parity
with the Series A Convertible Preferred Stock as to dividends into, or exchange
of such stock for, Junior Stock; and (iii) no stock ranking junior to the Series
A Convertible Preferred Stock as to dividends may be redeemed, purchased, or
otherwise acquired for consideration (including pursuant to sinking fund
requirements) except by conversion into or exchange for Junior Stock.
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The Corporation shall not permit any Subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under this Section 3 and Section 7
below, purchase or otherwise acquire such shares at such time and in such
manner. As used herein, "Subsidiary" means a corporation more than 50% of the
outstanding voting stock of which is owned, directly or indirectly, by the
Corporation or by one or more other Subsidiaries, or by the Corporation and one
or more other Subsidiaries.
Section 4. Redemption.
(a) Optional Redemption. The Corporation, at its option, may redeem
the shares of the Series A Convertible Preferred Stock, as a whole or from time
to time in part, on any Business Day set by the Board of Directors (the
"Redemption Date") at a redemption price per share equal to $3,000.00 plus an
amount equal to accrued and unpaid dividends thereon (whether or not earned or
declared) to the Redemption Date (subject to the right of the holder of record
on the record date for the payment of a dividend to receive the dividend due on
the corresponding Dividend Due Date, or the next Business Day thereafter, as
the case may be); provided, however, that, on and after December 16, 1999, in
the event that the closing price (as defined in Section 6(e)(viii)) of the
Common Stock for 30 consecutive Trading Days ending not more than five days
prior to the date of the notice of redemption is at least 180% of the
Conversion Price then in effect, the Corporation may so redeem such shares at
the following redemption price per share if redeemed during the twelve-month
period beginning on December 16 in the year indicated below:
REDEMPTION
YEAR PRICE
---- -----
1999 ........................... $1,050
2000 ........................... 1,040
2001 ........................... 1,030
2002 ........................... 1,020
2003 ........................... 1,010
and if redeemed at any time on or after December 16, 2004 at $1,000 per share,
plus, in each case, an amount equal to all accrued and unpaid dividends thereon
(whether or not earned or declared) to the Redemption Date (subject to the right
of the holder of record on the record date for the payment of a dividend to
receive the dividend due on the corresponding Dividend Due Date, or the next
Business Day thereafter, as the case may be). The applicable amount payable upon
redemption as provided in the immediately preceding sentence is hereinafter
referred to as the "Redemption Price."
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(b) Notice, etc.
(i) Notice of every redemption of shares of Series A Convertible
Preferred Stock pursuant to this Section 4 shall be mailed by first class
mail, postage prepaid, addressed to the holders of record of the shares to
be redeemed at their respective last addresses as they shall appear on the
stock register of the Corporation. Such mailing shall be at least 30 days
and not more than 60 days prior to the Redemption Date. Each such notice of
redemption shall specify the Redemption Date, the Redemption Price, the
place or places of payment, that payment will be made upon the later of the
Redemption Date or presentation and surrender of the shares of Series A
Convertible Preferred Stock, that on and after the Redemption Date,
dividends will cease to accumulate on such shares and that the right of
holders to convert such shares, as provided in Section 6 hereof, shall
terminate at the close of business on the Business Day immediately
preceding the Redemption Date.
(ii) In case of redemption of a part only of the shares of Series A
Convertible Preferred Stock at the time outstanding, the redemption shall
be pro rata. The Board of Directors shall have full power and authority,
subject to the provisions herein contained, to prescribe the terms and
conditions upon which shares of the Series A convertible Preferred Stock
shall be redeemed from time to time.
(iii) If such notice of redemption shall have been duly given and if
on or before the Redemption Date specified therein the funds necessary for
such redemption shall have been deposited by the Corporation with the bank
or trust company hereinafter referred to in trust for the pro rata benefit
of the holders of the shares called redemption, then, notwithstanding that
any certificate for shares so called for redemption shall not have been
surrendered for cancellation, from and after the Redemption Date, all
shares so called for redemption shall no longer be deemed to be
outstanding, dividends shall cease to accrue thereon and all rights with
respect to such shares shall forthwith cease and terminate, except only the
right of the holders thereof to receive from such bank or trust company at
any time on and after the Redemption Date the funds so deposited, without
interest. The aforesaid bank or trust company shall be organized and in
good standing under the laws of the United States of America or of any
State, shall have capital, surplus and undivided profits aggregating at
least $500,000,000 according to its last published statement of financial
condition, and shall be identified in the notice of redemption. Any
interest accrued on such funds shall be paid to the Corporation from time
to time. Any funds so set aside or deposited, as the case may be, and
unclaimed at the end of three years from such Redemption Date shall, to the
extent permitted by law, be released or repaid to the Corporation, after
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which repayment the holders of the shares so called for redemption shall
look only to the Corporation for payment thereof.
(c) Status of Redeemed Shares. Shares of the Series A Convertible
Preferred Stock which have been redeemed shall, after such redemption, have the
status of authorized but unissued shares of Preferred Stock of the Corporation,
without designation as to series, until such shares are once more designated as
part of a particular series by or on behalf of the Board of Directors.
Section 5. No Sinking Fund. The shares of Series A Convertible Preferred
Stock, shall not be subject to mandatory redemption or the operation of any
purchase, retirement, or sinking fund.
Section 6. Conversion Privilege.
(a) Conversion Right. The holder of any share of Series A Convertible
Preferred Stock shall have the right, at such holder's option (but if such share
is called for redemption, then in respect of such share only to and including,
but not after, the close of business on the Business Day immediately preceding
the applicable Redemption Date, provided that no default by the Corporation in
the payment of the applicable Redemption Price shall have occurred and be
continuing on the Redemption Date) to convert such share on any Business Day
into that number of fully paid and non-assessable Common Shares, without par
value ("Common Stock"), of the Corporation (calculated as to each conversion to
the nearest 1/100th of a share of Common Stock) obtained by dividing $1,000.00
by the Conversion Price then in effect. The "Conversion Price" shall initially
be equal to $11.33 and shall be subject to adjustment from time to time as set
forth below.
(b) Conversion Procedures. Any holder of shares of Series A
Convertible Preferred Stock desiring to convert such shares into Common Stock
shall surrender the certificate or certificates for such shares of Series A
Convertible Preferred Stock at the office of the Corporation or any transfer
agent for the Series A Convertible Preferred Stock (the "Transfer Agent"), which
certificate or certificates, if the Corporation shall so require, shall be duly
endorsed to the Corporation or in blank, or accompanied by proper instruments of
transfer to the Corporation or in blank, accompanied by irrevocable written
notice to the Corporation that the holder elects so to convert such shares of
Series A Convertible Preferred Stock and specifying the name or names in which a
certificate or certificates for Common Stock are to be issued.
The Corporation covenants that it will, as soon as practicable
after such deposit of certificates for Series A Convertible Preferred Stock
accompanied by the written notice of conversion and compliance with any other
conditions herein contained, deliver to the person for whose account such
shares of Series A Convertible Preferred Stock were so surrendered, or to his
nominee or nominees, certificates for the number of full shares of Common Stock
to which he shall be entitled as aforesaid, together with a
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cash adjustment of any fraction of a share as hereinafter provided. Subject to
the following provisions of this paragraph, such conversion shall be deemed to
have been made as of the date of such surrender of the shares of Series A
Convertible Preferred Stock to be converted, and the person or persons entitled
to receive the Common Stock deliverable upon conversion of such Series A
Convertible Preferred Stock shall be treated for all purposes as the record
holder or holders of such Common Stock on such date; provided, however, that the
Corporation shall not be required to convert any shares of Series A Convertible
Preferred Stock while the stock transfer books of the Corporation are closed for
any purpose, but the surrender of Series A Convertible Preferred Stock for
conversion during any period while such books are so closed shall become
effective for conversion immediately upon the reopening of such books as if the
surrender had been made on the date of such reopening, and the conversion shall
be at the Conversion Price in effect on such date.
(c) Certain Adjustments for Dividends. In the case of any share of Series
A Convertible Preferred Stock which is surrendered for conversion after any
record date established by the Board with respect to the payment of a dividend
on the Series A Convertible Preferred Stock and on or prior to the opening of
business on the next succeeding Dividend Due Date (or, if such Dividend Due Date
is not a Business Day, before the close of business on the next Business Day
following such Dividend Due Date), the dividend due on such date shall be
payable on such date to the holder of record of such share as of such preceding
record date notwithstanding such conversion. Shares of Series A Convertible
Preferred Stock surrendered for conversion during the period from the close of
business on any record date established by the Board with respect to the payment
of a dividend on the Series A Convertible Preferred Stock immediately preceding
any Dividend Due Date to the opening of business on such Dividend Due Date (or,
if such Dividend Due Date is not a Business Day, before the opening of business
on the next Business Day following such Dividend Due Date) shall, except in the
case of shares of Series A Convertible Preferred Stock which have been called
for redemption on a Redemption Date within such period, be accompanied by
payment in New York Clearing House funds or other funds acceptable to the
Corporation in an amount equal to the dividend payable on such Dividend Due Date
on the shares of Series A Convertible Preferred Stock being surrendered for
conversion. The dividend with respect to a share of Series A Convertible
Preferred Stock called for redemption on a Redemption Date during the period
from the close of on any record date established by the Board with respect to
the payment of a dividend on the Series A Convertible Preferred Stock next
preceding any Dividend Due Date to the opening of business on such Dividend Due
Date (or, if such Dividend Due Date is not a Business Day, before the opening of
business on the next Business Day following such Dividend Due Date) shall be
payable on such Dividend Due Date (or, if such Dividend Due Date is not a
Business Day, on the next Business Day following such Dividend Due Date) to the
holder of record of such share on such record date notwithstanding the
conversion of such share of Series A Convertible Preferred Stock after such
record date and prior to the opening of business on such Dividend Due Date (or,
if such Dividend Due Date is not a Business Day, before the opening of business
on the next Business Day
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following such Dividend Due Date), and the holder converting such share of
Series A Convertible Preferred Stock need not include a payment of such dividend
amount upon surrender of such share of Series A Convertible Preferred Stock for
conversion. Except as provided in this paragraph, no payment or adjustment shall
be made upon any conversion on account of any dividends accrued on shares of
Series A Convertible Preferred Stock surrendered for conversion or on account of
any dividends on the Common Stock issued upon conversion.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series A
Convertible Preferred Stock. If more than one certificate representing shares of
Series A Convertible Preferred Stock shall be surrendered for conversion at one
time by the same holder, the number of full shares issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series A Convertible Preferred Stock so surrendered. Instead of any fractional
share of Common Stock which would otherwise be issuable upon conversion of any
shares of Series A Convertible Preferred Stock, the Corporation will pay a cash
adjustment in respect of such fractional interest in an amount equal to the same
fraction of the Current Market Price per share of the Common Stock.
(e) Anti-Dilution Adjustments. The Conversion Price shall be adjusted from
time to time as follows:
(i) In case the Corporation shall pay or make a dividend in shares
of Common Stock on any class of capital stock of the Corporation, the
Conversion Price in effect immediately prior to the opening of business
on the next Business Day following the date fixed for determination of
shareholders entitled to receive such dividend shall be reduced by
multiplying such Conversion Price by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination and the denominator
shall be the sum of such number of shares and the total number of shares
constituting such dividend, such reduction to become effective immediately
prior to the opening of business on the next Business Day following the
date fixed for such determination. For the purposes of this clause (i), the
number of shares of Common Stock at any time outstanding shall include
shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock.
(ii) In case the Corporation shall hereafter issue rights, options or
warrants to all holders of its Common Stock entitling them to subscribe for
or purchase shares of Common Stock (such rights, options or warrants not
being available on an equivalent basis to holders of the Series A
Convertible Preferred Stock upon conversion) at a price per share less than
the Current Market Price of the Common Stock on the date fixed for the
determination of shareholders entitled to receive such rights, options
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or warrants (other than pursuant to a dividend reinvestment plan), (A) the
Conversion Price in effect immediately prior to the opening of business on
the next Business Day following the date fixed for such determination shall
be reduced by multiplying the Conversion Price in effect immediately prior
to the close of business on the date fixed for the determination of holders
of Common Stock entitled to receive such rights, options or warrants by a
fraction of which the numerator shall be the number of shares of Common
Stock outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock which the aggregate
of the offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such Current Market
Price and the denominator shall be the number of shares of Common Stock
outstanding at the close of business on the date fixed for such
determination plus the number of shares of Common Stock so offered for
subscription or purchase, such reduction to become effective immediately
prior to the opening of business on the next Business Day following the
date fixed for such determination. For the purposes of this clause (ii),
the number of shares of Common Stock at any time outstanding shall include
shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock; and (B) if any such rights, options or
warrants expire or terminate without having been exercised or are exercised
for a consideration different from that utilized in the computation of any
adjustment or adjustments on account of such rights, options or warrants,
the Conversion Price with respect to any Series A Preferred Shares not
previously converted into Common Stock shall be readjusted such that the
Conversion Price would be the same as would have resulted had such
adjustment been made without regard to the issuance of such expired or
terminated rights, options or warrants or based upon the actual
consideration received upon exercise thereof, as the case may be, which
readjustment shall become effective upon such expiration, termination or
exercise, as applicable; provided, however, that all readjustments in the
Conversion Price based upon any expiration, termination or exercise for a
different consideration of any such right, option or warrant, in the
aggregate, shall not cause the Conversion Price to exceed the Conversion
Price immediately prior to the time such rights, options or warrants were
initially issued (without regard to any other adjustments of such number
under this Section 6(e) that may have been made since the date of the
issuance of such rights, options or warrants).
(iii) In case the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the Conversion
Price in effect immediately prior to the opening of business on the next
Business Day following the day upon which such subdivision becomes
effective shall be proportionately reduced, and, conversely, in
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case outstanding shares of Common Stock shall each be combined into a
smaller number of shares of Common Stock, the Conversion Price in effect
immediately prior to the opening of business on the next Business Day
following the day upon which such combination becomes effective shall be
proportionately increased.
(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its indebtedness
or assets (including securities, but excluding any rights, options or
warrants referred to in clause (ii) of this Section 6(e), any dividend or
distribution paid exclusively in cash and any dividend referred to in
clause (i) of this Section 6(e)), the Conversion Price shall be adjusted so
that the same shall equal the price determined by multiplying the
Conversion Price in effect immediately prior to the close of business on
the date fixed for the determination of shareholders entitled to receive
such distribution by a fraction of which (A) the numerator shall be the
Current Market Price at the close of business on the date fixed for such
determination less the then fair value of the portion of the assets or
evidences of indebtedness so distributed applicable to one share of Common
Stock (the amount calculated pursuant to this clause (A) being hereinafter
referred to as the "Adjusted Market Price") and (B) the denominator shall
be such Current Market Price, such adjustment to become effective
immediately prior to the opening of business on the next Business Day
following the date fixed for the determination of shareholders entitled to
receive such distribution.
(v) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash that
is distributed and adjusted for as part of a distribution referred to in
clause (iv) of this Section 6(e)) in an aggregate amount that, combined
together with (I) the aggregate amount of any other distributions to all
holders of its Common Stock made exclusively in cash within the 12 months
preceding the date of payment of such distribution and in respect of which
no adjustment pursuant to this clause (v) or clause (vi) of this Section
6(e) has been made and (II) the aggregate of any cash plus the fair market
value as of the last time tender could have been made pursuant to such
tender offer, as it may have been amended (such time, the "Expiration
Time") of consideration payable in respect of any tender offer by the
Corporation or any of its Subsidiaries for all or any portion of the Common
Stock concluded within the 12 months preceding the date of payment of such
distribution and in respect of which no adjustment pursuant to this clause
(v) or clause (vi) of this Section 6(e) has been made, exceeds 10% of the
product of the Current Market Price per share of the Common Stock on the
date for the determination of holders of shares of Common Stock entitled to
receive such distribution times the number of shares of Common Stock
outstanding on such date, then, and
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in each such case, immediately after the close of business on such date for
determination, the Conversion Price shall be reduced so that the same shall
equal the price determined by multiplying the Conversion Price in effect
immediately prior to the close of business on the date fixed for
determination of the shareholders entitled to receive such distribution by
a fraction (i) the numerator of which shall be equal to the Current Market
Price per share of the Common Stock on the date fixed for such
determination less an amount equal to the quotient of (x) the excess of
such combined amount over such 10% and (y) the number of shares of Common
Stock outstanding on such date for determination and (ii) the denominator
of which shall be equal to the Current Market Price per share of the Common
Stock as of such date for determination.
(vi) In case a tender offer (the "Tender Offer") made by the
Corporation or any Subsidiary for all or any portion of the Common Stock
shall expire and the Tender Offer (as amended upon the expiration thereof)
shall require the payment to shareholders based on the acceptance (up to
any maximum specified in the terms of the tender offer) of Purchased
Shares (as defined below) of an aggregate of the cash plus other
consideration having a fair market value (as determined by the Board of
Directors) as of the Expiration Time of such tender offer that combined
together with (I) the aggregate of the cash plus the fair market value
(as determined by the Board of Directors) of consideration payable in
respect of any other tender offer (determined as of the Expiration Time of
such other tender offer) by the Corporation or any Subsidiary for all or
any portion of the Common Stock expiring within the 12 months preceding
the expiration of the Tender Offer and in respect of which no adjustment
pursuant to clause (v) of this Section 6(e) or this clause (vi) has been
made and (II) the aggregate amount of any distributions to all holders of
the Corporation's Common Stock made exclusively in cash within 12 months
preceding the expirations of the Tender Offer and in respect of which no
adjustment pursuant to clause (v) of this Section 6(e) or this clause (vi)
has been made, exceeds 10% of the product of the Current Market Price per
share of the Common Stock as of the Expiration Time of the Tender Offer
times the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time of the Tender Offer, then, and in
each such case, immediately prior to the opening of business on the day
after the date of the Expiration Time of the Tender Offer, the Conversion
Price shall be adjusted so that the same shall equal the price determined
by multiplying the Conversion Price immediately prior to close of business
on the date of the Expiration Time of the Tender Offer by a fraction (i)
the numerator of which shall be equal to (A) the product of (I) the
Current Market Price per share of the Common Stock as of the Expiration
Time of the Tender Offer and (II) the number of shares of Common Stock
outstanding (including any tendered shares) at the
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Expiration Time of the Tender Offer less (B) the amount of cash plus the
fair market value (determined as aforesaid) of the aggregate consideration
payable to shareholders based on the acceptance (up to any maximum
specified in the terms of the Tender Offer) of Purchased Shares as defined
below, and (ii) the denominator of which shall be equal to the product of
(A) the Current Market Price per share of the Common Stock as of the
Expiration Time of the Tender Offer and (B) the number of shares of Common
Stock outstanding (including any tendered shares) as of the Expiration
Time of the Tender Offer less the number of all shares validly tendered
and not withdrawn as of the Expiration Time of the Tender Offer, and
accepted for purchase up to any maximum (the shares deemed so accepted up
to any such maximum, being referred to as the "Purchased Shares").
(vii) The reclassification of Common Stock into securities other than
Common Stock shall be deemed to involve (a) a distribution of such
securities other than Common Stock to all holders of Common Stock (and the
effective date of such reclassification shall be deemed to be "the date
fixed for the determination of shareholders entitled to receive such
distribution" and the "date fixed for such determination" within the
meaning of clause (iv) of this Section 6(e), and (b) a subdivision or
combination, as the case may be, of the number of shares of Common Stock
outstanding immediately prior to such reclassification into the number of
shares of Common Stock outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective", as the case may be, and "the day upon which
such subdivision or combination becomes effective" within the meaning of
clause (iii) of this Section 6(e) above).
(viii) For the purpose of any computation under clause (ii), (iv),
(v), (vi) or (vii) of this Section 6(e), the current market price per share
of Common Stock (the "Current Market Price") on any day shall be deemed to
be the average of the daily closing prices per share for the ten
consecutive Trading Days ending on the earlier of the day in question and
the day before the Ex Date (as defined below) with respect to the issuance,
payment, or distribution or the date of the expiration of the tender offer
requiring such computation. For this purpose, the term "Ex Date", when used
with respect to any issuance or distribution, shall mean the first date on
which the Common Stock trades regular way on the applicable securities
exchange or in the applicable securities market without the right to
receive such issuance or distribution. "Trading Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which the
Common Stock is not traded on the applicable securities exchange or on the
applicable securities market. The closing
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price ("closing price") for each day shall be the reported last sale price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either
case on the New York Stock Exchange or, if the Common Stock is not listed
or admitted to trading on such Exchange, on the principal national
securities exchange on which the Common Stock is listed or admitted to
trading or, if not listed or admitted to trading on any national securities
exchange, on the Nasdaq National Market or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted
on the Nasdaq National Market, the average of the closing bid and asked
prices in the over-the-counter market as furnished by any New York Stock
Exchange member firm reasonably selected from time to time by the Board for
that purpose.
(f) No adjustment in the Conversion Price shall be required unless such
adjustment (plus any adjustments not previously made by reason of this Section
6(f)) would require an increase or decrease of at least one percent in such
Conversion Price; provided, however, that any adjustments which by reason of
this Section 6(f) is not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section
shall be made to the nearest cent or to the nearest 1/100 of a share of Common
Stock, as the case may be.
(g) Whenever the Conversion Price is adjusted as herein provided:
(i) the Corporation shall compute the adjusted Conversion Price in
accordance with Section 6(e) and shall prepare a certificate signed by the
treasurer of the Corporation setting forth the adjusted Conversion Price
and showing in reasonable detail the facts upon which such adjustment is
based, and such certificate shall forthwith be filed with any Transfer
Agent; and
(ii) a notice stating that the Conversion Price has been adjusted and
setting forth the adjusted Conversion Price shall forthwith be required,
and as soon as practicable after it is required, such notice shall be
mailed by the Corporation to all holders of Series A Convertible Preferred
Stock at their last addresses as they shall appear in the security
register.
(h) In case:
(i) the Corporation shall declare a dividend or other distribution on
its Common Stock (other than a dividend payable exclusively in cash that
would not cause an adjustment to the Conversion Price to take place
pursuant to Section 6(e) above); or
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(ii) the Corporation or any Subsidiary shall make a tender
offer for the Common Stock (other than a tender offer that would
not cause an adjustment to the Conversion Price pursuant to clause
(v) or (vi) of Section 6(e)); or
(iii) the Corporation shall authorize the granting to all
holders of its Common Stock of rights, options or warrants to
subscribe for or purchase any shares of capital stock of any class;
or
(iv) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock), or of any consolidation,
merger or share exchange to which the Corporation is a party and
for which approval of any shareholders of the Corporation is
required, or of the sale or transfer of all or substantially all
of the assets of the Corporation; or
(v) of the voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed with any Transfer Agent, and shall
cause to be mailed to all holders of the Series A Convertible Preferred Stock at
their last addresses as they shall appear in the security register, at least 20
days (or 10 days in any case specified in clause (i) or (ii) above) prior to the
effective date hereinafter specified, a notice stating (x) the date on which a
record has been taken for the purpose of such dividend, distribution or grant of
rights, options or warrants, or, if a record is not to be taken, the date as of
which the identity of the holders of Common Stock of record entitled to such
dividend, distribution, rights, options or warrants was determined, or (y) the
date on which such reclassification, consolidation, merger, share exchange,
sale, transfer, dissolution, liquidation or winding up is expected to become
effective, and the date as of which it is expected that holders of Common Stock
of record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, share exchange, sale, transfer, dissolution, liquidation
or winding up. Neither the failure to give such notice nor any defect therein
shall affect the legality or validity of the proceedings described in clauses
(i) through (v) of this Section 6(h).
(i) Nonassessability of Common Stock. The Corporation covenants that all
shares of Common Stock which may be issued upon conversion of Series A
Convertible Preferred Stock will upon issue be fully paid and nonassessable.
(j) Reservation of Shares; Transfer Tax; Etc. The Corporation shall at all
times reserve and keep available, out of its authorized and unissued stock,
solely for the purpose of effecting the conversion of the Series A Convertible
Preferred Stock, such number of shares of its Common Stock, free from preemptive
rights, as shall from time to time be sufficient to effect the conversion of all
shares of Series A Convertible
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Preferred Stock from time to time outstanding. The Corporation shall from time
to time, in accordance with the laws of the State of California, increase the
authorized number of shares of Common Stock if at any time the number of shares
of Common Stock not outstanding shall not be sufficient to permit the conversion
of all the then outstanding shares of Series A Convertible Preferred Stock.
If any shares of Common Stock required to be reserved for purposes
of conversion of the Series A Convertible Preferred Stock hereunder require
registration with or approval of any governmental authority under any Federal or
State law before such shares may be issued upon conversion, the Corporation
covenants that it will in good faith and as expeditiously as possible endeavor
to cause such shares to be duly registered or approved, as the case may be. If
the Common Stock is listed on the New York Stock Exchange or any other national
securities exchange, the Corporation covenants that it will, if permitted by the
rules of such exchange, list and keep listed on such exchange, upon official
notice of issuance, all shares of Common Stock issuable upon conversion of the
Series A Convertible Preferred Stock.
The Corporation covenants that it will pay any and all issue or
other taxes that may be payable in respect of any issue or delivery of shares
of Common Stock on conversion of the Series A Convertible Preferred Stock. The
Corporation shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue or delivery of Common Stock
(or other securities or assets) in a name other than that in which the shares
of Series A Convertible Preferred Stock so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of such tax or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value of the Common Stock, if any, the
Corporation covenants that it will take any corporate action which may, in the
opinion of its counsel, be necessary in order that the Corporation may validly
and legally issue fully paid and non-assessable shares of Common Stock at the
Conversion Price as so adjusted.
(k) Other Changes in Conversion Price. The Corporation may, but shall
not be obligated to, make such decreases in the Conversion Price, in addition of
those required or allowed by this Section 6, as shall be determined by it, as
evidenced by a resolution of the Board, to be advisable in order to avoid or
diminish any income tax to holders of Common Stock resulting from any dividend
or distribution of any capital stock of the Corporation or issuance of rights,
options or warrants to purchase or subscribe for any such stock or from any
event treated as such for income tax purposes.
Section 7. Liquidation Rights.
(a) Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation, the
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holders of outstanding shares of the Series A Convertible Preferred Stock shall
be entitled, before any payment or distribution shall be made on Junior Stock,
to be paid in full an amount equal to the Stated Value per share, plus an amount
equal to all accrued but unpaid dividends (whether or not earned or declared),
and no more. After payment of the full amount of such liquidation distribution,
the holders of the Series A Convertible Preferred Stock shall not be entitled to
any further participation in any distribution of assets of the Corporation.
(b) Insufficient Assets.
(i) If, upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, the assets of the Corporation, or proceeds
thereof, distributable among the holders of the shares of the Series A
Convertible Preferred Stock and any other stock of the Corporation ranking,
as to liquidation, dissolution or winding up, on a parity with the Series A
Convertible Preferred Stock (collectively, "Liquidation Parity Stock"),
shall be insufficient to pay in full the preferential amount set forth in
subparagraph (a) above and liquidating payments on all Liquidation Parity
Stock, then assets of the Corporation remaining after the distribution to
holders of any Senior Stock then outstanding of the full amounts to which
they may be entitled, or the proceeds thereof, shall be distributed among
the holders of the Series A Convertible Preferred Stock and all such
Liquidation Parity Stock ratably in accordance with the respective amount
which would be payable on such shares of Series A Convertible Preferred
Stock and any such Liquidation Parity Stock if all amounts payable thereon
were paid in full (which, in the case of such other stock, may include
accumulated dividends).
(ii) In the event of any such liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, unless and until
payment in full is made to the holders of all outstanding shares of the
Series A Convertible Preferred Stock of the liquidation distribution to
which they are entitled pursuant to subparagraph (a) above, no dividend or
other distribution shall be made to the holders of any Junior Stock and no
purchase, redemption or other acquisition for any consideration by the
Corporation shall be made in respect of any Junior Stock, other than any
such dividend or distribution consisting solely of, or purchase, redemption
or acquisition for consideration consisting solely of, shares of Junior
Stock.
(c) Definition. Neither the consolidation nor the merger of the
Corporation into or with another corporation or corporations shall be deemed
to be a liquidation, dissolution or winding up of the Corporation within the
meaning of this Section 7.
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Section 8. Voting Rights.
(a) No Vote Except as Provided. Except as otherwise expressly provided
herein or required by law, no holder of shares of Series A Convertible Preferred
Stock shall have or possess any right to notice of shareholders' meetings or any
vote (whether at such meeting or in writing without a meeting) with respect to
any shares of Series A Convertible Preferred Stock held by such holder on any
matter.
(b) Election of Directors. At any meeting of shareholders for the election
of directors of the Corporation (or, in lieu thereof, by the unanimous written
consent of the outstanding shares of Series A Convertible Preferred Stock), the
holders of Series A Convertible Preferred Stock shall have the right, voting or
consenting separately as a series, to the exclusion of the holders of the
Corporation's Common Stock or any other series of Preferred Stock or any other
class or series of capital stock of the Corporation, to elect the Applicable
Number (as hereinafter defined) of directors of the Corporation (each a "Series
A Director"). Any Series A Director may be removed by, and (except as provided
elsewhere in this paragraph (b)) shall not be removed without cause (or, except
to the extent required by law, with cause) except by, the vote or consent of the
holders of record of a majority of the outstanding shares of Series A
Convertible Preferred Stock, voting or consenting separately as a series, at a
meeting of the shareholders or of the holders of the shares of Series A
Convertible Preferred Stock called for that purpose or pursuant to a written
consent of the Series A Convertible Stock, as the case may be. Any vacancy in
the office of a Series A Director may be filled only by the vote or consent of
the holders of the outstanding shares of Series A Convertible Preferred Stock,
voting or consenting separately as a series, at a meeting of the shareholders or
of the holders of the shares of Series A Convertible Preferred Stock called for
that purpose or pursuant to a written consent of the Series A Convertible
Preferred Stock, as the case may be or, in the case of a vacancy created by
removal of a Series A Director, as provided above, at the same meeting at which
such removal shall be voted or by written consent of a majority of the
outstanding shares of Series A Convertible Preferred Stock. In no instance shall
the Board of Directors of the Corporation have the power to fill any vacancy in
the office of a Series A Director. Whenever holders of the Series A Convertible
Preferred Stock shall cease to be entitled to elect the then established
Applicable Number of directors, then and in any such case such Series A Director
or Directors as shall be designated by majority vote of the holders of the
Series A Convertible Preferred Stock shall, without any further action,
immediately cease to be a director of the Corporation. As used herein, the
Applicable Number at any time shall mean the smallest whole number that is
greater than or equal to the product of (i) 2/11 and (ii) the total number of
directors at such time (including the directors that the holders of Series A
Preferred Stock are entitled to elect at such time); provided, however, the
Applicable Number shall be reduced by the minimum number of directorships in
order that the sum of (i) the Applicable Number and (ii) the minimum whole
number of directors which can be elected (through the application of cumulative
voting) by shares of Common Stock (x) obtained upon conversion of the Series A
Convertible Preferred Stock or exercise of the Series A Warrants and (y) held of
record
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by the holder (or subsidiaries thereof) not equal or exceed a majority of the
total number of directors of the Company; and, provided further, however, until
the date of the Corporation's 1995 annual meeting of shareholders (currently
scheduled for May 23, 1995), the board of directors of the Corporation shall
consist of twelve members, of which the Applicable Number elected by the holders
of Series A Convertible Preferred Stock shall be two directors (it being
understood that, on said annual meeting date, the size of the board of directors
shall be reduced to eleven members again, with the removal or non-election of
one non-Series A Director).
(c) Certain Actions. So long as any shares of the Series A
Convertible Preferred Stock shall remain outstanding, the consent of the
holders of a majority of the shares of the Series A Convertible Preferred Stock
at the time outstanding, acting as a separate series, given in person or by
proxy, either in writing without a meeting or by vote at any meeting called for
the purpose, shall be necessary for effecting or validating:
(i) The authorization, creation, issuance or sale of any
shares of any class or series of capital stock of the Corporation
which shall rank senior to the Common Stock of the Corporation as to
dividend rights or rights upon liquidation, winding up or dissolution
of the Corporation, whether such capital stock shall constitute
Senior Stock, Parity Stock (including Series A Convertible Preferred
Stock) or Junior Stock, or otherwise, or any security convertible
thereinto or exchangeable therefor or representing the right to
acquire any of the foregoing; provided, however, that no such consent
is or shall be necessary for the authorization, creation, issuance or
sale of (A) additional shares of Series A Convertible Stock issuable,
at the election of the Company, pursuant to Section 4.3 of the
Investment Agreement or (B) additional shares of Series A Convertible
Preferred Stock payable as a dividend in accordance with Section 3(b)
above (including, without limitation, such shares payable as a
dividend upon additional shares issued as contemplated by clause (A)
of this paragraph (i));
(ii) Any amendment, alteration or repeal of any of the
provisions of the Articles of Incorporation or of the By-laws of the
Corporation (including any adoption of a Certificate of Determination
of any series of stock of the Corporation);
(iii) The merger or consolidation of the Corporation with or
into, or the sale or conveyance of all or substantially all of the
assets of the Corporation to, any person or entity (provided,
however, that on and after December 16, 1997, in lieu of the right to
vote on or consent with respect to the actions specified in this
paragraph (iii) as a separate series, the Series A Convertible
Preferred Stock shall have the right to vote or consent together with
the Common Stock, as a single class, and in any such vote or consent
a holder of shares of Series A Convertible Preferred
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Stock shall be entitled to a number of votes equal to the number of shares
of Common Stock (rounded down to the nearest share) into which such shares
of Series A Convertible Preferred Stock are convertible on the date the
vote is taken or consent is given); or
(iv) Any dividend or other distribution to all holders of its Common
Stock of cash or property or any purchase or acquisition by the Corporation
or any of its subsidiaries of its Common Stock in an aggregate amount that,
combined together with (A) the aggregate amount of any other such
distributions to all holders of its Common Stock within the 12 months
preceding the date of payment of such distribution and in respect of which
no vote was required pursuant to this paragraph (iv) and (B) the aggregate
of any cash plus the fair market value of consideration payable in respect
of any purchase or acquisition by the Corporation or any of its
subsidiaries for all or any portion of the Common Stock concluded within
the 12 months preceding the date of payment of such distribution and in
respect of which no vote was required pursuant to this paragraph (iv),
exceeds 15% of the product of the Current Market Price per share of the
Common Stock of the Corporation on the date for the determination of
holders of shares of Common Stock entitled to receive such distribution
times the number of shares of Common Stock outstanding on such date;
provided, however, that no such consent of the holders of the Series A
Convertible Preferred Stock shall be required if, at or prior to the time when
any such action of the type referred to in subparagraphs (i), (ii), (iii) and
(iv) of this Section 8 is to take effect, provision is made for the redemption
of all shares of the Series A Convertible Preferred Stock at the time
outstanding and deposit of the aggregate Redemption Price is made pursuant to
Section 4(b)(iii).
Section 9. Preemptive Rights. In the event the Company intends to issue
and sell shares of Common Stock in a public offering as contemplated by Section
8.10 of the Investment Agreement, the Company shall first provide the holders of
Series A Convertible Preferred Stock 60 day's prior written notice of such
intent. At the holder's election, each holder of Series A Convertible Preferred
Stock has the preemptive right to participate in such Common Stock offering up
to the holder's fully converted/exercised interest in the Common Stock of the
Company at the per share price received by the Company (i.e., without
underwriters' discount) in such public offering. For purposes of the foregoing,
the holder's fully converted/exercised interest in the Common Stock shall equal
the quotient of (I) the number of shares of Common Stock beneficially owned or
obtainable by the holder and its affiliates by virtue of ownership of the Series
A Preferred Shares (including any additional shares actually issued by virtue of
the provision permitting payment of dividends in kind on the Series A Preferred
Shares) and the Series A Warrants and conversion or exercise thereof divided by
(II) the sum of (A) the total number of shares of Common Stock of the Company
then outstanding plus
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(B) the number of shares referred to in (I). This preemptive right shall
terminate when this security is not held by American International Group, Inc.
or subsidiaries or affiliates thereof.
Section 10. Exclusion of Other Rights. Except as may otherwise be
required by law, the shares of Series A Convertible Preferred Stock shall not
have any preferences or relative, participating, optional or other special
rights, other than those specifically set forth in this resolution (as such
resolution may be amended from time to time) and in the Articles of
Incorporation of the Corporation, as amended. Without limitation of the
foregoing, the shares of Series A Convertible Preferred Stock shall have no
preemptive or subscription rights except as provided in Section 9.
Section 11. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
Section 12. Severability of Provisions. If any right, preference or
limitation of the Series A Convertible Preferred Stock set forth in this
resolution (as such resolution may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other rights, preferences and limitations set forth in this
resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable right, preference or limitation shall, nevertheless,
remain in full force and effect, and no right, preference or limitation herein
set forth shall be deemed dependent upon any other such right, preference or
limitation unless so expressed herein.
Neil H. Ashley declares under penalty of perjury under the laws of the
State of California that he has read the foregoing certificate and knows the
contents thereof and that the same is true of his own knowledge.
Dated: December 5, 1994 By: /s/ NEIL H. ASHLEY
-----------------------
Neil H. Ashley,
Chief Executive Officer
John R. Bollington declares under penalty of perjury under the laws of the
State of California that he has read the foregoing certificate and knows the
contents thereof and that the same is true of his own knowledge.
Dated: December 5, 1994 By: /s/ JOHN R. BOLLINGTON
-----------------------
John R. Bollington,
Secretary
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EXHIBIT
D
2
CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION OF
20TH CENTURY INDUSTRIES
Neil H. Ashley and John R. Bolington certify that:
1. They are the Chief Executive Officer and Secretary,
respectively, of 20th Century Industries, a California corporation.
2. Article IV of the Articles of Incorporation is hereby amended
to read in full as follows:
IV
This corporation is authorized to issue two classes of shares
to be designated respectively "Preferred Shares" and "Common Shares";
the total number of shares which this corporation has authority to
issue is 110,500,000 and the aggregate par value of all shares that are
to have a par value shall be $500,000; the number of Preferred Shares
that are to have a par value shall be 500,000 and the par value of each
share of such class shall be $1 and the number of Common Shares without
par value shall be 110,000,000. The Preferred Shares may be issued from
time to time in one or more series. The board of directors is hereby
authorized to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices and
the liquidation preferences of any wholly unissued series of Preferred
Shares, and the number of shares constituting any such series and the
designation thereof, or any of them; and to increase or decrease the
number of shares of any series subsequent to the issue of shares of
that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so
decreased, the shares constituting such decrease shall resume the
status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
3. Articles V, VI, VII and VIII of the Articles of Incorporation
are hereby renumbered as Articles VI, VII, VIII and IX, respectively.
4. A new Article V is hereby added to the Articles of
Incorporation, which shall read in full as follows:
V
A. Prohibited Transfer; Excess Stock. Except as provided in
Section G, until the Restriction Termination Date, any attempted direct
or indirect Transfer of Stock shall be deemed a "Prohibited Transfer"
if (i) such Transfer would increase the Percentage of Stock Owned by
any Person that (or
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by any Person whose Stock is or by virtue of such Transfer would be attributed
to any Person that), either after giving effect to the attribution rules
(including the option attribution rules) of Section 382 or without regard to
such attribution rules, Owns, by virtue of such Transfer would Own, or has at
any time since the period beginning three years prior to the date of such
Transfer Owned, Stock in excess of the Limit, (ii) such Transfer would increase
the Percentage of Stock Owned by any 5% Shareholder (including but not limited
to a Transfer that results in the creation of a 5% Shareholder), or (iii) such
Transfer would cause an "ownership change" of the corporation within the meaning
of Section 382. Except as otherwise provided in Sections D and F, the Stock or
Option sought to be Transferred in the Prohibited Transfer shall be deemed
"Excess Stock."
B. Transfer of Excess Stock to Trustee. Except as otherwise provided in
Sections D and F, a Prohibited Transfer shall be void ab inirio as to the
Purported Transferee in the Prohibited Transfer and such Purported Transferee
shall not be recognized as the owner of the Excess Stock for any purpose and
shall not be entitled to any rights as a stockholder of the corporation arising
from the ownership of Excess Stock, including, but not limited to, the right to
vote such Excess Stock or to receive dividends or other distributions in respect
thereof or, in the case of Options, to receive Stock in respect of their
exercise. Any Excess Stock shall automatically be transferred to the Trustee in
trust for the benefit of the Charitable Beneficiary, effective as of the close
of business on the business day prior to the date of the Prohibited Transfer;
provided, however, that if the transfer to the trust is deemed ineffective for
any reason, such Excess Stock shall nevertheless be deemed to have been
automatically transferred to the person selected as the Trustee at such time,
and such person shall have rights consistent with those of the Trustee as
described in this section and in Section C below. Any dividend or other
distribution with respect to such Excess Stock paid prior to the discovery by
the corporation that the Excess Stock has been transferred to the Trustee
("Prohibited Distributions") shall be deemed to be held by the Purported
Transferee as agent for the Trustee, and shall be paid to the Trustee upon
demand, and any dividend or distribution declared but unpaid shall be paid when
due to the Trustee. Any vote cast by a Purported Transferee with respect to
Excess Stock prior to the discovery by the corporation that the Excess Stock has
been transferred to the Trustee will be rescinded as void and shall be recast in
accordance with the desires of the Trustee acting for the sole benefit of the
Charitable Beneficiary. The Purported Transferee and any other Person holding
certificates representing Excess Stock shall immediately surrender such
certificates to the Trustee. The Trustee shall have all the rights of the owner
of the Excess Stock, including the right to vote, to receive dividends or other
distributions, and to receive proceeds from liquidation, which rights shall be
exercised for the sole benefit of the Charitable Beneficiary.
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C. Disposition of Excess Stock. As soon as practicable following receipt
of notice from the corporation that Excess Stock has been transferred to the
Trustee, the Trustee shall take such actions as it deems necessary to dispose of
the Excess Stock in an arm's-length transaction that would not constitute a
Prohibited Transfer. Upon the disposition of such Excess Stock, (i) the interest
of the Charitable Beneficiary in the Excess Stock shall terminate, and (ii) the
Trustee shall distribute the net proceeds of the sale as follows: (a) the
Purported Transferee shall receive an amount of the net proceeds of such sale
not to exceed the Purported Transferee's cost incurred to acquire such Excess
Stock, or, if such Excess Stock was Transferred for less than fair market value,
the fair market value of the Excess Stock on the date of the Prohibited
Transfer, in each case less all costs incurred by the corporation, the Trustee
and the Transfer Agent in enforcing the Restrictions, and (b) the Charitable
Beneficiary shall receive the balance of the net proceeds from the sale of the
Excess Stock, if any, together with any Prohibited Distributions received from
the Purported Transferee and any other distributions with respect to such Excess
Stock while such Stock was held by the Trustee. In the event the Purported
Transferee has disposed of the Excess Stock and distributed the proceeds and
other amounts otherwise than in accordance with this section, then (w) such
Purported Transferee shall be deemed to have disposed of such Excess Stock as an
agent for the Trustee, (x) such Purported Transferee shall be deemed to hold
such proceeds and any Prohibited Distributions as an agent for the Trustee, (y)
such Purported Transferee shall be required to return to the Trustee the
proceeds from such sale, together with any Prohibited Distributions theretofore
received by the Purported Transferee with respect to such Excess Stock, provided
that upon receipt of written permission from the Trustee, the Purported
Transferee will be entitled to retain an amount of such sale proceeds not to
exceed the amount that such Purported Transferee would have received from the
Trustee if the Trustee had obtained and resold the Excess Stock at any time
during the period beginning on the date of the Prohibited Transfer giving rise
to such Excess Stock and ending on the date of such disposition by the Purported
Transferee, assuming for this purpose that the Trustee would have sold the
Excess Stock for an amount equal to the lowest-quoted trading price of such
Excess Stock during such period, and (z) the Trustee shall transfer any
remaining proceeds to the Charitable Beneficiary. Neither the Trustee, the
corporation, the Purported Transferee nor any other party shall claim an income
tax deduction with respect to any transfer to the Charitable Beneficiary and
neither the Trustee nor the corporation shall benefit in any way from the
enforcement of the Restrictions, except insofar as these restrictions protect
the corporation's Income Tax Net Operating Loss Carryover. Neither the Trustee,
the corporation nor the Transfer Agent shall have any liability to any Person
for any loss arising from or related to a Prohibited Transfer.
D. Transfers by 5% Shareholders. In the event a Prohibited Transfer is
attributable to a Transfer by a 5% Shareholder, the corporation and
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the Transfer Agent shall make all reasonable efforts to locate the Person or
Public Group who acquired the Excess Stock (the "Public Purchaser"). In the
event the corporation is able to locate the Public Purchaser within ninety (90)
days of the Prohibited Transfer, the corporation shall request that the Public
Purchaser surrender the Excess Stock, together with any dividends or other
distributions theretofore received with respect to the Excess Stock by the
Public Purchaser, to the Purported Transferor, and, if such Stock is
surrendered, the Purported Transferor shall surrender to the Public Purchaser
the purchase price paid by the Public Purchaser for the Excess Stock, plus, if
the Public Purchaser acquired Ownership of the Excess Stock without knowledge
that such acquisition was a Prohibited Transfer, an amount equal to all other
losses, damages, costs and expenses incurred by the Public Purchaser to acquire
Ownership of the Excess Stock and to comply with the Restrictions (including any
loss incurred as a result of a decline in value of such Stock). In the event the
Transfer Agent and the corporation are unable to locate the Public Purchaser
within ninety (90) days following the Prohibited Transfer, or the Public
Purchaser refuses to surrender or has disposed of the Excess Stock prior to the
surrender of the Excess Stock to the Purported Transferor, such Stock shall no
longer be treated as Excess Stock and the corporation shall (i) purchase from
one or more third parties, in one or more transactions that would, to the extent
possible, reduce the Ownership of Stock by the Person or Public Group whose
Ownership increased as a result of the Prohibited Transfer to an amount equal to
such Ownership immediately prior to the Prohibited Transfer, shares of Stock
equal in type and number to the Stock Transferred in the Prohibited Transfer
(which Stock shall be treated as Excess Stock), (ii) hold such Stock for and on
behalf of the Purported Transferor, (iii) treat such Stock as Owned by the
Purported Transferor since the date of the Prohibited Transfer for all purposes,
including the right to vote and to receive dividends and other distributions,
and (iv) for all purposes treat any dividends and other distributions made to
such Person or Public Group as a dividend or other distribution to the Purported
Transferor, a payment by the Purported Transferor to the corporation to be
applied against the Amount Due (as defined below), and a non-dividend payment to
the Persons or Public Group who received such distributions. To the extent
reasonably possible, any votes cast by such Person or Public Group from and
after the date of the Prohibited Transfer with respect to Excess Stock shall be
rescinded in the same proportion as the votes actually cast by such Person or
Public Group, and the Purported Transferor shall be entitled to cast those votes
that were rescinded. The corporation shall hold such Excess Stock, and any
dividends or other distributions thereon, on behalf of the Purported Transferor,
as security for payment of the Amount Due, until the earlier of such time as (y)
the corporation has received, either directly from the Purported Transferor or
indirectly from any dividends or other distributions theretofore received by the
corporation with respect to such Excess Stock on behalf of the Purported
Transferor (or any amounts deemed paid by the Purported Transferor as provided
in this Section D), or any combination thereof, an amount equal to the amount
incurred by the corporation to fund the purchase such Excess
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Stock, plus all costs incurred by the corporation in enforcing the Restrictions
with respect to such Prohibited Transfer (including the amount of any
non-dividend payment deemed made by the corporation to the Person or Public
Group as provided in this Section D), plus interest on all such amounts from the
dates incurred by the corporation at the "applicable federal rate" determined
under Section 1274(d) of the Code (collectively, the "Amount Due") (it being the
intent to treat the Amount Due and any portion thereof as loan to the Purported
Transferor), or (z) the corporation is able to dispose of such Excess Stock on
behalf of the Purported Transferor in a transaction that would not be a
Prohibited Transfer, in which case the corporation will sell such Excess Stock
and distribute to the Purported Transferor any proceeds (together with any other
cash distributions theretofore received (or deemed received) with respect to the
Excess Stock) in excess of the Amount Due. The obligation of the Purported
Transferor for the Amount Due shall be payable on demand by the corporation. In
the event the Amount Due exceeds the proceeds from a sale of Excess Stock and
any cash distributions theretofore received (or deemed received) by the
corporation on behalf of the Purported Transferor with respect to such Excess
Stock, the balance shall be due from the Purported Transferor on demand.
E. Transfer Agent's Rights and Responsibilities. The Transfer Agent shall
not register any Transfer of Stock on the corporation's stock transfer records
if it has knowledge that such Transfer is Prohibited Transfer. The Transfer
Agent shall have the right, prior and as a condition to registering any Transfer
of Stock on the corporation's stock transfer records, to request any transferee
of the Stock to submit an affidavit, on a form agreed to by the Transfer Agent
and the corporation, stating the number of shares of each class of Stock Owned
by the transferee (and by Persons who would Own the transferee's Stock) before
the proposed Transfer and that would, if effect were given to the proposed
Transfer, be Owned by the transferee (and by Persons who would Own the
prospective transferee's Stock) after the proposed Transfer. If either (i) the
Transfer Agent does not receive such affidavit, or (ii) such affidavit evidences
that the Transfer was a Prohibited Transfer, the Transfer Agent shall notify the
corporation and shall not enter the Prohibited Transfer into the corporation's
stock transfer records, and the Trustee, the corporation and the Transfer Agent
shall take such steps as provided in the Restrictions in order to dispose of the
Excess Stock purportedly Owned by such Purported Transferee. If the Transfer
Agent, for whatever reason, enters a Prohibited Transfer in the corporation's
stock transfer records, such Transfer shall be nonetheless void and shall have
no force and effect, in accordance with the Restrictions, and the corporation's
stock transfer records shall be revised to so provide.
F. Certain Indirect Prohibited Transfers. In the event a Transfer would be
a Prohibited Transfer as a result of attribution to the Purported Transferee of
the Ownership of Stock by a Person (an "Other Person") who is not controlling,
controlled by or under common control with the Purported
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Transferee, which Ownership is nevertheless attributed to the Purported
Transferee, the Restrictions shall not apply in a manner that would invalidate
any Transfer to such Other Person, and the Purported Transferee and any Persons
controlling, controlled by or under common control with the Purported Transferee
(collectively, the "Purported Transferee Group") shall automatically be deemed
to have transferred to the Trustee at the time and in a manner consistent with
Section B hereof, sufficient Stock (which Stock shall (i) consist only of Stock
held legally or beneficially, whether directly or indirectly, by any member of
the Purported Transferee Group, but not Stock held through any Other Person,
other than shares held through a Person acting as agent or fiduciary for any
member of the Purported Transferee Group, (ii) be deemed transferred to the
Trustee, in the inverse order in which it was acquired by members of the
Purported Transferee Group, and (iii) be treated as Excess Stock) to cause the
Purported Transferee, following such transfer to the Trustee, not to be in
violation of the Restrictions; provided, however, that to the extent the
foregoing provisions of this Section F would not be effective to prevent a
Prohibited Transfer, the Restrictions shall apply to such other Stock Owned by
the Purported Transferee (including Stock actually owned by Other Persons), in a
manner designed to minimize the amount of Stock subject to the Restrictions or
as otherwise determined by the Board of Directors to be necessary to prevent a
Prohibited Transfer (which Stock shall be treated as Excess Stock).
G. Exceptions. The term "Prohibited Transfer" shall not include: (i) the
original issuance of Series A Convertible Preferred Stock pursuant to the
Investment Agreement, (ii) the original issuance of Series A Warrants pursuant
to the Investment Agreement, (iii) the conversion of Series A Convertible
Preferred Stock, (iv) the sale of Series A Convertible Preferred Stock or Common
Shares acquired upon the conversion thereof if the sale would not be a
Prohibited Transfer but for the transferor's ownership of Stock, in either case
in compliance with the Investment Agreement, (v) any purchase of Stock permitted
by Section 6.1(b) of the Investment Agreement, (vi) any sale of any securities
of the corporation acquired pursuant to the Investment Agreement after the
Restriction Effective Date if such acquisition was not prohibited pursuant to
the terms of the Investment Agreement, (vii) any Transfer described in Section
382(l)(3)(B) of the Code (relating to transfers upon death or divorce an certain
gifts) if all Persons who would Own the Stock Transferred would be treated for
purposes of Section 382 as having Owned such Stock at all times beginning more
than three (3) years prior to the date of the Transfer, (viii) any sale of
Common Stock by a Person who Owns more than 4.75% of the outstanding Common
Stock on November 15, 1994 if such sale would not result in a net increase in
the amount of Stock owned by 5% Shareholders during the three-year period ending
on the date of such sale, provided such sale would not otherwise be prohibited
under the Restrictions but for such transferor's Ownership of Stock, and (ix)
any Transfer with respect to which the Person who would otherwise be the
Purported Transferee obtains or is granted the prior
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written approval of the Board of Directors of the corporation, which approval
shall be granted in its sole and absolute discretion after considering all facts
and circumstances, including but not limited to future events the occurrence of
which are deemed by the Board of Directors of the corporation to be reasonably
possible.
H. Legend. All certificates or other instruments evidencing Ownership of
Stock shall bear a conspicuous legend describing the restrictions. The Board of
Directors shall take such actions as it deems necessary to substitute
certificates evidencing ownership of Stock and bearing such legend for
certificates not bearing such legend.
I. Prompt Enforcement; Further Actions. As soon as practicable and within
thirty (30) business days of learning of a purported Prohibited Transfer, the
corporation through its Secretary or any assistant Secretary shall demand that
the Purported Transferee (or any other member of the Purported Transferee Group)
or Public Purchaser surrender to the Trustee the certificates representing the
Excess Stock or any resale proceeds therefrom, and any Prohibited Distributions
or other dividends or distributions received thereon, and if such surrender is
not made within twenty (20) business days from the date of such demand, the
corporation shall institute legal proceedings to compel such surrender and for
compensatory damages on account of any failure to take such actions; provided,
however, that nothing in this Section I shall preclude the corporation in its
discretion from immediately bringing legal proceedings without a prior demand,
and also provided that failure of the corporation to act within the time periods
set out in this section shall not constitute a waiver of any right of the
corporation to compel any transfer required hereby. Upon a determination by the
Board of Directors that there has been or is threatened a Prohibited Transfer,
the Board of Directors may authorize such additional action as it deems
advisable to give effect to the Restrictions, including, without limitation,
refusing to give effect on the books of the Company to any such purported
Prohibited Transfer or instituting proceedings to enjoin any such purported
Prohibited Transfer. Nothing contained in the Restrictions shall limit the
authority of the Board of Directors to take such other action to the extent
permitted by law as it deems necessary or advisable to protect the corporation
and the interests of the holders of its securities in preserving the Income Tax
Net Operating Loss Carryover, including, but not limited to, refusing to give
effect to any Prohibited Transfer or other action on the books of the
corporation or instituting proceedings to enjoin any Prohibited Transfer or
other action; provided, however, that any Prohibited Transfer shall nevertheless
result in the consequences otherwise described in the Restrictions.
J. Board Authority to Interpret. The Board of Directors shall have the
authority to interpret the provisions of the Restrictions for the purpose of
protecting the Income Tax Net Operating Loss Carryover. Any such
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interpretation shall be final and binding on any Person or Public Group who Owns
or purports to acquire Ownership of Stock.
K. Damages. Any person who knowingly violates the Restrictions, and any
persons controlling, controlled by or under common control with such a person,
shall be jointly and severally liable to the corporation for, and shall
indemnify and hold the corporation harmless against, any and all damages
suffered as a result of such violation, including but not limited to damages
resulting from a reduction in or elimination of the corporation's ability to
utilize its Income Tax Net Operating Loss Carryover, and attorneys' and
accountants' fees incurred in connection with such violation.
L. Severability. If any part of the Restrictions is judicially determined
to be invalid or otherwise unenforceable, such invalidity or unenforceability
shall not affect the remainder of the Restrictions, which shall be thereafter
interpreted as if the invalid or unenforceable part were not contained herein,
and, to the maximum extent possible, in a manner consistent with preserving the
ability of the corporation to utilize to the greatest extent possible the Income
Tax Net Operating Loss Carryover.
M. Effect on Stock Exchange Transactions. Nothing in the Restrictions
shall preclude the settlement of a transaction entered into through the
facilities of the New York Stock Exchange. The Stock that is the subject of such
transaction shall continue to be subject to the terms of the Restrictions after
such settlement.
N. Definitions:
"AIG" shall mean American International Group, Inc., a Delaware
corporation, and its subsidiaries, collectively.
"Charitable Beneficiary" shall mean an organization described in
Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code designated in
writing by the corporation.
"Code" shall mean the Internal Revenue Code of 1986, as amended and as
it may be amended from time to time hereafter.
"Control" shall mean the possession, direct or indirect, of the power to
direct or cause the direction of the management, policies or decisions of a
Person, whether through the ownership of voting securities, by contract, family
relationship or otherwise. The terms "controlling," "controlled by" and "under
common control with" shall have correlative meanings. A Person shall be deemed
to control or be under common control with a Purported Transferee if the Excess
Stock Owned by such Person is treated as Owned by the
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Purported Transferee by virtue of the family attribution rules of Section 318 of
the Code.
"5% Shareholder" shall mean any Person or Public Group who is a "5-percent
shareholder" of the corporation within the meaning of Section 382, substituting
"4.75 percent" for "5 percent" each place it appears therein.
"Income Tax Net Operating Loss Carryover" shall mean the net operating
loss, capital loss, net unrealized built-in loss, general business credit,
alternative minimum tax credit, foreign tax credit and any other carryovers or
losses as determined for United States federal income tax purposes that are or
could become subject to limitation under Section 382, and to which the
corporation is entitled under the Code and Regulations, at any time during which
the Restrictions are in force.
"Investment Agreement" shall mean that Investment and Strategic Alliance
Agreement between the corporation and AIG, dated as of October 17, 1994,
including the Exhibits and Schedules thereto, as it may be amended from time to
time.
"Limit" shall mean the lesser of (i) 4.75 Percent of the Stock, (ii) 4.75
percent of the outstanding Common Shares or (iii) 4.75 percent of the
outstanding Series A Convertible Preferred Stock.
"Option" shall mean any interest that could give rise to the Ownership of
Stock and that is an option, contract, warrant, convertible instrument, put,
call, stock subject to a risk of forfeiture, pledge of stock or any interest
that is similar to any of such interest or any other interest that would be
treated, under paragraph (d)(9) of Treasury Regulation Section 1.382-4, in the
same manner as an option, whether or not any of such interests is subject to
contingencies.
"Own," and all derivations of the word "Own," shall mean any direct or
indirect, actual or beneficial interest, including, except as otherwise
provided, a constructive ownership interest under the attribution rules
(including the option attribution rules) of Section 382. In determining whether
a Person Owns an amount of Stock in excess of the Limit, Options Owned by such
Person (or other Persons whose Ownership of Stock is or would be attributable
under Section 382 to such Person) shall be treated as exercised (and the Stock
that would be acquired by such exercise as outstanding) and Options Owned by
other Persons shall be treated as not exercised (and the Stock that would be
acquired if such options Owned by other Persons were exercised shall be treated
as not outstanding), in each case without regard to whether such treatment would
result in an ownership change within the meaning of Section 382. In determining
whether a Transfer that is an exercise, conversion or similar transaction with
respect to an Option increases the Percentage Ownership of Stock of any Person
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or Public Group, such Option shall be treated as if it were not Owned by such
Person immediately prior to such Transfer.
"Percent," "Percentage" or "%" shall mean percent or percentage by value.
"Person" shall mean any individual (other than a Public Group treated as an
individual under Section 382) or any "entity" as that term is defined in
Regulations Section 1.382-3(a).
"Public Group" shall have the meaning assigned to such term in the
applicable Regulations under Section 382. Any Transfer or attempted Transfer of
Stock to or from an individual or entity whose Stock is included in determining
the Percentage of Stock Owned by a Public Group for purposes of Section 382
shall be treated as a Transfer or attempted Transfer to such Public Group.
"Purported Transferee" shall mean a Person or Public Group who acquires
Ownership of Excess Stock in a Prohibited Transfer or, except as otherwise
provided in the Restrictions, any subsequent transferee of such Excess Stock.
"Purported Transferor" shall mean a Person who Transfers Excess Stock in a
Prohibited Transfer.
"Regulations" shall mean Treasury Regulations, including proposed or
temporary regulations, promulgated under the Code, as the same may be amended
from time to time. References herein to specific provisions of temporary
Regulations shall include the analogous provisions of final Regulations or other
successor Regulations.
"Restriction Effective Date" shall mean the date of the closing of the
purchase of the Series A Convertible Preferred Stock by AIG pursuant to the
Investment Agreement.
"Restriction Termination Date" shall mean the earliest to occur of (a) the
end of the thirty-eighth (38th) month following the Restriction Effective Date,
(b) the first day of the first taxable year following the taxable year (or
years) in which the Income Tax Net Operating Loss Carryover has been reduced to
zero, or (c) the date upon which the Board of Directors has determined that
there has been a change in law (including but not limited to the repeal of
Section 382 without a successor provision that places restrictions on the Income
Tax Net Operating Loss Carryover based on changes of ownership of the
corporation's Stock similar to Section 382) eliminating the need for the
Restrictions in order to preserve the corporation's ability to utilize the
Income Tax Net Operating Loss Carryover.
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"Restrictions" shall mean the restrictions on the Transfer and Ownership of
Stock as set forth in this Article V.
"Section 382" shall mean Section 382 of the Code and the Regulations
promulgated thereunder, and any successor statute and regulations.
"Stock" shall mean the Common Shares, the Series A Convertible Preferred
Stock, and any interest in the corporation that would be treated as stock under
Section 382, without regard to clauses (ii)(B) and (iii)(B) of paragraph (f)(18)
of Temporary Treasury Regulation Section 1.382-2T (but only if, in determining
the Ownership by any Person of Stock, the uniform treatment of such interest as
Stock or as not Stock, as the case may be, would increase such Person's
Percentage Ownership of Stock), and shall also include any Stock the ownership
of which may be acquired by the exercise of an Option.
"Transfer" shall mean any direct or indirect acquisition or disposition of
stock, whether by sale, exchange, merger, consolidation, transfer, assignment,
conveyance, distribution, pledge, inheritance, gift, mortgage, the creation of
any security interest in, or lien or encumbrance upon, or any other acquisition
or disposition of any kind and in any manner, whether voluntary or involuntary,
knowing or unknowing, by operation of law or otherwise. Notwithstanding any
understandings or agreements to which an Owner of Stock is a party, any
arrangement, the effect of which is to transfer any or all of the rights arising
from Ownership of Stock, shall be treated as a Transfer. A Transfer shall also
include (i) a transfer of an interest in an entity and a change in the
relationship between two or more Persons that results in a change in the
Ownership of Stock and (ii) the creation, grant, exercise, conversion, Transfer
or other disposition of or with respect to an Option, regardless of whether such
Option previously had been treated as exercised or converted for any other
purpose; provided, however, that a Transfer shall not include the issuance or
disposition (other than a conversion, exercise or similar transaction in which
Stock is acquired) of an Option described in paragraph (d)(9) of Treasury
Regulation Section 1.382-4, and whether an Option is so described shall be
determined by the Board of Directors in its sole and absolute discretion.
"Transfer Agent" means the Person responsible for maintaining the books and
records in which are recorded the ownership and transfer of shares of Stock or
any Person engaged by the corporation for the purpose of fulfilling the duties
required to be fulfilled by the Transfer Agent hereunder.
"Trustee" means the trustee of the trust appointed by the corporation,
provided that the Trustee shall be a Person unaffiliated with the corporation,
any 5% Shareholder, and any Person purchasing or disposing of Stock in a
Prohibited Transfer.
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5. The foregoing amendments to the Articles of Incorporation of the
corporation have been approved by the Board of Directors.
6. The foregoing amendments to the Articles of Incorporation of the
corporation have been duly approved by the required vote of shareholders in
accordance with Section 902 of the Corporations Code. The corporation has only
one class of shares outstanding, to wit, Common Stock. The total number of
outstanding shares of Common Stock of the corporation is 51,472,471. The vote of
a majority of the outstanding shares of Common Stock was required to approve the
foregoing amendments. The number of shares of Common Stock voting in favor of
the amendments equaled or exceeded the vote required.
/s/ NEIL H. ASHLEY
----------------------
Neil H. Ashley
/s/ JOHN R. BOLLINGTON
----------------------
John R. Bollington
Each of the undersigned declares under penalty of perjury under the laws of
the State of California that the matters set forth in the foregoing Certificate
are true and correct of his own knowledge and that this declaration was executed
on December 15, 1994, at Woodland Hills, California.
/s/ NEIL H. ASHLEY
----------------------
Neil H. Ashley
/s/ JOHN R. BOLLINGTON
----------------------
John R. Bollington
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EXHIBIT
E
2
ANNEX B
AMENDED AND RESTATED
BYLAWS
OF
20TH CENTURY INDUSTRIES,
A CALIFORNIA CORPORATION
ARTICLE I. OFFICES
Section 1.01 Principal Executive Office. The principal executive office
of the corporation is hereby fixed at 6301 Owensmouth Avenue, Woodland Hills,
California 91367. The Board of Directors (hereinafter called the "Board") is
hereby granted full power and authority to change said principal office from one
location to another.
Section 1.02 Other Offices. The corporation may also have an office or
offices at such other place or places, either within or without the State of
California, as the Board may from time to time determine or as the business of
the corporation may require.
ARTICLE II. SHAREHOLDERS
Section 2.01 Annual Meetings. The Annual Meeting of shareholders of the
corporation, for the purpose of electing directors and for the transaction of
such other proper business as may come before such meeting, shall be held on the
fourth Tuesday of May of each year at 10:00 a.m., or such other date or time as
may be fixed by the Board.
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Section 2.02 Special Meetings. Special Meetings of shareholders may be
called at any time for any purpose or purposes permitted under California law by
the Board, by the Chairman of the Board, by the President or by holders of the
common stock of the corporation entitled to cast not less than ten percent (10%)
of the votes entitled to be cast at such meeting.
Section 2.03 Place of Meetings. All meetings of shareholders shall be
held either at the principal executive office of the corporation or at any other
location within or without the State of California, as shall be determined from
time to time by the Board of Directors or as specified in the respective notices
or waivers of notice thereof.
Section 2.04 Notice of Meetings.
(a) Written notice of each Annual or Special Meeting of shareholders shall
be given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each shareholder entitled to vote thereat. Such notice shall
state the place, date, and hour of the meeting, and (i) in the case of a Special
Meeting, the general nature of the business to be transacted; or (ii) in the
case of the Annual Meeting, those matters which the Board, at the time of the
mailing of the notice, intends to present for action by the shareholders, but
any proper matter may be presented at the meeting for such action. The notice of
any meeting at which directors are to be
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elected shall include the names of the nominees intended, at the time of the
notice, to be presented by management for election.
(b) Notice of a meeting of shareholders shall be given either personally or
by mail addressed, postage prepaid, to the shareholder at the address of such
shareholder appearing on the authorized record books of the corporation, or if
no such address appears or is given, by publication at least once in a newspaper
of general circulation in the City of Los Angeles, California. Notice of any
meeting of shareholders shall not be required to be given to any shareholder who
shall have waived such notice; and such notice shall be deemed to be waived by
any shareholder who shall attend such meeting in person or by proxy, except a
shareholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business on the
grounds that the meeting has not been lawfully called or convened. An affidavit
of mailing of any notice or report in accordance with the provisions of the
California General Corporation Law, executed by the Secretary, Assistant
Secretary or any transfer agent, shall be prima facie evidence of the giving of
notice or report.
Section 2.05 Quorum and Vote Required.
(a) At any meeting of shareholders, holders of record of shares of stock
having a majority of the votes entitled to be cast thereat, represented in
person or by proxy, shall constitute a quorum for the transaction of business.
The affirmative vote of the holders of shares of stock having a majority of the
votes
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so constituting a quorum shall be considered to be the act of the shareholders,
unless the vote of a greater number or voting by classes is required by the
California General Corporation Law or by the Articles of Incorporation of the
corporation.
(b) The shareholders present at a duly called or held meeting at which a
quorum is present may continue to do business until adjournment, notwithstanding
withdrawal of enough shareholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by holders of shares of stock having
at least a majority of the number of votes required to constitute a quorum.
Section 2.06 Adjourned Meeting and Notice Thereof.
(a) Any meeting of shareholders, whether or not a quorum is present, may be
adjourned from time to time. In the absence of a quorum [except as provided in
Section 2.05(b) of this Article], no other business may be transacted at such
adjourned meeting.
(b) It shall not be necessary to give any notice of the time and place of
an adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken; provided,
however, that when a meeting of shareholders is adjourned for more than fifteen
(15) days or, if after adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given as in the case of an
original meeting.
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Section 2.07 Voting.
(a) The shareholders entitled to notice of any meeting or to vote at any
such meeting shall be only persons in whose name shares stand on the share
records of the corporation on the record date determined in accordance with
Section 2.08 of this Article. Persons holding shares of the corporation in a
fiduciary capacity shall be entitled to vote such shares. Persons whose shares
are pledged shall be entitled to vote the pledged shares, unless in the transfer
by the pledgor, the pledgor shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or his proxy, may represent such shares
and vote thereon. Shares having voting power standing of record in the names of
two or more persons, whether fiduciaries, members of a partnership, joint
tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted by any one of the registered holders, either in person or by proxy.
(b) The vote at any meeting of shareholders on any question need not be by
written ballot unless so directed by the Chairman of the meeting or so requested
by any shareholder at such meeting. On a vote by written ballot, each ballot
shall be signed by the shareholder voting, or by his duly appointed proxy if
there be such proxy, and it shall state the number of shares voted.
Section 2.08 Record Date.
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(a) The Board may fix in advance a record date for the determination of
shareholders entitled to notice of any meeting or to vote or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to rights, or entitled to exercise any rights in respect to any other
lawful action. The record date so fixed shall be not more than sixty (60) nor
less than ten (10) days prior to the date of the meeting, nor more than sixty
(60) days prior to any of the other aforementioned actions. When a record date
is so fixed, only shareholders of record on that date are entitled to notice of
and to vote at the meeting or to receive the dividend, distribution, or
allotment of rights, or to exercise of the rights, as the case may be,
notwithstanding any transfer of shares on the books of the corporation after the
record date. A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board fixes a new record date for the adjourned meeting. The
Board shall fix a new record date if the meeting is adjourned for more than
fifteen (15) days from the date set for the original meeting.
(b) If no record date is fixed by the Board, the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be the close of business on the fifth (5th) business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the fifth (5th) business day next preceding the day on which the
meeting is held. If no record date is fixed by the
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Board, the record date for determining shareholders for any other purpose shall
be at the close of business on the fifth (5th) business day next preceding the
day on which the Board adopts the resolution relating thereto, or the sixtieth
(60th) day prior to the date of such other action, whichever is later.
Section 2.09 Consent of Absentees. The transactions of any meeting of
shareholders, however called and noticed, and wherever held, are as valid as
though had at a meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or after the
meeting, each of the persons entitled to vote, not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. All such waivers, consents, or
approvals shall be filed with the corporate records or be made a part of the
minutes of such meeting.
Section 2.10 Action Without Meeting. Any action which, under any
provision of law, may be taken at any Annual or Special Meeting of shareholders,
may be taken without a meeting and without prior notice thereof if a consent in
writing, setting forth the actions so taken, shall be signed by shareholders
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Unless a record date for voting purposes be
fixed as provided in Section 2.08 of this Article, the record date for
determining
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shareholders entitled to give consent pursuant to this Section 2.10, when no
prior action by the Board has been taken, shall be the day on which the first
written consent is given.
Section 2.11 Proxies. Every person entitled to vote shares has the right
to do so either in person or by one or more persons authorized by a written
proxy executed by such shareholder and filed with the Secretary of the
corporation before or at the meeting; provided, however, that no proxy may be
voted or acted upon after eleven (11) months from the date set forth on the said
proxy unless the proxy shall provide therein for a longer period. A proxy may be
revoked by a writing delivered to the Secretary of the corporation stating that
the proxy is revoked, or by a subsequent proxy executed by the person executing
the prior proxy and presented to the meeting, or, as to any meeting, by actual
attendance at such meeting in person and voting in person by the person
executing the proxy.
Section 2.12 Conduct of Meetings. The Chairman of the corporation or his
designee (which designee shall be an executive officer of the corporation), or
in the absence of the Chairman and any such designee the Vice Chairman, shall
preside as Chairman at all meetings of shareholders. The Chairman shall conduct
each such meeting in a businesslike and fair manner, but shall not be obligated
to follow any technical, formal, or parliamentary rules or principles of
procedure. The Chairman's ruling on procedural matters shall be conclusive and
binding on all shareholders; unless at the time of such ruling a request for
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a vote is made by a shareholder entitled to vote and who is represented in
person or by proxy at the meeting, in which case the decision of shareholders
holding a majority of the votes represented at the meeting and entitled to be
cast shall be conclusive and binding on all Shareholders. Without limiting the
generality of the foregoing, the Chairman shall have all of the powers usually
vested in the chairman of a meeting of Shareholders.
Section 2.13 Inspectors of Election. In advance of any meeting of
shareholders, the Board may appoint inspectors of election to act at the meeting
and any adjournment thereof. If inspectors are not appointed, or if any persons
so appointed fail to appear or refuse to act, the Chairman of such meeting may
appoint inspectors at the meeting. The number of inspectors shall be either one
or three. Each inspector so appointed shall first subscribe an oath to
faithfully execute the duties of an inspector at such meeting with strict
impartiality and according to the best of his ability. Such inspectors shall
have the duties prescribed by Section 707(b) of the California General
Corporation Law and they (i) shall decide upon the qualification of those
entitled to vote, (ii) shall report the number of shares represented at the
meeting and entitled to vote on the question presented, (iii) shall conduct the
balloting and accept the votes, and (iv) when the voting is completed, shall
ascertain and report the number of votes respectively for and against each
question presented. Reports of the inspectors shall be in writing and subscribed
and delivered by them to the Secretary of
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the corporation. If there are three inspectors of election, the decision, act,
or certificate of a majority is effective in all respects as the decision, act
or certificate of all.
ARTICLE III. DIRECTORS
Section 3.01 Powers. Subject to any limitation of the Articles of
Incorporation, of these Bylaws, and of actions required by law to be approved by
the shareholders, the business and affairs of the corporation shall be managed
and all corporate powers shall be vested in, and exercised by or under the
direction of the Board of Directors. The Board may, as permitted by law,
delegate the management of the day-to-day operation of the business of the
corporation to a management company or other persons or officers of the
corporation, provided that the business and affairs of the corporation shall be
managed and all corporate powers shall be exercised under the ultimate direction
and policies of the Board.
Section 3.02 Number of Directors. The authorized number of directors of
the corporation shall be twelve.
Section 3.03 Election and Term of Office.
(a) Directors will be elected in the manner provided herein at each Annual
Meeting of shareholders, but if such Annual Meeting of shareholders is not held
or the directors are not elected thereat, the directors may be elected at any
Special Meeting of shareholders held for that purpose. Each director, including
a director elected to fill a vacancy, shall hold office until the next Annual
Meeting of shareholders and until a
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successor has been duly elected and qualified, or until he or she shall resign
or shall have been removed.
(b) At each election, the persons receiving the greatest number of votes
from the class of stock entitled to vote therefor, up to the number of directors
then to be elected by such class, shall be the persons then elected. The
election of directors shall be subject to any provisions contained in the
Articles of Incorporation relating thereto, and to any provisions of California
law for cumulative voting in the election of directors. Nominations of persons
to serve as directors shall be submitted to the Secretary of the corporation at
the meeting of shareholders at which directors will be elected.
Section 3.04 Resignation. Any director may resign at any time by giving
written notice to the Board or to the Chairman of the Board, the President or
the Secretary of the corporation. Any such resignation shall take effect at the
times specified therein or, if the time be not specified, it shall take effect
immediately upon its receipt; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. If a
resignation is to be effective at a future time, a successor may be elected to
take office when the resignation becomes effective.
Section 3.05 Vacancies.
(a) A vacancy or vacancies in the Board shall be deemed to exist in case of
the death, resignation or removal of any director, or if the authorized number
of directors be
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increased, or if the holders of any class of stock fail at any Annual or Special
Meeting of shareholders at which any directors are elected to elect the full
authorized number of directors to be voted for by such class at said meeting.
(b) The Board may declare vacant the office of a director who has been
declared of unsound mind by an order of court of duly authorized jurisdiction or
a director who has been convicted of a felony. Except to the extent it would be
contrary to the Articles of Incorporation or law, any director may be removed at
any time, with or without cause, by the affirmative vote of the holders of a
majority of the voting power of the class of stock entitled to elect such
director given at a Special Meeting of shareholders called for that purpose;
provided, however, that no director may be removed (unless the entire Board of
Directors is removed) when the votes from the class of stock entitled to elect
such director cast against such removal, or not consenting in writing to such
removal, would be sufficient to elect such director if voted cumulatively at an
election at which the total number of votes entitled to be cast by such class
were cast (or if such action is taken by written consent, all shares entitled to
vote were voted) and the entire number of directors authorized to be elected by
such class at the time of the directors' most recent election were then being
elected.
(c) No reduction of the authorized number of directors shall have the
effect of removing any director prior to the expiration of the director's term
of office.
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(d) Except as otherwise provided in the Articles of Incorporation, any
vacancy on the Board, whether because of death, resignation, disqualification,
an increase in the number of directors, or any other cause, may be filled by the
vote of the majority of the remaining directors, although less than a quorum;
provided, however, that a vacancy occurring by reason of removal of a director
by the vote of shareholders entitled to remove such director may be filled only
by the vote of such shareholders. The shareholders of a class of stock entitled
to elect a director may elect such director at any time to fill a vacancy not
filled by the directors, and any such election by such shareholders shall
require the consent of a majority of the votes of such shareholders entitled to
be cast therefor; provided, however, that no director shall be elected by
written consent to fill a vacancy created by removal of any director, except by
the unanimous written consent of all shareholders of the class of stock entitled
to vote for the election of such director. Each director chosen to fill a
vacancy shall hold office until the next Annual Meeting of shareholders and
until his successor shall have been elected and qualified or until he shall
resign or shall have been removed.
Section 3.06 Place of Meetings. All meetings of the Board shall be held
either at the principal executive office of the corporation or at any other
location within or without the State of California as shall be determined, from
time to time, by the Board of Directors, or as specified in the respective
notices or waivers of notice thereof.
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Section 3.07 First Meeting. Immediately following each Annual Meeting of
shareholders the Board shall meet for the purpose of organization, selection of
a Chairman of the Board, election of officers, and the transaction of any other
proper business. Except as provided by law, notice of such First Meeting is
hereby dispensed with.
Section 3.08 Regular Meetings. The Board of Directors shall hold Regular
Meetings on the last Tuesday of February and August, and in November on the
Tuesday of the week preceding that in which Thanksgiving falls, at 10:00 a.m.,
but the Executive Committee of the Board, if any is created, may meet more often
if the Committee deems it necessary or appropriate. Except as provided by law,
notice of Regular Meetings of the Board of Directors is hereby dispensed with.
Section 3.09 Special Meetings.
(a) Special Meetings of the Board may be called at any time by the Chairman
of the Board, the President, or the Secretary or by any two directors.
(b) Special Meetings of the Board shall be held upon at least four days'
written notice or 48 hours' notice given personally or by telephone, telegraph,
telex or other similar means of communication. Any such notice shall be
addressed or delivered to each director at such director's address as it is
shown upon the records of the corporation or as may have been given to the
corporation by the director for purposes of notice.
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Section 3.10 Quorum. The presence of a majority of the authorized number
of directors shall be required to constitute a quorum of the Board of Directors
for the transaction of business at any meeting of the Board, except to adjourn
as hereinafter provided. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board, unless a greater number of directors is
required for any specific action by law, or by these Bylaws, or by the Articles
of Incorporation of the corporation. A meeting at which a quorum is initially
present may continue to transact business notwithstanding the withdrawal of
directors, and every act or decision approved by at least a majority of the
number of directors required, as noted above, to constitute a quorum for such
meeting shall be regarded as the act or decision of the Board, unless a greater
number of directors is required by law, by the Bylaws, or by the Articles of
Incorporation of the corporation. The directors shall act only as a Board, and
the individual directors shall have no power as such, unless such power be
expressly conferred upon a director by a duly adopted resolution of the Board.
Section 3.11 Participation in Meetings by Conference Telephone. Members
of the Board may participate in a meeting of the Board through use of conference
telephone or similar communications equipment, but only so long as all members
participating in such meeting can hear and freely communicate with one another.
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Section 3.12 Waiver of Notice. The transactions of any meeting of the
Board, however called and noticed or wherever held, shall be as valid as though
had at a meeting duly held after regular call and notice if a quorum be present
at such meeting, and if, either before or after the meeting, each of the
directors not present signs a written waiver of notice, and a consent to the
holding of such meeting, or an approval of the minutes thereof. All such waivers
and consents or approvals shall be filed with the corporate records or be made a
part of the minutes of the meeting.
Section 3.13 Adjournment. A majority of the directors present, whether or
not a quorum is present, may adjourn any meeting of directors to another time
and place. If the meeting is adjourned for more than twenty-four (24) hours,
notice of such adjournment to another time or place shall be given prior to the
time of the reconvening of the adjourned meeting to the directors who were not
present at the meeting at the time of the adjournment.
Section 3.14 Fees and Compensation. Directors and members of committees
may receive such compensation, if any, for their services and such reimbursement
for expenses, as may be fixed or determined by the Board.
Section 3.15 Action Without Meeting. Any action required or permitted to
be taken by the Board may be taken without a meeting of the Board if all members
of the Board shall individually or collectively consent in writing to such
action.
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Such unanimous written consent or consents shall have the same effect as a
unanimous vote of the Board, and shall be filed with the minutes of the
proceedings of the Board.
Section 3.16 Committees.
(a) The Board may, by resolution passed by a majority of the authorized
number of directors, designate one or more committees of the Board, each
committee to consist of one or more of the directors of the corporation. Among
the committees which may be appointed may be an Executive Committee which shall
have and may exercise all the powers and authority of the Board in the
management of the affairs of the corporation between Regular or Special meetings
of the Board.
(b) All committees shall have and may exercise the powers and authority of
the Board in the management of the business and affairs of the corporation to
the extent provided in the resolution of the Board creating said committees; but
no committee shall have any power or authority in reference to (i) the approval
of any action which requires shareholders' approval or approval of the
outstanding shares; (ii) amending the Articles of Incorporation; (iii) adopting
an agreement of merger or consolidation; (iv) recommending to the shareholders
the sale, lease or exchange of all or substantially all of the corporation's
properties and assets; (v) recommending to the shareholders a dissolution of the
corporation or a revocation of the dissolution; (vi) amending or repealing the
Bylaws of the corporation; (vii) the filling of vacancies on the Board or on
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any committee; (viii) the fixing of compensation of directors for serving on the
Board or on any committee; (ix) amending or repealing any resolution of the
Board which by its express terms is not so amendable or repealable by the Board;
(x) declaring a distribution to shareholders; and (x) issuing shares.
(c) The Board shall have the power to prescribe the manner in which the
proceedings of any such committee shall be conducted. Unless the Board or such
committee shall otherwise provide, the regular or special meetings and other
actions of any such committee shall be governed by the provisions in this
Article applicable to meetings and actions of the Board. Written Minutes shall
be kept of each meeting of each committee of the Board.
Section 3.17 Officers of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders (or shall designate an executive
officer of the corporation to so preside, as provided in Section 2.12 of these
Bylaws) and at all meetings of the Board. The Board also shall have a
Vice-Chairman of the Board who shall preside at meetings of shareholders (in the
absence or disability of the Chairman and in the absence of a designee of the
Chairman to preside as provided in Section 2.12 of these Bylaws) and the Board
of Directors (in the absence or disability of the Chairman of the Board). The
Chairman and Vice-Chairman shall have such other powers and duties as are
specifically designated by the Board. The Board may appoint individuals to serve
as a Chairman Emeritus or Director Emeritus.
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A Chairman Emeritus or Director Emeritus shall have no duties or
responsibilities, and shall not be entitled to vote in their capacity as
Chairman Emeritus or Director Emeritus in connection with any meeting or
proceeding of the Board and may be appointed or removed at the pleasure of the
Board. A Chairman Emeritus or Director Emeritus shall not be deemed to be a
member of the Board for any purpose whatsoever, solely by reason of such
designation.
ARTICLE IV. OFFICERS
Section 4.01 Officers. The officers of the corporation shall be a
Chairman of the Board, a Vice-Chairman of the Board, a Chief Executive Officer,
a President, a Secretary, and a Chief Financial Officer. The Corporation may
also have at the discretion of the Board such other officers, each to hold
office for a period, and have authority to perform such duties as the Board may
from time to time determine.
Section 4.02 Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the shareholders (or shall designate an executive
officer of the corporation to so preside, as provided in Section 2.12 of these
Bylaws) and at all meetings of the Board of Directors.
Section 4.03 Vice-Chairman of the Board. The Vice-Chairman of the Board
shall perform the duties of the Chairman, during the Chairman's absence or
disability.
Section 4.04 Chief Executive Officer. The Chief Executive Officer shall
be the General Manager of the corporation
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and shall have, subject to the control of the Board, general supervision and
direction of the business and affairs of the corporation.
Section 4.05 President. The President shall have the general powers and
duties of management as are described by the Board.
Section 4.06 Secretary. The Secretary shall be responsible for the
maintenance of the corporate records of the Company, such as the Articles of
Incorporation, Bylaws, minutes and list of shareholders. The Secretary shall be
responsible for the maintenance of the list of shareholders which may be
delegated to a transfer agent. The Secretary shall give or cause to be given
notice of all meetings of shareholders and of the Board and any committees of
the Board required by the Bylaws or by law to be given. The Secretary shall have
other powers and duties as may be described by the Board.
Section 4.07 Chief Financial Officer. The Chief Financial Officer of the
corporation shall maintain or cause to be maintained adequate and correct
accounts of the properties, and financial and business transactions of the
Corporation, and shall send or cause to be sent to the shareholders of the
Corporation such financial statements and reports as are by law and these Bylaws
required to be sent to them.
Section 4.08 Appointment. The Chairman of the Board, the Vice-Chairman of
the Board, and the Chief Executive Officer,
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the President and Chief Operating Officer, the Chief Financial Officer and the
Secretary shall be elected by the Board. Other officers may be elected or
appointed and their duties prescribed by the Board or the Chief Executive
Officer. If such appointment is by the Chief Executive Officer, it shall
terminate at the next meeting of the Board unless the Board affirms the
appointment.
Section 4.09. Removal and Resignation.
(a) All officers shall serve as officers and employees of the corporation
at the pleasure of the Board and may be removed from office, and their
employment may be terminated with or without cause, and with or without notice:
(i) by the Board, or
(ii) by the Chief Executive Officer, prior to the affirmation of the
officer's appointment by the Board if such officer was appointed by the
Chief Executive Officer, or
(iii) by the Chief Executive Officer, with the concurrence or
ratification of the Board, or the Executive Committee of the Board.
No officer of the corporation shall have any employment status other
than that of an "at will" employee whose employment can be terminated at any
time pursuant to the procedures set forth in this Section 4.09, unless there is
a written agreement altering this "at will" employment status,
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approved by a resolution of the board it is binding and effective.
(b) Any officer may resign at any time without prejudice to the rights of
the corporation under any contract to which the corporation is a party by giving
written notice to the Board, or to the Chief Executive Officer or to the
Secretary of the Corporation. Any such resignation shall take effect at the date
of the receipt of such notice or at any later time specified therein; and unless
otherwise provided therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 4.10 Vacancies. A vacancy of any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed by these Bylaws for the regular appointment to such office.
Section 4.11 Retirement of Officers. Provided that the exemption
conditions set forth in applicable Federal and California statutes are satisfied
(e.g. 29 USC Section 631(c); 29 CFR Sections 1625.12 and 1627.17; Cal. Govt.
Code Section 12942(c) and FEHC Regulation Subsection 7296(c)(2)), each officer
elected or required to be elected by the Board shall retire as of the last day
of the month in which such officer's 65th birthday occurs; however, such officer
may continue to be employed for such additional period of time, and under such
conditions as are specifically authorized by resolution of the Board of
Directors.
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ARTICLE V. CONTRACTS, CHECKS,
DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01 Execution of Contracts. Except as these Bylaws may otherwise
provide, the Board may, by duly adopted resolution, authorize any officer or
agent of the corporation to enter into any contract or execute any instrument in
the name and on behalf of the corporation, and such authority may be general or
confined to specific instances; and unless so authorized by the Board or by
these Bylaws, no officer, agent or employee shall have any power or authority to
bind the corporation by any contract or engagement or to pledge its credit or to
render it liable for any purpose or in any amount.
Section 5.02 Checks, Drafts, Etc. All checks, drafts or other orders for
payment of money, notes or other evidence of indebtedness issued in the name of
or which are payable to the corporation, shall be signed by or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such person shall give such bond, if any, as
the Board may require.
Section 5.03 Deposit. All funds of the corporation not otherwise employed
shall be deposited from time to time to the credit of the corporation in such
banks, trust companies or other depositories as the Board may select, or as may
be selected by any Board committee, officer, assistant, agent or attorney of the
corporation to whom such power shall have been delegated by the Board. For the
purpose of deposit and for the purpose of
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collection for the account of the corporation, the President, Secretary, any
Vice-President or the Treasurer (or any other officer, assistant, agent or
attorney of the corporation who shall from time to time be determined by the
Board) may endorse, assign and deliver checks, drafts and other orders for the
payment of money which are payable to the order of the corporation.
Section 5.04 General and Special Bank Accounts. The Board may from time
to time authorize the opening and keeping of general and special bank accounts
with such banks, trust companies or other depositories as the Board may select
or as may be selected by any Board committee, officer, assistant, agent or
attorney of the corporation to whom such power shall have been delegated by the
Board. The Board may make such special rules and regulations with respect to
such bank accounts, not inconsistent with the provisions of these ByLaws, as it
may deem expedient.
ARTICLE VI. SHARES AND THEIR TRANSFER
Section 6.01 Certificates for Shares.
(a) Every owner of shares of the corporation shall be entitled to have a
certificate or certificates, to be in such form as the Board shall prescribe,
certifying the number and class of shares of the corporation owned by him. The
certificates representing such shares shall be numbered in the order in which
they shall be issued, and shall be signed in the name of the corporation by the
Chairman of the Board, or by the
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President and by the Secretary or Assistant Secretary, or by the duly appointed
transfer agent or registrar of the corporation. Any of the signatures on the
certificates may be a facsimile signature, provided that at least the signature
of the corporation's transfer agent or registrar on the certificate is an
original signature. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon any such certificate
shall thereafter have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature shall have been placed thereupon, were
such officer, transfer agent or registrar at the date of issue.
(b) A record shall be kept of the respective names of the persons, firms or
corporations owning the shares represented by such certificates, the number and
classes of shares represented by such certificates, respectively, and the
respective issuance dates thereof, and in case of cancellation, the respective
dates of cancellation. Every certificate surrendered to the corporation for
exchange or transfer shall be cancelled, and no new certificate or certificates
shall be issued in exchange for any existing certificate until such existing
certificate shall have been so cancelled, except in cases provided for in
Section 6.04.
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Section 6.02 Transfers of Shares. Transfers of shares of the corporation
shall be made only on the books of the corporation by the registered holder
thereof, or by his attorney thereunto authorized by written power of attorney
duly executed and filed with the Secretary of the corporation or with a transfer
agent duly appointed as provided in Section 6.03, and upon surrender of the
certificate or certificates for such shares properly endorsed and the payment of
all required taxes thereon. The person in whose name shares of stock stand on
the books of the corporation shall be deemed the owner thereof for all purposes
as regards the corporation. Whenever any transfer of shares shall be made for
collateral security purposes, and not absolutely, such fact shall be expressly
stated in the entry of transfer if, when the certificate or certificates shall
be presented to the corporation for transfer, both the transferor and the
transferee request the corporation to do so.
Section 6.03 Regulations. The Board may make such rules and regulations
as it may deem expedient, not inconsistent with these Bylaws, concerning the
issue, transfer and registration of certificates for shares of the corporation.
It may appoint, or authorize any officer or officers to appoint, one or more
transfer agents and one or more registrars, and may require all certificates for
shares to bear the signature or signatures or facsimiles thereof of any of them.
Section 6.04 Lost, Stolen, Destroyed, and Mutilated Certificates. In any
case of loss, theft, destruction, or
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mutilation of any certificate of shares, another certificate may be issued in
its place upon proof of such loss, theft, destruction, or mutilation, and upon
the giving of a bond of indemnity to the corporation in such form and in such
sum as the Board may direct; provided, however, that a new certificate may be
issued without requiring any bond when, in the judgment of the Board, it is
appropriate and proper so to do.
ARTICLE VII. INDEMNIFICATION
Section 7.01 For the purposes of this Article VII, "agent" means any
person who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust or other enterprise, or was a director,
officer, employee or agent of a foreign or domestic corporation which was a
predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation; "proceeding" means any threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative; and "expenses" includes without limitation
attorneys' fees and any expenses of establishing a right to indemnification
under Section 7.04 or Section 7.05(d) of this Article VII.
Section 7.02 The corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any proceeding (other
than an action by or in the
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right of the corporation to procure a judgment in its favor) by reason of the
fact that such person is or was an agent of the corporation, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding if such person acted in good faith and in a
manner such person reasonably believed to be in the best interests of the
corporation and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of such person was unlawful. The termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which the person reasonably
believed to be in the best interests of the corporation or that the person had
reasonable cause to believe that the person's conduct was unlawful.
Section 7.03 The corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was an agent of the
corporation, against expenses actually and reasonably incurred by such person in
connection with the defense or settlement of such action if such person acted in
good faith, in a manner such person believed to be in the best interests of the
corporation and its shareholders.
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No indemnification shall be made under this Section 7.03 for any of the
following:
(a) In respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation in the performance of such
person's duty to the corporation and its shareholders, unless and only to the
extent that the court in which such proceeding is or was pending shall determine
upon application that, in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for expenses and only to the
extent that the court shall determine;
(b) Of amounts paid in settling or otherwise disposing of a pending action
without court approval; or
(c) Of expenses incurred in defending a pending action which is settled or
otherwise disposed of without court approval.
Section 7.04 To the extent that an agent of the corporation has been
successful on the merits in defense of any proceeding referred to in Section
7.02 or Section 7.03 or in defense of any claim, issue or matter therein, the
agent shall be indemnified against expenses actually and reasonably incurred by
the agent in connection therewith.
Section 7.05 Except as provided in Section 7.04, any indemnification under
this Article VII shall be made by the corporation only if authorized in the
specific case, upon a determination that indemnification of the agent is proper
in the
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circumstances because the agent has met the applicable standard of conduct set
forth in Section 7.02 or Section 7.03, by any of the following:
(a) A majority vote of a quorum consisting of directors who are not parties
to such proceeding;
(b) If such a quorum of directors is not obtainable, by independent legal
counsel in a written opinion;
(c) Approval by the affirmative vote of the holders of a majority of the
shares of common stock of the corporation entitled to vote represented at a duly
held meeting at which a quorum is present or by the written consent of the
holders of a majority of the outstanding shares of common stock entitled to
vote. For this purpose, the shares owned by the person to be indemnified shall
not be considered outstanding and shall not be entitled to vote thereon; or
(d) The court in which such proceeding is or was pending upon application
made by the corporation or the agent or the attorney or other person rendering
services in connection with the defense, whether or not such application by the
agent, attorney or other person is opposed by the corporation.
Section 7.06 Expenses incurred in defending any proceeding may be advanced
by the corporation prior to the final disposition of such proceeding upon
receipt of an undertaking by or on behalf of the agent to repay such amount if
it shall be
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determined ultimately that the agent is not entitled to be indemnified as
authorized in this Article VII.
Section 7.07 The indemnification provided by this Article VII shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under these Bylaws or under any agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in an official capacity
and as to action in another capacity while holding such office, to the extent
such additional rights to indemnification are authorized in the Articles of
Incorporation. The rights to indemnity hereunder shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors and administrators of the person. Nothing
contained in this Article VII shall affect any right to indemnification to which
persons other than such directors and officers may be entitled by contract or
otherwise.
Section 7.08 No indemnification or advance shall be made under this
Article VII, except as provided in Section 7.04 or Section 7.05(d), in any
circumstance where it appears:
(a) That it would be inconsistent with a provision of the Articles of
Incorporation, these Bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
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(b) That it would be inconsistent with any condition expressly imposed by a
court in approving a settlement.
Section 7.09 The corporation shall have power to purchase and maintain
insurance on behalf of any agent of the corporation against any liability
asserted against or incurred by the agent in such capacity or arising out of the
agent's status as such whether or not the corporation would have the power to
indemnify the agent against such liability under the provisions of the this
Article VII. The fact that the corporation owns all or a portion of the shares
of the company issuing a policy of insurance shall not render this Section
inapplicable if either of the following conditions are satisfied:
(a) If the Articles of Incorporation authorize indemnification in excess of
that authorized in this Article VII and the insurance provided by this Section
is limited as indemnification is required to be limited by paragraph (11) of
subdivision (a) of Section 204 of the California Corporations Code; or
(b) (i) The company issuing the insurance policy is organized, licensed and
operated in a manner that complies with the insurance laws and regulations
applicable to its jurisdiction of organization;
(ii) The company issuing the policy provides procedures for processing
claims that do not permit that company
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to be subject to the direct control of the corporation that purchased that
policy; and
(iii) The policy issued provides for some manner of risk sharing between
the issuer and purchaser of the policy, on the one hand, and some unaffiliated
person or persons, on the other, such as by providing for more than one
unaffiliated owner of the company issuing the policy or by providing that a
portion of the coverage furnished will be obtained from some unaffiliated
insurer or reinsurer.
Section 7.10 The provisions of this Article VII do not apply to any
proceeding against any trustee, investment manager or other fiduciary of any
employee benefit plan in such person's capacity as such, even though such person
may also be an agent of the employer corporation as defined in Section 7.01 of
this Article VII. The corporation shall have power to indemnify such a trustee,
investment manager or other fiduciary to the extent permitted by subdivision (f)
of Section 207 of the California Corporations Code.
ARTICLE VIII. MISCELLANEOUS
Section 8.01 Seal. The Board shall provide a corporate seal, which shall
be in the form of a circle and shall bear the name of the corporation and words
and figures showing that the corporation was incorporated in the State of
California and the year of the incorporation.
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Section 8.02 Waiver of Notices. Whenever notice is required to be given
by these Bylaws or the Articles of Incorporation or by law, the person entitled
to said notice may waive such notice in writing, either before or after the time
stated therein, and such waiver shall be deemed equivalent to notice.
Section 8.03 Fiscal Year. The fiscal year of the corporation shall be
that twelve-month period ending on December 31 in each year.
Section 8.04 Dividends. The Board may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and on
the terms and conditions provided by law, subject to any legal, regulatory or
contractual restrictions to which the corporation is then subject.
Section 8.05 Representation of Shares of Other Corporations. The Chairman
of the Board or any officer or officers authorized by the Board or by the
Chairman of the Board are each authorized to vote, represent, and exercise on
behalf of the corporation all rights incident to any and all shares of any other
corporation or corporations standing in the name of this corporation, including
subsidiaries of the corporation. The authority granted herein may be exercised
either by any such officer in person or by any other person authorized to do so
by proxy or power of attorney duly executed by said officer.
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Section 8.06 Inspection of Bylaws. The corporation shall keep at its
principal executive office the original or a copy of its Bylaws as amended to
date, which copy shall be open to inspection by shareholders at all reasonable
times during office hours. If the principal executive office of the corporation
is outside the State of California and the corporation has no principal business
office in such state, it shall upon the written notice of any shareholder
furnish to such shareholder a copy of these Bylaws as amended to date. The
original or a copy of the Bylaws certified to be a true copy by the Secretary or
an Assistant Secretary of the corporation shall be prima facie evidence of the
adoption of such Bylaws and of the matters stated therein.
Section 8.07 Amendment of Bylaws. Subject to the right of the outstanding
shares to adopt, amend, or repeal Bylaws, these Bylaws may, from time to time
and at any time, be amended or repealed, and new or additional Bylaws adopted,
by approval of the Board; provided, however, that such Bylaws may not contain
any provision in conflict with law or with the Articles of Incorporation of the
corporation. After the issuance of shares, any Bylaw specifying or changing a
fixed number of directors or the maximum or minimum number or changing from a
fixed to a variable Board or vice versa may only be adopted by approval of the
outstanding shares; provided, however, that a Bylaw or amendment of the Articles
of Incorporation reducing a fixed number or the minimum number of directors to a
number less than five cannot be adopted if the vote cast against its adoption
35
37
at a meeting, or the shares not consenting in the case of action by written
consent, are equal to more than 16 2/3 percent of the votes entitled to be cast.
Section 8.08 Construction of Bylaws. Unless otherwise stated in these
Bylaws or unless the context requires, the definitions contained in the
California General Corporation Law shall govern the construction of these
Bylaws. Without limiting the generality of the foregoing, the masculine gender
includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the word "person" includes a
corporation or other entity as well as a natural person.
Section 8.09 Annual Report to Shareholders. The annual report to
shareholders referred to in Section 1501 of the California General Corporation
Law is expressly dispensed with, but nothing herein shall be interpreted as
prohibiting the Board of Directors from issuing annual or other periodic reports
to the shareholders of the corporation as they consider to be appropriate.
Section 8.10 National Emergency. In the event of a national emergency as
described in Section 688 of the California Insurance Code, this corporation
shall be considered to have those emergency bylaw provisions which are provided
for by statute in Article 1.7 of Chapter 1 of Part 2 of Division 1 of the
California Insurance Code as now in effect or as hereafter may be amended.
36
1
EXHIBIT
F
2
[LOGO]
20TH CENTURY INDUSTRIES
6301 OWENSMOUTH AVENUE
WOODLAND HILLS, CALIFORNIA 91367
November 15, 1994
Dear Fellow Shareholder:
At a special meeting of the shareholders called for December 15, 1994,
shareholders will be asked to consider a transaction between your company, 20th
Century Industries (the "Company"), and American International Group, Inc.
("AIG"), one of the leading insurance groups in the United States. The proposed
transaction involves, among other things, an investment by AIG of $216 million
in the Company, as more specifically described in the attached Proxy Statement.
I urge you to read the attached Proxy Statement carefully and in its entirety.
The Company's financial condition and operating results have been
significantly adversely affected by the January 17, 1994 Northridge earthquake
(the "Northridge Earthquake") and the California Supreme Court's ruling on
August 18, 1994 upholding the California Commissioner of Insurance's
Proposition 103 rollback order against the Company. As of September 8, 1994,
the Company estimated the gross losses and allocated loss adjustment expenses
expected to be sustained by its insurance subsidiaries, 20th Century Insurance
Company and 21st Century Casualty Company, from the Northridge Earthquake to be
approximately $815 million. The rollback order requires the Company to rebate
approximately $121 million, which includes accrued interest through September
30, 1994, as to which the Company had accrued $51 million as of June 30, 1994.
As a result of the Northridge Earthquake and the adverse rollback judgment, the
Company's stockholders' equity has declined from approximately $655 million on
December 31, 1993 to approximately $163 million on September 30, 1994, or 75%,
and the total statutory policyholders' surplus of its two insurance
subsidiaries has declined from approximately $582 million on December 31, 1993
to approximately $71 million on September 30, 1994, or 88%.
In light of this dramatic decline in financial strength, it has become
essential for the Company to raise equity capital as expeditiously as possible.
The effect of the Northridge Earthquake and the Supreme Court decision has been
to cause the Company to be in violation of the net worth maintenance and other
financial covenants under its credit agreement with its bank lenders. In
addition, the California Department of Insurance (the "DOI") has requested the
Company to restore the statutory surplus of its insurance subsidiaries to at
least $250 million. Furthermore, A.M. Best Company ("Best"), the insurance
rating organization, indicated prior to public announcement of AIG's investment
that its intention was to downgrade the ratings of the insurance subsidiaries
to "C" (marginal), which would have significantly adversely affected the
Company's competitive position.
In response to the adverse events of this year and to the pressures
from the bank lenders, the DOI and Best, the Company has entered into the
proposed transaction with AIG in order to restore the Company's equity capital
and its financial flexibility. Giving effect to the investment, the Company's
stockholders' equity would be approximately $373 million as of September 30,
1994 (on a pro forma basis) and the total statutory policyholders' surplus of
the two insurance subsidiaries would be increased to at least $250 million. The
bank lenders have conditionally waived their rights to pursue remedies against
the Company based on existing defaults pending consummation of AIG's investment
and have otherwise consented to the terms of the investment. The DOI has also
approved the investment and is satisfied that the investment restores the
surplus of the Company's insurance subsidiaries to appropriate levels. Best has
indicated that, although the Company remains under review, the proposed
transaction has positive implications. Management believes that should the
transaction be consummated, the Company's insurance subsidiaries' ratings will
not be downgraded at this time. Your Board of Directors believes that AIG's
investment will stabilize the Company's financial condition and its competitive
position.
3
At the special meeting, shareholders will be asked to authorize the
agreement with AIG (the "Investment Agreement") and the transactions to be
consummated pursuant thereto (Proposal 1), including, among others, the sale to
AIG, for an aggregate purchase price of $216 million, of (i) 200,000 shares of
the Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"), stated value $1,000 per share, which are convertible into shares of
Common Stock at a conversion price of $11.33 per share, and (ii) 16 million
Series A Warrants (the "Series A Warrants") to purchase an aggregate of 16
million shares of Common Stock at an exercise price of $13.50 per share,
providing the opportunity for the Company to obtain additional equity capital
in the event the Series A Warrants are exercised. Pursuant to the terms of the
Series A Preferred Stock, holders will be entitled to elect two of the
Company's eleven directors. The Investment Agreement provides that, in the
event that the Company's gross losses and allocated loss adjustment expenses
arising from the Northridge Earthquake exceed $850 million, the Company, at its
option, may obtain an additional capital infusion from AIG of up to $70
million, although the Company may determine not to obtain some or all of the
additional capital from AIG in light of certain rules under the Internal
Revenue Code governing the Company's ability to utilize its net operating
losses to offset taxable income in future years, as discussed more fully below
and in the Proxy Statement.
As part of the transaction, the Company and AIG have agreed to use
their best efforts to negotiate and mutually agree upon a joint venture
agreement whereby the Company and AIG will form a new subsidiary or
subsidiaries to engage in the Company's automobile insurance business in states
outside California. These joint venture arrangements between the Company and
AIG are expected to enable the Company to expand its automobile insurance
business outside of California, thereby diversifying the risks of business
concentration in one geographic area. It is anticipated that AIG will provide
the initial start-up capital for the specific joint ventures, subject to mutual
agreement upon the extent of such capital and the ownership interests, profit
interests and other factors related to the specific ventures. In addition,
subsidiaries of AIG and each of the Company's insurance subsidiaries will enter
into quota share reinsurance treaties as to 10% of each of the subsidiaries'
policies incepting on and after January 1, 1995, thereby reducing the premium
to surplus ratios for the insurance subsidiaries.
At the special meeting, shareholders also will be asked to approve
certain amendments to the Company's Articles of Incorporation, including
authorization of additional shares of Common Stock, necessitated in order to
enable the Company to issue the appropriate number of shares of Common Stock on
conversion of the Series A Preferred Stock and exercise of the Series A
Warrants (Proposal 2). Shareholders will be asked to consider and vote upon
adoption of an amendment to the Company's Articles of Incorporation to include
certain restrictions, effective for up to 38 months following the consummation
of the investment, on the transferability and ownership of shares of stock
designed to prevent transactions in stock that could, under certain
circumstances, trigger limitations under the Internal Revenue Code of 1986 on
the Company's ability to utilize net operating losses (including gross losses
and allocated loss adjustment expenses related to the Northridge Earthquake) to
offset taxable income in future years (Proposal 3). Finally, at the special
meeting, shareholders will be asked to ratify certain indemnification
agreements entered into between the Company and its insurance subsidiaries and
their directors and officers and to approve any such indemnification agreements
that may be entered into with directors, officers, employees or other agents in
the future (Proposal 4). Approval of the AIG investment is not conditioned upon
ratification and approval of the indemnification agreements.
In summary, your Board of Directors believes that the infusion of
equity capital resulting from the AIG investment and the other transactions
contemplated hereby are essential to restore the Company's financial condition
and flexibility in response to the adverse events of this year. Were
shareholders of the Company not to approve Proposals 1, 2 and 3, neither AIG
nor the Company would be obligated to consummate the proposed transaction, and
there can be no assurance that the Company would be able to obtain the
necessary capital infusion from other sources on comparable terms. If the
transaction is not consummated, the DOI can be expected to recommence
regulatory actions with respect to the Company, which might include prohibiting
the Company's insurance subsidiaries from writing further insurance policies
pending the infusion of additional capital. In addition, the bank lenders could
elect to pursue their remedies under the credit agreement, including
accelerating all amounts owed by the Company and foreclosing on the capital
stock of the insurance subsidiaries pledged as collateral under the credit
agreement. Moreover, Best would
4
continue to review and would likely further downgrade the ratings of the
insurance subsidiaries. Any or all of these actions by the DOI, the bank
lenders or Best could have a severe impact on the market value of the Company's
stock and the Company's ongoing business operations.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE PROPOSED TRANSACTION WITH
AIG IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AIG TRANSACTION, THE
PROPOSED AMENDMENTS TO THE ARTICLES OF INCORPORATION AND THE INDEMNIFICATION
AGREEMENTS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" PROPOSALS 1, 2, 3 AND
4. IN APPROVING THE AIG TRANSACTION AND RECOMMENDING SHAREHOLDER APPROVAL OF
PROPOSAL 1, THE BOARD OF DIRECTORS CONSIDERED THE FACTORS DESCRIBED IN THE
ATTACHED PROXY STATEMENT, INCLUDING THE OPINION OF SMITH BARNEY INC. ("SMITH
BARNEY") THAT, AS OF THE DATE OF THE OPINION AND SUBJECT TO CERTAIN
CONSIDERATIONS AND ASSUMPTIONS EXPRESSED IN SUCH OPINION, THE CONSIDERATION TO
BE RECEIVED BY THE COMPANY FOR THE SECURITIES TO BE ISSUED IN THE TRANSACTION
WOULD BE FAIR, FROM A FINANCIAL POINT OF VIEW, TO THE COMPANY. THE FULL TEXT OF
THE WRITTEN OPINION OF SMITH BARNEY, WHICH SETS FORTH THE ASSUMPTIONS MADE,
MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS
APPENDIX I TO THE ATTACHED PROXY STATEMENT. SHAREHOLDERS ARE URGED TO READ THIS
OPINION CAREFULLY IN ITS ENTIRETY.
It is important that your shares be represented and voted at the
meeting. Even if you plan to attend the meeting, please sign, date and mail
promptly the enclosed proxy card in the enclosed postage-paid envelope. Please
note that a failure to timely return a properly executed proxy card or to vote
in person at the meeting in effect constitutes a vote against the proposals.
Accordingly, we urge you to take a moment now to sign, date and mail your
proxy. I urge you to read the attached Proxy Statement in its entirety before
voting.
On behalf of the Board of Directors, thank you for your cooperation
and continued support.
Sincerely,
Neil H. Ashley,
Chief Executive Officer
5
[LOGO]
20TH CENTURY INDUSTRIES
6301 OWENSMOUTH AVENUE
WOODLAND HILLS, CALIFORNIA 91367
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 15, 1994
TO THE SHAREHOLDERS OF 20TH CENTURY INDUSTRIES:
A Special Meeting of Shareholders (the "Meeting") of 20th Century
Industries, a California Corporation (the "Company"), will be held at the
Marriott Hotel, 21850 Oxnard Street, Woodland Hills, California 91367 on
Thursday, December 15, 1994 at 2:00 P.M., local time, for the following
purposes:
1. INVESTMENT AGREEMENT PROPOSAL. To consider and vote upon the
approval of an Investment and Strategic Alliance Agreement dated as of October
17, 1994 between the Company and American International Group, Inc., a Delaware
corporation ("AIG"), as it may be amended from time to time (the "Investment
Agreement"), and the performance by the Company of all transactions and acts
contemplated by the Investment Agreement (collectively, the "Transaction"),
including, among other things, (a) the sale to AIG, or to certain wholly owned
subsidiaries that AIG may designate (collectively, also referred to as "AIG"),
for an aggregate purchase price of $216 million, of (i) 200,000 shares of the
Company's Series A Convertible Preferred Stock, stated value $1,000 per share
(the "Series A Preferred Stock"), which are convertible into shares of common
stock, without par value ("Common Stock"), at a conversion price of $11.33 per
share (subject to customary antidilution provisions), and (ii) 16 million
Series A Warrants (the "Series A Warrants") to purchase an aggregate of 16
million shares of Common Stock at an exercise price of $13.50 per share
(subject to adjustment as described herein); (b) the issuance of shares of
Common Stock upon conversion of shares of Series A Preferred Stock and upon
exercise of the Series A Warrants in accordance with their terms; and (c) the
issuance of additional shares of Series A Preferred Stock (the "Earthquake
Shares") on the terms described herein at the election of the Company in the
event gross losses and allocated loss adjustment expenses associated with the
January 17, 1994 Northridge, California earthquake (the "Northridge
Earthquake") exceed $850 million (collectively, the "Investment Agreement
Proposal").
2. INCREASED AUTHORIZED CAPITAL PROPOSAL. To consider and vote
upon adoption of an amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock from 80 million
shares to 110 million shares (the "Increased Authorized Capital Proposal").
3. TRANSFER RESTRICTIONS PROPOSAL. To consider and vote upon
adoption of an amendment to the Company's Articles of Incorporation to include
certain restrictions, effective for up to 38 months following the consummation
of the Transaction, on the transferability and ownership of shares of stock
designed to prevent transactions in stock that, under certain circumstances,
could trigger limitations under the Internal Revenue Code of 1986 on the
Company's ability to utilize net operating losses (including gross losses and
allocated loss adjustment expenses related to the Northridge Earthquake) to
offset taxable income in future years (the "Transfer Restrictions Proposal").
4. INDEMNIFICATION AGREEMENTS PROPOSAL. To consider and vote
upon the ratification of certain Indemnification Agreements (the
"Indemnification Agreements") that have been entered into between the Company
and its subsidiaries and their directors and executive officers and the
approval of any such Indemnification Agreements that may be entered into in the
future between the Company and its subsidiaries and their directors, officers,
employees or other agents. The Indemnification Agreements (i) provide
directors, officers, employees and other agents of the Company and its
subsidiaries party thereto with additional rights to indemnification and rights
to advancement of expenses beyond the specific provisions of California law and
the Company's and its subsidiaries' Articles of Incorporation and Bylaws, (ii)
provide such persons with contractual rights to indemnification and advancement
of expenses in circumstances under which such indemnification and advancement
would otherwise be left to the discretion of the Company's and its
subsidiaries' Boards of Directors and (iii) protect persons covered by
Indemnification Agreements from subsequent adverse changes in the
indemnification provisions contained in the Company's and its subsidiaries'
Articles of Incorporation or Bylaws (the "Indemnification Agreements
Proposal").
6
5. OTHER BUSINESS. To transact such other business as may
properly come before the Meeting and any postponements or adjournments thereof.
The accompanying Proxy Statement more fully describes the matters to
be considered at the Meeting. Only holders of record of the Common Stock at the
close of business on November 1, 1994, which has been fixed by the Board of
Directors as the record date for the Meeting, shall be entitled to notice of,
and to vote at, the Meeting and any adjournments thereof.
Pursuant to Rule 312.00 of the New York Stock Exchange ("NYSE") and
the Company's listing agreement with the NYSE with respect to the outstanding
Common Stock, shareholder approval is required for the issuance of securities
convertible into Common Stock if the Common Stock into which securities are
convertible will have voting power equal to or in excess of 20% of the voting
power outstanding before the issuance of such securities. The Transaction would
constitute such an issuance. Under the rules of the NYSE, the affirmative vote
of the holders of a majority of the shares of Common Stock represented in
person or by proxy and entitled to vote at the Meeting is required to approve
the Investment Agreement Proposal, provided that the total vote cast on the
proposal represents a majority of the issued and outstanding shares of Common
Stock.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Common Stock, voting as a single class, is required to
approve each of the Increased Authorized Capital Proposal and the Transfer
Restrictions Proposal.
Shareholder approval of the Indemnification Agreements Proposal is not
required by law. Nevertheless, because the Company's and its subsidiaries'
directors and officers are parties to the Indemnification Agreements, and
beneficiaries of the rights conferred thereby, the Board of Directors believes
it is appropriate to submit to the shareholders the proposal to ratify existing
Indemnification Agreements and to approve the provision of Indemnification
Agreements to directors, officers, employees or other agents in the future. The
affirmative vote of the holders of a majority of the shares of Common Stock
represented in person or by proxy and entitled to vote at the Meeting is
required to approve the Indemnification Agreements Proposal; however, the
Indemnification Agreements will be effective whether or not such approval is
obtained.
Pursuant to the Investment Agreement, all directors and officers of
the Company holding shares of the Company's Common Stock have entered into a
Voting Agreement with AIG, pursuant to which such shareholders have agreed to
vote all of the shares of Common Stock owned of record by them as of October
17, 1994 (representing approximately 25.77% of the then outstanding shares) and
any shares thereafter acquired in favor of the Investment Agreement Proposal,
the Increased Authorized Capital Proposal and the Transfer Restrictions
Proposal and against any and all proposals that would adversely affect in any
way the likelihood of approval of the Investment Agreement Proposal and the
consummation of the Transaction. The Voting Agreement does not assure that the
Investment Agreement Proposal, the Increased Authorized Capital Proposal or the
Transfer Restrictions Proposal will be approved.
EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL WILL BE VOTED ON SEPARATELY BY THE SHAREHOLDERS OF THE
COMPANY. NEITHER AIG NOR THE COMPANY IS OBLIGATED TO CONSUMMATE THE TRANSACTION
IN THE EVENT SHAREHOLDERS FAIL TO APPROVE EACH OF THE INVESTMENT AGREEMENT
PROPOSAL, THE INCREASED AUTHORIZED CAPITAL PROPOSAL AND THE TRANSFER
RESTRICTIONS PROPOSAL.
BY ORDER OF THE BOARD OF DIRECTORS
JOHN R. BOLLINGTON
Secretary
Woodland Hills, California
November 15, 1994
7
IT IS IMPORTANT THAT ALL SHAREHOLDERS VOTE. WE URGE YOU TO SIGN, DATE
AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN
TO ATTEND THE MEETING IN PERSON. THIS WILL ENSURE THE PRESENCE OF A QUORUM AT
THE MEETING. IF YOU DO ATTEND THE MEETING, YOU THEN MAY WITHDRAW YOUR PROXY AND
VOTE IN PERSON. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER
NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING A
LETTER FROM THE BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL
OWNERSHIP OF THE SHARES AND YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY
ISSUED IN YOUR NAME. IN ORDER TO FACILITATE THE PROVISION OF ADEQUATE
ACCOMMODATIONS, PLEASE INDICATE ON THE PROXY WHETHER YOU PLAN TO ATTEND THE
MEETING.
8
TABLE OF CONTENTS
PAGE
----
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SUMMARY DESCRIPTION OF MATTERS TO BE CONSIDERED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
REVOCABILITY OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
COSTS OF SOLICITATION OF PROXIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
VOTING SECURITIES AND VOTING RIGHTS; RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 9
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PROPOSAL 1 APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
BACKGROUND TO AND REASONS FOR THE TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Negotiations Regarding a Capital Infusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Reasons For the Transaction; Board of Directors Recommendations . . . . . . . . . . . . . . . . . . . . . . . . 17
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DISSENTERS' RIGHTS AND PREEMPTIVE RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
IMPACT OF THE TRANSACTION ON THE COMPANY AND EXISTING SHAREHOLDERS; CERTAIN CONSIDERATIONS . . . . . . . . . . . . 22
Impact on Voting and Other Rights of Shareholders; Impact on Future Share Issuances . . . . . . . . . . . . . . 22
Substantial Equity Ownership on Conversion/Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Diminished Ability to Sell the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Certain Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Quota Share Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Joint Venture Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Provision for Unforeseen Losses from the Northridge Earthquake . . . . . . . . . . . . . . . . . . . . . . . . 27
Effect on Capital and Earnings Available for Common Shareholders . . . . . . . . . . . . . . . . . . . . . . . 27
Alternatives to the Investment Agreement Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
THE INVESTMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Issuance and Sale of Preferred Stock and Series A Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Description of Series A Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Description of the Series A Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Quota Share Reinsurance Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Provision for Adverse Northridge Earthquake Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Restrictions on Additional Issuances of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Standstill Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Competing Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Regulatory Filings and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Transferability of the Series A Preferred Stock and Series A Warrants . . . . . . . . . . . . . . . . . . . . . 37
Joint Venture Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Certain Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Expenses of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
i
9
PAGE
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Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SOURCE OF FUNDS; INFORMATION CONCERNING AIG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
AIG's DESIGNEES FOR SERIES A PREFERRED STOCK DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
VOTE REQUIRED FOR APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . 41
CERTAIN MATTERS RELATED TO THE INVESTMENT AGREEMENT PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Amendment of the Bank Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
PROPOSAL 2 APPROVAL OF THE INCREASED AUTHORIZED CAPITAL PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . 46
DESCRIPTION OF THE PROPOSED AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
PURPOSE AND EFFECT OF THE PROPOSED AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
VOTE REQUIRED FOR APPROVAL OF THE INCREASED AUTHORIZED CAPITAL PROPOSAL . . . . . . . . . . . . . . . . . . . . . 46
PROPOSAL 3 APPROVAL OF THE TRANSFER RESTRICTIONS PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
PURPOSE OF THE PROPOSED AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
The Company's NOLs and Section 382 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Effect of the Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
DESCRIPTION AND EFFECT OF THE PROPOSED TRANSFER RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Description of the Proposed Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Continued Risk of Ownership Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Enforceability of the Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Anti-Takeover Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
VOTE REQUIRED FOR APPROVAL OF THE TRANSFER RESTRICTIONS PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . 54
PROPOSAL 4 APPROVAL OF THE INDEMNIFICATION AGREEMENTS PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
AUTHORITY FOR AND PURPOSE OF INDEMNIFICATION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
RIGHTS AND AUTHORIZATIONS PROVIDED UNDER CALIFORNIA LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES AND LIMITATION OF DIRECTOR LIABILITY CURRENTLY AUTHORIZED BY THE
COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
PRINCIPAL TERMS OF THE INDEMNIFICATION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
VOTE REQUIRED FOR APPROVAL OF THE INDEMNIFICATION AGREEMENTS PROPOSAL . . . . . . . . . . . . . . . . . . . . . . 60
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 62
FINANCIAL CONDITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
PROPOSED CAPITAL TRANSACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
IMPACT OF NORTHRIDGE EARTHQUAKE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
OPERATIONS EXCLUDING THE EFFECT OF THE NORTHRIDGE EARTHQUAKE AND PROPOSITION 103 ROLLBACK . . . . . . . . . . . . 66
Nine Months Ended September 30, 1994 Compared to Nine Months Ended
September 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
YEARS ENDED DECEMBER 31, 1993, DECEMBER 31, 1992 AND
DECEMBER 31, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Industry Overview and Company Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Underwriting Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Policy Acquisition and General Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
ii
10
PAGE
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Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Regulatory Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Home Office Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SHAREHOLDER PROPOSALS FOR 1995 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
APPENDICES
Appendix I -- Opinion of Smith Barney dated September 26, 1994
Appendix II -- Investment and Strategic Alliance Agreement dated as of October 17, 1994 between the
Company and AIG.
Appendix III -- Form of Certificate of Determination for the Series A Preferred Stock
Appendix IV -- Form of Warrant Certificate for the Series A Warrants
Appendix V -- Form of Amendment to the Company's Articles of Incorporation Increasing the Number of
Authorized Shares of Common Stock
Appendix VI -- Form of Amendment to the Company's Articles of Incorporation Adopting the Transfer
Restrictions
Appendix VII -- Form of Indemnification Agreement
11
[LOGO]
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
20TH CENTURY INDUSTRIES
6301 OWENSMOUTH AVENUE
WOODLAND HILLS, CALIFORNIA 91367
--------------
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation
by the Board of Directors of 20th Century Industries (the "Company") of proxies
for use at the Special Meeting of Shareholders to be held at the Marriott
Hotel, 21850 Oxnard Street, Woodland Hills, California 91367 on Thursday,
December 15, 1994 at 2:00 P.M., local time, and all adjournments or
postponements thereof (the "Meeting").
THIS PROXY STATEMENT AND THE ACCOMPANYING NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS AND PROXY (THE "PROXY MATERIALS") WERE FIRST MAILED TO
SHAREHOLDERS ON OR ABOUT NOVEMBER 15, 1994.
SUMMARY DESCRIPTION OF MATTERS TO BE CONSIDERED
The following is a summary of the proposals contained in this Proxy
Statement. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information, the Consolidated Financial
Statements, schedules and notes thereto contained elsewhere in this Proxy
Statement, and the appendices to this Proxy Statement. Shareholders are urged
to read this Proxy Statement and the appendices to this Proxy Statement in its
and their entirety.
PROPOSAL 1 -- INVESTMENT AGREEMENT PROPOSAL
THE INVESTMENT AGREEMENT
At the Meeting, shareholders will be asked to consider and vote upon
approval of the Investment and Strategic Alliance Agreement dated as of October
17, 1994 between the Company and American International Group, Inc., a Delaware
corporation ("AIG"), as it may be amended from time to time (the "Investment
Agreement"), and the performance by the Company of all transactions and acts
contemplated by the Investment Agreement (collectively, the "Transaction"),
including, among other things, (a) the sale to AIG, or to certain wholly owned
subsidiaries that AIG may designate (collectively, also referred to as "AIG"),
for an aggregate purchase price of $216 million, of (i) 200,000 shares of the
Company's Series A Convertible Preferred Stock, stated value $1,000 per share
(the "Series A Preferred Stock"), which are convertible into shares of common
stock, without par value ("Common Stock"), at a conversion price of $11.33 per
share (subject to customary antidilution provisions), and (ii) 16 million
Series A Warrants (the "Series A Warrants") to purchase an aggregate of 16
million shares of Common Stock at an exercise price of $13.50 per share
(subject to adjustment as described below); (b) the issuance of shares of
Common Stock upon conversion of shares of Series A Preferred Stock and upon
exercise of the Series A Warrants in accordance with their terms; and (c) the
issuance of additional shares of Series A Preferred Stock (the "Earthquake
Shares") on the terms described herein at the election of the Company in the
event gross losses and allocated loss adjustment expenses associated with the
January 17, 1994 Northridge, California earthquake (the "Northridge
Earthquake") exceed $850 million (collectively, the "Investment Agreement
Proposal").
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If the Investment Agreement Proposal is approved, holders of the
Series A Preferred Stock, voting separately as a class, will be entitled to
elect two of the Company's eleven directors. One vacancy on the Company's Board
of Directors has been created as a result of the resignation of James O. Curley
as President and director effective as of October 31, 1994. Concurrent with the
consummation of the Transaction, two persons designated by AIG will be elected
to the Board of Directors. Until the date of the Company's 1995 annual meeting
of shareholders (currently scheduled for May 23, 1995), the Board of Directors
shall consist of twelve members. On the date of the 1995 annual meeting, the
Board of Directors will be reduced to eleven members, with AIG retaining two
designees on the Board. Holders of Common Stock will not be entitled to vote in
the election of such two directors. In the event that the Company's gross
losses and allocated loss adjustment expenses related to the Northridge
Earthquake exceed $850 million prior to or following the consummation of the
Transaction, AIG shall, if requested by the Company, contribute up to an
additional $70 million to the Company in exchange for the Earthquake Shares,
which will have an aggregate liquidation value equal to the contributed amount
plus an additional liquidation amount based on a formula designed to compensate
AIG for its proportional share of the Company's after-tax loss resulting from
the gross losses and allocated loss adjustment expenses relating to the
Northridge Earthquake in excess of $850 million. The Company may determine not
to issue some or all of the Earthquake Shares in light of certain rules under
the Internal Revenue Code governing the Company's ability to utilize its net
operating losses to offset taxable income in future years. See "Approval of the
Transfer Restrictions Proposal" and "Approval of the Investment Agreement
Proposal -- Impact of the Transaction on the Company and Existing Shareholders;
Certain Considerations -- Provision for Unforeseen Losses from the Northridge
Earthquake." The Series A Preferred Stock will be entitled to a per annum
cumulative dividend equal to 9% payable quarterly. At the option of the Company
during the first three years after the date of consummation of the Transaction
(the "Closing Date"), dividends may be paid in cash or in kind (whereby a
holder, in lieu of cash, receives shares of Series A Preferred Stock having a
liquidation value equal to the dividends declared).
The Series A Warrants will be exercisable at any time following the
first anniversary of the Closing Date (the "Effective Date"), in whole or in
part, for an aggregate of 16 million shares of Common Stock upon payment of an
exercise price of $13.50 per share (the "Exercise Price"), subject to
adjustment pursuant to customary antidilution provisions. In the event the
Company's gross losses and allocated loss adjustment expenses from the
Northridge Earthquake exceed $945 million and AIG contributes additional
capital to the Company pursuant to the Investment Agreement prior to the first
anniversary of the Closing Date, the Effective Date will be deferred to the
second anniversary of the Closing Date. The Effective Date may be accelerated
in the event the Company's Board of Directors approves such, and the Effective
Date shall automatically be accelerated to any earlier date that AIG is
entitled to acquire additional securities of the Company pursuant to the
standstill provisions of the Investment Agreement (discussed herein). The
Series A Warrants will expire on the thirteenth anniversary of the Closing
Date. The exercise of the Series A Warrants will be prohibited pursuant to
certain transfer restrictions that will be included in the Company's Articles
of Incorporation if the Transfer Restrictions Proposal is approved. See
"Approval of the Transfer Restrictions Proposal." In addition, in the event the
Company's gross losses and allocated loss adjustment expenses with respect to
the Northridge Earthquake exceed $945 million, the Exercise Price of the Series
A Warrants shall be reduced by $0.08 per share for each million dollars of
gross losses and allocated loss adjustment expenses in excess of $945 million
(provided that the Exercise Price shall never be reduced to less than $1.00 per
share as a result of Northridge Earthquake losses); provided, however, that no
adjustment to the Exercise Price shall be made with respect to increases in
gross losses and allocated loss adjustment expenses attributable to the
Northridge Earthquake reported in financial statements following the 1995
year-end audited financial statements of the Company.
In connection with the Investment Agreement, upon consummation of the
Transaction, subsidiaries of AIG and each of the Company's insurance
subsidiaries, 20th Century Insurance Company and 21st Century Casualty Company
(collectively, the "Insurance Subsidiaries"), shall enter into a five-year
quota share reinsurance agreement for 10% of each of the Insurance
Subsidiaries' policies incepting on and after
2
13
January 1, 1995. At AIG's option, the agreements may be renewed annually for
four additional one-year terms following the initial term, with an annual
reduction of 2% in the share percentage ceded to AIG's subsidiaries.
The Investment Agreement also provides that, following the
consummation of the Transaction, the Company and AIG will use their respective
best efforts to negotiate and mutually agree upon a joint venture agreement
whereby the Company and AIG will form a new subsidiary or subsidiaries to
engage in the Company's automobile insurance business in states outside
California. No plans, arrangements or understandings exist between the Company
and AIG concerning the merger of the Company or the Insurance Subsidiaries with
AIG or any of its subsidiaries.
In connection with the execution of the original letter of intent and
term sheet with AIG relating to the Transaction, the Company and AIG entered
into a Stock Option Agreement dated September 26, 1994 (the "Stock Option
Agreement") pursuant to which the Company granted to AIG an option to acquire
up to 15% of the Company's outstanding shares of Common Stock under certain
circumstances at an exercise price of $11.33 per share (the "Option"), which
Option AIG can require the Company to repurchase under certain circumstances.
The Stock Option Agreement will expire in the event the Transaction is
consummated. See "Approval of the Investment Agreement Proposal -- Certain
Matters Related to the Investment Agreement Proposal -- The Stock Option
Agreement."
AIG is a holding company which, through its subsidiaries, is primarily
engaged in a broad range of insurance and insurance-related activities in the
United States and abroad. AIG's member companies write property, casualty,
marine, life and financial services insurance and are engaged in a range of
financial services businesses throughout the world. AIG's common stock is
listed on the New York Stock Exchange ("NYSE"), as well as the stock exchanges
of London, Paris, Switzerland and Tokyo. At September 30, 1994, AIG had
stockholders' equity of approximately $16.2 billion. For further financial
information concerning AIG, see "Approval of the Investment Agreement Proposal
- -- Source of Funds; Information Concerning AIG."
BACKGROUND TO THE TRANSACTION
The Company's financial condition and operating results have been
significantly adversely affected as a result of the Northridge Earthquake.
After several preliminary lower estimates, as of September 8, 1994, the Company
revised upward the estimated gross losses and allocated loss adjustment
expenses expected to be sustained by the Insurance Subsidiaries to
approximately $815 million (the "Revised Loss Estimate"). See "Approval of the
Investment Agreement Proposal -- Background to and Reasons for the
Transaction."
Prior to the Revised Loss Estimate, on August 18, 1994, the California
Supreme Court reversed a lower court ruling that had upheld the Company's
challenge to the constitutionality of certain regulations and an administrative
order issued by the California Commissioner of Insurance (the "Commissioner")
pursuant to California Proposition 103 (the "Proposition 103 Ruling"). See
"Approval of the Investment Agreement Proposal -- Background to and Reasons for
the Transaction" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Financial Condition." The effect of the
Proposition 103 Ruling was to reinstate the Commissioner's order directing that
the Company issue refunds totaling approximately $78.3 million, plus interest
at 10% per annum from May 8, 1989, to policyholders who purchased insurance
from the Insurance Subsidiaries between November 8, 1988 and November 8, 1989.
Prior to the Proposition 103 Ruling, the Company had accrued approximately $51
million with respect to its possible Proposition 103 liability. Barring action
by the U.S. Supreme Court to reverse the Proposition 103 Ruling, the
Commissioner's refund order obligates the Company to pay approximately $121
million, which includes accrued interest through September 30, 1994. On
November 10, 1994, the Los Angeles Superior Court stayed enforcement of the
Commissioner's refund order until such time as the U.S. Supreme Court rules on
the Company's petition for a writ of certiorari, or until December 28, 1994 if
a petition to the Supreme Court has not been filed by that date. The Company
fully intends to file its petition with the Supreme Court prior to December 28,
1994. The Commissioner has also issued an order that the Company pay the
Proposition 103 rollback by November 14, 1994 or show cause why the payment
cannot be made. In response to the Commissioner's order, the Company will
assert that, by virtue of the stay order issued on November 10, 1994,
3
14
any payment schedule must be deferred until after the U.S. Supreme Court
decides whether to issue a writ of certiorari and accept the case for review.
As of September 30, 1994, the Company increased its accrual to cover the
Proposition 103 liability to $121 million.
As a result of the Northridge Earthquake and the Proposition 103
Ruling, the Company's stockholders' equity has declined from approximately $655
million on December 31, 1993 to approximately $163 million on September 30,
1994, or 75%, and the total statutory policyholders' surplus of the Insurance
Subsidiaries has declined from approximately $582 million on December 31, 1993
to approximately $71 million at September 30, 1994, or 88%.
The Revised Loss Estimate, as well as the Proposition 103 Ruling,
caused the Company to be in default of the net worth maintenance covenant under
its credit agreement (the "Bank Credit Agreement") with its bank lenders (the
"Lenders"). As a result, on September 12, 1994, the Lenders declared that the
loans under the Bank Credit Agreement would thereafter bear the default rate of
interest and that, as long as any default existed, additional loans would not
be available. Shortly thereafter, the Lenders requested that the Company pledge
$25 million as additional collateral to secure the obligations of the Company
under the Bank Credit Agreement and proposed a "timetable/action plan" to
resolve the Company's capital issues. By the end of September, additional
defaults arose under the policyholders' surplus and operating leverage
covenants of the Bank Credit Agreement. In addition, the California Department
of Insurance (the "DOI") required the Company to take steps to restore the
surplus of the Insurance Subsidiaries to appropriate levels. Furthermore, A.M.
Best Company ("Best"), the insurance rating organization, indicated prior to
public announcement of AIG's investment that its intention was to downgrade the
ratings of the Insurance Subsidiaries to "C" (marginal), which would have
significantly adversely affected the Company's competitive position. All of
these factors made it imperative that the Company engage in a capital-restoring
transaction as expeditiously as possible.
The Company considered various alternatives to the Transaction,
including additional bank borrowings, the sale of public convertible
securities, a rights offering, a common stock offering and an outright sale or
merger of the Company. The Company concluded that it was unlikely that any of
such alternatives would provide all of the benefits of the Transaction as
described under "-- Reasons for the Transaction", below, or that such
alternatives would be successful on an expedited basis on terms as favorable to
the Company as the Transaction.
REASONS FOR THE TRANSACTION
In light of the financial background described above, the Transaction
involves matters of great importance to the Company and its shareholders. The
Board of Directors has unanimously approved the Investment Agreement Proposal
and believes that the Transaction is in the best interests of the Company and
its shareholders. Giving effect to the Transaction, the Company's stockholders'
equity would be approximately $373 million as of September 30, 1994 (on a pro
forma basis) and the total statutory policyholders' surplus of the Insurance
Subsidiaries would increase to at least $250 million. The Lenders have
conditionally waived their rights to pursue remedies against the Company based
on existing defaults pending consummation of the Transaction and have otherwise
consented to the terms of the Transaction. The DOI has approved the Transaction
and is satisfied that the Transaction restores the Insurance Subsidiaries'
surplus to appropriate levels. Best has indicated that, although the Company
remains under review, the Transaction has positive implications. Management
believes that, should the Transaction be consummated, the Insurance
Subsidiaries' ratings will not be downgraded at this time.
The Board of Directors, in approving the Transaction and recommending
shareholder approval of the Investment Agreement Proposal, considered a number
of factors, including the following: (i) consummation of the Transaction will
provide the Company with $210 million of new capital (after deducting the
estimated expenses of the Transaction), a majority of which will be utilized to
strengthen the surplus of the Insurance Subsidiaries; (ii) consummation of the
Transaction, barring any unforeseen events, would likely avoid a further
ratings downgrading by Best, although it will not ensure that a downgrading
will not occur in the future (see "Approval of the Investment Agreement
Proposal -- Impact of the Transaction on the Company and Existing Shareholders;
Certain Considerations -- Alternatives to the Investment Agreement Proposal");
(iii) consummation of the Transaction would satisfy the DOI's regulatory
concerns (see "Approval of
4
15
the Investment Agreement Proposal -- Impact of the Transaction on the Company
and Existing Shareholders; Certain Considerations -- Alternatives to the
Investment Agreement Proposal"); (iv) without consummation of the Transaction,
the Company would likely be unable to resolve the existing defaults under the
Bank Credit Agreement on a timely basis and on terms as satisfactory to the
Company as those contained in the amendment and waiver
entered into between the Company and the Lenders (see "Approval of the
Investment Agreement Proposal -- Impact of the Transaction on the Company and
Existing Shareholders; Certain Considerations -- Alternatives to the Investment
Agreement Proposal"); (v) the Investment Agreement permits the Company, at its
option, to obtain additional capital from AIG in the event of further adverse
developments regarding the Company's loss experience from the Northridge
Earthquake, although there can be no assurance that capital provided by AIG
would be sufficient to cover further adverse developments with respect to the
Northridge Earthquake were such developments to arise, and, in any event, the
Company may determine not to obtain some or all of the additional capital from
AIG in light of certain rules under the Internal Revenue Code governing the
Company's ability to utilize its net operating losses to offset taxable income
in future years (see "Approval of the Transfer Restrictions Proposal" and
"Approval of the Investment Agreement Proposal -- Impact of the Transaction on
the Company and Existing Shareholders; Certain Considerations -- Provision for
Unforeseen Losses from the Northridge Earthquake"); (vi) consummation of the
Transaction provides the opportunity for the Company to obtain additional
equity capital in the event the Series A Warrants are exercised, although,
pursuant to the Bank Credit Agreement, the proceeds from the exercise of the
Series A Warrants must be utilized to repay amounts owed under the Bank Credit
Agreement; (vii) the Investment Agreement provides for quota share reinsurance
agreements with subsidiaries of AIG covering 10% of each of the Insurance
Subsidiaries' policies incepting after January 1, 1995, which will reduce the
Insurance Subsidiaries' premium to surplus ratios; (viii) although there can be
no assurance, the joint venture arrangements between the Company and AIG
(discussed below) are expected to expand the Company's automobile insurance
business outside of California; (ix) the standstill provisions contained in the
Investment Agreement (discussed below) will preclude AIG under most
circumstances from purchasing additional shares of Common Stock for three
years; (x) although there can be no assurance, the Company hopes to benefit
from the addition of members of AIG's senior management to the Board of
Directors (discussed below); (xi) it is unlikely that any of the possible
alternative transactions considered by the Board of Directors would be
successful on an expedited basis and on terms as favorable to the Company as
the Transaction; (xii) the existing assets, operations, earnings and prospects
of the Company in light of the economic and regulatory climate, the adverse
loss experience incurred by the Company with respect to the Northridge
Earthquake and the uncertainty surrounding the Proposition 103 Ruling; (xiii)
the terms of the Investment Agreement, including the voting rights, conversion
rights, preferences and other rights of the Series A Preferred Stock and the
Series A Warrants; and (xiv) the opinion of Smith Barney Inc. ("Smith Barney")
delivered on September 26, 1994, that as of such date and subject to certain
considerations and assumptions expressed in such opinion, the consideration to
be received by the Company for the securities to be issued in the Transaction
is fair, from a financial point of view, to the Company. In considering the
Transaction, the Board of Directors considered certain consequences that could
result from the Transaction that are described below under "Approval of the
Investment Agreement Proposal -- Impact of the Transaction on the Company and
Existing Shareholders; Certain Considerations."
PROPOSAL 2 -- INCREASED AUTHORIZED CAPITAL PROPOSAL
At the Meeting, shareholders will be asked to consider and vote upon
adoption of an amendment to Article IV of the Company's Articles of
Incorporation increasing the number of authorized shares of Common Stock from
80 million shares to 110 million shares (the "Increased Authorized Capital
Proposal"). The proposed amendment to the Articles of Incorporation is
necessary in order to permit the Transaction to occur, because, absent the
amendment, the Company would not have sufficient shares of Common Stock
authorized under its Articles of Incorporation to satisfy its obligation to
issue shares of Common Stock on conversion of the Series A Preferred Stock and
exercise of the Series A Warrants issued in the Transaction. Neither the
Company nor AIG is required to consummate the Transaction in the event
shareholders fail to approve the Increased Authorized Capital Proposal, and the
Company and AIG have not discussed any alternatives that would permit
consummation of the Transaction under such circumstances.
5
16
PROPOSAL 3 -- TRANSFER RESTRICTIONS PROPOSAL
At the Meeting, shareholders will be asked to consider and vote upon
adoption of an amendment to the Company's Articles of Incorporation to include
certain restrictions (the "Transfer Restrictions"), effective for up to 38
months following the consummation of the Transaction on the transferability and
ownership of stock of the Company designed to prevent transactions in stock
that could, under certain circumstances, trigger limitations under the Internal
Revenue Code of 1986 (the "IRC") on the Company's ability to utilize the net
operating losses (including gross losses and allocated loss adjustment expenses
related to the Northridge Earthquake) and other tax attributes ("NOLs") to
offset taxable income in future years (the "Transfer Restrictions Proposal").
Absent these restrictions, there would be no limitations on the ability of one
or more shareholders to cause an "ownership change" of the Company within the
meaning of Section 382 of the IRC. Any such ownership change would, under
certain circumstances, significantly defer the utilization of the NOLs,
accelerate the payment of federal income tax, result in the expiration of the
NOLs prior to their use, reduce stockholders' equity and slow the growth of
statutory policyholders' surplus.
PROPOSAL 4 -- INDEMNIFICATION AGREEMENTS PROPOSAL
At the Meeting, shareholders also will be asked to consider and vote
upon the ratification of certain Indemnification Agreements (the
"Indemnification Agreements") that have been entered into between the Company
and the Insurance Subsidiaries and their directors and certain of their
executive officers and the approval of any such Indemnification Agreements that
may be entered into in the future between the Company and its Insurance
Subsidiaries and their directors, officers, employees or other agents pursuant
to which the Company and its Insurance Subsidiaries will be required to
indemnify such persons with respect to certain liabilities that they may face
as a result of their serving as directors, officers, employees or agents (the
"Indemnification Agreements Proposal"). The Indemnification Agreements Proposal
is not in any way conditioned upon approval of the Investment Agreement
Proposal, the Increased Authorized Capital Proposal or the Transfer
Restrictions Proposal, nor are such proposals conditioned upon approval of the
Indemnification Agreements Proposal. The Indemnification Agreements (i) provide
directors, officers, employees and other agents of the Company and the
Insurance Subsidiaries party thereto with additional rights to indemnification
and rights to advancement of expenses beyond the specific provisions of
California law and the Company's and the Insurance Subsidiaries' Articles of
Incorporation and Bylaws, (ii) provide such persons with contractual rights to
indemnification and advancement of expenses in circumstances under which such
indemnification and advancement would otherwise be left to the discretion of
the Company's and the Insurance Subsidiaries' Boards of Directors and (iii)
protect persons covered by Indemnification Agreements from subsequent adverse
changes in the indemnification provisions contained in the Company's and the
Insurance Subsidiaries' Articles of Incorporation or Bylaws. The Board of
Directors believes that the Indemnification Agreements are in the Company's and
its shareholders' best long-term interests, and that such agreements enhance
the Company's ability to continue to attract and retain individuals of the
highest quality and ability to serve as the Company's and the Insurance
Subsidiaries' directors, officers, employees or other agents.
Shareholder ratification or approval of the Indemnification Agreements
is not required by law. Because the Company's and the Insurance Subsidiaries'
directors and executive officers are parties to the Indemnification Agreements,
and beneficiaries of the rights conferred thereby, the Board of Directors
believes it is appropriate to submit to the shareholders the proposal to ratify
and approve the Indemnification Agreements. Nonetheless, the Company believes
that the Indemnification Agreements are binding and enforceable contracts
whether or not shareholder ratification or approval of the Indemnification
Agreements is obtained. Accordingly, the Company and the Insurance
Subsidiaries intend to abide by the terms of the Indemnification Agreements
they have entered into, and may enter into new Indemnification Agreements with
future directors and other officers, employees and agents, even if the
Indemnification Agreements Proposal is not approved.
OTHER BUSINESS
In addition to the foregoing, at the Meeting, shareholders will be
asked to transact such other business as may properly come before the Meeting
and any postponements or adjournments thereof.
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THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL.
EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL WILL BE VOTED ON SEPARATELY BY THE SHAREHOLDERS OF THE
COMPANY. NEITHER AIG NOR THE COMPANY IS OBLIGATED TO CONSUMMATE THE TRANSACTION
IN THE EVENT SHAREHOLDERS FAIL TO APPROVE EACH OF THE INVESTMENT AGREEMENT
PROPOSAL, THE INCREASED AUTHORIZED CAPITAL PROPOSAL AND THE TRANSFER
RESTRICTIONS PROPOSAL.
The Board of Directors reserves its right to amend or waive the
provisions of the Investment Agreement and the other documents related thereto
in all respects before or after the approval of the Investment Agreement
Proposal by the shareholders. In addition, the Board of Directors reserves its
right to terminate the Investment Agreement in accordance with its terms
notwithstanding shareholder approval.
REVOCABILITY OF PROXIES
A proxy (the "Proxy") for use at the Meeting is enclosed. Any
shareholder who executes and delivers such Proxy has the right to revoke it at
any time before it is voted by filing with the Secretary of the Company an
instrument revoking it or a duly executed proxy bearing a later date. It also
may be revoked by attending the Meeting and voting in person. Subject to such
revocation, all shares represented by a properly executed Proxy received prior
to or at the Meeting will be voted by the proxy holders whose names are set
forth in the accompanying Proxy (the "Proxy Holders") in accordance with the
instructions on the Proxy. If no instruction is specified with respect to a
matter to be acted upon, the shares represented by the Proxy will be voted (i)
"FOR" the Investment Agreement Proposal, (ii) "FOR" the Increased Authorized
Capital Proposal, (iii) "FOR" the Transfer Restrictions Proposal, and (iv)
"FOR" the Indemnification Agreements Proposal. It is not anticipated that any
matters will be presented at the Meeting other than as set forth in the
accompanying Notice of Special Meeting of Shareholders. If, however, any other
matters properly are presented at the Meeting, the Proxy will be voted in
accordance with the best judgment and in the discretion of the Proxy Holders.
COSTS OF SOLICITATION OF PROXIES
This solicitation of Proxies is made for the Board of Directors of the
Company, and the Company will bear the costs of this solicitation, including
the expense of preparing, assembling, printing and mailing this Proxy Statement
and the material used in this solicitation of Proxies. It is contemplated that
Proxies will be solicited principally through the mails, but directors,
officers and regular employees of the Company may solicit Proxies personally or
by telephone. Although there is no formal agreement to do so, the Company may
reimburse banks, brokerage houses and other custodians, nominees and
fiduciaries for their reasonable expenses in forwarding these proxy materials
to their principals. In addition, the Company has retained D.F. King & Co.,
Inc. to assist in the solicitation of Proxies for a fee of approximately
$10,000, plus reimbursement of reasonable out-of-pocket expenses incurred in
connection with this solicitation and a $2.75 fee for contacting each
registered owner and/or non-objecting beneficial owner of shares of Common
Stock, if required. The Company may pay for and use the services of other
individuals or companies not regularly employed by the Company in connection
with the solicitation of Proxies if the Board of Directors of the Company
determines that it is advisable.
VOTING SECURITIES AND VOTING RIGHTS; RECORD DATE
There were issued and outstanding 51,472,471 shares of Common Stock as
of November 1, 1994, the date set as the record date (the "Record Date") for
the purpose of determining the shareholders entitled to notice of and to vote
at the Meeting and any adjournment or postponement thereof.
Each holder of Common Stock will be entitled to one vote, in person or
by proxy, for each share of Common Stock standing in his name on the books of
the Company as of the Record Date on any matter submitted to the vote of the
shareholders.
7
18
Pursuant to Rule 312.00 of the NYSE and the Company's listing
agreement with the NYSE with respect to the outstanding Common Stock,
shareholder approval is required for the issuance of securities convertible
into Common Stock if the Common Stock into which securities are convertible
will have voting power equal to or in excess of 20% of the voting power
outstanding before the issuance of such securities. The Transaction would
constitute such an issuance. Under the rules of the NYSE, the affirmative vote
of the holders of a majority of the shares of Common Stock represented in
person or by proxy and entitled to vote at the Meeting is required to approve
the Investment Agreement Proposal, provided that the total vote cast on the
proposal represents a majority of the issued and outstanding shares of Common
Stock.
The affirmative vote of the holders of a majority of the issued and
outstanding shares of Common Stock, voting as a single class, is required to
approve each of the Increased Authorized Capital Proposal and the Transfer
Restrictions Proposal.
Shareholder approval of the Indemnification Agreements Proposal is not
required by law. Nevertheless, because the Company's and the Insurance
Subsidiaries' directors and officers are parties to the Indemnification
Agreements, and beneficiaries of the rights conferred thereby, the Board of
Directors believes it is appropriate to submit to the shareholders the proposal
to ratify existing Indemnification Agreements and to approve the provision of
Indemnification Agreements to directors, officers, employees or other agents in
the future. The affirmative vote of the holders of a majority of the shares of
Common Stock represented in person or by proxy and entitled to vote at the
Meeting will approve the Indemnification Agreements Proposal; however, the
Indemnification Agreements will be effective whether or not such approval is
obtained.
The presence, in person or by proxy, at the Meeting of the holders of
a majority of the shares of Common Stock outstanding as of the Record Date will
constitute a quorum for transacting business. Abstentions will be treated as
the equivalent of a negative vote for the purpose of determining whether a
proposal has been adopted. If a member broker indicates on the Proxy that such
broker does not have discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as present and entitled
to vote with respect to that matter.
Pursuant to the Investment Agreement, all directors and officers of
the Company holding shares of the Company's Common Stock have entered into
Voting Agreements with AIG, pursuant to which such shareholders have agreed to
vote all of the shares of Common Stock owned of record by them as of October
17, 1994 (representing approximately 25.77% of the then outstanding shares) and
any shares thereafter acquired in favor of the Investment Agreement Proposal,
the Increased Authorized Capital Proposal and the Transfer Restrictions
Proposal and against any and all proposals that would adversely affect in any
way the likelihood of approval of the Investment Agreement Proposal and the
consummation of the Transaction. The Voting Agreement does not assure that the
Investment Agreement Proposal, the Increased Authorized Capital Proposal or the
Transfer Restrictions Proposal will be approved.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities
and Exchange Commission (the "SEC"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; and at
its regional offices located at 7 World Trade Center, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago Illinois 60661-2511. Copies of
such materials may also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain
fees prescribed by the SEC. The Company's Common Stock is listed on the NYSE
and, accordingly, reports, proxy statements and other information are available
for inspection at the offices of the NYSE at 20 Broad Street, New York, New
York 10005.
8
19
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
ownership of the Company's Common Stock by each person known by the Company to
be the beneficial owner of more than 5% of the Company's Common Stock, by each
director, by the executive officers named below, and by all executive officers
and directors as a group. For a discussion of AIG's prospective beneficial
ownership of shares of Common Stock, assuming consummation of the Transaction
and the conversion by AIG of its shares of Series A Preferred Stock and the
exercise of its Series A Warrants. See "Approval of the Investment Agreement
Proposal -- Impact of the Investment on the Company and Existing Shareholders;
Certain Considerations -- Substantial Equity Ownership on
Conversion/Exercise." Each of the Company's directors and executive officers
who own shares of Common Stock has agreed to vote his or her shares held of
record in favor of the Investment Agreement Proposal, the Increased Authorized
Capital Proposal and the Transfer Restrictions Proposal. See "Approval of the
Investment Agreement Proposal -- The Investment Agreement -- Voting Agreement."
AS OF NOVEMBER 1, 1994
----------------------------------
AMOUNT AND
NATURE OF PERCENT OF
NAME AND ADDRESS BENEFICIAL OUTSTANDING
OF BENEFICIAL OWNER OWNERSHIP(1) COMMON STOCK(2)
------------------- ------------ ---------------
Union Automobile Insurance Company
303 East Washington Street
Bloomington, IL 61701 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,850,000(3) 9.42%
Louis W. Foster
6301 Owensmouth Avenue
Woodland Hills, CA 91367 . . . . . . . . . . . . . . . . . . . . . . . . 4,725,696(4) 9.18%
John B. DeNault
3314 Motor Avenue
Los Angeles, CA 90034 . . . . . . . . . . . . . . . . . . . . . . . . . . 4,362,000(5) 8.47%
The Capital Group, Inc.
333 South Hope Street
Los Angeles, CA 90071 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,446,300(6) 6.70%
Alliance Capital Management, L.P.
1345 Avenue of the Americas
New York, NY 10105 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,665,700(7) 5.18%
Neil H. Ashley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,748(8) *
James O. Curley** . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,540(9) *
Rex J. Bates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320,000 *
Stanley J. Burke . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 *
John B. DeNault, III . . . . . . . . . . . . . . . . . . . . . . . . . . 1,573,700(5)(10) 3.06%
R. Scott Foster, M.D. . . . . . . . . . . . . . . . . . . . . . . . . . . 318,996(11) *
Rachford Harris . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972,313(12) 1.89%
Wayne F. Horning . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555,418 1.08%
Arthur H. Voss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436,300 *
John R. Bollington . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,757(13) *
William L. Mellick . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,800(14) *
Paul S. Castellani . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,202(15) *
All Directors and Executive Officers as a Group (25 Persons) . . . . . . 13,262,606 25.77%
___________
* Less than 1%.
** Mr. Curley resigned as President of the Company and as a director
effective as of October 31, 1994.
9
20
(1) Unless otherwise indicated, each beneficial owner set forth in the
table has sole voting and investment power with respect to all of the
shares of Common Stock shown as beneficially owned.
(2) Based upon 51,472,471 shares issued and outstanding as of November 1,
1994.
(3) Includes shares owned of record by American Union Life Insurance
Company, a wholly owned subsidiary of Union Automobile Insurance
Company. This information is based upon written information provided
to the Company by representatives of Union Automobile Insurance
Company.
(4) Mr. Foster, Chairman of the Board of the Company, had sole voting
power over 4,725,696 shares.
(5) John B. DeNault and John B. DeNault, III share voting and investment
power with respect to 408,000 shares for which they are both
considered beneficial owners.
(6) This information is based upon the contents of a Schedule 13G, dated
June 30, 1994, filed by the Capital Group Inc. with the SEC.
(7) Includes shares beneficially owned by separate investment funds or
accounts under the management of Alliance Capital Management, L.P.,
but does not include any other shares that may be owned by affiliates
of Alliance Capital Management, L.P. This information is based upon
information provided to the Company by representatives of Alliance
Capital Management, L.P.
(8) Includes 338 shares held through the Company's Savings and Security
Plan 401(k) as of September 30, 1994.
(9) Includes 10,240 shares held in the Company's Restricted Shares Plan
which can be voted by the participant but cannot be disposed of until
vested.
(10) Excludes 800 shares held by the wife of John B. DeNault, III as to
which he has no voting or investment power, and for which he disclaims
beneficial ownership.
(11) Includes 23,818 shares held in the R. Scott Foster Inc. Foster Profit
Sharing Trust for his benefit and 66 shares held for his minor
children, as to which he has sole voting and investment power.
(12) Excludes 14,400 shares held by the wife of Rachford Harris, as to
which he has no voting or investment power, and for which he disclaims
beneficial ownership.
(13) Includes 4,479 shares held in the Company's Restricted Shares Plan
which can be voted by the participant but cannot be disposed of until
vested and includes 676 shares held through the Company's Savings and
Security Plan 401(k) as of September 30, 1994.
(14) Includes 4,656 shares held in the Company's Restricted Shares Plan
which can be voted by the participant but cannot be disposed of until
vested.
(15) Includes 6,210 shares held in the Company's Restricted Shares Plan
which can be voted by the participant but cannot be disposed of until
vested.
10
21
CAPITALIZATION
The following table sets forth the summary capitalization of the
Company and its subsidiaries as of September 30, 1994, and as adjusted to give
effect to the consummation of the Transaction.
SEPTEMBER 30, 1994
-------------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(DOLLARS IN THOUSANDS
EXCEPT SHARE DATA)
Bank Loan Payable, less loan fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . $153,631 $153,631
Stockholders' equity:
Series A Preferred Stock, $1,000 stated value, 376,126 shares authorized and 200,000
outstanding as adjusted(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $200,000
Common Stock, without par value, 80,000,000 shares authorized actual, 110,000,000
shares authorized as adjusted and 51,472,471 outstanding . . . . . . . . . . . . . 69,233 79,233
Unrealized investment losses-net . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,313) (26,313)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,523 120,523
-------- --------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163,443 373,443
-------- --------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $317,074 $527,074
======== ========
___________
(1) As adjusted to give effect to the sale to AIG of (i) 200,000 shares of
Series A Preferred Stock at a price of $1,000 per share, and (ii) 16
million Series A Warrants for an aggregate of $16 million, net of $6
million of expenses expected to be incurred in connection with the
Transaction. See "Approval of the Investment Agreement Proposal -- Use
of Proceeds."
(2) Bank Loan Payable includes $160 million outstanding principal amount
of borrowings with the Lenders incurred June 30, 1994, less
unamortized fees incurred in connection with such borrowing.
(3) The Company's Articles of Incorporation authorize the Company to issue
an aggregate of 500,000 shares of Preferred Stock, $1.00 par value per
share, of which the Company has reserved 376,126 shares for issuance
as shares of Series A Preferred Stock.
11
22
PROPOSAL 1
APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL
BACKGROUND TO AND REASONS FOR THE TRANSACTION
FINANCIAL CONDITION
The Company's financial condition and operating results have been
significantly adversely affected by the Northridge Earthquake. After several
preliminary lower estimates, in the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994 (the "March Report"), which was filed with the
SEC on May 16, 1994, the Company estimated gross losses and allocated loss
adjustment expenses from this catastrophe to be $600 million. Losses from the
Northridge Earthquake caused the Company's stockholders' equity to decline 47%
from stockholders' equity of approximately $655 million as of December 31, 1993
to approximately $348 million as of March 31, 1994 and the total statutory
policyholders' surplus of the Insurance Subsidiaries to decline 65% from
approximately $582 million as of December 31, 1993 to approximately $205
million as of March 31, 1994. At that date, the ratio of the Company's total
net written premiums to statutory surplus was 5:1. In the March Report, the
Company indicated that the effect of the Northridge Earthquake on its financial
condition required a reduction in its historical pattern of growth and in its
exposure to the risk of another major earthquake. Following the Northridge
Earthquake, the Company implemented a number of steps to reduce its exposure
from homeowners' losses, including the cessation of all advertising and
marketing for new policies. On May 24, 1994, the Company also announced the
suspension of its quarterly dividend for the third and fourth quarters of
fiscal 1994.
The magnitude of the Company's estimated losses from the Northridge
Earthquake placed significant continuing pressure on the Company's financial
condition, and there were discussions with the DOI regarding its level of
statutory surplus. On June 9, 1994, the Company announced an agreement with the
DOI designed to reduce the Company's earthquake exposure. Pursuant to the
agreement, the DOI ordered the Insurance Subsidiaries to discontinue writing
new homeowners, condominium owners and earthquake insurance and to discontinue
renewal of existing earthquake insurance. The DOI also approved a 17% rate
increase for the homeowners program. The Insurance Subsidiaries agreed to offer
renewal without earthquake coverage to existing homeowners and condominium
owners policyholders for two more annual renewal periods. The Company also
agreed to increase the combined statutory surplus of the Insurance Subsidiaries
to at least $250 million by June 30, 1994. The Company discontinued writing new
business in accordance with the DOI order immediately, discontinued renewing
earthquake coverage for policies with renewal effective dates on or after July
23, 1994 and implemented the approved rate change for renewed homeowners
policies with renewal effective dates on or after August 1, 1994. As a result
of these actions, homeowners policies-in-force have declined 6.5% from 211,311
as of June 30, 1994 to 197,546 as of September 30, 1994 and condominium owners
policies-in-force have declined 8.6% from 21,989 as of June 30, 1994 to 20,092
as of September 30, 1994.
On June 27, 1994, the Company announced receipt of a commitment for a
$175 million loan from the Lenders to strengthen the capital of the Insurance
Subsidiaries. In addition, the Company announced the purchase, effective June
16, 1994, of an additional $400 million of reinsurance coverage in excess of
its then current reinsurance coverage of $200 million. The additional $400
million layer of reinsurance decreases by $50 million per month starting on
July 16, 1994 as the Company's earthquake exposure lessens over time with the
expiration of existing policies. At the same time, the Company announced an
increase to $685 million in the estimate of gross losses and allocated loss
adjustment expenses associated with the Northridge Earthquake. Effective June
30, 1994, the Bank Credit Agreement was finalized and the Company borrowed $160
million, $120 million of which was contributed to the Insurance Subsidiaries to
increase their statutory surplus. The obligations of the Company under the Bank
Credit Agreement are secured by a pledge of the stock of the Insurance
Subsidiaries. As of June 30, 1994, the combined statutory surplus of the
Insurance Subsidiaries had increased to approximately $252 million and the
ratio of the Company's total net written premiums to statutory surplus was
approximately 4:1.
On August 18, 1994, the California Supreme Court issued a decision
(the "Proposition 103 Ruling") reversing a lower court ruling that had upheld
the Company's challenge to the constitutionality of certain
12
23
regulations and an administrative order issued by the Commissioner pursuant to
California Proposition 103. The effect of the Proposition 103 Ruling was to
reinstate the Commissioner's order directing that the Company issue refunds
totaling approximately $78.3 million, plus interest at 10% per annum from
May 8, 1989, to policyholders who purchased insurance from the Insurance
Subsidiaries between November 8, 1988 and November 8, 1989.
On September 2, 1994, the Company filed a petition for rehearing with
the California Supreme Court. That petition was denied on September 29, 1994,
and the Company has directed its attorneys to prepare and file a petition for a
writ of certiorari with the United States Supreme Court, which is required to
be filed on or before December 28, 1994. No assurance can be given that the
U.S. Supreme Court will issue a writ of certiorari and accept the case for
review. In the event that it does elect to review the Proposition 103 Ruling,
the case is not likely to be briefed and argued until the 1995-96 Supreme Court
term. On November 10, 1994, the Los Angeles Superior Court stayed enforcement
of the Commissioner's refund order until such time as the U.S. Supreme Court
rules on the Company's petition for a writ of certiorari, or until December 28,
1994 if a petition to the Supreme Court has not been filed by that date. The
Company fully intends to file its petition with the Supreme Court prior to
December 28, 1994. The Commissioner has also issued an order that the Company
pay the Proposition 103 rollback by November 14, 1994 or show cause why the
payment cannot be made. In response to the Commissioner's order, the Company
will assert that, by virtue of the stay order issued on November 10, 1994, any
payment schedule must be deferred until after the U.S. Supreme Court decides
whether to issue a writ of certiorari and accept the case for review.
Prior to the Proposition 103 Ruling, the Company had accrued
approximately $51 million with respect to its possible Proposition 103
liability. Barring action by the U.S. Supreme Court to reverse the Proposition
103 Ruling, the Commissioner's refund order obligates the Company to pay
approximately $121 million, which includes accrued interest through September
30, 1994. As of September 30, 1994, the Company has accrued this amount.
On September 8, 1994, the Company revised upward the estimated gross
losses and allocated loss adjustment expenses from the Northridge Earthquake
expected to be sustained by its Insurance Subsidiaries to approximately $815
million (the "Revised Loss Estimate"). The Revised Loss Estimate as well as the
Proposition 103 Ruling caused the Company to be in violation of the net worth
maintenance and other financial covenants under the Bank Credit Agreement. The
statutory surplus of the Insurance Subsidiaries was reduced from approximately
$252 million on June 30, 1994 to approximately $71 million on September 30,
1994, the ratio of the Company's total net written premiums to statutory
surplus increased to 14:1 and the Company's stockholders' equity declined to
approximately $163 million. These adverse developments put a severe financial
strain on the Company.
The DOI, after discussions with the Company's management, requested
that the Company expeditiously implement a plan that would provide a
responsible level of surplus at the Insurance Subsidiaries. At the same time,
an agreement was reached among the DOI, two consumer intervenors and the
Company regarding the Company's proposed automobile insurance rate increase
that had been filed for approval in December, 1993. The agreement for a rate
increase, which had been recommended in a proposed decision by an
administrative law judge, was subject to approval by the Commissioner. On
September 14, 1994, the Commissioner approved a 6% rate increase, which was
estimated to generate an additional $56 million per year in revenues. The
agreement provided that the 6% rate increase would decrease to 3% when the
Insurance Subsidiaries' total net written premium to statutory surplus ratio
had reached 3:1. The Commissioner also indicated that he intended to require
payment of the full $121 million, which includes accrued interest through
September 30, 1994, in rebates owed to policyholders as a result of the
Proposition 103 Ruling.
In addition to the pressure being asserted on the Company by the DOI
to take the necessary steps to restore the surplus of the Insurance
Subsidiaries, the Company also experienced pressure from the Lenders. On
September 8, 1994, the Company notified the Lenders that the Company was in
default under the Bank Credit Agreement and, on September 12, 1994, the Lenders
imposed the default rate of interest on
13
24
outstanding loans and notified the Company that, in accordance with the terms
of the Bank Credit Agreement, no additional loans would be available while any
default was continuing. The Lenders also requested prompt information concerning
the steps the Company was taking to restore the capital of the Insurance
Subsidiaries and to cure the default. On September 20, 1994, the Lenders
requested that the Company deposit $25 million of its cash in a cash collateral
account with one of the agent banks to secure its obligations under the Bank
Credit Agreement, and on September 21, 1994, the Lenders proposed a
"timetable/action plan" to resolve the Company's capital issues, requiring the
Company to provide to the Lenders a detailed listing of the capital investment
alternatives available to the Company by September 27, 1994, requiring the
receipt by the Company of a preliminary letter of intent from at least one
interested investor, or, in lieu thereof, the Company's retention of an
investment banker, by September 30, 1994, and requiring a meeting with all the
Lenders on October 4, 1994.
As a result of losses from the Northridge Earthquake, the ratings of
the Insurance Subsidiaries had been downgraded from "A+" (superior) to "B+"
(very good) by Best in June 1994. On September 8, 1994, with the announcement
of the Revised Loss Estimate, Best downgraded its ratings of the Insurance
Subsidiaries from "B+" (very good) to "B-" (adequate) and placed the Insurance
Subsidiaries' ratings under review. Discussions between the Company and Best
continued, with Best expressing serious concern about the impact of the Revised
Loss Estimate and the impact of the Proposition 103 Ruling. On September 21,
1994, the Company became aware that Best intended to downgrade further the
ratings of the Insurance Subsidiaries from "B-" (adequate) to "C" (marginal),
which was likely to have a significant adverse impact on the Company's
competitive position.
NEGOTIATIONS REGARDING A CAPITAL INFUSION
As the Company's financial condition deteriorated and became more
publicized following the September 8, 1994 announcement of the Revised Loss
Estimate, the Company received certain unsolicited preliminary indications of
interest from various parties regarding possible transactions designed to
fulfill the Company's requirements for additional capital. On September 8,
1994, a subsidiary of a large financial holding company expressed an interest
in making an investment in the Company. On September 13 and 14, 1994,
representatives of the Company met with representatives of this company. This
potential investor, with whom the Company engaged in several discussions, was,
however, unwilling to invest in the Company an amount in excess of $175
million, and its proposal contained other terms and conditions that the Company
believed to be unsatisfactory. During this period, the Company also received
other unsolicited inquiries and expressions of interest from third parties and
engaged in discussions with certain of those potential investors, but none of
the parties appeared able to act quickly enough and at substantial enough
levels to respond to the immediacy of the Company's financial situation.
On September 14, 1994, AIG learned that the Company was talking to
potential investors and wrote to the Company requesting the opportunity to make
a proposal. There had been earlier informal contacts, initiated by AIG, between
representatives of AIG and its advisors and representatives of the Company in
June and July of 1994 at which time the possibility of a number of different
transactions were discussed but no serious proposals were made. On September
19, 1994, the Company met with representatives of AIG to discuss the terms of a
possible investment by AIG in the Company.
On September 20, 1994, representatives of AIG suggested entering into
an exclusivity agreement for a period of 30 days. The Company declined to do
so. On September 21, 1994, AIG outlined a possible transaction involving the
purchase of $200 million of 9% convertible preferred stock with a conversion
price of 120% of the closing price of the Common Stock on the NYSE on September
21, 1994, the purchase for $16 million of 16 million warrants to purchase
Common Stock exercisable at $13.00 per share of Common Stock, a quota share
reinsurance agreement with respect to 15% of the Company's automobile insurance
book of business and an agreement with respect to certain future joint
ventures. AIG also proposed that, concurrently with reaching preliminary
agreement on proposed terms, the Company grant AIG a "lock-up" option to
acquire shares of Common Stock of the Company equal to 19.9% of the issued and
outstanding Common Stock at an exercise price equal to the closing price of the
Common Stock on the NYSE on the day immediately prior to the announcement date.
AIG indicated that it was unwilling to engage in serious discussions with the
Company if its investment proposal were to be used by the Company simply for
the
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purpose of soliciting additional proposals regarding the Company from third
parties. AIG also indicated to the Company that it was not interested in
pursuing a lengthy negotiation process in light of the financial situation of
the Company and that if an agreement were to be reached with AIG, it should be
concluded within a few days.
On September 21, 1994, the Company engaged Smith Barney Inc. ("Smith
Barney") to provide financial advice to the Company, to assist the Company in
its negotiations with AIG and the Lenders and ultimately to provide a fairness
opinion to the Board of Directors in connection with a potential transaction.
In July 1994, representatives of Smith Barney had met with the President of the
Company to familiarize him with Smith Barney's credentials in order that he
might consider calling upon Smith Barney to serve the Company in connection
with any capital-raising transaction. At that July meeting, Smith Barney
discussed alternative financing ideas as well as possible strategic partners;
however, no specific transaction or proposed transaction was discussed. Smith
Barney has advised the Company that, from time to time, it has been engaged by
AIG to render brokerage services, investment advisory services and other
financial advisory services. See "-- Opinion of Financial Advisor," below.
On September 21, 1994, representatives of the Company met with
representatives of Smith Barney and the Company's special legal counsel,
Gibson, Dunn & Crutcher ("Gibson, Dunn"), and reviewed the proposed terms of
the investment by AIG, as well as other options that might be available to the
Company. The Company's senior management considered the proposal internally,
consulted with several directors of the Company and concluded to invite AIG to
engage in further negotiations. In addition to senior management of the
Company, two directors of the Company, John B. DeNault and Rex J. Bates, were
active participants in the discussions with AIG. Later in the day on September
21, 1994, senior management of the Company and its advisors met with senior
management of AIG and continued the negotiations regarding the proposed terms
of a transaction. During these discussions, a number of modifications requested
by the Company and its advisors to the proposed terms were made, including the
addition of a three-year standstill agreement, a reduction in the number of
directors to be elected by the holders of the preferred stock from three to
two, an increase from two to three in the number of years during which
dividends on the preferred stock could be paid-in-kind at the option of the
Company, the revision of the quota share reinsurance proposal to cover 10% of
the Insurance Subsidiaries' policies incepting after the closing of the
proposed transaction, several revisions to the restrictions on the conduct of
the Company's business prior to consummation of the transaction and a delay in
the exercisability of the warrants.
A special meeting of the Board of Directors was held on September 22,
1994 (the "September 22 Meeting") to consider the proposed transaction with AIG
and to discuss alternatives to the proposed transaction. The meeting was
attended in person by all of the Company's directors except for R. Scott Foster
and James O. Curley. Also in attendance were certain executives of the Company,
a representative of Gibson, Dunn, representatives of Smith Barney and Herbert
S. Smith, counsel for the Company. At the September 22 Meeting, members of the
Board discussed in detail the specific terms of the proposed AIG transaction
and received advice from the Company's legal and financial advisors. Gibson,
Dunn advised the Board as to the Board's legal and fiduciary responsibilities
in considering the proposed transaction and its alternatives. Smith Barney made
a presentation regarding alternatives that included additional bank borrowings,
the sale of public convertible securities, a rights offering, a common stock
offering and an outright sale or merger of the Company (the "Alternatives")
that were available to the Company given its current financial condition and
position. Smith Barney also discussed the apparent advantages, disadvantages
and key considerations with respect to each of the Alternatives. The Board of
Directors concluded that it was unlikely that any of the Alternatives would
provide all of the perceived benefits of the proposed transaction with AIG as
described under "-- Reasons for the Transaction; Board of Directors
Recommendations" below, or that any of the Alternatives would be successful on
an expedited basis on terms as favorable to the Company as the proposed
transaction with AIG. The Board of Directors was given a summary of the
proposed transaction with AIG by its legal and financial advisers and discussed
with Smith Barney its assessment of the Company's current situation, including
the key consideration that the Company had experienced a severe one-time loss
to an otherwise excellent franchise that had historically generated a superior
return on equity, the third party pressures facing the Company and the
speculation in the press and financial community about the Company's financial
condition.
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The directors thoroughly considered and reviewed the Alternatives and
the proposed transaction and asked numerous questions of Company management and
of the Smith Barney representatives regarding Smith Barney's presentation of
the Alternatives available to the Company. In addition, two senior executives
from AIG joined a portion of the September 22 Meeting and made a presentation
to the Board concerning the AIG proposal and the benefits to be derived
therefrom. No formal action was taken by the Board with respect to the AIG
proposal; however, a Capital Augmentation Committee of the Board of Directors
(the "Committee"), consisting of Neil H. Ashley, John B. DeNault and Rex J.
Bates, was formed, and the Committee was directed to negotiate further with AIG
in order to improve the terms of its proposal.
Substantial negotiations continued with AIG during the afternoon of
September 22, 1994. On September 23, 1994, senior management of the Company, a
representative of Gibson, Dunn, a representative of Smith Barney, senior
management of AIG and legal counsel for AIG met with the Commissioner and
senior officials of the DOI to discuss the AIG proposal that was under
consideration. The Commissioner encouraged the Company to proceed with the
negotiations and indicated that while the DOI would not commit to any approvals
at that time, it would cooperate in reviewing on an expedited basis any
agreements which were ultimately achieved. The Commissioner requested that the
DOI be kept informed of the progress of the negotiations.
Negotiations between the Committee and the Company's advisors and
senior executives of AIG and its advisors continued over the weekend of
September 24-25 and a number of changes in the proposed terms were made at the
request of the Committee. The significant changes included: (i) an increase in
the per share exercise price of the warrants from $13.00 to $13.50; (ii)
elimination of a class vote by the holders of the preferred stock on certain
fundamental transactions after three years; (iii) expansion of the standstill
agreement to cover proxy contests; (iv) provision that the contribution of
additional capital by AIG for additional preferred stock in the event of
further adverse loss experience with respect to the Northridge Earthquake was
made at the option of the Company; (v) the modification of the terms of the
stock option to reduce the number of option shares from 19.9% to 15.0% of the
outstanding Common Stock, to increase the per share exercise price of the
option to be equal to the conversion price of the preferred stock ($11.33 per
share) and to place a $10 million limit on the amount of cash the Company could
be required to pay in the event AIG's rights to cause all or a portion of the
option to be repurchased by the Company were exercised; and (vi) the addition
of a "fiduciary out" provision permitting the Company to provide confidential
information to a third party submitting an unsolicited bona fide proposal under
certain circumstances if the directors reasonably determined that their
fiduciary duties to shareholders so required.
On September 26, 1994, another special meeting of the Board of
Directors (the "September 26 Meeting") was held at which all directors were in
attendance except James O. Curley. At this meeting a revised proposed letter of
intent and term sheet (with indications of which terms had been changed)
together with a form of stock option agreement were reviewed and discussed in
detail by the directors. Representatives of Gibson, Dunn and Smith Barney
outlined for the directors the proposed terms of the letter of intent, the term
sheet and the stock option agreement, and representatives of Smith Barney made
a detailed presentation of key financial and market information, an analysis of
selected minority investment transactions, an analysis of selected convertible
preferred stock offerings and a pro forma analysis giving effect to the
proposed transaction. During a recess in the September 26 Meeting, further
discussions and negotiations were held between the Committee and AIG regarding
certain aspects of the proposal with the result that the proposal was further
improved from the Company's perspective. Thereafter, the September 26 Meeting
was reconvened and the final proposed terms of the transaction were reviewed
with the directors. Smith Barney orally delivered its opinion (later confirmed
in writing) that as of such date and subject to certain considerations and
assumptions expressed in such opinion, the consideration to be received by the
Company for the securities to be issued in the proposed transaction was fair,
from a financial point of view, to the Company. See "-- Opinion of Financial
Advisor." The directors present unanimously approved the revised letter of
intent, term sheet and Stock Option Agreement with AIG.
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Following the September 26 Meeting, revisions to the term sheet to
reflect final terms approved by the Board were made and the letter of intent
and Stock Option Agreement were executed and delivered. Early on September 27,
1994, the Company and AIG each announced publicly the proposed terms of the
Transaction.
Between September 28 and October 17, 1994, the parties negotiated the
terms of the definitive agreements. During this period, the Company also
negotiated with the Lenders the terms of an amendment and waiver to the Bank
Credit Agreement (the "Amendment and Waiver") in order to facilitate the
proposed transaction with AIG. The Amendment and Waiver, which was executed and
delivered by the Company and the Lenders on October 17, 1994, conditionally
waived the existing financial defaults and certain other provisions that would
be breached by the Transaction, and made certain amendments to the Bank Credit
Agreement, effective upon the closing of the Transaction, as more fully
described below. See "Approval of the Investment Agreement Proposal -- Certain
Matters Related to the Investment Agreement Proposal -- Amendment of the Bank
Credit Agreement."
On October 17, 1994, a special meeting of the Board of Directors (the
"October 17 Meeting") was held at which all directors were in attendance. At
the October 17 Meeting, representatives of Gibson, Dunn and Smith Barney
reviewed in detail with the directors the proposed terms of the definitive
agreements, drafts of which had been distributed to the directors prior to the
meeting. The variations from the terms contained in the letter of intent and
term sheet were discussed. The most significant changes involved: the agreement
by AIG to abide by certain restrictions on transfer of the Company's stock
(subject to certain exceptions) which the Company had determined were necessary
with or without the Transaction in order to protect against the risk of loss of
the tax benefits associated with the Company's expected net operating losses
for the fiscal year ending December 31, 1994 (see "Approval of the Transfer
Restrictions Proposal"); a provision which restricts the ability of the Company
to issue Common Stock (see "Approval of the Investment Proposal -- The
Investment Agreement -- Restrictions on Additional Issuances of Capital
Stock"); and an express acknowledgement that the absence of further material
adverse loss developments with respect to the Northridge Earthquake was not a
condition to AIG's obligation to consummate the Transaction. The Board of
Directors received the advice of its legal and financial advisors regarding the
terms of the Amendment and Waiver. Smith Barney confirmed to the Board of
Directors that had the definitive agreements containing the final terms of the
Transaction been entered into on September 26, 1994, the date of the letter of
intent, its fairness opinion as of that date would not have been different.
After further discussion and analysis, the directors unanimously approved the
definitive agreements and the Amendment and Waiver, authorized their execution
and delivery by the Company and unanimously recommended that the shareholders
of the Company approve the proposed transaction with AIG. Immediately following
the October 17 Meeting, the Investment Agreement and the Amendment and Waiver
were executed and delivered, and, early on October 18, 1994, the Company
announced publicly that a definitive agreement had been reached with AIG.
REASONS FOR THE TRANSACTION; BOARD OF DIRECTORS RECOMMENDATIONS
The Board of Directors has unanimously approved the Investment
Agreement Proposal and believes that the Transaction is in the best interests
of the Company and its shareholders. Each of the directors and officers of the
Company has executed and delivered a Voting Agreement with AIG, pursuant to
which each director and officer has agreed to vote all shares of Common Stock
owned of record by him or her or thereafter acquired in favor of approval of
the Investment Agreement Proposal. The Board of Directors, in approving the
Transaction and recommending shareholder approval of the Investment Agreement
Proposal, considered a number of factors, including, without limitation, the
following:
(i) Consummation of the Transaction would strengthen the
surplus of the Insurance Subsidiaries, increasing total statutory
policyholders' surplus to at least $250 million (based on the
statutory policyholders' surplus as of September 30, 1994) and
reducing the ratio of the Company's total net written premiums to
statutory surplus to 4:1;
(ii) Entering into the letter of intent and term sheet on
September 26, 1994 avoided a downgrading in the ratings assigned to
the Insurance Subsidiaries by Best to a "C" (marginal) that the
Insurance
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Subsidiaries had been informed was scheduled to occur on or about
September 26, 1994. Consummating the Transaction, barring any
unforeseen events, is likely to continue to avoid a downgrading of the
ratings by Best, although it will not ensure that a downgrading will
not occur in the future (see "-- Impact of the Transaction on the
Company and Existing Shareholders; Certain Considerations --
Alternatives to the Investment Agreement Proposal.");
(iii) Consummation of the Transaction would respond to the
regulatory concerns raised by the DOI regarding the need for the
Company to restore expeditiously the surplus of the Insurance
Subsidiaries (see "-- Impact of the Transaction on the Company and
Existing Shareholders; Certain Considerations -- Alternatives to the
Investment Agreement Proposal.");
(iv) It would be likely that, without consummation of the
Transaction, the Company would be unable to resolve the existing
defaults under the Bank Credit Agreement on a timely basis and on
terms as satisfactory to the Company as those contained in the
Amendment and Waiver (see "-- Impact of the Transaction on the Company
and Existing Shareholders; Certain Considerations -- Alternatives to
the Investment Agreement Proposal.");
(v) The terms of the Transaction permit the Company to
obtain additional capital from AIG, at its option, in the event of
further adverse developments regarding the Company's loss experience
from the Northridge Earthquake, although there can be no assurance
that capital provided by AIG would be sufficient to cover further
adverse developments with respect to the Northridge Earthquake were
such developments to arise, and, in any event, the Company may
determine not to obtain some or all of the additional capital from AIG
in light of the rules in Section 382 of the IRC governing the
Company's ability to utilize its NOLs (see "Approval of the Transfer
Restrictions Proposal" and "Approval of the Investment Agreement
Proposal -- Impact of the Transaction on the Company and Existing
Shareholders; Certain Considerations -- Provision for Unforeseen
Losses from the Northridge Earthquake");
(vi) Consummation of the Transaction provides the
opportunity for the Company to obtain additional equity capital in the
event the Series A Warrants are exercised, although, pursuant to the
Bank Credit Agreement, the proceeds from the exercise of the Series A
Warrants must be utilized to repay amounts owed under the Bank Credit
Agreement;
(vii) The terms of the Transaction enable the Company to
obtain additional surplus relief in the form of quota share
reinsurance agreements covering 10% of each of the Insurance
Subsidiaries policies incepting after January 1, 1995;
(viii) Although there can be no assurance, the joint venture
agreements to be entered into with AIG are expected to enable the
Company to expand its automobile insurance business outside of
California, thereby diversifying the risks of business concentration
in one geographic area, without the need to invest the initial start
up capital required for such expansion (subject to the mutual
agreement of the Company and AIG upon the extent of such capital and
the ownership interests, profit interests and other factors related to
the specific ventures);
(ix) As a result of the standstill provisions included in
the Investment Agreement, AIG will be precluded from purchasing
additional shares of Common Stock for three years, except in certain
circumstances such as an insolvency of the Company, a breach by the
Company of the Investment Agreement or an acquisition by a third party
of 20% or more of the outstanding shares of Common Stock (as described
more fully under "The Investment Agreement -- Standstill Provisions"),
allowing for continued independence;
(x) Although there can be no assurance, the Company hopes
to benefit from the addition of members of AIG's senior management to
the Board of Directors;
(xi) The Board of Directors believed it was unlikely that
any of the Alternatives would be successful on an expedited basis and
on terms as favorable to the Company as the Transaction;
(xii) The existing assets, operations, earnings and
prospects of the Company in light of the economic and regulatory
climate, the adverse loss experience incurred by the Company with
respect to the Northridge Earthquake and the uncertainty surrounding
the Proposition 103 Ruling;
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(xiii) The terms of the Investment Agreement, including the
voting rights, preference and other rights of the Series A Preferred
Stock and the Series A Warrants; and
(xiv) Smith Barney rendered an opinion that as of the date
the letter of intent was signed and subject to certain considerations
and assumptions expressed in such opinion, the consideration to be
received by the Company for the securities to be issued in the
proposed transaction was fair, from a financial point of view, to the
Company.
In considering the Transaction, the Board of Directors considered
certain consequences that could result from the Transaction that are described
below under "-- Impact of the Transaction on the Company and Existing
Shareholders; Certain Considerations."
In view of the variety of factors considered by the Board in
connection with its evaluation of the Transaction, the Board of Directors did
not find it practical to, and did not, qualify or otherwise assign relative
weights to the individual factors considered in reaching its determination and
recommendations set forth herein. Neither the Board nor any individual director
articulated the consideration of, or otherwise identified, any one factor or
group of factors as more significant than any other in reaching the
determination or recommendation set forth herein.
THE BOARD OF DIRECTORS BELIEVES THAT THE INVESTMENT AGREEMENT PROPOSAL
AND THE TRANSACTION ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND
ITS SHAREHOLDERS AND HAS UNANIMOUSLY APPROVED THE INVESTMENT AGREEMENT PROPOSAL
AND UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY VOTE "FOR"
APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL.
OPINION OF FINANCIAL ADVISOR
On September 21, 1994, the Company engaged Smith Barney to act as its
financial advisor in connection with the Company's review of its capital needs.
In connection with the engagement, the Company requested that Smith Barney
evaluate the fairness, from a financial point of view, to the Company of the
proposed consideration to be received by the Company for the securities to be
issued in connection with the Transaction. On September 26, 1994, Smith Barney
delivered to the Board of Directors its oral opinion which was confirmed in
writing that same date to the effect that, as of such date and subject to
certain considerations and assumptions, the consideration to be received by the
Company for the securities to be issued in connection with the Transaction is
fair, from a financial point of view, to the Company. No limitations were
imposed by the Board of Directors upon Smith Barney with respect to the
investigations made or procedures followed by Smith Barney in rendering its
opinion.
In arriving at its opinion, Smith Barney reviewed the letter of intent
and held discussions with certain senior officers, directors and other
representatives and advisors of the Company concerning the business, operations
and prospects of the Company. Smith Barney examined certain publicly available
business and financial information relating to the Company as well as certain
other information provided by the management of the Company and certain other
publicly available information, including financial information relating to
public companies whose operations were deemed comparable to those of the
Company. Smith Barney also considered the distressed financial condition of the
Company, and the fact that the Company, as described by management, was under
considerable pressure from the DOI, Best and the Lenders concerning the
Company's need for additional capital. In addition, Smith Barney also
considered the financial terms of certain other significant equity investments
in publicly traded companies and conducted such other analyses and examinations
and considered such other financial, economic and market criteria as Smith
Barney deemed appropriate in arriving at its opinion. Smith Barney's opinion
was necessarily based upon financial, stock market and other conditions and
circumstances existing and disclosed to Smith Barney as of the date of its
opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information publicly available or provided to or otherwise discussed
with Smith Barney. With respect to the financial information provided to or
otherwise received by or discussed with Smith Barney, Smith Barney assumed that
such financial information was
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reasonably prepared on bases reflecting the currently available estimates and
judgments of the management of the Company as to the expected future financial
performance of the Company. Smith Barney did not make or obtain an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Company. In addition, Smith Barney was not requested to solicit, nor did
Smith Barney solicit, third-party indications of interest with respect to an
investment in the Company as compared to any alternative transaction in which
he Company might engage nor did its opinion address the relative merits of the
Transaction.
In rendering its opinion, Smith Barney did not consider the terms of
any joint venture arrangement between the Company and AIG, or the effect that
any such joint venture arrangement would have on the business of the Company.
In addition, Smith Barney did not review any of the definitive agreements
relating to the Transaction prior to rendering its opinion, and assumed in its
opinion that such documents would contain terms not materially different from
those set forth in the letter of intent or additional terms which would
adversely affect the economic terms of the Transaction. At the October 17
Meeting, Smith Barney confirmed to the Board of Directors that had the
Investment Agreement been entered into on September 26, 1994, the date of the
letter of intent, Smith Barney's fairness opinion would not have been
different.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED SEPTEMBER
26, 1994, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS APPENDIX I TO THIS PROXY
STATEMENT. THE COMPANY'S SHAREHOLDERS ARE URGED TO READ THIS OPINION CAREFULLY
IN ITS ENTIRETY. SMITH BARNEY'S OPINION IS DIRECTED ONLY TO THE FAIRNESS TO THE
COMPANY OF THE CONSIDERATION TO BE RECEIVED FOR THE SECURITIES TO BE ISSUED IN
THE TRANSACTION FROM A FINANCIAL POINT OF VIEW AND HAS BEEN PROVIDED SOLELY FOR
THE USE OF THE COMPANY'S BOARD OF DIRECTORS IN ITS EVALUATION OF THE
TRANSACTION, DOES NOT ADDRESS ANY OTHER ASPECT OF THE TRANSACTION OR ANY
RELATED TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY OF THE
COMPANY'S SHAREHOLDERS AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE MEETING.
In preparing its opinion to the Board of Directors of the Company,
Smith Barney performed a variety of financial and comparative analyses,
including those described below. The summary of such analyses does not purport
to be a complete description of the analyses underlying Smith Barney's opinion;
however, all material factors that Smith Barney considered in performing its
analyses and all material financial and comparative analyses that Smith Barney
performed are described herein. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. In arriving at its opinion,
Smith Barney did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Smith Barney believes
that its analyses must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying such
analyses and its opinion. In its analyses, Smith Barney made numerous
assumptions with respect to the Company, industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of the Company. The estimates contained in such
analyses are not necessarily indicative of actual values or predictive of
future results or values, which may be significantly more or less favorable
than those suggested by such analyses. In addition, analyses relating to the
value of businesses or securities do not purport to be appraisals or to reflect
the prices at which businesses or securities actually may be sold. Accordingly,
such analyses and estimates are inherently subject to substantial uncertainty.
Comparison With Other Transactions. Using publicly available
information, Smith Barney analyzed several transactions involving minority
convertible preferred stock investments in companies, many of which were
distressed financially. Smith Barney then analyzed the terms of the securities
to be issued in the Transaction and the consideration to be received by the
Company for the securities, as compared to the terms of the securities involved
in such prior transactions and the consideration received for such securities.
The terms analyzed included, without limitation, the size of the investment,
voting power and board representation, if any, acquired by the investor,
dividend rates applicable to the investment, redemption
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provisions, and the relationship between the conversion price and market price
of the underlying common stock. In each case, Smith Barney considered the terms
of these investments in light of the financial condition of the company
involved.
Analysis of Public Preferred Stock Offerings. Smith Barney analyzed
selected convertible preferred stock offerings completed over the past two
years in the public markets where the securities had a credit rating of "B-" or
below. Smith Barney compared the terms of these offerings, including the
dividend yield based on a spread to the 30-year treasury yield and the
conversion premium, to the terms of the Series A Preferred Stock to be issued
in the Transaction.
Pro Forma Analysis. Smith Barney analyzed the pro forma effects of
the Transaction on the Company's balance sheet at August 31, 1994 and
anticipated operating results for 1994, based on management's then current
expectations for 1994 results and certain other assumptions supplied by the
Company.
Internal Rate of Return Analysis. Smith Barney performed an internal
rate of return analysis utilizing the Company's projected results for the
fiscal years ended December 31, 1995 through 2004, assuming terminal multiples
to book value and to net income based on the Company's historical trading
performance computed in accordance with generally accepted accounting
principles. A factor in Smith Barney's analysis in rendering its opinion was
its analysis of whether the investment returns that could be realized by AIG
were commensurate with the risks inherent in the investment. Smith Barney
utilized the results of the internal rate of return analysis to estimate the
investment returns that could be realized by AIG in the Transaction and
concluded that the investment returns that could be realized by AIG were
commensurate with the risks of the investment.
Warrant Valuation. Using the Black-Scholes pricing methodology, Smith
Barney estimated the value of the Series A Warrants to be issued in the
Transaction, using different volatility and market price assumptions. Based on
these results, Smith Barney estimated the five-year internal rate of return to
AIG from the Transaction.
Other Factors and Comparative Analyses. In rendering its opinion,
Smith Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of the Company's
historical and projected financial results.
Pursuant to the terms of Smith Barney's engagement, the Company has
paid Smith Barney an initial financial advisory and opinion fee of $1 million
and Smith Barney will be entitled to receive an additional $1 million upon
consummation of the Transaction. The Company has also agreed to reimburse Smith
Barney for its out-of-pocket expenses incurred in performing its services,
including reasonable attorneys' fees and expenses, and to indemnify Smith
Barney and related persons against certain liabilities, including liabilities
under federal securities laws, arising out of Smith Barney's engagement. The
Company has been advised by Smith Barney that it believes that its fees are
reasonable based on the services performed and fees payable in other
transactions.
Smith Barney has advised the Company that, in the ordinary course of
business, it may actively trade the securities of the Company and AIG for its
own account or for the account of its customers and, accordingly, may at any
time hold a long or short position in such securities. Smith Barney also
advised the Company that in the past it has provided financial advisory and
investment banking services to AIG and received fees for the rendering of such
services and that Smith Barney and its affiliates (including The Travelers,
Inc. and its affiliates) maintain business relationships with AIG. In January
1994, Smith Barney was retained by AIG to sell one of its insurance
subsidiaries, and, in June 1994 when AIG decided not to sell the subsidiary,
Smith Barney received a $100,000 fee from AIG for its services. Prior to 1994,
AIG had engaged Smith Barney in a variety of assignments.
Smith Barney is a nationally recognized investment banking firm and
was selected by the Company based on Smith Barney's experience and expertise.
Smith Barney regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings,
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competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Prior to the Transaction, the Company had not previously engaged Smith
Barney to render any financial advisory services.
USE OF PROCEEDS
The net proceeds to the Company from the Investment are estimated to
be approximately $210 million, after the deduction of the expenses of the
Transaction, which are expected to total approximately $6 million. The
Investment Agreement provides that the amount of net proceeds necessary for
each of the Insurance Subsidiaries to satisfy minimum statutory capital
requirements or other capital requirements imposed by the DOI must be
contributed by the Company as common equity to each such subsidiary.
Previously, the Company committed to the DOI that the Insurance Subsidiaries
would restore a minimum aggregate capital and surplus of $250 million.
Accordingly, it is expected that approximately $180 million of the net proceeds
will be contributed by the Company to the equity of the Insurance Subsidiaries.
The amount of any remaining net proceeds will be retained by the Company and
invested by the Company in investment securities in accordance with the
Company's customary investment policies. The Investment Agreement provides that
such remaining net proceeds may be withdrawn from such investments at such time
and for such uses as the Board of Directors shall deem proper.
DISSENTERS' RIGHTS AND PREEMPTIVE RIGHTS
Shareholders have no dissenters' rights or preemptive rights in
connection with the issuance of the Series A Preferred Stock or the Series A
Warrants.
IMPACT OF THE TRANSACTION ON THE COMPANY AND EXISTING SHAREHOLDERS; CERTAIN
CONSIDERATIONS
While the Board of Directors is of the opinion that the Investment
Agreement Proposal is fair to, and its approval is advisable and in the best
interests of, the Company and its shareholders, shareholders should consider
the following possible effects in evaluating the Investment Agreement Proposal.
IMPACT ON VOTING AND OTHER RIGHTS OF SHAREHOLDERS; IMPACT ON FUTURE SHARE
ISSUANCES
The Investment Agreement Proposal involves the issuance of securities
that will entitle the holders to special voting rights. The holders of Series A
Preferred Stock will have the exclusive right to elect two of eleven members of
the Board of Directors, provided that, until the Company's next annual meeting
of shareholders (currently scheduled for May 23, 1995), the Board will consist
of twelve directors, two of whom will be designated by AIG, after which time
the Board will be reduced to eleven members, with AIG retaining two designees
on the Board. Thereafter, if the size of the Board of Directors is ever
changed, holders of Series A Preferred Stock will have the right, voting or
consenting separately as a class, to elect the smallest whole number of
directors (the "Applicable Number") that is greater than or equal to the
product of (i) 2/11 and (ii) the total number of directors at such time;
provided that the Applicable Number shall be reduced so that the total number
of directors which can be elected by the holders, including as a result of
their record ownership of all shares of Common Stock (x) obtained upon
conversion of Series A Preferred Stock or on exercise of Series A Warrants and
(y) held of record by the holder (or subsidiaries thereof), shall not equal or
exceed a majority of the total number of directors of the Company. See
"Approval of the Investment Agreement -- The Investment Agreement --
Description of Series A Preferred Stock." In addition, without the approval of
holders of a majority of the outstanding shares of Series A Preferred Stock,
the Company will not be entitled to (i) issue any shares of any class or series
of stock of the Company ranking senior to the Common Stock as to dividend
rights or rights upon liquidation, winding up or dissolution, (ii) amend, alter
or repeal any provisions of the Articles of Incorporation or the Bylaws, (iii)
enter into any merger or consolidation with, or sell all or substantially all
of the assets of the Company to, any person or (iv) make certain extraordinary
dividends or other distributions to all holders of Common Stock; provided,
however, that, with respect to clause (iii), after the third anniversary of the
Closing Date, holders of Series A Preferred Stock will no longer have a special
right to vote with respect to such transactions, but will vote together with
Common Stock, as a single class, and will be entitled to a number of votes
equal to the number of shares of Common Stock into which such shares of Series
A Preferred Stock are convertible on the date the vote is taken or the consent
is given.
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In the event the Company needs to obtain additional capital following
any sale of the Earthquake Shares to AIG and following any additional or
revised quota share reinsurance arrangements that the Insurance Subsidiaries
and AIG may enter into, the Investment Agreement requires that the Company
develop a capital financing plan that is reasonably acceptable to AIG. The
Investment Agreement does not specify what criteria AIG will apply in
determining whether any future capital financing plan is "reasonably
acceptable." Furthermore, the Investment Agreement will prohibit the Company
from issuing additional shares of Common Stock or similar securities (other
than pursuant to employee stock option or employee benefit plans) for 38 months
from the Closing Date, the period during which the Transfer Restrictions will
be imposed on primary issuances and secondary trading of shares of Common stock
in light of the tax considerations discussed under "Approval of the Transfer
Restrictions Proposal" below. Following such time, the Company may again sell
Common Stock to the public in a fully distributed public offering provided
that, prior to any such sale, AIG shall be afforded the prior opportunity
either to preemptively participate in such offering according to its equity
interest in the Company or to offer to purchase all outstanding shares of the
Company's Common Stock. For further discussion, see "-- The Investment
Agreement -- Restrictions on Additional Issuances of Capital Stock". As a
consequence of these restrictions, the Company has less flexibility in its
ability to raise additional capital. In addition, such restrictions may have
the result of preventing AIG's ownership interest in the Company from being
diluted, which could enhance AIG's ability to acquire an absolute majority of
the Company's outstanding shares of Common Stock once the standstill provisions
included in the Investment Agreement have expired. See "-- Substantial Equity
Ownership on Conversion/Exercise."
The holders of Series A Preferred Stock will be entitled to certain
preferences over holders of Common Stock. The shares of Series A Preferred
Stock will be entitled to a per annum dividend equal to 9% payable quarterly
prior to the payment of any dividends on shares of Common Stock, although
dividends on the Series A Preferred Stock may be paid in kind (in lieu of cash)
by the Company during the first three years following the Closing Date. The
Series A Preferred Stock will also rank prior to Common Stock with respect to
rights upon liquidation, winding up or dissolution of the Company.
SUBSTANTIAL EQUITY OWNERSHIP ON CONVERSION/EXERCISE
The Series A Preferred Stock and Series A Warrants will entitle AIG to
acquire a substantial percentage of the outstanding shares of Common Stock. If
the 200,000 shares of Series A Preferred Stock were fully converted into shares
of Common Stock, AIG would receive 17,652,250 additional shares of Common
Stock. If the 16 million Series A Warrants were exercised in full, AIG would
receive 16 million shares of Common Stock. Pursuant to the Investment
Agreement, if the Company's gross losses and allocated loss adjustment expenses
relating to the Northridge Earthquake exceed $850 million, the Company has the
option to issue the Earthquake Shares in exchange for the contribution by AIG
of additional funds, although the Company may determine not to issue some or
all of the Earthquake Shares in light of the rules in Section 382 of the IRC
governing the Company's ability to utilize its NOLs. See "-- Certain Tax
Considerations" and "-- Provision for Unforeseen Losses from the Northridge
Earthquake," below. In addition, the Company is entitled to pay dividends on
outstanding shares of Series A Preferred Stock (including any Earthquake
Shares) during the first three years following the Closing Date by the payment
in kind of additional shares of Series A Preferred Stock ("PIK Shares") having
a liquidation value equal to the amount of dividends owed. Both the Earthquake
Shares and the PIK Shares would also be convertible into additional shares of
Common Stock. The table below shows (a) the number of shares of Common Stock
and the percentage of the fully diluted shares of Common Stock outstanding
owned by AIG as of November 1, 1994, (b) the number of shares of Common Stock
and the percentage of the fully diluted shares of Common Stock outstanding that
AIG could acquire (i) on conversion of the Series A Preferred Stock and (ii) on
exercise of the Series A Warrants and
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(c) the total number of shares and the aggregate percentage of the fully diluted
shares of Common Stock outstanding that AIG would hold assuming AIG exercised
all of the Series A Warrants and converted its 200,000 shares of Series A
Preferred Stock.
PERCENTAGE OF
FULLY DILUTED
NUMBER OF SHARES SHARES OUTSTANDING(1)
---------------- ---------------------
Common Stock owned as of November 1, 1994 . . . . . . . . 900,000 1.06%
Common Stock purchasable on full conversion of the
original 200,000 shares of Series A Preferred
Stock . . . . . . . . . . . . . . . . . . . . . . . . 17,652,250 20.74%
Common Stock purchasable on full exercise of the Series A
Warrants . . . . . . . . . . . . . . . . . . . . . . . 16,000,000 18.80%
---------- -----
TOTAL POTENTIAL HOLDINGS . . . . . . . . . . . . . . . . 34,552,250 40.59%(2)
___________
(1) Based on the number of shares of Common Stock outstanding as of
November 1, 1994 (51,472,471 shares), as adjusted to give effect to
the issuance of shares of Common Stock issuable on conversion of the
original 200,000 shares of Series A Preferred Stock and on exercise of
the Series A Warrants.
(2) Assuming the maximum number of Earthquake Shares were issued to AIG
pursuant to the Investment Agreement and all dividends payable on
outstanding shares of Series A Preferred Stock during the first three
years following the Closing Date were paid by the issuance of PIK
Shares, AIG would be entitled to acquire an additional 15,545,103
shares of Common Stock on conversion of such Earthquake Shares and PIK
Shares following the third anniversary of the Closing Date.
Consequently, AIG's potential Common Stock holdings could total as
much as 50,097,353 shares after the third anniversary of the Closing
Date, representing 49.76% of the outstanding shares of Common Stock
based on the number of shares of Common Stock outstanding as of
November 1, 1994, as adjusted to give effect to the conversion of the
original 200,000 shares of Series A Preferred Stock, the exercise of
the Series A Warrants and the conversion of the Earthquake Shares and
PIK Shares.
The Investment Agreement includes standstill provisions that, with
certain exceptions, will prevent AIG from acquiring additional shares of
capital stock in excess of those purchasable on conversion of its Series A
Preferred Stock (including the Earthquake Shares and the PIK Shares) and on
exercise of the Series A Warrants for a period of three years after the Closing
Date. Following the expiration of the standstill provisions, there will be no
agreement imposing limitations on AIG's ability to acquire additional shares of
capital stock and/or to acquire control of the Company, other than the
limitations contained in the Certificate of Determination for the Series A
Preferred Stock that will reduce the number of directors that can be elected by
the holders of Series A Preferred Stock to the extent that AIG would otherwise
be able to elect a majority of the Board by virtue of its holdings of Series A
Preferred Stock and Common Stock (x) obtained upon conversion of the Series A
Preferred Stock or on exercise of the Series A Warrants and (y) held of record
by AIG (or its subsidiaries). See "-- The Investment Agreement -- Description
of Series A Preferred Stock."
DIMINISHED ABILITY TO SELL THE COMPANY
As a result of AIG's substantial ownership interest in the Company's
securities, it may be more difficult for a third party to acquire the Company.
By virtue of the substantial percentage of the Common Stock that AIG would
acquire upon conversion of its shares of Series A Preferred Stock and exercise
of its Series A Warrants, a potential buyer would likely be deterred from any
effort to acquire the Company absent the consent of AIG or its participation in
the transaction. In addition, the consent of at least a majority of the
outstanding shares of Series A Preferred Stock, voting separately as a class,
will be required for approval of the merger or consolidation of the Company or
the sale of substantially all of its assets during the first three years
following the Closing Date, after which time holders of Series A Preferred
Stock will not have a special class vote with respect to such transactions, but
will vote together with holders of Common Stock, as a single class, and in any
such vote holders of shares of Series A Preferred Stock will be entitled to a
number of votes equal to the number of shares of Common Stock into which such
shares of Series A Preferred Stock are convertible on the date the vote is
taken. See "The Investment Agreement -- Description of Series A
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Preferred Stock -- Voting Rights." As a result, issuance of the Series A
Preferred Stock and Series A Warrants and consummation of the other
transactions contemplated by the Investment Agreement might have the effect
of preventing or discouraging an attempt by another person or entity to take
over or otherwise gain control of the Company. As of the date of this Proxy
tatement, management knows of no specific effort to accumulate the Company's
securities or to obtain control of the Company by means of a merger, tender
offer, solicitation in opposition to management or otherwise.
CERTAIN TAX CONSIDERATIONS
The Company estimates that, as of December 31, 1994, NOLs of
approximately $400 million will be available to offset taxable income
recognized by the Company and its subsidiaries in periods after December 31,
1994. For federal income tax purposes, these NOLs will expire in the year 2009.
NOLs benefit the Company by offsetting taxable income dollar-for-dollar by the
amount of the NOLs, thereby eliminating (subject to a relatively minor
alternative minimum tax) the 35% federal corporate tax on such income.
Under Section 382 of the IRC, the benefit of the Company's NOLs can be
reduced or eliminated if the Company undergoes an "ownership change," as
defined in Section 382. Generally, an "ownership change" occurs if one or more
shareholders, each of whom owns 5% or more of a company's capital stock, and
certain "public groups" increase their aggregate ownership of the company by
more than 50 percentage points over the lowest percentage of stock owned by
such shareholders or groups over the preceding three-year period (based on
value). If an ownership change of the Company were to occur, the amount of
taxable income in any year (or portion of a year) subsequent to the ownership
change that could be offset by NOLs or other carryovers existing (or
"built-in") prior to such ownership change could not exceed the product
obtained by multiplying (i) the aggregate value of the Company's stock
immediately prior to the ownership change (with certain adjustments) by (ii)
the federal long-term tax exempt rate (currently 6.25%). Because the value of
the Company's stock, as well as the federal long-term tax-exempt rate,
fluctuate, it is impossible to predict with any accuracy the annual limitation
upon the amount of taxable income of the Company that could be offset by such
NOLs or other items were an ownership change to occur. The Company would incur
a corporate-level tax (current maximum federal rate of 35%) on any taxable
income during a given year in excess of such limitation. While the NOLs not
used as a result of this limitation remain available to offset taxable income
in future years, the effect of an ownership change, under certain
circumstances, would be to significantly defer the utilization of the NOLs,
accelerate the payment of federal income tax, cause a portion of the NOLs to
expire prior to their use, reduce stockholders' equity and slow the growth of
statutory policyholders' surplus.
Approval and consummation of the Transaction increases the risk that
the Company will undergo an ownership change because of the significant change
in ownership attributable to AIG's ownership interest in the Company. The
Company has determined, however, that, based on the current ownership by 5
percent shareholders of the Company, in order for there to be an ownership
change of the Company on the Closing Date, certain factual determinations must
be made with respect to the value of the Series A Preferred Stock and the
principal purpose underlying the issuance and structure of the securities
issued (or issuable) pursuant to the Investment Agreement. In particular, the
Company believes that, based on its estimate of potential values of the Series
A Preferred Stock, its knowledge of the current ownership of Common Stock by 5
percent shareholders, and the current trading price of its Common Stock, an
ownership change of the Company will not occur on the Closing Date unless there
is a determination that a principal purpose of the Transaction structure
governing the issuance of the Series A Preferred Stock or the Series A Warrants
was to avoid or ameliorate the impact of an ownership change under Section 382.
The Company and AIG have indicated that avoiding or ameliorating the impact of
an ownership change under Section 382 was not a purpose of the issuance or
structure of any of those securities. Therefore, based on information currently
available to the Company, all of which is subject to change following the date
of this Proxy Statement, the Company does not believe an ownership change will
occur on the Closing Date. If the Internal Revenue Service ("IRS") were to
successfully challenge this position, however, it is possible that the
consummation of the Transaction would cause an ownership change of the Company.
Even if consummation of the Transaction does not cause an ownership
change of the Company, the issuance of the Series A Preferred Stock will result
in a significant shift of ownership of the Company's stock to AIG. If
additional stock were accumulated by AIG (such as the PIK Shares or Earthquake
Shares) or
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other 5 percent shareholders of the Company (as defined for purposes of Section
382) before or after the Transaction, it is possible that those accumulations,
when coupled with the increase in AIG's ownership resulting from the
Transaction, could cause an ownership change of the Company.
In order to assist in preventing an ownership change of the Company,
the Board of Directors has recommended and approved, subject to approval by the
shareholders, the Transfer Restrictions Proposal. The Transfer Restrictions
Proposal, if approved, would place significant restrictions on the ability of
certain shareholders to acquire and dispose of, directly or indirectly, the
Company's stock, effective for up to 38 months following the consummation of
the Transaction.
Even if the Transfer Restrictions Proposal is approved, however, the
extent to which the related restrictions are enforceable is uncertain under
California law. In addition, the Transfer Restrictions contain certain
exceptions for specified transactions effected by or with AIG, which could
result in an ownership change of the Company. Purchases by other shareholders
of Common Stock and other events that occur prior to the Transfer Restrictions
becoming effective can effect the percentage shift in the Company's ownership
as determined for purposes of Section 382, and any such acquisition could
increase the likelihood that the Company will experience an ownership change if
such shift, coupled with the consummation of the Transaction, causes the
ownership of 5 percent shareholders of the Company to increase. There also can
be no assurance, in the event transfers in violation of the Transfer
Restrictions are attempted, that the IRS will not assert that such transfers
have federal income tax significance notwithstanding the Transfer Restrictions.
Moreover, while Section 382 provides that fluctuations in the relative values
of different classes of stock are not taken into account in determining whether
an ownership change occurs, no regulations or other guidance have been issued
under this provision. Therefore, the extent to which changes in relative values
between the Series A Preferred Stock and the Common Stock could result in an
ownership change of the Company is unclear, and it is possible that
fluctuations in the value of the Series A Preferred Stock and the Common Stock
could result in an ownership change of the Company. As a result, the Company
believes that the Transfer Restrictions serve to reduce, but not necessarily
eliminate, the risk that Section 382 will cause the limitations described above
on the use of NOLs by the Company.
The Company believes that the Transfer Restrictions are in the best
interests of the Company and its shareholders and are reasonable, and the
Company will act vigorously to enforce the restrictions against all current and
future holders of the Company's shares.
A detailed discussion of the application of Section 382 to the
Investment Agreement, and a discussion of the Transfer Restrictions Proposal,
are set forth under the heading "Approval of the Transfer Restrictions
Proposal," below.
Approval of the Transfer Restrictions Proposal may result in a
decreased valuation of the Common Stock due to the resulting restrictions on
transfers to persons directly or indirectly owning or seeking to acquire a
significant block of the Common Stock within 38 months of the Closing Date.
QUOTA SHARE REINSURANCE
The quota share reinsurance arrangements will reduce the net written
premium to surplus ratio of the Insurance Subsidiaries. The treaties will have
a five-year term and, at AIG's option, may be renewed annually thereafter for
four additional one-year periods, provided that the percentage share ceded to
AIG's subsidiaries will be reduced to 8% in the first renewal period, 6% in the
second renewal period, 4% in the third renewal period and 2% in the fourth
renewal period. The Insurance Subsidiaries will receive a commission equal to
10.8% of the ceded written premium for policies with effective dates from
January 1, 1995 through December 31, 1995. For policies with effective dates in
each subsequent underwriting year, the commission will be equal to the rate of
the Insurance Subsidiaries' incurred underwriting expenses (as recorded in the
Insurance Subsidiaries' statutory statements) to net written premium for the
prior calendar year.
JOINT VENTURE ARRANGEMENTS
Pursuant to the Investment Agreement, the Company and AIG have agreed
to use their respective best efforts to negotiate and mutually agree upon a
master joint venture agreement whereby the Company and AIG or its subsidiaries
will form new joint venture subsidiaries to engage in the sale of automobile
insurance policies in jurisdictions outside the State of California. See "--
The Investment Agreement -- Joint Venture Agreement." The ownership interests
and capital contributions of the parties in the joint ventures have not yet
been agreed upon, and the parties have not yet defined the geographic scope of
any such joint ventures
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that may be pursued. It is anticipated that AIG will provide the initial
start-up capital for the specific joint ventures, subject to mutual agreement
upon the extent of such capital and the ownership interests, profit interests
and other such factors related to the specific ventures. The joint ventures, if
formed, will enable the Company to expand into geographic areas in which it has
not previously sold insurance. The ventures, however, will not be under the
complete control of the Company, and the parties have not yet addressed
policies and procedures that will be put in place for the management of the
ventures. No assurances can be made that the Company and AIG will be able to
agree upon the definitive terms of the joint venture arrangements or that, if
the joint ventures are formed, they will achieve profitability.
PROVISION FOR UNFORESEEN LOSSES FROM THE NORTHRIDGE EARTHQUAKE
Since the Northridge Earthquake occurred, the Company and other
members of the property and casualty insurance industry have revised their
estimates of claim costs and related expenses several times. Delayed discovery
of the severity of damages has caused claims to be reevaluated as the
additional damage becomes known and has made the estimation process extremely
difficult. Because of the difficulties of estimation, it is possible that the
Company's Northridge Earthquake loss estimates will increase. The development
of gross losses and allocated loss adjustment expenses related to the
Northridge Earthquake in excess of the amount currently accrued could have
adverse consequences for the Company. In order to ameliorate the impact of this
risk at least in part, a provision has been included in the Investment
Agreement that allows the Company, at its option, to require AIG to contribute
up to $70 million of additional capital to the Company in exchange for the
Earthquake Shares. The Company, however, may determine not to issue some or all
of the Earthquake Shares as a means of obtaining additional capital to cover
unforeseen losses related to the Northridge Earthquake in light of the rules in
Section 382 of the IRC governing the Company's ability to utilize its NOLs to
offset taxable income in future years, or the Company could elect to issue some
or all of the Earthquake Shares notwithstanding the fact that such issuance
could result in a limitation on the Company's ability to utilize its NOLs. See
"-- Certain Tax Considerations," above. In addition, the Investment Agreement
provides that the Company and AIG from time to time may discuss the possibility
of AIG's subsidiaries providing additional reinsurance to the Insurance
Subsidiaries in excess of the reinsurance currently contemplated by the
Investment Agreement for the purpose of improving the Company's
premium-to-surplus ratio, although neither AIG nor the Company is obligated to
enter into such additional reinsurance arrangements. The Investment Agreement
provides that, in the event the Company requires additional capital after AIG
has purchased the Earthquake Shares and the Company has availed itself of any
additional quota share reinsurance arrangements that may be available through
AIG, the Company will be required to develop a capital financing plan that is
reasonably acceptable to AIG.
In the event the Company's gross losses and allocated loss adjustment
expenses with respect to the Northridge Earthquake exceed $945 million, the
Investment Agreement provides that the Exercise Price of the Series A Warrants
shall be reduced by $0.08 per share for each million dollars of gross losses
and allocated loss adjustment expenses in excess of $945 million (provided that
the Exercise Price shall never be reduced to less than $1.00 per share as a
result of Northridge Earthquake losses); provided, however, that no adjustment
to the Exercise Price shall be made with respect to increases in gross losses
and loss adjustment expenses attributable to Northridge Earthquake reported in
financial statements following the 1995 year-end audited financial statements
of the Company. See "-- The Investment Agreement -- Quota Share Reinsurance
Arrangements" and "-- Provision for Adverse Northridge Earthquake
Developments."
EFFECT ON CAPITAL AND EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS
After giving effect to expenses of the Transaction, the sale of the
Series A Preferred Stock and the Series A Warrants to AIG would increase the
Company's capital by approximately $210 million. Dividends on the Series A
Preferred Stock would reduce earnings available for common shareholders by
approximately $18 million per annum (or $26 million assuming all of the
Earthquake Shares were issued as of the consummation of the Transaction). Based
upon the number of shares of Common Stock outstanding as of November 1, 1994
and without giving effect to the conversion of any shares of Series A Preferred
Stock or the exercise of any Series A Warrants, the quarterly dividends on
outstanding shares of Series A Preferred Stock would reduce the Company's
primary earnings per share by approximately $0.35 per year (or $0.50 per year
assuming all of the Earthquake Shares were issued as of the consummation of the
Transaction).
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ALTERNATIVES TO THE INVESTMENT AGREEMENT PROPOSAL
In the event the Investment Agreement Proposal is not approved by the
shareholders at the Meeting, or the Transaction is not consummated for any
other reason, the Company would seek alternative sources of additional capital
and/or pursue acquisition proposals and/or consider other quota share
reinsurance arrangements. There can be no assurance that the Company would be
successful in any such efforts or that the Company would be able to consummate
a transaction that has all of the features of, or similar terms as provided in,
the Investment Agreement. The Company has not sought alternative sources of
additional capital nor has it pursued acquisition proposals since October 17,
1994, the date as of which the Investment Agreement was entered into by the
Company and AIG. The Company's inability to consummate the Transaction could
result in the DOI immediately recommencing regulatory actions, which might
include prohibiting the Insurance Subsidiaries from writing further insurance
policies pending the infusion of additional capital. In addition, because of
the defaults under the Bank Credit Agreement that would remain in the absence
of the Transaction and the Amendment and Waiver, the Lenders could elect to
pursue their remedies under the Bank Credit Agreement, including accelerating
all amounts owed by the Company and foreclosing on the capital stock of the
Insurance Subsidiaries pledged as collateral under the Bank Credit Agreement.
Moreover, Best would continue to review and would likely further downgrade the
ratings of the Insurance Subsidiaries unless an alternative transaction were
immediately identified. Any or all of these actions by the DOI, the Lenders or
Best would materially impair the ability of the Insurance Subsidiaries to
continue their operations as currently conducted.
In the event the Investment Agreement Proposal is not approved, the
Stock Option Agreement provides that the Option would be triggered upon the
occurrence of certain events arising prior to October 31, 1995 (the expiration
date of the Option), including a third-party investment in, or acquisition of,
the Company. The Stock Option Agreement provides that AIG may, after the Option
becomes exercisable, require the Company to repurchase the Option or any shares
of Common Stock purchased on exercise of the Option (the "Option Shares") for
the greater of $10 million or the market value of the Option or the Option
Shares, as applicable, provided that the Company will not be required to pay an
aggregate of more than $10 million to repurchase any portion of the Option or
the Option Shares. See "Certain Matters Related to the Investment Agreement
Proposal -- The Stock Option Agreement."
THE INVESTMENT AGREEMENT
The following is a summary of certain provisions of the Investment
Agreement, a copy of which is attached hereto as Appendix II. This summary is
not intended to be complete and shareholders are urged to read the Investment
Agreement in its entirety.
The Board of Directors reserves its right to amend or waive the
provisions of the Investment Agreement and the other documents related thereto
in all respects before or after the approval of the Investment Agreement
Proposal by the shareholders. In addition, the Board of Directors reserves its
right to terminate the Investment Agreement in accordance with its terms
notwithstanding shareholder approval.
ISSUANCE AND SALE OF PREFERRED STOCK AND SERIES A WARRANTS
Pursuant to the Investment Agreement, the Company will sell, and AIG
or certain of its subsidiaries will purchase 200,000 shares of Series A
Preferred Stock and 16 million Series A Warrants. The Investment Agreement
provides that AIG will pay the Company $200 million for the shares of Series A
Preferred Stock and $16 million for the Series A Warrants.
DESCRIPTION OF SERIES A PREFERRED STOCK
The following is a summary of the rights, preferences and privileges
of the Series A Preferred Stock as contained in the Certificate of
Determination for the Series A Preferred Stock, a copy of which is attached
hereto as Appendix III (the "Series A Certificate of Determination").
Shareholders are urged to read the Series A Certificate of Determination in its
entirety.
Priority. The Series A Preferred Stock will have a liquidation value
of $1,000 per share (the "Liquidation Value"). The Series A Preferred Stock
will rank prior to the Common Stock and to all other classes and series of
equity securities of the Company now or hereinafter authorized, issued or
outstanding (the
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Common Stock and such other classes and series of equity securities
collectively are referred to herein as the "Junior Stock"), other than any
classes or series of equity securities of the Company ranking on parity with
("Parity Stock") or senior to ("Senior Stock") the Series A Preferred Stock as
to dividend rights and rights upon liquidation, winding up or dissolution of
the Company. The Series A Preferred Stock shall be junior to all outstanding
debt of the Company. The Series A Preferred Stock will be subject to the
creation of Senior Stock, Parity Stock and Junior Stock to the extent not
prohibited by the Company's Articles of Incorporation, subject to the approval
of the holders of the outstanding shares of Series A Preferred Stock. See "--
Additional Voting Rights."
Dividends. The Series A Preferred Stock will be entitled to a per
annum cumulative dividend equal to 9% payable quarterly as declared by the
Board. At the option of the Company, dividends will be payable either in cash
or in kind (whereby the holder receives, in lieu of cash, shares of Series A
Preferred Stock having a liquidation value equal to the dividends declared)
during the first three years after the Closing Date. Following the third
anniversary of the Closing Date, dividends will be payable quarterly only in
cash.
Conversion. The Series A Preferred Stock will be convertible at any
time, in whole or in part, at the option of the holder into shares of the
Common Stock at a per share conversion price equal to $11.33 (the "Conversion
Price"). The Conversion Price is subject to certain post-closing antidilution
adjustments upon the occurrence of certain events such as (i) stock dividends,
stock splits and reverse stock splits, (ii) stock reclassifications, (iii)
issuances of rights, warrants or securities convertible or exchangeable into
Common Stock having a conversion or exercise price per share less than the
market value of the Common Stock, (iv) cash dividends totalling in excess of
10% of the Company's total market capitalization, and (v) tender offers by the
Company for shares of Common Stock for aggregate consideration exceeding 10% of
the Company's total market capitalization.
Redemption. The Series A Preferred Stock will be redeemable at the
option of the Company for a redemption price equal to 300% of the Liquidation
Value of the Series A Preferred Stock (plus accrued dividends). Notwithstanding
the foregoing, in the event that, prior to any notice of redemption given by
the Company following the fifth anniversary of the Closing Date, the closing
price per share of Common Stock for 30 consecutive trading days ending not more
than five days prior to the date of the notice of redemption exceeds 180% of
the Conversion Price, the redemption price in connection with any redemption
following such fifth anniversary of the Closing Date shall be 105% of the
Liquidation Value of the Series A Preferred Stock (plus accrued dividends),
declining 1% each year thereafter until redeemable at par (plus accrued
dividends) in the eleventh year following the Closing Date and thereafter.
Rights to Elect Directors. The Series A Preferred Stock, voting as a
separate class, will be entitled to elect two of the Company's eleven
directors. Holders of Series A Preferred Stock shall not be entitled to vote in
the election of the remaining directors, who shall be elected by holders of
shares of Common Stock. In the event that the total number of directors of the
Company is increased or decreased, the number of directors elected by the
holders of Series A Preferred Stock will be increased or decreased, as
appropriate, such that the minimum number of directors that may be elected by
holders of Series A Preferred Stock (the "Applicable Number") will equal or
exceed 2/11th of the directors; provided, however, that the Applicable Number
shall be reduced by the minimum number of directorships in order that the sum
of (i) the Applicable Number and (ii) the minimum whole number of directors
which can be elected (through the application of cumulative voting) by shares
of Common Stock (x) obtained upon conversion of the Series A Preferred Stock or
on exercise of the Series A Warrants and (y) held of record by the holder (or
subsidiaries thereof) not equal or exceed a majority of the total number of
directors of the Company; provided further, however, until the date of the
Company's 1995 annual meeting of shareholders (currently scheduled for May 23,
1995), the Board of Directors of the Company shall consist of twelve members,
of which the Applicable Number elected by the holders of Series A Preferred
Stock shall be two directors (it being understood that, on said annual meeting
date, the size of the Board of Directors shall be reduced to eleven members
again, with the removal or non-election of one of the directors who is not a
Series A Preferred Stock designee).
Additional Voting Rights. In addition, the Company will not be
entitled to (i) issue any shares of Senior Stock, (ii) amend, alter or repeal
any provisions of the Articles of Incorporation or the Bylaws, (iii) enter into
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any merger or consolidation with, or sell all or substantially all of the
assets of the Company to, any person or (iv) make any dividend or other
distribution to all holders of Common Stock of cash or property that, combined
with the aggregate amount of any other such distributions within the 12 months
preceding the date of payment of such distribution and the aggregate amount of
consideration payable in respect of any purchase by the Company of any of its
Common Stock within the preceding 12 months, exceeds 15% of the total market
capitalization of the Company; provided, however, that, with respect to clause
(iii), after the third anniversary of the Closing Date, holders of Series A
Preferred Stock will not have a special right to vote with respect to such
transactions, but will vote together with Common Stock, as a single class, and
in any such vote or consent a holder of shares of a Series A Preferred Stock
will be entitled to a number of votes equal to the number of shares of Common
Stock into which such shares of Series A Preferred Stock are convertible on the
date the vote is taken or the consent is given.
Preemptive Rights. In the event the Company intends to issue and sell
shares of Common Stock in a public offering (when permitted under the
Investment Agreement), AIG shall have the rights discussed below under
"Restrictions on Additional Issuances of Capital Stock," including the
preemptive right to participate in such Common Stock offering up to AIG's fully
convertible/exercised interest in the Common Stock of the Company at the per
share price received by the Company (i.e., without underwriters' discount) in
such public offering.
DESCRIPTION OF THE SERIES A WARRANTS
The following is a summary of certain provisions of the Series A
Warrants, as contained in the form of Warrant Certificate. This summary is not
intended to be complete and shareholders are urged to read in its entirety the
form of Warrant Certificate, a copy of which is attached hereto as Appendix IV.
Exercise of the Series A Warrants. The Series A Warrants will be
exercisable at any time following the first anniversary of the Closing Date
(the "Effective Date"), in whole or in part, for an aggregate of 16 million
shares of Common Stock upon payment of an exercise price of $13.50 per share
(the "Exercise Price"). In the event the Company's gross losses and allocated
loss adjustment expenses from the Northridge Earthquake exceed $945 million and
AIG contributes additional capital to the Company pursuant to the Investment
Agreement prior to the first anniversary of the Closing Date, the Effective
Date will be deferred to the second anniversary of the Closing Date. See "--
Provision For Adverse Northridge Earthquake Developments." The Effective Date
may be accelerated to be an earlier date in the event the Company's Board of
Directors approve such, and the Effective Date shall automatically be
accelerated to any earlier date that AIG is entitled to acquire additional
securities of the Company pursuant to the standstill provisions of the
Investment Agreement. See "-- Standstill Provisions." The Series A Warrants
will expire on the thirteenth anniversary of the Closing Date. In addition, the
exercise of the Series A Warrants will be subject to the Transfer Restrictions
that will be included in the Company's Articles of Incorporation if the
Transfer Restrictions Proposal is approved. See "Approval of the Transfer
Restrictions Proposal."
Adjustments to the Exercise Price. The Exercise Price and/or the
number of shares of Common Stock purchasable on exercise of the Series A
Warrants are subject to certain antidilution adjustments upon the occurrence of
certain events such as (i) stock dividends, stock splits and reverse stock
splits, (ii) stock reclassifications, (iii) issuances of rights, warrants or
securities convertible or exchangeable into Common Stock having a conversion or
exercise price per share less than the market value of the Common Stock, (iv)
cash dividends totalling in excess of 10% of the Company's total market
capitalization, and (v) tender offers by the Company for shares of Common Stock
for aggregate consideration exceeding 10% of the Company's total market
capitalization. The Series A Warrants provide that in the event of the
consolidation, merger or sale or transfer of all or substantially all of the
assets of the Company, the person formed by such consolidation or merger or
which acquires such assets, as the case may be, shall execute and deliver to
the holder of the Series A Warrants a new warrant certificate entitling the
holder to exercise such Series A Warrants into the kind and amount (if any) of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock into which
such Series A Warrants might have been converted immediately prior to such
consolidation, merger, sale or transfer.
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In the event the Company's gross losses and allocated loss adjustment
expenses with respect to the Northridge Earthquake exceed $945 million, the
Exercise Price of the Series A Warrants shall be reduced by $0.08 per share for
each million dollars of gross losses and allocated loss adjustment expenses in
excess of $945 million (provided that the Exercise Price shall never be reduced
to less than $1.00 per share as a result of Northridge Earthquake losses);
provided, however, that no adjustment to the Exercise Price shall be made with
respect to increases in gross losses and allocated loss adjustment expenses
reflected in financial statements following the 1995 year-end audited financial
statements of the Company. For purposes of the foregoing adjustments, gross
losses and allocated loss adjustment expenses related to the Northridge
Earthquake shall be calculated on the earlier of (i) any exercise of the Series
A Warrants or, (ii) otherwise, on a quarterly basis. See "-- Provision for
Adverse Northridge Earthquake Developments."
Voting Rights. The Series A Warrants will have no voting rights.
QUOTA SHARE REINSURANCE ARRANGEMENTS
Upon consummation of the Investment, the Insurance Subsidiaries will
enter into quota share reinsurance treaties with subsidiaries of AIG covering
10% of each of the Insurance Subsidiaries' policies incepting on and after
January 1, 1995. The treaties will have a five-year term and, at AIG's option,
will be renewable annually thereafter for four additional one-year renewal
periods, provided that the quota share percentage ceded to AIG's subsidiaries
will be reduced to 8% in the first renewal period, 6% in the second renewal
period, 4% in the third renewal period and 2% in the fourth renewal period. AIG
will pay the Insurance Subsidiaries a commission equal to 10.8% of the ceded
written premium for policies with effective dates from January 1, 1995 through
December 31, 1995. For policies with effective dates in each subsequent
underwriting year, the commission will be equal to the rate of the Insurance
Subsidiaries' incurred underwriting expenses (as recorded in the Insurance
Subsidiaries' statutory statements) to net written premium for the prior
calendar year. The Investment Agreement provides that, following the Closing
Date, the Company and AIG may from time to time discuss additional quota share
arrangements. In particular, the Company and AIG may discuss an arrangement
whereby (i) the Insurance Subsidiaries cede such participation in excess of the
10% participation pursuant to the Quota Share Agreements as results in an
agreed upon net premium-to-surplus ratio being achieved and (ii) in the event
the Insurance Subsidiaries' net premium-to-surplus ratio subsequently improves
below such specified ratio, the increased participation pursuant to clause (i)
shall thereafter be reduced to achieve the specified ratio, with increases and
reductions in the additional participation made annually. Neither the Company
nor AIG is obligated to enter into any such arrangement.
PROVISION FOR ADVERSE NORTHRIDGE EARTHQUAKE DEVELOPMENTS
Sale of Additional Series A Preferred Stock. The Investment Agreement
provides that, if at any time (before or after the Closing Date, but subject to
the Transaction occurring) the Company's and the Insurance Subsidiaries' gross
losses and allocated loss adjustment expenses associated with claims resulting
from the Northridge Earthquake exceed $850 million (such excess being referred
to herein as the "Excess Loss Amount"), AIG shall, if requested in writing by
the Company after the Closing Date, contribute to the capital of the Company,
in whole or in part, an amount up to the lesser of (i) $70 million or (ii) the
Excess Loss Amount (the "AIG Contribution"). In consideration of the AIG
Contribution, the Company shall issue to AIG that number of fully paid and
nonassessable Earthquake Shares having an aggregate liquidation value equal to
(x) the amount of the AIG Contribution plus (y) an amount equal to the product
of (1) the AIG Contribution, (2) 0.65 and (3) the quotient of (I) the number of
shares of Common Stock beneficially owned or obtainable by AIG and its
affiliates by virtue of ownership of the shares of Series A Preferred Stock
(including any additional shares actually issued by virtue of the provision of
the Certificate of Determination governing the Series A Preferred Stock
permitting payment of dividends by the issuance of PIK Shares) and the Series A
Warrants and conversion or exercise thereof divided by (II) the sum of (A) the
total number of shares of Common Stock of the Company outstanding October 17,
1994 plus (B) the number of shares referred to in (I); provided, however, that
the aggregate liquidation value of any Earthquake Shares issued pursuant to the
foregoing provisions of the Investment Agreement (without taking into account
any Series A Preferred Shares issuable as a dividend in kind on any outstanding
Series A Preferred Shares) shall not exceed $87.9725 million. The amount
represented as "(y)" in the above formula is designed to represent
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AIG's proportional share of the Company's after-tax loss resulting from the
Excess Loss Amount. Successive contributions under the foregoing provisions for
partial amounts reflecting developments over time shall be permitted, with
minimum cash contributions prior to the final contribution being for no less
than $10 million. The Company may determine not to issue some or all of the
Earthquake Shares as a means of obtaining additional capital to cover
unforeseen losses related to the Northridge Earthquake in light of the rules in
Section 382 of the IRC governing the Company's ability to utilize its NOLs. See
"Approval of the Transfer Restrictions Proposal" and "Approval of the
Investment Agreement Proposal -- Impact of the Transaction on the Company and
Existing Shareholders; Certain Considerations -- Provision for Unforeseen
Losses from the Northridge Earthquake."
Adjustment to the Exercise Price of the Series A Warrants. In the
event the Company's gross losses and allocated loss adjustment expenses with
respect to the Northridge Earthquake exceed $945 million, the Exercise Price of
the Series A Warrants shall be reduced by $0.08 per share for each million
dollars of gross losses and allocated loss adjustment expenses in excess of
$945 million (provided that the Exercise Price shall never be reduced to less
than $1.00 per share as a result of Northridge Earthquake losses); provided,
however, that no adjustment to the Exercise Price shall be made with respect to
increases in gross losses and allocated loss adjustment expenses reflected in
financial statements following the 1995 year-end audited financial statements
of the Company. For the purposes of determining the foregoing adjustments, the
gross losses and allocated loss adjustment expenses with respect to the
Northridge Earthquake shall be calculated on the earlier of (i) any exercise of
the Series A Warrants or, (ii) otherwise, on a quarterly basis.
RESTRICTIONS ON ADDITIONAL ISSUANCES OF CAPITAL STOCK
In the event that the Company needs to obtain additional capital
financing following any sale of the Earthquake Shares to AIG and any additional
or revised quota share reinsurance arrangements that the Insurance Subsidiaries
and AIG may enter into, the Investment Agreement provides that the Company
shall be required to develop a capital financing plan which is reasonably
acceptable to AIG.
The Investment Agreement further provides that the Company may not
issue additional shares of Common Stock or of another class of securities
similar thereto, or any securities, options, warrants or similar rights
convertible, exercisable, exchangeable or having other rights to acquire any
such shares (except for certain issuances of Common Stock pursuant to employee
stock option or employee benefit plans); provided, however, that following the
end of the 38th month following the Closing Date (i.e., the period referred to
in the Transfer Restrictions proposed in light of Section 382 of the IRC (see
"Approval of the Transfer Restrictions Proposal")), the Company may issue and
sell shares of Common Stock in a fully distributed public offering, so long as
(i) the Company first provides AIG prior notice of the Company's intent to make
such an offering and (ii) the Company provides AIG a prior opportunity, at
AIG's election, either (x) to make an offer to purchase the outstanding shares
of Common Stock of the Company (with the result that the public offering not
proceed) or (y) to preemptively participate in such Common Stock offering up to
AIG's fully converted/exercised interest in the Common Stock of the Company at
the per share price received by the Company (i.e., without underwriters'
discount) in such public offering.
STANDSTILL PROVISIONS
Pursuant to the Investment Agreement, AIG has agreed with the Company
that for a period of three years commencing on and following the Closing Date,
neither AIG nor any of its subsidiaries will, without the prior approval of the
Company's Board of Directors, (i) acquire, offer to acquire or agree to acquire
(other than (A) in accordance with the terms of the Investment Agreement, the
Series A Warrants, the Series A Certificate of Determination and the Stock
Option Agreement, (B) as a result of a stock split, stock dividend or other
recapitalization by the Company, (C) upon the execution of unsolicited buy
orders by any affiliate of AIG that is a registered broker-dealer for the
account of its customer, (D) as to subsidiaries of AIG engaged in investment
activities in the ordinary course, acquisitions up to an aggregate of 1% of the
outstanding Common Stock (excluding the 900,000 shares of Common Stock already
owned by AIG) or of any other class of voting securities in the ordinary course
and without an intent to influence the management or control of the Company, or
(E) in a transaction in which AIG or an affiliate of AIG acquires a previously
unaffiliated business entity that owns voting securities of the Company) any
outstanding Common Stock or
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any other voting securities of the Company or commence any tender or exchange
offer seeking to acquire beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934 (the "Exchange Act") without regard to the
60-day provision in paragraph (d)(1)(i) thereof) of the Common Stock or any
other voting securities, (ii) become a member of a 13(d) group, within the
meaning of Rule 13d-5 under the Exchange Act (a "Group"), with respect to any
Common Stock or voting securities of the Company, other than a Group composed
solely of itself and its affiliates, or encourage any other Group to acquire
any Common Stock or other voting securities of the Company (other than in
purchases from AIG), (iii) solicit any proxies or shareholder consents or
become a participant (other than by voting), or encourage any person to become
a participant, in a proxy or consent solicitation with respect to any of the
Company's securities (in each case other than solicitations to holders of
Series A Preferred Shares with respect to matters as to which the Series A
Preferred Shares are entitled to vote), (iv) call any special meeting of
shareholders, (v) make any public proposal to shareholders with respect to
any extraordinary transaction involving the Company, including, but not limited
to, any business combination, restructuring, recapitalization or dissolution,
or (vi) request in a manner that would require public disclosure of such
request by the Company or AIG that the Company amend any restrictions contained
in the standstill provisions; provided, however, that the Investment Agreement
provides that the foregoing restrictions shall not apply with respect to Common
Stock or shares of other voting securities held or managed as part of an
investment portfolio by subsidiaries of AIG if, and only to the extent, AIG's
subsidiaries have fiduciary obligations to third parties to take any such
actions. In the event AIG becomes aware (including, but not limited to, by
notice from the Company) that an affiliate (as defined under the Exchange Act)
(other than a subsidiary) of AIG has taken any action that would be prohibited
of AIG by the foregoing, the Investment Agreement provides that AIG shall, to
the extent that it has the authority, right and power to do so, promptly cause
such action to cease and, if practicable, to be reversed in order to effectuate
the intent of the standstill provisions.
Notwithstanding the foregoing, pursuant to the Investment Agreement,
AIG shall have the right freely to acquire additional securities of the Company
in any manner whatsoever and engage in any of the activities proscribed under
the standstill provisions, in the event that (i) an Insolvency Event (as
defined below) occurs; (ii) 60 days after the Company or any of its
subsidiaries is in default under any indebtedness or other borrowing incurred
by it unless such default is cured during such 60-day period; (iii) the Company
or any of its subsidiaries breaches the Investment Agreement, the Stock Option
Agreement, provisions of the Series A Warrants, the Series A Certificate of
Determination, the Registration Rights Agreement, the Quota Share Agreements or
the Voting Agreement in any material respect; (iv) any person not affiliated
with AIG acquires beneficial ownership (as defined in Rule 13d-3 without regard
to the 60-day provision in paragraph (d)(1)(i) thereof) of 20% or more of the
outstanding shares of the Common Stock or any more of the outstanding shares of
the Common Stock or any other class of the Company's voting securities, or
commences any tender or exchange offer seeking to acquire any such ownership;
(v) a third party engages in a proxy solicitation for the purpose of removing
directors of the Company elected by the holders of Common Stock or influencing
the directors' management of the Company; or (vi) a majority of the directors
of the Company who were elected by the holders of Common Stock vote to
terminate or release AIG from compliance with any or all of the standstill
provisions. Pursuant to the Investment Agreement, an "Insolvency Event" is
deemed to have occurred (i) if the Company or any of its subsidiaries shall
commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy" as now or hereafter in effect, or under any state
insurance insolvency, liquidation, rehabilitation or similar statute or any
successor statutes thereto ("Insolvency Statutes"); (ii) an involuntary case is
commenced against the Company or any of its subsidiaries under an Insolvency
Statute; (iii) a custodian is appointed for, or takes charge of, all or any
substantial part of the property of the Company or any of its subsidiaries;
(iv)(a) the Company or any of its subsidiaries or (b) any other person,
including any insurance regulator, commences any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution
or similar law of any jurisdiction, whether now or hereafter in effect,
relating to the Company or such subsidiary; (v) any insurance regulator shall
take material action with respect to the Company or any of its subsidiaries
(other than merely requiring the Company to prepare a financial plan) pursuant
to the terms of any applicable Risk-Based Capital insurance regulatory
requirements; (vi) the Company or any of its subsidiaries is adjudicated
insolvent or bankrupt; (vii) any order of relief or other order approving any
such
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case or proceeding is entered; (viii) the Company or any of its subsidiaries
suffers any appointment of any custodian or the like for it or any substantial
part of its property to continue undischarged or unstayed for a period of 60
days; (ix) the Company or any of its subsidiaries makes a general assignment
for the benefit of creditors; (x) the Company or any subsidiary shall fail to
pay, or shall state that it is unable to pay, or shall be unable to pay, its
debts, generally as they become due; (xi) the Company or any of its
subsidiaries shall call a meeting of its creditors with a view to arranging a
composition or adjustment of its debts; (xii) the Company or any of its
subsidiaries shall by any act or failure to act indicate its consent to,
approval of or acquiescence in any of the foregoing; or (xiii) any corporate
action is taken by the Company or any of its subsidiaries for the purpose of
effecting any of the foregoing; provided, however, in the case of clauses (ii),
(iii), (iv)(b), (v) and (vii), an "Insolvency Event" shall occur only in the
event the Company is unable to cause such involuntary case, appointment,
proceeding or action to be dismissed or withdrawn by the 90th day after the
commencement thereof.
COMPETING ACQUISITION PROPOSALS
Pursuant to the Investment Agreement, prior to the Closing, the
Company has agreed that neither the Company nor any of its subsidiaries nor any
of the respective officers, directors or employees of the Company or any of its
subsidiaries shall, and the Company shall direct and use its best efforts to
cause its and its subsidiaries' agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by the
Company or any of its subsidiaries) not to, initiate, solicit or encourage,
directly or indirectly, any inquiries or the making of any proposal or offer
(including, without limitation, any proposal or offer to shareholders of the
Company) with respect to a merger, consolidation, share exchange, business
combination, purchase of all or a significant portion of the assets of the
Company or any of its subsidiaries, purchase of all or any portion of the
capital stock of the Company or any of its subsidiaries or securities
convertible, exchangeable, exercisable or having any other rights to acquire
any of such capital stock, tender offer or exchange offer, or any reinsurance
agreement outside the ordinary course of business (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal" and any such
transaction being referred to as an "Acquisition Transaction") or engage in any
discussions or negotiations concerning, or provide any confidential information
or data to, any person relating to an Acquisition Proposal, or otherwise
facilitate any effort or attempt to make or implement an Acquisition Proposal
and the Company and its subsidiaries shall not enter into any agreement or
letter of intent with respect to any Acquisition Transaction.
Notwithstanding the foregoing, the Investment Agreement provides that,
in the event the Company receives an unsolicited request for confidential
information or data from a third party that has made a bona fide proposal
(subject to due diligence and other usual conditions) to enter into an
Acquisition Transaction, the Company may provide confidential information or
data to such third party if the Board of Directors of the Company reasonably
determines, after consulting with its outside legal counsel, (i) that such
third party is capable (financially, legally and otherwise) of completing the
transaction described in the Acquisition Proposal and (ii) that their fiduciary
duty to shareholders requires such. In the event AIG provides the Company with
an additional proposal following the decision of the Board of Directors of the
Company, in the exercise of its fiduciary duty, to provide confidential
information to any third party, the Company may disclose AIG's additional
proposal to such third party.
CERTAIN COVENANTS
Pursuant to the Investment Agreement, the Company has agreed that,
prior to the Closing Date, the Company will conduct business in ordinary course
and, among other things, will not, without the consent of AIG: (i) enter into,
modify, renew, terminate or commute, any reinsurance agreement; (ii) incur
capital expenditures in excess of $2 million; (iii) declare or pay dividends or
other distributions, or make redemptions or other acquisitions of its capital
stock; (iv) purchase or sell investment assets outside normal investment
policies, or change such policies; (v) incur indebtedness outside the normal
course; (vi) pledge assets (except as required pursuant to the Bank Credit
Agreement); (vii) waive material rights under contracts; (viii) increase or
modify employment compensation or enter into or modify existing severance
arrangements other than in the normal course; (ix) change any accounting
methods or practices, including any reserve methodologies, (x) amend, modify or
waive any rights under the Bank Credit Agreement; (xi) enter into new
transactions with affiliates; (xii) issue, sell, grant or purchase any shares
of its capital stock
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or warrants, options or other securities convertible, exchangeable or
exercisable therefor (except as required in accordance with outstanding
employee options); (xiv) amend its articles or by laws, subdivide or reclassify
its capital stock or change its business, merge or consolidate with, or acquire
all or substantially all of the assets or stock of, any other person; or (xv)
enter into any extraordinary contracts or contracts that would materially
increase the liabilities of the Company or take any action that would impair
the Company's ability to perform under the Investment Agreement. Prior to the
Closing Date, AIG shall be entitled to notice from the Company of material
adverse changes to the business of the Company.
CONDITIONS PRECEDENT
The Investment Agreement provides that the obligations of AIG to
consummate the transactions contemplated by the Investment Agreement are
subject to the fulfillment prior to or on the Closing Date of certain
conditions precedent, or the waiver thereof by AIG, including the following:
(a) the representations and warranties of the Company shall be true and correct
in all material respects as of the Closing Date as though made on and as of the
Closing Date; (b) the Company and its Subsidiaries shall have performed and
complied in all material respects with all agreements and conditions contained
in the Investment Agreement required to be performed or complied with by the
Company or its subsidiaries prior to or at the Closing; (c) there shall not
have been issued and be in effect (whether temporary, preliminary or permanent)
any order of any court or tribunal of competent jurisdiction which prohibits
the consummation of the transactions contemplated in the Investment Agreement
or imposes any material restriction on AIG or the Company in connection with
the transactions contemplated by the Investment Agreement or with respect to
the business operations of the Company either prior to or subsequent to the
Closing Date; (d) no action, suit, investigation or other proceeding relating
to the transactions contemplated by the Investment Agreement shall have been
instituted or threatened before any governmental entity which AIG determines in
its reasonable discretion presents a substantial risk of the restraint or
prohibition of the transactions contemplated in connection therewith; (e) the
Investment Agreement Proposal, the Increased Authorized Capital Proposal and
the Transfer Restrictions Proposal shall have been approved by the requisite
vote of the Company's shareholders; (f) the DOI shall have approved in a form
that is satisfactory to AIG in good faith in its sole discretion all
transactions and acts contemplated by the Investment Agreement (including the
exercise of conversion, exercise and other rights under the Series A Preferred
Stock and Series A Warrants), and AIG shall be satisfied, in good faith in its
sole discretion, as to the status with the DOI of any issues arising out of or
related to the Proposition 103 Ruling or the Company's obligations relating to
Proposition 103, the Company's solvency plan, the rates applicable to the
Company's insurance products, the arrangements relating to the Bank Credit
Agreement or the dividends payable by the Insurance Subsidiaries; (g) any
waiting period (and any extension thereof) applicable to the consummation of
the transactions contemplated by the Investment Agreement (other than the
transactions contemplated by the Master JV Agreement(as defined below)) under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 shall have expired or
been terminated; (h) the Company and the Lenders under the Bank Credit
Agreement shall have entered into a definitive amendment to the Bank Credit
Agreement, effective upon consummation of the Investment Agreement, amending
the Bank Credit Agreement such that the Investment Agreement and the
transactions contemplated thereby are permitted under the Bank Credit Agreement
as so amended and whereby no default, or event which could result in a default,
exists under the Bank Credit Agreement as so amended; (i) the Company shall
have delivered to AIG certifications, executed by the Chief Executive Officer
and the President of the Company, dated the Closing Date, as to certain
matters; (j) the Company shall have received, made, or obtained all required
consents, approvals, authorizations, orders, notices, filings, registrations or
qualifications required in connection with the transactions and acts
contemplated by the Investment Agreement, except where the failure to do so
does not have a Material Adverse Effect (defined below) or a material adverse
effect on the financial condition, properties, business or results of
operations of AIG and its subsidiaries taken as a whole and does not materially
and adversely interfere with the transactions and acts contemplated by the
Investment Agreement; (k) all consents, registrations, approvals, permits or
authorizations of any governmental entity required in connection with the
transactions and acts contemplated by the Investment Agreement shall be in full
force and effect, and no circumstances shall have changed or exist that would,
if known to any governmental entity, be reasonably likely to result in the
withdrawal of its consent, registration, approval, permit or authorization; (l)
AIG shall have received certain
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legal written opinions; (m) there shall not have been any newly adopted or
proposed legislation, regulation or rule that would have a Material Adverse
Effect; (n) the Company shall have provided a letter to AIG from the Company's
auditors stating that, following their review of the Company's books and
records completed not later than five days prior to the Closing Date, they
confirm that there have been no material increases or decreases in specified
balance sheet and income statement items, as mutually agreed, from the date of
the last financial statements provided to AIG; (o) the Company shall have
delivered an opinion of actuary executed by the Chief Actuary of the Company,
as of the most recently completed monthly period for which actuarial
information is available prior to the Closing Date, opining that as of such
date the reserves for loss and loss adjustment expense reflected on the balance
sheet of the Company and its subsidiaries have been established in conformity
with generally accepted actuarial principles and practices consistently
applied, that such reserves were established in conformity with the
requirements of the DOI and that such reserves make a reasonable provision for
all unpaid loss and loss adjustment expense obligations of the Company under
the terms of its policies and agreements; (p) the Company shall have furnished
to AIG such executed and conformed copies of such other opinions and
certificates, letters and documents as AIG may reasonably request and as are
customary for transactions such as those contemplated by the Investment
Agreement; (q) since the date of the Investment Agreement, nothing shall have
occurred which has had, or is reasonably likely to have, a material adverse
effect on the financial condition, regulatory condition, capital, properties,
business, results of operations or prospects of the Company or its subsidiaries
taken as a whole (it being understood that additional gross losses and
allocated loss adjustment expenses relating to the Northridge Earthquake shall
not be taken into account in determining the foregoing); and (r) no person or
group shall have (i) acquired, or commenced the tender offer to acquire, 33
1/3% or more of the Common Stock or (ii) initiated or announced a proxy
solicitation of the holders of Common Stock with the intent of removing one or
more of the current members of the Company's Board of Directors or senior
management or altering management of the Company. "Material Adverse Effect" is
defined in the Investment Agreement as a Material Adverse Effect on the
financial condition, regulatory condition, capital, properties, business,
results of operations or prospects of the Company and its subsidiaries taken as
whole, in each case considered on either a statutory accounting principles
basis or a generally accepted accounting principles basis.
The obligations of the Company to consummate the transactions
contemplated by the Investment Agreement are subject to the fulfillment prior
to or on the Closing Date of certain conditions precedent reciprocal to the
conditions contained in paragraphs (a), (b), (c), (d), (e), (g), (h), (i), (j),
(k) and (l), above, and to the condition that the DOI shall have approved all
transactions and acts contemplated by the Investment Agreement, or to the
waiver of any of the foregoing conditions by the Company.
REGULATORY FILINGS AND APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules promulgated thereunder, certain
transactions, including certain of the transactions contemplated by the
Investment Agreement, may not be consummated unless certain information has
been furnished to the Federal Trade Commission (the "FTC") and the Antitrust
Division of the Justice Department (the "Antitrust Division") and certain
waiting period requirements have been satisfied. Pursuant to the HSR Act, on
October 13, 1994 and October 14, 1994, AIG and the Company, respectively, filed
Notification and Report Forms with the FTC and the Antitrust Division for
review in connection with the Investment Agreement. The HSR Act waiting period
was terminated on November 3, 1994. Notwithstanding the termination of the HSR
Act waiting period, at any time before or after the consummation of the
transactions contemplated by the Investment Agreement, any person may take
action under the antitrust laws, including seeking to enjoin the consummation
of the transactions contemplated by the Investment Agreement or seeking the
divestiture by AIG of all or any part of the securities received by it pursuant
to the Investment Agreement. There can be no assurance that a challenge to the
transactions contemplated by the Investment Agreement on antitrust grounds will
not be made or that, if such a challenge is made, it would not be successful.
In addition, consummation of the Transaction is subject to approval of
the DOI, which was obtained on November 10, 1994.
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Except as disclosed in this Proxy Statement, the Company is not aware
of any other material federal, state or foreign regulatory approval that is
required in order to consummate the Transaction. Should any such approval be
required, it is currently contemplated that such approval will be sought.
TRANSFERABILITY OF THE SERIES A PREFERRED STOCK AND SERIES A WARRANTS
The Series A Preferred Stock, the Series A Warrants or any Common
Stock received upon conversion or exercise of the Series A Preferred Stock or
the Series A Warrants may not be sold or otherwise transferred except in
compliance with the Investment Agreement. The Series A Preferred Stock or the
Common Stock issuable upon conversion of the Series A Preferred Stock may be
transferred at any time, in whole or in part, in private transactions not
requiring registration under the Securities Act of 1933, as amended (the
"Securities Act"), (i) to affiliates of AIG or (ii) commencing one year
following the Closing Date, in amounts not less than $50 million, to
third-party investors reasonably acceptable to the Company. The Series A
Preferred Stock or the underlying Common Stock purchasable on conversion of the
Series A Preferred Stock may also be sold, in whole or in part, in an
underwritten offering effected pursuant to the registration rights granted by
the Registration Rights Agreement described below or, commencing one year
following the Closing Date, pursuant to Rule 144 promulgated under the
Securities Act. See "-- Registration Rights." In addition, the resale of the
shares of Series A Preferred Stock and shares of Common Stock acquired upon
conversion of the Series A Preferred Stock may be subject to certain
restrictions pursuant to the Transfer Restrictions included in the Articles of
Incorporation if the Transfer Restrictions Proposal is approved, unless the
Board of Directors elects to waive the Transfer Restrictions. See "Approval of
the Transfer Restrictions Proposal."
The Series A Warrants are transferable, in whole or in part in private
transactions not requiring registration under the Securities Act, (i) to
affiliates of AIG and (ii) in amounts of not less than two million Series A
Warrants, to third-party investors reasonably acceptable to the Company. The
Common Stock purchasable upon exercise of the Series A Warrants may also be
sold, in whole or in part, in an underwritten offering effected pursuant to the
registration rights granted by the Registration Rights Agreement described
below or, commencing one year following the Closing Date, pursuant to Rule 144
promulgated under the Securities Act. See "-- Registration Rights." In addition,
the exercise of the Series A Warrants and the resale of the Series A Warrants
and any shares of Common Stock purchased upon exercise of the Series A Warrants
will be subject to certain restrictions pursuant to the Transfer Restrictions
included in the Articles of Incorporation if the Transfer Restrictions Proposal
is approved, unless the Board of Directors elects to waive the Transfer
Restrictions. See "Approval of the Transfer Restrictions Proposal."
JOINT VENTURE AGREEMENT
Pursuant to the Investment Agreement, after the Closing Date, the
Company and AIG have agreed to use their respective best efforts to negotiate
and mutually agree upon a master joint venture agreement (the "Master JV
Agreement") whereby the Company and AIG will form a new subsidiary or
subsidiaries to engage in the Company's business in states outside California
mutually agreed from time to time by the parties, thereby enhancing the
Company's expansion plans envisioned prior to the Northridge Earthquake. The
overall venture, and/or each local venture established pursuant to the Master
JV Agreement, will have a name to be agreed by the parties which will include
reference to a portion of the name of each of the parties. The ownership
interests and capital contributions of the parties in the specific ventures
established pursuant to the Master JV Agreement will be as mutually agreed,
reflecting the knowledge, skills, human resources, technology and other
capacities of the parties brought to the particular venture, and in particular
reflecting the Company's special distribution capabilities. It is anticipated
that AIG will provide the initial start-up capital for specific ventures
established pursuant to the Master JV Agreement, subject to mutual agreement
upon the extent of such capital and the ownership interests, profit interests
and other factors related to the specific ventures.
CERTAIN REPRESENTATIONS AND WARRANTIES
Under the Investment Agreement, the Company has made certain
representations and warranties to AIG as to the Company, including (i)
organization and qualification; (ii) authorized capital; (iii) the Series A
Preferred Stock and the Series A Warrants; (iv) corporate power and authority;
(v) insurance, licenses, permits and filings; (vi) non-insurance licenses and
permits; (vii) reports, financial and statutory statements; (viii) required
consents from governmental authorities or other third parties; (ix) insurance
contracts and
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rates; (x) reinsurance; (xi) reserves; (xii) title to properties;
(xiii) intangible property and computer software; (xiv) absence of undisclosed
liabilities; (xv) absence of certain changes to its business, financial
condition or capitalization; (xvi) litigation, liabilities and compliance with
laws; (xvii) compliance with environmental laws; (xviii) employee benefits
plans; (xix) taxes; (xx) insurance; (xxi) financial advisers and brokers;
(xxii) exhibits, schedules and certificates furnished in connection with the
Investment Agreement; (xxiii) labor matters; (xxiv) contracts; (xxv) investment
company status; and (xxvi) exemption of the issuance of the Series A Preferred
Stock and the Series A Warrants from registration under federal securities
laws.
Under the Investment Agreement, AIG has made certain representations
and warranties to the Company as to AIG, including (i) organization and
qualification; (ii) corporate power and authority; (iii) required consents from
governmental authorities or other third parties; (iv) financing; (v) investment
intent and (vi) and the absence of certain actions, suits or proceedings.
TERMINATION
The Investment Agreement may be terminated (a) by the mutual consent
of the Company and AIG; (b) by the Company or AIG if (i) the Closing shall not
have occurred on or prior to April 1, 1995 or (ii) the holders of the shares of
the Common Stock fail to approve the Investment Agreement Proposal, the
Increased Authorized Capital Proposal and the Transfer Restrictions Proposal
and the consummation of the transactions contemplated by the Investment
Agreement, provided that the party seeking termination is not in material
breach of the Investment Agreement; (c) by AIG, if (i) the DOI formally shall
have declined to approve (by order or other official determination, after
pursuit by AIG of all practical remedies before the DOI) the transactions and
acts contemplated by the Investment Agreement in a manner that is satisfactory
to AIG in good faith in its sole discretion, (ii) the Company shall have
breached in any material respect any of its representations or warranties, or
the covenants or agreement contained in the Investment Agreement, which breach
is not cured within 10 days after notice from AIG to the Company specifying
such breach, (iii) the Board of Directors of the Company shall have withdrawn
or modified in any manner adverse to AIG its approval or recommendation of the
transactions contemplated by the Investment Agreement, or the Board of
Directors of the Company, upon request by AIG, shall fail to reaffirm such
approval or recommendation, or shall have resolved to do any of the foregoing
or (iv) prior to the mailing of this Proxy Statement, the Company shall not
have resolved its outstanding issues with the Lenders under the Bank Credit
Agreement on terms that are satisfactory to AIG in its reasonable discretion or
(d) by the Company, (i) if the DOI formally shall have declined to approve (by
order or other official determination, after pursuit by the Company of all
practical remedies before the DOI) any transactions and acts contemplated by
the Investment Agreement or (ii) if AIG shall have breached in any material
respect any of the representations or warranties, or covenants or agreements,
contained in the Investment Agreement, which breach is not cured within 10 days
after notice from the Company to AIG specifying such breach. See "Certain
Matters Related to the Investment Agreement Proposal -- Amendment of the Bank
Credit Agreement" for a discussion of the Amendment and Waiver to the Bank
Credit Agreement that has been entered into by the Company and the Lenders.
If the Investment Agreement is terminated as provided above, such
termination shall be without liability of either the Company or AIG, or any
director, officer, employee or representative of the Company or AIG, to the
other party to the Investment Agreement; provided that the Company or AIG, as
the case may be, shall be liable for any willful breach of the Investment
Agreement and, unless the Investment Agreement is terminated by the Company due
to a material breach of the Investment Agreement by AIG, the Investment
Agreement requires the Company to pay to AIG $1.5 million to reimburse AIG for
the fees, expense and costs associated with the Investment Agreement.
INDEMNIFICATION
All representations and warranties of the Company and AIG contained in
the Investment Agreement shall survive the consummation of the transactions
contemplated by the Investment Agreement for a period of two years from the
Closing Date; provided that the representations and warranties of the Company
which are applicable to federal, state, local and other taxes shall survive
until the applicable statute of limitations has expired.
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The Investment Agreement provides that the Company will indemnify,
defend and hold harmless AIG, its subsidiaries and affiliates and their
respective directors, officers, employees and agents and the successors and
assigns of any of them, from all claims for the period for which such
representation or warranty survives arising out of the breach of any
representation or warranty of the Company contained in the Investment Agreement
or the breach of any covenant or agreement by the Company contained in the
Investment Agreement, the Stock Option Agreement, the Series A Certificate of
Determination, the Series A Warrant Certificate or the other agreements
contemplated by the Investment Agreement; provided, however, that the Company
shall not have any liability to indemnify AIG unless the aggregate of all
losses relating thereto for which the Company would be liable exceeds on a
cumulative basis an amount equal to $7.5 million, and then only to the extent
of any such excess.
The Investment Agreement provides that AIG will indemnify, defend and
hold harmless the Company, its subsidiaries and affiliates and their respective
directors, officers, employees and agents and the successors and assigns of any
of them, from all claims arising out of the breach of any representation or
warranty of AIG contained in the Investment Agreement for the period for which
such representation or warranty survives; provided, however, that AIG shall not
have any liability to indemnify the Company unless the aggregate of all losses
related thereto for which AIG would be liable exceeds on a cumulative basis an
amount equal to $7.5 million, and then only to the extent of any such excess.
EXPENSES OF THE TRANSACTION
Whether or not the transactions contemplated by the Investment
Agreement are consummated, all costs and expenses incurred in connection with
the Investment Agreement will be paid by the party incurring such expense,
subject to the requirement that the Company pay AIG $1.5 million to reimburse
AIG for its fees, expenses and costs associated with the Investment Agreement
in the event of a termination of the Investment Agreement other than due to a
default by AIG. See " -- Termination."
REGISTRATION RIGHTS
As of the Closing Date, the Series A Preferred Stock and the Series A
Warrants will not be listed on the NYSE or any other national securities
exchange and the issuance of the Series A Preferred Stock and the Series A
Warrants will not be registered with the SEC and therefore they will be
restricted securities. However, the Company has entered into a Registration
Rights Agreement with AIG (the "Registration Rights Agreement"), pursuant to
which AIG or any transferee from AIG in a private transaction will be entitled
to certain additional rights with respect to the registration under the
Securities Act of the shares of Series A Preferred Stock or the shares of
Common Stock purchased upon conversion or exercise of the Series A Preferred
Stock or the Series A Warrants (the "Registrable Shares"). The Registration
Rights Agreement provides that AIG or its private transferee may demand
registration with respect to (i) the Registrable Shares, provided that no such
demand registration may be made with respect to an offering of shares having an
aggregate market value of less than $50 million, or (ii) shares of Common Stock
purchased upon exercise of the Series A Warrants, provided that no such demand
registration may be made with respect to an offering of shares having an
aggregate market value of less than $25 million. The Registration Rights
Agreement also provides that, in the event the Company proposes to register any
of its securities under the Securities Act for its own account or for the
account of any other person, AIG or its private transferee will be entitled to
include Registrable Shares in any such registration, subject to the right of
the managing underwriter of any such offering in certain circumstances to
exclude some or all of such Registrable Shares from such registration.
VOTING AGREEMENT
Pursuant to the Investment Agreement, all directors and officers of
the Company holding shares of the Company's Common Stock have entered into a
separate Voting Agreement with AIG (the "Voting Agreement"), pursuant to which
such shareholders have agreed to vote all of the shares of Common Stock owned
of record by them or thereafter acquired in favor of the Investment Agreement
Proposal, the Increased Authorized Capital Proposal and the Transfer
Restrictions Proposal, and against any and all proposals that would adversely
affect, in any way the likelihood of approval of the Investment Agreement and
the consummation of the transactions contemplated thereby.
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Pursuant the Voting Agreement, such shareholders have also agreed that
they will not (i) sell or otherwise transfer, or enter into any voting
agreement and arrangement with respect to, the shares of Common Stock
beneficially owned by them or thereafter acquired (except that each such
shareholder may sell, transfer, exchange, pledge or otherwise dispose of or
encumber up to 2% of his or her shares), or (ii) initiate, solicit or encourage
in any way any offer or proposal which would adversely affect in any way the
likelihood of approval by shareholders of the Investment Agreement and the
consummation of the transactions contemplated thereby; provided that such
shareholders who are directors of the Company shall not be restricted from
taking any action as directors which are reasonably necessary to satisfy such
directors' fiduciary duties to the shareholders of the Company.
SOURCE OF FUNDS; INFORMATION CONCERNING AIG
AIG has informed the Company that the $200 million to be used to
purchase the Series A Preferred Stock and the $16 million to be used to
purchase the Series A Warrants will come from working capital generated in the
ordinary course of its operations.
AIG is a holding company which, through its subsidiaries, is primarily
engaged in a broad range of insurance and insurance-related activities in the
United States and abroad. AIG's member companies write property, casualty,
marine, life and financial services insurance, and are engaged in a range of
financial services businesses throughout the world. AIG's common stock is
listed on the NYSE, as well as the stock exchanges of London, Paris,
Switzerland and Tokyo. The principal executive offices of AIG are located at 70
Pine Street, New York, New York 10270, telephone number (212) 770-7000.
From its origins in 1919, AIG has grown to become a leading U.S.-based
international insurance organization. At September 30, 1994 and December 31,
1993, respectively, AIG's stockholders' equity was approximately $16.2 billion
and $15.2 billion. Net income for the nine-month periods ended September 30,
1994 and 1993 was approximately $1.60 billion and $1.43 billion, respectively,
and net income for the years ended December 31, 1993, 1992 and 1991 was
approximately $1.94 billion, $1.66 billion and $1.55 billion, respectively. As
a diversified international financial services organization, AIG's results of
operations and financial condition are affected by economic and political
conditions, legislative and regulatory actions, the level of insurance claims
(which depends in part on the incidence of catastrophes and judicial decisions
affecting insurer liabilities) and other factors. The Company and AIG believe
that AIG has the financial resources to satisfy its obligation to purchase
additional shares of Series A Preferred Stock in the event the Company elects
to require such investment in light of additional adverse developments with
respect to the Northridge Earthquake.
AIG'S DESIGNEES FOR SERIES A PREFERRED STOCK DIRECTORS
If the Investment Agreement Proposal is approved by the shareholders,
holders of the Series A Preferred Stock, voting separately as a class, will be
entitled to elect two of the Company's eleven directors (the "Series A
Directors"). One vacancy on the Company's Board of Directors has been created
as a result of the resignation of James O. Curley as President and director
effective as of October 31, 1994. Concurrent with the consummation of the
Transaction, two persons designated by AIG will be elected to the Board. Until
the date of the Company's 1995 annual meeting of shareholders (currently
scheduled for May 23, 1995), the Board of Directors shall consist of twelve
members. On the date of the 1995 annual meeting, the Board of Directors will be
reduced to eleven members, with AIG retaining two designees on the Board. AIG
has advised the Company that, upon consummation of the Investment, it will
elect the persons named below as the two Series A Directors to serve until the
next annual meeting of shareholders and until their successors are elected by
the holders of the Series A Preferred Stock and have been duly qualified. AIG
has advised the Company that it currently does not know of any circumstance
which could render any of these individuals unable to take office. The
following sets forth certain information concerning the persons who have been
designated by AIG to serve on the Company's Board of Directors as the Series A
Directors.
Howard Smith, 50, is presently a Senior Vice-President and the
Comptroller of AIG. Prior to joining AIG in October 1984, Mr. Smith spent 19
years with Coopers & Lybrand and was the Partner in charge of that firm's New
York insurance practice.
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Robert Sandler, 52, is presently Senior Vice-President, Senior
Casualty Actuary and Senior Claims Officer of AIG. Mr. Sandler is also
presently the Chairman of American International Underwriters, AIG's overseas
property-casualty operation, and has executive responsibilites in AIG that
include responsibility for oversight of AIG's domestic personal lines
businesses. Mr. Sandler first joined AIG in 1968.
VOTE REQUIRED FOR APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL
Pursuant to Rule 312.00 of the NYSE and the Company's listing
agreement with the NYSE with respect to the outstanding Common Stock,
shareholder approval is required for the issuance of securities convertible
into Common Stock if the Common Stock into which securities are convertible
will have voting power equal to or in excess of 20% of the voting power
outstanding before the issuance of such securities. The Transaction would
constitute such an issuance. Shareholder approval of the Investment Agreement
Proposal will constitute shareholder approval of the Investment for NYSE
purposes. Under the rules of the NYSE, the affirmative vote of the holders of a
majority of the shares of Common Stock represented in person or by proxy and
entitled to vote at the Meeting is required to approve the Investment Agreement
Proposal, provided that the total vote cast on the proposal represents a
majority of the issued and outstanding shares of Common Stock. The Investment
Agreement also requires that the Common Stock issuable upon conversion of the
Series A Preferred Stock and exercise of the Series A Warrants be approved for
listing on the NYSE, subject to official notice of issuance, prior to the
Closing Date.
Pursuant to the Investment Agreement, each of the directors and
officers of the Company holding shares of the Company's Common Stock has
entered into a Voting Agreement with AIG, pursuant to which such shareholders
have agreed to vote all of the shares of Common Stock owned of record by them
or thereafter acquired in favor of the Investment Agreement Proposal, the
Increased Authorized Capital Proposal and the Transfer Restrictions Proposal
and against any and all proposals which would adversely affect, in any way the
likelihood of approval of the Investment Agreement and the consummation of the
transactions contemplated thereby. See "-- The Investment Agreement -- Voting
Agreement."
EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL WILL BE VOTED ON SEPARATELY BY THE SHAREHOLDERS OF THE
COMPANY. NEITHER AIG NOR THE COMPANY IS OBLIGATED TO CONSUMMATE THE TRANSACTION
IN THE EVENT SHAREHOLDERS FAIL TO APPROVE EACH OF THE INVESTMENT AGREEMENT
PROPOSAL, THE INCREASED AUTHORIZED CAPITAL PROPOSAL AND THE TRANSFER
RESTRICTIONS PROPOSAL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE INVESTMENT AGREEMENT PROPOSAL.
CERTAIN MATTERS RELATED TO THE INVESTMENT AGREEMENT PROPOSAL
AMENDMENT OF THE BANK CREDIT AGREEMENT
The Bank Credit Agreement executed and delivered by the Company and
the Lenders in June 1994 contains a comprehensive set of covenants, including
various financial covenants (including the net worth maintenance, minimum
statutory surplus and operating leverage covenants under which the Company was
in default following the September 1994 Revised Loss Estimate), restrictions on
the issuance of equity securities (other than common stock), required
prepayments upon the issuance of equity securities, restrictions on payment of
dividends, restrictions on the incurrence of debt and contingent obligations,
restrictions on investments and restrictions on amendments to the Company's
Articles of Incorporation and restrictions on change of control of the Company.
The obligations of the Company under the Bank Credit Agreement are secured by a
pledge of the stock of the Insurance Subsidiaries.
Pursuant to the Amendment and Waiver executed and delivered by the
Company and the Lenders on October 17, 1994, the Lenders have waived defaults
that would arise under the foregoing provisions and certain other provisions of
the Bank Credit Agreement in connection with execution and delivery of the
Investment Agreement, consummation of the Transaction and consummation of the
transactions contemplated by the Increased Authorized Capital Proposal, the
Transfer Restrictions Proposal and the Indemnification Agreements Proposal.
Certain of the waivers are conditional, including waiver of requirements that
proceeds from the issuance of the Series A Preferred Stock and the Series A
Warrants be applied to prepay
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the loans under the Bank Credit Agreement, waiver of restrictions on the
disposition of assets contemplated by the quota share agreements, waiver of
restrictions on transactions with affiliates (to the extent AIG may be deemed
an affiliate), waiver of existing defaults under the specified financial
covenants and waiver of the event of default that would arise upon any change
of control in connection with the Transaction. The foregoing waivers will
expire if (i) any other default under the Bank Credit Agreement arises before
the Transaction is consummated, (ii) the Investment Agreement is terminated or
AIG or the Company shall announce its intention not to consummate the
Transaction or (iii) the Transaction is not consummated prior to December 31,
1994 (provided that such date is subject to extension for up to three months if
certain conditions are met). If the conditional waivers expire, the Amendment
and Waiver provides that all rights and remedies of the Lenders under the Bank
Credit Agreement shall be fully reinstated as if such waivers had never been
granted.
Effective upon consummation of the Transaction by December 31, 1994
(or such extended date as described above), the Bank Credit Agreement will also
be amended in certain respects. Among other changes, the amendments would
revise the restrictions on issuance of equity securities to permit issuance of
the Series A Preferred Stock (including the Earthquake Shares and PIK Shares)
and certain other preferred stock and revise the definition of Net Worth to
include the aggregate liquidation value of Series A Preferred Stock and such
other preferred stock (but not exceeding the cash consideration received
therefor). The amendments would also revise the restrictions on dividends to
permit payment of cash dividends on the Series A Preferred Stock on the same
basis as cash dividends on Common Stock (i.e., requiring satisfaction of
certain financial coverage standards and absence of defaults), provided that in
1995 the Company may pay cash dividends on the Series A Preferred Stock after
the loans and commitments under the Bank Credit Agreement are reduced from $160
million to $140 million, so long as no defaults exist and the sum of such cash
dividends and 1995 debt service does not exceed the aggregate amount of cash
dividends received by the Company from the Insurance Subsidiaries after
consummation of the Transaction. Under these provisions no assurances can be
given at this time that the Company will be permitted to pay dividends on the
Series A Preferred Stock in cash rather than PIK Shares. In addition, under a
new covenant added by the Amendment and Waiver, if an Excess Loss Amount arises
in connection with the Northquake Earthquake and the Company is entitled to
require AIG to purchase any Earthquake Shares, then, through the exercise of
such right or through the issuance of other preferred stock or other equity
securities having terms satisfactory to a specified percentage of Lenders, the
Company is required within 90 days to obtain an amount of capital for
contribution to the Insurance Subsidiaries equal to the lesser of (i) the
proceeds from the sale of the Earthquake Shares AIG is required to purchase and
(ii) the amount necessary to restore the aggregate surplus of the Insurance
Subsidiaries to the amount thereof immediately after consummation of the
Transaction, giving effect to capital contributions in connection with the
Transaction. The foregoing covenant could materially restrict the Company's
options in reviewing alternatives to issuance of the Earthquake Shares in the
event that an Excess Loss Amount arises.
Certain transactions contemplated by the Investment Agreement remain
subject to possible restriction under the Bank Credit Agreement. The Lenders
have not consented to any investment that may be contemplated by the Master JV
Agreement and the Company intends to review its proposed investment thereunder,
if any, with the Lenders when the terms of the Master JV Agreement are more
fully developed. The Lenders have also not waived requirements that proceeds
from the exercise of the Series A Warrants be applied to prepay the loans under
the Bank Credit Agreement, although under the Transfer Restrictions such
exercise is not anticipated for at least 38 months after consummation of the
Transaction.
AIG has notified the Company that, conditional upon the Closing Date
occurring on or prior to December 31, 1994, it approves the form of the
Amendment and Waiver and acknowledges that the Amendment and Waiver resolves
the Company's outstanding issues with the Lenders under the Bank Credit
Agreement.
THE STOCK OPTION AGREEMENT
As a condition to entering into the letter of intent, AIG had
requested that the Company enter into a stock option agreement granting AIG the
right to purchase shares of Common Stock of the Company in the
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event certain circumstances arise that could interfere with the consummation of
the Investment. AIG's purpose in requesting such an arrangement was to provide
itself with added assurances that, once the letter of intent was signed, the
Company would not use AIG's investment proposal solely to seek a better deal
for the Company from a third-party investor. After negotiations regarding the
terms of such stock option arrangement, the Company and AIG, concurrently with
the execution of the letter of intent, entered into the Stock Option Agreement.
The consummation of the transactions contemplated by the Stock Option Agreement
are not subject to shareholder approval. The following is a summary of certain
provisions of the Stock Option Agreement.
Option Grant. Pursuant to the Stock Option Agreement, the Company has
granted to AIG an unconditional, irrevocable option (the "Option") to purchase
up to 7,720,871 fully paid and nonassessable shares of Common Stock at a price
per share in cash equal to $11.33 (the "Option Price"). The Stock Option
Agreement provides that the Option expires upon the consummation of the
transactions contemplated by the Investment Agreement. The Option may be
exercised as a whole or in part in one or more exercises from time to time, but
if, and only if, a Triggering Event (as defined under "-- Exercise of the
Option") occurs prior to the expiration of the Option. The Stock Option
Agreement provides that in no event shall the number of shares issuable upon
exercise of the Option exceed 15% of the total outstanding Common Stock at the
time of exercise (the "Maximum Applicable Percentage"). In the event that any
additional shares of Common Stock are issued or otherwise become outstanding
after the date of the Stock Option Agreement, the aggregate number of shares of
Common Stock purchasable upon exercise of the Option (inclusive of shares, if
any, previously purchased upon exercise of the Option) shall automatically be
increased so that, after such issuance, it shall equal the Maximum Applicable
Percentage. Any such increase shall not affect the Option Price.
Exercise of the Option. The right of AIG or any subsequent holder of
the Option (a "Holder") to exercise the Option will be triggered only in the
event that one or more of the following events occurs on or prior to October
31, 1995 (each such event referred to hereinafter as a "Triggering Event") and
prior to the expiration of the Option:
(i) The Company or any subsidiary (as defined) of the
Company, without having received AIG's prior written consent, shall
have entered into an agreement to engage in an Acquisition Transaction
(as defined below) with any person (the term "person" for purposes of
this Agreement having the meaning assigned to such term in Sections
3(a)(9) and 13(d)(3) of the Exchange Act, and the rules and
regulations thereunder), other than AIG or a subsidiary of AIG
(collectively, "Excluded Persons"), or the Company or any subsidiary
of the Company, without having received AIG's prior written consent,
shall have recommended that the shareholders of the Company approve or
accept any Acquisition Transaction; the term "Acquisition Transaction"
shall mean (A) a merger or consolidation, joint venture agreement, or
any similar transaction, with the Company or any subsidiary of the
Company, (B) a purchase, lease or other acquisition outside the
ordinary course of business of any material assets, or an assumption
of any material assets, of the Company or any subsidiary of the
Company, (C) a sale, exchange or other issuance of any capital stock
of the Company or any of its subsidiaries or securities convertible
into or exchangeable for any such capital stock, except such issuances
pursuant to the exercise of options issued to employees under benefit
plans as disclosed in the Company's filings with the SEC prior to the
date of the Stock Option Agreement, (D) any reinsurance transaction
outside the ordinary course of business, (E) a purchase or other
acquisition (including by way of merger, consolidation, share
exchange, tender or exchange offer or otherwise) of beneficial
ownership (as the term "beneficial ownership" is defined in Section
13(d) of the Exchange Act and the rules and regulations thereunder) of
securities representing 10% or more of the voting power of the Company
or any subsidiary of the Company, or (F) any substantially similar
transaction;
(ii) (A) Any person, other than an Excluded Person, alone
or together with such person's affiliates and associates (as the terms
"affiliate" and "associate" are defined in Rule 12b-2 under the
Exchange Act), shall have acquired beneficial ownership or the right
to acquire beneficial ownership of 20% or more of the then outstanding
shares of Common Stock, or (B) any group (as the term "group" is
defined
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in Section 13(d)(3) of the Exchange Act), other than a group of which
any Excluded Person is a member, shall have been formed that
beneficially owns 20% or more of the shares of Common Stock then
outstanding; or
(iii) After a proposal is made by any person, other than an
Excluded Person, to the Company or its shareholders to engage in an
Acquisition Transaction, the Company shall have breached any covenant
or agreement contained in the letter of intent, including, without
limitation, by failing to promptly provide AIG with any information
that it provides to any third party proposing an Acquisition
Transaction as required to be pursuant to the Investment Agreement
(see "The Investment Agreement -- Competing Acquisition Proposals"),
unless such breach is promptly cured without jeopardizing the prompt
consummation of the transactions contemplated by the terms of the
Investment Agreement.
The Holder shall be entitled to exercise the Option provided that it
sends a written notice of such exercise to the Company within 120 days
following the first such Triggering Event. The Stock Option Agreement provides
that the 120-day period for the exercise of the Option after a Triggering Event
shall be extended in each case at the request of the Holder (i) to the extent
necessary to obtain all regulatory approvals for the exercise of such rights
and for the expiration of all statutory waiting periods and (ii) to the extent
necessary to avoid liability under Section 16(b) of the Exchange Act by reason
of such exercise.
AIG's Right to Require the Company to Repurchase the Option. The
Stock Option Agreement provides that, upon the occurrence of a Triggering Event
that occurs prior to the expiration of the Option, (i) at the request of a
Holder, delivered from time to time in writing within 120 days of such
occurrence (a "Repurchase Notice"), the Company will be required to repurchase
the Option from the Holder, as a whole or in part, at a price (the "Option
Repurchase Price") equal to the greater of (x) the number of shares of Common
Stock then purchasable upon exercise of the Option (or such lesser number of
shares as may be subject to the Repurchase Notice (as defined below))
multiplied by the amount by which the market/offer price (as defined below)
exceeds the Option Price and (y) $10 million and (ii) at the request of a
Holder or any person who has been a Holder (for purposes of the Option
repurchase provisions, each such person being referred to as a "Holder"),
delivered in writing within 120 days of such occurrence, the Company shall
repurchase such number of shares of Common Stock upon total or partial exercise
of the Option ("Option Shares") from such Holder as the Holder shall designate
at a price (the "Option Share Repurchase Price") equal to the number of shares
designated multiplied by the "market/offer" price; provided, that in no event
shall the Company be required to pay cash of more than an aggregate of $10
million to repurchase any portion of the Option or Option Shares. The term
"market/offer price" is defined to mean the highest of (x) the price per share
of Common Stock at which a tender or exchange offer for Common Stock has been
made, (y) the price per share of Common Stock to be paid by any third party
pursuant to an agreement with the Company and (z) the highest closing price for
shares of Common Stock within the three-month period immediately preceding the
delivery of the Repurchase Notice. In the event that a tender or exchange offer
is made for the Common Stock of the Company or an agreement is entered into for
a merger or consolidation involving consideration other than cash, the value of
the securities or other property issuable or deliverable in exchange for the
Common Stock shall be determined by a nationally recognized investment banking
firm selected by the Company.
The Stock Option Agreement provides that, to the extent that, upon or
following the delivery of a Repurchase Notice, the Company is prohibited under
applicable law or regulation, or as a consequence of administrative policy,
from repurchasing the Option (or any portion thereof) and/or any Option Shares
subject to the Repurchase Notice, the Company shall immediately so notify the
Holder in writing and thereafter deliver or cause to be delivered, from time to
time, to the Holder the portion of the Option Repurchase Price and the Option
Share Repurchase Price, as applicable, that Company is no longer prohibited
from delivering, within five business days after the date on which it is no
longer so prohibited; provided, however, that upon notification by the Company
in writing of such prohibition, the Holder may within five days of receipt of
such notification from the Company (and notwithstanding any prior delivery by
the Company of any portion of the Option Repurchase Price and/or the Option
Share Repurchase Price) revoke in writing its Repurchase Notice, as a whole or
in part (a "Notice of Revocation"), whereupon the Company shall promptly
deliver to the Holder (i) a new Stock Option Agreement evidencing the right of
the
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Holder to purchase that number of shares of Common Stock equal to the sum
of (A) the number of shares of Common Stock purchasable upon exercise of the
Option at the time of delivery of the Repurchase Notice that were not subject
to such Repurchase Notice plus (B) the number of shares subject to the Notice
of Revocation and (ii) a certificate for the Option Shares subject to the
Notice of Revocation. Notwithstanding anything to the contrary in the Stock
Option Agreement, including, without limitation, the time limitations on the
exercise of the Option, the Holder may exercise the Option for 120 days after
Notice of Revocation has been issued.
The 120-day periods applicable to the exercise of a Holder's rights
with respect to a repurchase by the Company of the Option or any exercise of
the Option after a Notice of Revocation shall be extended in each case at the
request of the Holder (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights and for the expiration of all
statutory waiting periods and (ii) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise.
Registration Rights. Upon the occurrence of a Triggering Event that
occurs prior to the expiration of the Option, the Company shall, at the request
of AIG delivered in the notice of exercise of the Option, as promptly as
practicable prepare, file and keep current a shelf registration statement under
the Securities Act covering any or all Option Shares issued and issuable
pursuant to the Option and shall use its best efforts to cause such
registration statement to become effective and remain current in order to
permit the sale or other disposition of any Option Shares in accordance with
any plan of disposition requested by AIG; provided, however, that the Company
may postpone filing a registration statement relating to a registration request
for a period of time (not in excess of 120 days) if in its judgment such filing
would require the disclosure of material information that the Company has a
bona fide business purpose for preserving as confidential.
Regulatory Approvals Upon Exercise of the Option. The obligation of
the Company to deliver any shares of Common Stock upon exercise of all or a
portion of the Option is subject to the receipt of any necessary approvals
under the HSR Act (which have been obtained) and any rules and regulations of
the DOI applicable to the exercise of the portion of the Option being
exercised. In the event that a Holder has complied with all regulatory filings
requirements required by the HSR Act or the DOI and, as of the time at which
the Option is exercised, the applicable regulatory agency has failed to approve
of AIG's exercise of all or a portion of the Option, the Holder may exercise
its rights to require the Company to repurchase the Option with respect to the
portion of the Option not approved (as well as all rights under the Stock
Option Agreement with respect to the portion approved or not subject to
approval).
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PROPOSAL 2
APPROVAL OF THE INCREASED AUTHORIZED CAPITAL PROPOSAL
At a meeting held on October 17, 1994, the Board of Directors, by
unanimous vote, approved, subject to approval by the shareholders, an amendment
to the Company's Articles of Incorporation to increase the number of shares of
Common Stock which the Company is authorized to issue from 80 million shares to
110 million shares. The text of the proposed amendment is set forth as Appendix
V hereto. Shareholders are urged to read Appendix V in its entirety.
DESCRIPTION OF THE PROPOSED AMENDMENT
The Company's Articles of Incorporation currently authorize the
issuance of 80 million shares of Common Stock, of which 51,472,471 shares were
issued and outstanding as of November 1, 1994. Of the remaining 28,527,529
unissued shares, as of November 1, 1994, 334,409 shares were reserved for
issuance under the Company's Restricted Shares Plan and 240,000 shares were
reserved for issuance under the Company's Savings and Security Plan 401(k).
Therefore, there were only 28,085,744 shares of authorized but unissued and
unreserved Common Stock available for issuance as of November 1, 1994.
PURPOSE AND EFFECT OF THE PROPOSED AMENDMENT
Assuming that the Investment Agreement Proposal and the Increased
Authorized Capital Proposal are approved by the shareholders, pursuant to the
Investment Agreement, the Company will be required to reserve for issuance an
aggregate of 49,197,353 shares of Common Stock issuable upon conversion of the
Series A Preferred Stock (including the Earthquake Shares and the PIK Shares)
and exercise of the Series A Warrants.
If the Increased Authorized Capital Proposal is approved by the
shareholders, sufficient additional shares of Common Stock will be available
for issuance by the Company pursuant to the Investment Agreement and thereafter
from time to time, without further action or authorization by the shareholders
(except as may be required in a specific case by law or by any exchange on
which the Company's securities may then be listed and except further that the
Investment Agreement restricts such issuances as described under "Approval of
the Investment Agreement Proposal -- The Investment Agreement -- Restrictions
on Additional Issuances of Capital Stock"), for such corporate purposes as may
be deemed to be in the best interests of the Company and its shareholders.
As of the date of this Proxy Statement, other than the issuance of
shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, exercise of the Series A Warrants contemplated by the Investment
Agreement or exercise of the Stock Option Agreement, or the issuance of shares
of Common Stock pursuant to the Company's Restricted Shares Plan, the Board of
Directors has no agreements, commitments or plans to issue any additional
shares of Common Stock. Shareholders generally do not have preemptive rights,
although, pursuant to the Investment Agreement, AIG will have certain rights to
participate in future issuances of capital stock by the Company. See "Approval
of the Investment Agreement Proposal -- The Investment Agreement --
Restrictions on Additional Issuances of Capital Stock."
VOTE REQUIRED FOR APPROVAL OF THE INCREASED AUTHORIZED CAPITAL PROPOSAL
Under California law, the affirmative vote of the holders of a
majority of the issued and outstanding shares of Common Stock entitled to vote,
voting as a single class, is required to approve the adoption of the proposed
amendment to the Company's Article of Incorporation. If approved, and if the
Investment Agreement Proposal is approved, the amendment will take effect upon
the filing of the amendment with the office of the California Secretary of
State. The Company intends to make such filing as soon as practicable following
approval.
Pursuant to the Investment Agreement, all directors and officers of
the Company holding shares of the Company's Common Stock have entered into
Voting Agreements with AIG, pursuant to which such shareholders have agreed to
vote all of the shares of Common Stock owned of record by them or thereafter
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acquired in favor of the Investment Agreement Proposal, the Increased
Authorized Capital Proposal and the Transfer Restrictions Proposal and against
any and all proposals which would adversely affect in any way the likelihood of
approval of the Investment Agreement and the consummation of the Transaction.
EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL WILL BE VOTED ON SEPARATELY BY THE SHAREHOLDERS OF THE
COMPANY. NEITHER AIG NOR THE COMPANY IS OBLIGATED TO CONSUMMATE THE TRANSACTION
IN THE EVENT SHAREHOLDERS FAIL TO APPROVE EACH OF THE INVESTMENT AGREEMENT
PROPOSAL, THE INCREASED AUTHORIZED CAPITAL PROPOSAL AND THE TRANSFER
RESTRICTIONS PROPOSAL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPROVAL OF THE INCREASED AUTHORIZED CAPITAL PROPOSAL.
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PROPOSAL 3
APPROVAL OF THE TRANSFER RESTRICTIONS PROPOSAL
At a meeting held on October 17, 1994, the Board of Directors, by
unanimous vote, approved, subject to approval by the shareholders, an amendment
to the Company's Articles of Incorporation to impose certain restrictions (the
"Transfer Restrictions") on the transferability and ownership of stock of the
Company for up to 38 months following consummation of the Transaction. The text
of the proposed amendment is set forth as Appendix VI hereto. Shareholders are
urged to read Appendix VI in its entirety.
PURPOSE OF THE PROPOSED AMENDMENT
The Transfer Restrictions are designed to restrict direct and indirect
transfers of the Company's stock that could result in the imposition of
limitations on the use by the Company, for federal income tax purposes, of the
NOLs and other tax attributes that are and will be available to the Company, as
discussed more fully below.
THE COMPANY'S NOLS AND SECTION 382
The Company estimates that as of December 31, 1994, NOLs of
approximately $400 million will be available to offset taxable income
recognized by the Company in periods after December 31, 1994. For federal
income tax purposes, these NOLs will expire in the year 2009. NOLs benefit the
Company by offsetting taxable income dollar-for-dollar by the amount of the
NOLs, thereby eliminating (subject to a relatively minor alternative minimum
tax) the 35% federal corporate tax on such income.
The benefit of a company's NOLs can be reduced or eliminated under
Section 382 of the IRC. Section 382 limits the use of losses and other tax
benefits by a company that has undergone an "ownership change," as defined in
Section 382. Generally, an ownership change occurs if one or more shareholders,
each of whom owns 5% or more in value of a company's capital stock, increase
their aggregate percentage ownership by more than 50 percentage points over the
lowest percentage of stock owned by such shareholders over the preceding
three-year period. For this purpose, all holders who each own less than 5% of a
company's capital stock are generally treated together as one or more 5 percent
shareholders. In addition, certain constructive ownership rules, which
generally attribute ownership of stock to the ultimate beneficial owner thereof
without regard to ownership by nominees, trusts, corporations, partnerships or
other entities, or to related individuals, are applied in determining the level
of stock ownership of a particular shareholder. Special rules, described below,
can result in the treatment of options (including warrants) as exercised if
such treatment would result in an ownership change. All percentage
determinations are based on the fair market value of a company's capital stock,
including any preferred stock which is voting or convertible (or otherwise
participates in corporate growth).
If an ownership change of the Company were to occur, the amount of
taxable income in any year (or portion of a year) subsequent to the ownership
change that could be offset by NOLs or other carryovers existing (or
"built-in") prior to such ownership change could not exceed the product
obtained by multiplying (i) the aggregate value of the Company's stock
immediately prior to the ownership change (with certain adjustments) by (ii)
the federal long-term tax exempt rate (currently 6.25%). Because the value of
the Company's stock, as well as the federal long-term tax-exempt rate,
fluctuate, it is impossible to predict with any accuracy the annual limitation
upon the amount of taxable income of the Company that could be offset by such
NOLs or other items if an ownership change were to occur on or subsequent to
the Closing Date. The Company would incur a corporate-level tax (current
maximum federal rate of 35%) on any taxable income during a given year in
excess of such limitation. While the NOLs not used as a result of this
limitation remain available to offset taxable income in future years, the
effect of an ownership change, under certain circumstances, would be to
significantly defer the utilization of the NOLs, accelerate the payment of
federal income tax, cause a portion of the NOLs to expire prior to their use,
reduce stockholders' equity and slow the growth of statutory policyholders'
surplus.
EFFECT OF THE TRANSACTION
Approval and consummation of the Transaction increases the risk that
the Company will undergo an ownership change because of the significant change
in ownership attributable to AIG's ownership interest in the Company. The
Company has determined, however, that in order for there to be an ownership
change of
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the Company on the Closing Date, certain factual determinations must be
made with respect to the value of the Series A Preferred Stock and the
principal purpose underlying the issuance and structure of the securities
issued (or issuable) pursuant to the Investment Agreement. Regulations issued
in March 1994 provide that an "option" will be treated as exercised for
purposes of Section 382 if it meets any one of three tests, each of which will
apply only if a "principal purpose" of the issuance, transfer or structuring of
the option was to avoid or ameliorate the impact of an ownership change under
Section 382. The term "option" for this purpose is defined broadly to include,
among other things, a contingent purchase, warrant or put, regardless of
whether it is contingent or otherwise not currently exercisable. Under this
definition, the Series A Warrants and the Earthquake Shares, as well as any PIK
Shares, could be viewed as "options." The Company believes that, based on its
estimate of the potential values of the Series A Preferred Stock, its knowledge
of the current ownership of Common Stock by 5 percent shareholders, and the
current trading price of the Common Stock, all of which are subject to change
following the date of this Proxy Statement, an ownership change of the Company
will not occur on the Closing Date unless there is a determination that a
principal purpose of the Transaction structure governing the issuance of the
Series A Preferred Stock or the Series A Warrants was to avoid or ameliorate
the impact of an ownership change under Section 382.
The Company did not negotiate the terms of the Investment Agreement,
including the terms of the Series A Preferred Stock (including the PIK Shares
and the Earthquake Shares) or the Series A Warrants, with a view to avoid or
ameliorate the impact of an ownership change of the Company under Section 382,
and therefore the Company believes that the issuance, transfer or structuring
of any aspect of the Investment Agreement did not have as one of its purposes
the avoidance or amelioration of the impact of an ownership change. AIG also
has indicated that it did not negotiate the terms of the Investment Agreement
with a view to avoiding an ownership change, and it has indicated its belief
that the issuance, transfer or structuring of any aspect of the Investment
Agreement did not have as one of its purposes the avoidance or amelioration of
an ownership change of the Company. As a result, both the Company and AIG have
indicated their belief that none of the "options" relating to the Investment
Agreement should be treated as "exercised" as of the Closing Date for purposes
of determining whether an ownership change of the Company will occur on the
Closing Date. The Company and AIG's conclusions are not binding on the IRS,
however, and thus the IRS could challenge this conclusion. If the IRS were to
successfully challenge this position, it is possible that the consummation of
the Transaction would cause an ownership change of the Company.
Purchases by other shareholders of the Company's Common Stock can
effect the percentage shift in the Company's ownership as determined for
purposes of Section 382, and any such acquisition could increase the likelihood
that the Company will experience an ownership change if such shift, coupled
with the consummation of the Transaction, causes the ownership by 5 percent
shareholders (including groups of less-than-5 percent shareholders that are
treated as 5 percent shareholders) of the Company to increase by more than 50
percentage points during a three-year period.
The Company has proposed, and the Board of Directors of the Company
have approved, the Transfer Restrictions based on the assumption that the
Company will not experience an ownership change from the date hereof to and
including the Closing Date, and that consummation of the Transaction will not
result in an ownership change of the Company.
DESCRIPTION AND EFFECT OF THE PROPOSED TRANSFER RESTRICTIONS
THE FOLLOWING IS A BRIEF SUMMARY OF THE PROPOSED TRANSFER
RESTRICTIONS, THE FORM OF WHICH IS ATTACHED IN ITS ENTIRETY AS APPENDIX VI AND
IS INCORPORATED HEREIN BY REFERENCE. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE PROPOSED TRANSFER RESTRICTIONS. ALL
SHAREHOLDERS ARE URGED TO READ THE PROPOSED TRANSFER RESTRICTIONS IN THEIR
ENTIRETY.
If approved, the proposed Transfer Restrictions would add new Article
V of the Articles of Incorporation of the Company.
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DESCRIPTION OF THE PROPOSED TRANSFER RESTRICTIONS
Upon approval and filing of the Transfer Restrictions, Article V
generally will restrict, until 38 months after the Closing Date (or earlier in
certain events), any direct or indirect transfer of "stock" (which includes the
Series A Preferred Stock, the Common Stock and any other interest treated as
"stock" for purposes of Section 382) of the Company if the effect would be to
increase the ownership of stock by any person who during the preceding
three-year period owned more than 4.75% of the Company's stock, would otherwise
increase the percentage of stock owned by a "5 percent shareholder" (as defined
in the IRC, substituting "4.75 percent" for "5 percent"), or otherwise would
cause an ownership change of the Company within the meaning of Section 382. For
purposes of applying the 4.75% limitation on acquisitions of ownership, the
4.75% threshold applies separately to the Series A Preferred Stock and the
Common Stock, so that an acquisition of more than 4.75% of either series could
invoke the Transfer Restrictions notwithstanding the possibility that the
purported transferee would not own more than 4.75% of the value of the
Company's stock in the aggregate. Transfers included under the Transfer
Restrictions include sales to persons who would exceed the thresholds discussed
above, or to persons whose ownership of shares would by attribution cause
another person to exceed such thresholds, as well as sales by persons who
exceeded such thresholds prior to the Transfer Restrictions becoming effective.
Numerous rules of attribution, aggregation and calculation prescribed under the
IRC (and related regulations) will be applied in determining whether the 4.75%
threshold has been met and whether a group of less than 4.75 percent
shareholders will be treated as a "public group" that is a 5 percent
shareholder under Section 382. As a result of these attribution rules, the
Transfer Restrictions could result in prohibiting ownership of the Company's
stock as a result of a change in the relationship between two or more persons
or entities, or a transfer of an interest other than the Company's stock, such
as an interest in an entity that, directly or indirectly, owns the Company's
stock. The Transfer Restrictions may also apply to proscribe the creation or
transfer of certain "options" (which are broadly defined) in respect of the
Company's stock to the extent, generally, that exercise of the option would
result in a proscribed level of ownership.
Generally, the Transfer Restrictions will be imposed only with respect
to the amount of the Company's stock (or options with respect to the Company's
stock) purportedly transferred in excess of the threshold established in the
Transfer Restrictions. In any event, the restrictions will not prevent a
transfer if the purported transferee obtains the approval of the Board of
Directors of the Company, which approval shall be granted or withheld in the
sole and absolute discretion of the Board of Directors, after considering all
facts and circumstances including but not limited to future events deemed by
the Board of Directors to be reasonably possible.
The Company believes that, as of the date hereof, the only
shareholders that would, or may, be treated as beneficially owning at least
4.75% of the Company's stock are Messrs. Foster and DeNault (and persons
treated for purposes of Section 382 as owning their shares), Union Automobile
Insurance Company and its affiliates, and, possibly, the Capital Group, Inc.
and its affiliates and Alliance Capital Management, L.P. and its affiliates
(although the beneficial ownership of the Capital Group's and Alliance's shares
is unclear). In addition, if the Transaction is approved and consummated, AIG
will be a 4.75 percent shareholder on the Closing Date. There may be other
shareholders that beneficially own at least 4.75% of the Company's stock,
although the Company is not aware of any such shareholders. Except as discussed
below, the Transfer Restrictions would restrict any other person or entity (or
group thereof) from acquiring sufficient stock of the Company to cause such
person or entity to become the owner of 4.75% of the Company's stock, and would
prohibit persons that own over 4.75% of the Company's stock generally from
increasing or decreasing their ownership of the Company's stock, without
obtaining the approval of the Company's Board of Directors.
Assuming approval and filing of the Transfer Restrictions, Article V
of the Articles of Incorporation of the Company would provide for all
certificates representing the Company's stock, including stock issued on a
negotiated or other transfer thereof, to bear the following legend: "THE SHARES
OF STOCK REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS PURSUANT TO ARTICLE V
OF THE ARTICLES OF INCORPORATION OF THE CORPORATION REPRINTED IN ITS ENTIRETY
ON THE BACK OF THIS CERTIFICATE." The Board of Directors also intends to issue
instructions to or
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make arrangements with the transfer agent of the Company (the "Transfer Agent")
to implement the Transfer Restrictions. The Transfer Restrictions provide that
the Transfer Agent shall not record any transfer of the Company's stock
purportedly transferred in excess of the threshold established in the Transfer
Restrictions. The Transfer Agent also has the right, prior to and as a
condition to registering any transfers of the Company's stock on the Company's
stock transfer records, to request an affidavit from the purported transferee
of the stock regarding such purported transferee's actual and constructive
ownership of the Company's stock, and if the Transfer Agent does not receive
such affidavit or the affidavit evidences that the transfer would violate the
Transfer Restrictions, the Transfer Agent is required to notify the Company and
to not enter the transfer in the Company's stock transfer records. These
provisions may result in the delay or refusal of certain requested transfers of
the Company's stock.
Upon adoption and filing of the Transfer Restrictions, any direct or
indirect transfer of stock attempted in violation of the restrictions would be
void ab initio as to the purported transferee, and the purported transferee
would not be recognized as the owner of the shares owned in violation of the
restrictions for any purpose, including for purposes of voting and receiving
dividends or other distributions in respect of such stock, or in the case of
options, receiving stock in respect of their exercise. Stock acquired in
violation of the Transfer Restrictions is referred to as "Excess Stock."
Excess Stock is automatically transferred to a trustee for the benefit
of a charitable beneficiary designated by the Company, effective as of the
close of business on the business day prior to the date of the violative
transfer. Any dividends or other distributions paid prior to discovery by the
Company that the stock has been transferred to the trustee are treated as held
by the purported transferee as agent for the trustee and must be paid to the
trustee upon demand, and any dividends or other distributions declared but
unpaid after such time shall be paid to the trustee. Votes cast by a purported
transferee with respect to Excess Stock prior to the discovery by the Company
that the Excess Stock was transferred to the trustee will be rescinded as void
and recast in accordance with the desire of the trustee acting for the benefit
of the charitable beneficiary. The trustee shall have all rights of ownership
of the Excess Stock. As soon as practicable following the receipt of notice
from the Company that Excess Stock was transferred to the trustee, the trustee
is required to sell such Excess Stock in an arms-length transaction that would
not constitute a violation under the Transfer Restrictions. The net proceeds of
the sale, after deduction of all costs incurred by the Company, the Transfer
Agent, and the trustee, will be distributed first to the violating shareholder
in an amount equal to the lesser of such proceeds or the cost incurred by the
shareholder to acquire such Excess Stock, and the balance of the proceeds, if
any, will be distributed to the charitable beneficiary together with any other
distributions with respect to such Excess Stock received by the trustee. If the
Excess Stock is sold by the purported transferee, such person will be treated
as having sold the Excess Stock as an agent for the trustee, and shall be
required to remit all proceeds to the trustee (less, in certain cases, an
amount equal to the amount such person otherwise would have been entitled to
retain had the trustee sold such shares).
Special provisions apply where the violative transfer involves a
transfer by a 4.75 percent shareholder, which are designed to continue to treat
such 4.75 percent shareholder as owning the shares transferred. In such case,
the Company must attempt to locate the person or public group that purchased
the Excess Stock, and if such person or public group can be located, the Excess
Stock will be required to be returned (together with any distributions received
thereon) to the transferor, and the transferor will be required to return the
purchase price, together with all other losses, damages, costs and expenses
incurred by that purchaser, to the purchaser. If the Company is unable to
locate the purchaser within 90 days, the Company is required to purchase stock
equal in type and number to the stock transferred in a manner that would reduce
the ownership of the person or public group whose ownership increased as a
result of the prohibited transfer and will hold such stock on behalf of the
4.75 percent shareholder that transferred the stock in violation of the
Transfer Restrictions. In such case, the 4.75 percent shareholder will be
treated as the owner of the Excess Stock for all purposes, and amounts incurred
by the Company to finance the purchase of such stock will be treated as a loan
to such shareholder, with interest at the "applicable federal rate" under
Section 1274(d) of the IRC.
If the violative transaction results from indirect ownership of stock,
the Transfer Restrictions provide a mechanism that is intended to invalidate
the ownership of the Company's stock actually owned by the
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violating shareholder and any persons within such shareholder's control group.
Only if such provisions will not be effective to prevent a violation of the
Transfer Restrictions will ownership of stock by other persons be invalidated
under the Transfer Restrictions.
The Transfer Restrictions provide that any person who knowingly
violates the Transfer Restrictions or any persons in the same control group
with such person shall be jointly and severally liable to the Company for, and
shall indemnify and hold the Company harmless against, any and all damages
suffered as a result of such violation, including but not limited to damages
resulting from a reduction in or elimination of the Company's ability to use
its NOLs.
The Transfer Restrictions will not apply to (i) the sale to AIG of
Series A Preferred Stock pursuant to the Investment Agreement, (ii) the sale to
AIG of Series A Warrants pursuant to the Investment Agreement, (iii) the
conversion by AIG of Series A Preferred Stock, (iv) the sale by AIG of Series A
Preferred Stock or Common Stock acquired upon the conversion thereof if the
sale would not otherwise be prohibited under the Transfer Restrictions but for
AIG's ownership of stock in the Company, (v) any purchase effected by AIG as
permitted by Section 6.1(b) of the Investment Agreement, (vi) any sale effected
by AIG of any securities of the Company acquired after the Closing Date if such
transaction was not prohibited pursuant to the terms of the Investment
Agreement, (vii) any transfer described in Section 382(l)(3)(B) of the IRC
(relating to transfers upon death or divorce and certain gifts) if the
transferor held the stock transferred more than 3 years prior to the date of
the transfer, (viii) any sale of Common Stock by a person who owns more than
4.75% of the outstanding Common Stock on the date of this Proxy Statement if
such sale would not result in a net increase in the amount of stock owned by 5
percent shareholders (as determined for purposes of Section 382) during the
three-year period ending on the date of such sale, provided such sale would not
otherwise be prohibited under the Transfer Restrictions but for such
transferor's ownership of stock of the Company, and (ix) any transfer which the
Board of Directors has approved in writing, which approval may be given in the
sole and absolute discretion of Board of Directors after considering all facts
and circumstances, including but not limited to future events the occurrence of
which are deemed to be reasonably possible. The exceptions in clauses (i)
through (vi) were required by the Investment Agreement. In general, the
exceptions in clauses (i) through (iii) permit the consummation of the
Investment Agreement. The exception in clause (iv) permits AIG in certain
circumstances to dispose of its Series A Preferred Stock or Common Stock
acquired upon the conversion thereof, which would have the effect of causing
the percentage ownership of the transferee public group to increase. However,
such a sale would cause a corresponding decrease in AIG's ownership, and,
therefore, should not have an effect on whether the Company experiences an
ownership change unless there is a change in relative values between the Series
A Preferred Stock and the Common Stock at the time of such a transfer that
would result in an ownership change. See "-- Continued Risk of Ownership
Change," below. A transaction described in clause (v), if it were to occur,
could result in AIG increasing its ownership of the Company's stock without
limitation and thereby could cause an ownership change of the Company. The
foregoing exceptions for AIG, and the related potential tax consequences, were
considered by the Board of Directors in determining whether to approve the
Investment Agreement, and the Board determined that it was in the best
interests of the Company to agree to the Investment Agreement, including the
foregoing exceptions to the Transfer Restrictions for AIG. See "-- Continued
Risk of Ownership Change," below.
Assuming the approval of the Transfer Restrictions, the Company's
By-Laws will similarly be amended to provide for the Transfer Restrictions and
stock certificate legend.
The Company does not believe that the adoption of the Transfer
Restrictions will adversely affect the continued listing of the Common Stock on
the NYSE.
CONTINUED RISK OF OWNERSHIP CHANGE
Notwithstanding the transfer restrictions, there remains a risk that
certain changes in relationships among shareholders or other events will cause
an ownership change of the Company under Section 382.
The extent to which the Transfer Restrictions are enforceable is
uncertain under California law. See "-- Enforceability of the Transfer
Restrictions," below. In addition, the Transfer Restrictions contain certain
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exceptions for specified transactions effected by AIG which could result in an
ownership change of the Company. Purchases by other shareholders of the
Company's Common Stock and other events that occur prior to the Transfer
Restrictions becoming effective can effect the percentage shift in the
Company's ownership as determined for purposes of Section 382, and any such
acquisition could increase the likelihood that the Company will experience an
ownership change if such shift, coupled with the consummation of the
Transaction, causes the ownership of 5 percent shareholders of the Company to
increase. There also can be no assurance, in the event transfers in violation
of the Transfer Restrictions are attempted, that the IRS will not assert that
such transfers have federal income tax significance notwithstanding the
Transfer Restrictions. Moreover, while Section 382 provides that fluctuations
in the relative values of different classes of stock are not taken into account
in determining whether an ownership change occurs, no regulations or other
guidance have been issued under this provision. Therefore, the extent to which
changes in relative values of the Series A Preferred Stock and the Common Stock
could result in an ownership change of the Company is unclear, and it is
possible that fluctuations in value could result in an ownership change of the
Company. See "Approval of the Investment Agreement Proposal -- Impact of the
Transaction on the Company and Existing Shareholders; Certain Considerations --
Certain Tax Considerations," above.
The Board of Directors of the Company has the discretion to approve a
transfer of stock that would otherwise violate the Transfer Restrictions. If
the Board of Directors decides to permit a transfer that would otherwise
violate the Transfer Restrictions, that transfer or later transfers may result
in an ownership change that would limit the use of the tax attributes of the
Company. The Board of Directors of the Company intends to consider any such
attempted transfer individually and determine at the time whether it is in the
best interests of the Company, after consideration of any factors that the
Board deems relevant (including possible future events), to permit such
transfer notwithstanding that an ownership change of the Company may occur.
As a result of the foregoing, the Transfer Restrictions serve to
reduce, but not necessarily eliminate, the risk that Section 382 will cause the
limitations described above on the use of tax attributes of the Company.
ENFORCEABILITY OF THE TRANSFER RESTRICTIONS
THE COMPANY BELIEVES THAT THE TRANSFER RESTRICTIONS ARE IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS AND ARE REASONABLE, AND THE
COMPANY WILL ACT VIGOROUSLY TO ENFORCE THE RESTRICTIONS AGAINST ALL CURRENT AND
FUTURE HOLDERS OF THE COMPANY'S SHARES REGARDLESS OF HOW THEY VOTE ON THE
TRANSFER RESTRICTIONS. Among other things, the Transfer Restrictions require a
shareholder (and any persons in such shareholder's control group) who knowingly
violates the Transfer Restrictions to indemnify the Company for any damages
suffered as a result of such violation, including damages resulting from a
reduction in or elimination of the Company's ability to utilize the NOLs. Even
if the Transfer Restrictions are approved and the Articles of Incorporation are
amended accordingly, however, there can be no assurance that the Transfer
Restrictions or portions thereof will be enforceable. Under California law, the
Transfer Restrictions are not binding with respect to shares issued prior to
the adoption of the Transfer Restrictions unless the holder of the shares voted
in favor of the Transfer Restrictions Proposal. The Company intends to take the
position, solely for the purpose of determining the applicability of the
Transfer Restrictions to the holder of shares (and not for the purpose of
determining whether the Transfer Restrictions Proposal is approved), that
shares were voted in favor of the Transfer Restrictions Proposal unless the
contrary is established to its satisfaction. The Company also intends in
certain circumstances to assert the position that shareholders have waived the
right to challenge or are estopped from challenging the enforceability of the
Transfer Restrictions, regardless of whether they voted in favor of the
Transfer Restrictions Proposal. In addition, under California law, the Transfer
Restrictions are not enforceable against a transferee of shares without
knowledge of such restriction unless such restriction is stated on the share
certificate. Accordingly, the Board of Directors intends to instruct
shareholders to surrender and exchange their certificates for new certificates
bearing a legend reflecting the Transfer Restrictions. Such a legend may result
in a decreased valuation of the Common Stock due to the resulting restrictions
on transfers to persons directly of indirectly owning or seeking to acquire a
significant block of the Common Stock.
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ANTI-TAKEOVER EFFECT
The Transfer Restrictions and the related By-Law provisions may be
deemed to have an "anti-takeover" effect because they will restrict, for up to
38 months following the Closing Date, the ability of a person or entity (or
group thereof) from accumulating in the aggregate at least 4.75% of the
Company's Common Stock or Series A Preferred Stock and the ability of persons,
entities or groups now owning at least 4.75% of the Company's Common Stock or
Series A Preferred Stock from acquiring additional stock. The Transfer
Restrictions would discourage or prohibit accumulations of substantial blocks
of shares for which shareholders might receive a premium above market value.
However, in the opinion of the Board of Directors of the Company, the
fundamental importance to the Company's shareholders of maintaining the
availability of the tax benefits to the Company outweighs the indirect
anti-takeover effect the Transfer Restrictions may have.
The indirect "anti-takeover" effect of the Transfer Restrictions is
not the reason for the Transfer Restrictions. The Board of Directors of the
Company considers the Transfer Restrictions to be reasonable and in the best
interests of the Company and its shareholders because the Transfer Restrictions
reduce certain of the risks that the Company and its subsidiaries will be
unable to utilize the tax benefits described above. Nonetheless, the Transfer
Restrictions will restrict a shareholder's ability to acquire, directly or
indirectly, additional stock of the Company in excess of the specified
limitations. Furthermore, a shareholder's ability to dispose of his stock of
the Company (or any other stock of the Company which such shareholder may
acquire) may be restricted as a result of the Transfer Restrictions, and a
shareholder's ownership of stock of the Company may become subject to the
Transfer Restrictions upon the actions taken by related persons.
VOTE REQUIRED FOR APPROVAL OF THE TRANSFER RESTRICTIONS PROPOSAL
Under California law, the affirmative vote of the holders of a
majority of the issued and outstanding shares of Common Stock entitled to vote,
voting as a single class, is required to approve the Transfer Restrictions
Proposal. If approved, and if the Investment Agreement Proposal and the
Increased Authorized Capital Proposal are approved, the amendment will take
effect upon the filing of an amendment with the office of the California
Secretary of State. The Company intends to make such filing as soon as
practicable following approval.
Pursuant to the Investment Agreement, all directors and officers of
the Company holding shares of the Company's Common Stock have entered into
Voting Agreements with AIG, pursuant to which such shareholders have agreed to
vote all of the shares of Common Stock owned of record by them or thereafter
acquired in favor of the Investment Agreement Proposal, the Increased
Authorized Capital Proposal and the Transfer Restrictions Proposal and against
any and all proposals which would adversely affect, in any way, the likelihood
of approval of the Investment Agreement and the consummation of the
transactions contemplated thereby.
Shareholders should be aware that a vote in favor of the Transfer
Restrictions may result in a waiver of the shareholder's ability to contest the
enforceability of the Transfer Restrictions. Consequently, all shareholders
should carefully consider this in determining whether to vote in favor of the
Transfer Restrictions. The Company intends vigorously to enforce the Transfer
Restrictions against all current and future holders of its stock.
EACH OF THE INVESTMENT AGREEMENT PROPOSAL, THE INCREASED AUTHORIZED
CAPITAL PROPOSAL, THE TRANSFER RESTRICTIONS PROPOSAL AND THE INDEMNIFICATION
AGREEMENTS PROPOSAL WILL BE VOTED ON SEPARATELY BY THE SHAREHOLDERS OF THE
COMPANY. NEITHER AIG NOR THE COMPANY IS OBLIGATED TO CONSUMMATE THE TRANSACTION
IN THE EVENT SHAREHOLDERS FAIL TO APPROVE EACH OF THE INVESTMENT AGREEMENT
PROPOSAL, THE INCREASED AUTHORIZED CAPITAL PROPOSAL AND THE TRANSFER
RESTRICTIONS PROPOSAL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE
APPROVAL OF THE TRANSFER RESTRICTIONS PROPOSAL.
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PROPOSAL 4
APPROVAL OF THE INDEMNIFICATION AGREEMENTS PROPOSAL
The Board of Directors has approved, and the Company has entered into,
contracts of indemnity, in substantially the form attached hereto as Appendix
VII, with its directors and certain of its executive officers. The Insurance
Subsidiaries (20th Century Insurance Company and 21st Century Casualty Company)
have entered in indemnity agreements (all such indemnification agreements
executed by the Company and by the Insurance Subsidiaries being the
"Indemnification Agreement") on terms substantially identical to the
Indemnification Agreements executed by the Company with each of their
respective directors and executive officers. The Company and the Insurance
Subsidiaries will also enter into such contracts from time to time with future
directors of the Company and the Insurance Subsidiaries and with such of their
officers, employees or other agents as may be designated by the Board of
Directors. In the following discussion, the "Company" includes each of the
Company and the Insurance Subsidiaries.
The Indemnification Agreements provide the individuals who are parties
to the Indemnification Agreements with a contractual right to indemnification
and advancement of defense expenses that would be in addition to any rights
provided under the California General Corporation Law (the "GCL"), the
Company's Articles of Incorporation or Bylaws, or otherwise. In general,
pursuant to the GCL and the Company's Articles of Incorporation and Bylaws, the
Company is authorized, but not required to, indemnify and advance defense
expenses of its directors, officers, employees and other agents ("Agents").
Under the GCL and the Company's Articles of Incorporation and Bylaws, to the
extent that Agents of the Company are successful, even in part, in defending
themselves against a proceeding brought against them by reason of the fact that
the person is or was an Agent of the Company, the Company is required to pay
all expenses actually and reasonably incurred by Agents of the Company in such
a proceeding. Except with respect to such payment of expenses, however,
indemnification and advancement of expenses is otherwise left to the discretion
of the Company. See "-- Rights and Authorizations Provided Under California
Law" and "-- Indemnification and Advancement of Expenses and Limitation of
Director Liability Currently Authorized by the Company." Accordingly, the
purpose of the Indemnification Agreements is to provide the Agents of the
Company that are parties to the Indemnification Agreements with specific
contractual rights to indemnification and advancement of defense expenses as
set forth in the Indemnification Agreements. See "-- Principal Terms of the
Indemnification Agreements."
Shareholder ratification or approval of the Indemnification Agreements
is not required by law. Nevertheless, because the Company's and the Insurance
Subsidiaries' directors and officers are parties to the Indemnification
Agreements, and beneficiaries of the rights conferred thereby, the Board of
Directors believes it is appropriate to submit to the shareholders the proposal
to ratify existing Indemnification Agreements and to approve the provision of
Indemnification Agreements to directors, officers, employees or other agents in
the future. In addition, the Company believes that shareholder ratification of
the Indemnification Agreements may pose a significant obstacle to any
subsequent attempt by particular groups or interests to invalidate any such
agreements. Shareholders should thus be aware that by ratifying the
Indemnification Agreements, they may be waiving their right effectively to
object at a later date to the form of the Agreements or to payments made
pursuant to their terms. The affirmative vote of the holders of a majority of
the shares of Common Stock represented in person or by proxy and entitled to
vote at the Meeting is required to approve the Indemnification Agreements
Proposal. Nonetheless, the Company believes that the Indemnification Agreements
are binding and enforceable contracts whether or not shareholder approval or
ratification of the Indemnification Agreements is obtained. Accordingly, the
Company and the Insurance Subsidiaries intend to abide by the terms of the
Indemnification Agreements they have entered into, and may enter into new
Indemnification Agreements with future Agents, even if the Indemnification
Agreements Proposal is not approved. The Indemnification Agreements will apply
to any actions taken by directors and/or executive officers prior to the
Meeting, including actions taken by directors and executive officers in
response to the Northridge Earthquake and the Proposition 103 Ruling and in
connection with the Transaction.
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The Indemnification Agreements may be amended from time to time in the
future by the parties thereto without shareholder approval. In addition, the
Board of Directors may determine, with or without shareholder approval, to
enter into a different form of indemnification agreement in the future if, as a
result of the Company's experience in administering the Indemnification
Agreements or for any other reason, the Board of Directors considers it
desirable to do so. The Company does not currently have any plans to increase
its level of directors' and officers' liability insurance coverage in the event
the Indemnification Agreements Proposal is approved. The Company does not
believe that the Indemnification Agreements will have any material impact on
the financial condition (including liquidity) of the Company.
AUTHORITY FOR AND PURPOSE OF INDEMNIFICATION AGREEMENTS
The purpose of the Indemnification Agreements is to (i) provide Agents
of the Company additional rights to indemnification and rights to advancements
of expenses beyond the specific provisions of Section 317 of the GCL, Article
VII of the Company's Articles of Incorporation and Article VII of the Company's
Bylaws, (ii) provide such persons with contractual rights to indemnification
and advancement of expenses in circumstances under which such indemnification
and advancements would otherwise be left to the discretion of the Company's
Board of Directors and (iii) protect persons covered by Indemnification
Agreements from subsequent adverse changes in the indemnification provisions
contained in the Company's Articles of Incorporation or Bylaws. The
Indemnification Agreements provide rights to indemnification and advancements
of expenses that are broader than those specifically provided or authorized by
statute or the Company's Articles of Incorporation or Bylaws. Section 317 of
the GCL states that the indemnification authorized thereby is not intended to
be exclusive of any other indemnification rights any person may otherwise have.
The extent of the additional rights that may be provided by agreement, however,
has not been definitively determined. Accordingly, the scope of
indemnification provided by the Indemnification Agreements may be subject to
future judicial interpretation.
The Indemnification Agreements also obligate the Company to provide
indemnification and to advance expenses in circumstances under which such
actions would otherwise be subject to the discretion of the Company's Board of
Directors. Under Section 317 of the GCL and Article VII of the Company's
Articles of Incorporation and Article VII of the Company's Bylaws, except to
the extent an Agent has been successful on the merits in the defense of a
proceeding or claim, indemnification is authorized but not required to be made.
Accordingly, absent the Indemnification Agreements, an Agent would not be
assured that the Board of Directors would indemnify such Agent even if
indemnification were permitted by the GCL and the Company's Articles of
Incorporation and Bylaws.
The Indemnification Agreements are also intended to protect Agents
from amendments to the indemnification provisions of the Company's Articles of
Incorporation and Bylaws. Absent the Indemnification Agreements, the
indemnification that might be made available to Agents could be unilaterally
limited or eliminated by the Company by amendment to the Company's Articles of
Incorporation or Bylaws. The Indemnification Agreements would provide the
Agents covered thereby with specific contractual rights to indemnification that
could not be amended without their consent.
The rights to indemnification and advancement of expenses currently
provided by the GCL and the Company's Articles of Incorporation and Bylaws, and
the limitations of directors' liability currently provided under Article VI of
the Articles of Incorporation, are summarized as follows:
RIGHTS AND AUTHORIZATIONS PROVIDED UNDER CALIFORNIA LAW
Section 317 of the GCL authorizes the Company to indemnify and advance
expenses to its Agents in certain situations. To the extent that Agents of the
Company are successful, even in part, in defending themselves against a
proceeding brought against them by reason of the fact that the person is or was
an Agent of the Company, the GCL requires the Company to pay all expenses
actually and reasonably incurred by them in connection with the proceeding.
Even if an Agent has not been successful in defending against such a claim or
proceeding, the GCL expressly authorizes the Company to provide indemnification
if it determines that the Agent acted in good faith and in a manner that he or
she reasonably believed to be in the Company's best interest, and, in the case
of a criminal proceeding, that the person had no reasonable cause to believe
that his or her conduct was unlawful.
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When the claim against the Agent is made by or on behalf of a person
other than the Company, the GCL permits indemnification for judgments, fines
and amounts paid in settlement, and expenses (including attorneys' fees). When
the claim is made by the Company itself or by shareholders suing derivatively
(i.e., in the Company's right) the GCL permits indemnification of expenses, if
the Agent has satisfied the standard of conduct discussed in the preceding
paragraph, but does not permit any indemnification (i) in the event that a
judgment establishes that the Agent is liable to the Company unless the court
determines that, in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnification for expenses and then only to
the extent that the court shall determine, (ii) of amounts paid in settling or
disposing of an action without court approval or (iii) of expenses incurred in
defending an action that is settled or disposed of without court approval.
Regardless of the type of claim or proceeding, all indemnification under the
GCL that is not required by statute must be authorized in the specific case
prior to payment by: (a) a majority vote of a quorum of disinterested
directors, (b) if such a quorum is not obtainable, by independent legal counsel
in a written opinion, (c) a majority of a quorum of the disinterested
shareholders, or (d) the court in which the proceeding was pending.
The GCL also authorizes the Company to advance defense expenses to an
Agent provided he or she undertakes to repay the amounts advanced if it is
ultimately determined that the Agent is not to be entitled to indemnification
as provided in the GCL. No specific board authorization of such payment is
required.
The GCL contains a "nonexclusivity provision" which provides that the
rights to indemnification provided therein are not exclusive of any other
rights to which directors or officers of California corporations may be
entitled under any provision of the bylaws, agreement, vote of shareholders or
disinterested directors or otherwise. This "nonexclusivity provision" permits
California corporations, among other things, to enter into separate
indemnification contracts with their officers, directors, employees and other
Agents and thereby provide rights that are additional to those provided in GCL
itself.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES AND LIMITATION OF DIRECTOR
LIABILITY CURRENTLY AUTHORIZED BY THE COMPANY
Certain provisions of the Company's Articles of Incorporation and
Bylaws authorize the indemnification of, and advancements of expenses to, its
directors and officers and other provisions limit the liability of directors to
the Company.
Article VII of the Company's Articles of Incorporation provides that
the Company is authorized to provide indemnification of its Agents in excess of
that expressly permitted under Section 317 of the GCL by bylaw, agreement, vote
of shareholders or disinterested directors or otherwise, to the fullest extent
such indemnification may be authorized by the Articles of Incorporation.
The provisions of Article VII of the Bylaws authorize indemnification
of, and the advancement of expenses to, Agents in the same circumstances and
subject to the same limitations as are set forth in Section 317 and require
such indemnification in the same situation as Section 317. See "--Rights and
Authorizations Provided Under California Law" above.
Article VII of the Bylaws also provides that the Company may advance
to its Agents the expenses of defending any proceeding if they provide an
undertaking to repay such advances if it is determined that such person is not
entitled to be indemnified as provided in such Article.
Article VII of the Bylaws further provides that the Company will not
be obligated to indemnify any person in any circumstance where it appears that
it would be inconsistent with a provision of the Articles of Incorporation, the
Bylaws, a resolution of the shareholders or an agreement which prohibits or
otherwise limits indemnification or if it would be inconsistent with any
condition expressly imposed by a court in approving a settlement.
Like the GCL, Article VII of the Bylaws provides that the rights to
indemnification and advancement of expenses it provides are not to be deemed
exclusive of any other rights to which an Agent might be entitled under any
other arrangement, including a contract.
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In addition to the authorizations of indemnification provided by the
Company's Articles of Incorporation and Bylaws, Article VI of the Company's
Articles of Incorporation provides that the liability of directors for monetary
damages shall be eliminated to the fullest extent permissible under California
law. The effect of Article VI is to limit liability for monetary damages for
breaches of a director's fiduciary duty, including negligence. The limitation
of liability only applies with respect to claims by the Company (including
derivative actions) or its shareholders and does not extend to claims by third
parties. Pursuant to Section 204 of the GCL, the provisions of Article VI do
not, however, eliminate or limit the liability of directors for: (1) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of the law, (2) acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (3) any
transaction from which a director derived an improper benefit, (4) acts or
omissions that show a reckless disregard for the director's duty to the Company
or its shareholders in circumstances in which the director was aware, or should
have been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the Company or its shareholders, (5) acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders and (6)
liabilities arising under Section 310 of the GCL (relating to contracts in
which a director has a material financial interest) and Section 316 of the GCL
(relating to certain unlawful dividends, distributions, loans and guarantees).
Moreover, Article VI does not limit a director's liability for acts taken in
his or her capacity as an officer. Further, equitable remedies, such as
injunctive relief, against directors are not limited by Article VI.
PRINCIPAL TERMS OF THE INDEMNIFICATION AGREEMENTS
The following is a summary of the principal terms of the
Indemnification Agreements, the form of which is attached as Appendix F hereto.
Shareholders are urged to read the form of the Indemnification Agreements in
its entirety.
With respect to claims against the indemnitee made by or on behalf of
a person other than the Company, the Indemnification Agreements require the
Company to indemnify the indemnitee against expenses or liabilities of any type
whatsoever (including, but not limited to, judgments, fines, penalties, and
amounts paid in settlement (if the settlement is approved in advance by the
Company)) actually and reasonably incurred by indemnitee in connection with any
pending or completed action or proceeding, in which the indemnitee may be or
may have been involved as a party threatened or otherwise, by reason of the
fact that the indemnitee is or was a director or officer of the Company, by
reason of any action taken by him or her or of any inaction on his or her part
while acting as such director or officer or by reason of the fact that he or
she is or was serving at the request of the Company as an Agent of another
enterprise or predecessor corporation of the Company (each a "Proceeding") if
indemnitee acted in good faith and in a manner indemnitee reasonably believed
to be in the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his or her
conduct was unlawful. No indemnification is required to be made by the Company
in any criminal proceeding where the indemnitee has been adjudged guilty unless
a disinterested majority of the directors determine that the indemnitee did not
receive, participate in or share in any pecuniary benefit to the detriment of
the Company and, in view of all the circumstances of the case, the indemnitee
is fairly and reasonably entitled to indemnification.
With respect to claims made by the Company itself or by shareholders
suing derivatively, the Indemnification Agreements require the Company to
indemnify the indemnitee against expenses (including attorneys' fees) actually
and reasonably incurred by the indemnitee in connection with the investigation,
preparation, defense or settlement of a Proceeding if the indemnitee acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of the Company and its shareholders. No indemnification is required
to be made by the Company under the Agreements with respect to any claim as to
which the indemnitee shall have been adjudged to be liable to the Company in
the performance of the indemnitee's duty to the Company and its shareholders
unless and only to the extent that the court in which such Proceeding is or was
pending determines upon application that, in view of all the circumstances of
the case, the indemnitee is fairly and reasonably entitled to indemnification
for such expenses and then only to the extent that the court shall determine.
In addition to the foregoing, the Indemnification Agreements provide
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that the Company is obligated to indemnify the indemnitee to the fullest extent
permitted by law, even if such indemnification is not specifically authorized
by other provisions of the Agreements, the Company's Articles of Incorporation
or Bylaws or statute. Accordingly, under certain circumstances, an indemnitee
could have rights to indemnification under the Indemnification Agreements that
are more extensive than the specific rights described herein.
No payments may be made under the Indemnification Agreements for
claims: (a) to indemnify the indemnitee for any acts or omissions or
transactions from which a director may not be relieved of liability under
Section 204(a)(10) of the GCL (see "-- Indemnification and Advancement of
Expenses and Limitation of Director Liability Currently Authorized by the
Company"), or for expenses, judgments, penalties, or other payments incurred in
an administrative proceeding or action instituted by an appropriate regulatory
agency which proceeding or action results in a final order assessing civil
money penalties or requiring affirmative action by an individual or individuals
in the form of payments to the Company, (b) to indemnify or advance expenses to
the indemnitee with respect to Proceedings or claims initiated or brought
voluntarily by the indemnitee and not by way of defense, except that such
indemnification or advancement of expenses may be provided by the Company in
specific cases if a disinterested majority of the directors has approved the
initiation or bringing of such suit or if the proceeding was brought to
establish a right to indemnification under the Indemnification Agreements or
any law, (c) to indemnify the indemnitee for any expenses incurred by the
indemnitee with respect to any proceeding instituted by the indemnitee to
enforce or interpret the Indemnification Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
indemnitee in such proceeding was not made in good faith or was frivolous, (d)
to indemnify the indemnitee for expenses or liabilities which have been paid
directly to or on behalf of the indemnitee by an insurance carrier under a
policy of directors' and officers' liability insurance maintained by the
Company or any other policy of insurance maintained by the Company or the
indemnitee, or (e) to indemnify the indemnitee for expenses and the payment of
profits arising from the purchase and sale by the indemnitee of securities in
violation of Section 16(b) of the Exchange Act.
Upon receipt of a written claim for indemnification, the Company is
required to determine by any of the methods provided under Section 317 of the
GCL (see "-- Rights and Authorizations Provided Under California Law") whether
the indemnitee has met the applicable standard of conduct which makes it
permissible to indemnify him or her. If such a claim is not paid in full within
90 days of receipt, indemnitee may thereafter bring suit to recover the unpaid
amount of such claim.
The Indemnification Agreements also require the Company to pay
expenses incurred by the indemnitee in defending and investigating any
Proceeding prior to the final disposition of such Proceeding within 30 days
after receiving from the indemnitee copies of invoices presented to the
indemnitee for such expenses and an undertaking by or on behalf of the
indemnitee to the Company to repay such amount to the extent it is ultimately
determined that the indemnitee is not entitled to indemnification. In a
proceeding brought by the Company directly, in its own right (as distinguished
from an action brought derivatively or by any receiver or trustee), the
Indemnification Agreements provide that the Company shall not be required to
make the advances if a majority of the disinterested directors determine that
it does not appear that the indemnitee has met the GCL's standard of conduct
for indemnification described above (see "-- Rights and Authorizations Provided
Under California Law") and the advancement of such expenses would not be in the
best interests of the Company and its shareholders.
In the event that the Company would be obligated to pay the expenses
of any Proceeding against the indemnitee, the Company would be entitled to
assume the defense of such Proceeding, with counsel approved by the indemnitee.
After retention of such counsel by the Company, the indemnitee would have the
right to employ his or her own counsel in any such Proceeding at the
indemnitee's expense. If (a) the employment of counsel by the indemnitee has
been previously authorized by the Company, (b) the indemnitee shall have
reasonably concluded that there may be a conflict of interest between the
Company and the indemnitee in the conduct of such defense, or (c) the Company
had not employed counsel to assume the defense of such Proceeding, then the
Company would be obligated to pay the fees and expenses of the indemnitee's
separate counsel.
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The Indemnification Agreements require indemnitees to notify the
Company as soon as reasonably practicable of any matter with respect to which
the indemnitee intends to seek indemnification thereunder. Upon receipt of such
notice, the Company would be obligated to notify its directors' and officers'
liability insurance carrier promptly, if such insurance were then in effect.
Under the Indemnification Agreements, the Company generally is required to use
its best efforts to obtain and maintain directors' and officers' liability
insurance which provides each indemnitee the same rights and benefits as are
accorded to the most favorably insured of the Company's directors.
Regardless of what the Indemnification Agreements purport to provide,
all rights to indemnification and advancement of expenses thereunder exist only
to the extent permitted by applicable law. For this reason, the Agreements
provide that no indemnification will be payable if such payment would be
unlawful. The Agreements also contain a severability provision stating that, if
any portions of the Agreement are found to be unenforceable, the remaining
provisions will be given full force and effect.
The Indemnification Agreements apply to any claims asserted after the
effective dates of such agreements, whether arising from acts or omissions
occurring before or after their effective dates. Like all indemnification
obligations, the Company's obligations under the Indemnification Agreements
could have a significant impact on the Company's finances in the event that
major litigation were initiated against directors, officers or other
indemnified Agents. In such an event, the Company's obligations under the
Agreement are not conditioned on its ability to pay or on the effect such
payment obligations might have on its financial condition. The Company is not
aware of any pending or threatened claim against any of the Company's
directors, officers or other Agents for which indemnification may be sought
pursuant to the Agreements.
The Indemnification Agreements attempt to ensure that, in the event of
a change in control of the Company or other circumstances in which directors
and officers must make difficult choices among conflicting interests or
implement policies that may serve the interests of the Company and not those of
a particular group, the Company's decision makers are not influenced by
considerations of whether they will be adequately protected from unwarranted
personal liability. While no such threats or choices currently confront the
Company, the Board of Directors believes that the Indemnification Agreements
are in the Company's and shareholders' best long-term interests, and that such
Agreements will enhance the Company's ability to continue to attract and retain
individuals of the highest quality and ability to serve as its directors and
officers.
The extent to which Agents of the Company are indemnified under the
Indemnification Agreements with respect to liabilities arising under the
Securities Act or the Exchange Act (other than Section 16(b) of the Exchange
Act, which is specifically excluded), is not specifically set forth in the
Indemnification Agreements. The Company has been advised by its legal advisors,
however, that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and the Exchange Act and is,
therefore, unenforceable.
VOTE REQUIRED FOR APPROVAL OF THE INDEMNIFICATION AGREEMENTS PROPOSAL
Shareholder ratification or approval of the Indemnification Agreements
is not required by law. Nevertheless, because the Company's and the Insurance
Subsidiaries' directors and officers are parties to the Indemnification
Agreements, and beneficiaries of the rights conferred thereby, the Board of
Directors believes it is appropriate to submit to the shareholders the proposal
to ratify the Indemnification Agreements. The affirmative vote of the holders
of a majority of the shares of Common Stock represented in person or by proxy
and entitled to vote at the Meeting is required to approve the Indemnification
Agreements Proposal. The Indemnification Agreements Proposal is not in any way
conditioned upon approval of the Investment Agreement Proposal, the Increased
Authorized Capital Proposal or the Transfer Restrictions Proposal, nor are such
proposals conditioned upon approval of the Indemnification Agreements Proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" APPROVAL OF THE INDEMNIFICATION AGREEMENTS PROPOSAL
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as
of the end of, each of the years in the five-year period ended December 31,
1993 are derived from the consolidated financial statements of 20th Century
Industries and its subsidiaries. The consolidated financial statements as of
December 31, 1993 and 1992 and for each of the years in the three-year period
ended December 31, 1993 are included elsewhere in this Proxy Statement. All
dollar amounts set forth in the following tables are in thousands, except per
share data. The unaudited consolidated income data for the nine months ended
September 30, 1994 and September 30, 1993 and the unaudited consolidated
balance sheet data at September 30, 1994 are derived from the unaudited
consolidated financial statements included herein. In the opinion of
management, such unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements referred to
above and include all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the financial position of the Company and
the results of operations for the indicated periods. Operating results for the
nine months ended September 30, 1994 are not necessarily indicative of the
results that may be expected for fiscal 1994.
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------
1994 1993 1993 1992 (1)
---- ---- ---- --------
(UNAUDITED)
INCOME DATA:
Net premiums earned . . . . . . . . . . . . . . . . . . $ 777,809 $731,832 $ 989,712 $ 896,353
Net investment income . . . . . . . . . . . . . . . . . 64,765 72,812 97,574 94,255
Realized investment gains . . . . . . . . . . . . . . . 61,550 12,741 16,729 11,498
Other revenue (expense) . . . . . . . . . . . . . . . . 800 (72) (180) (116)
---------- -------- --------- ----------
Total Revenues 904,924 817,313 1,103,835 1,001,990
---------- -------- --------- ----------
Net losses and loss adjustment expenses . . . . . . . . 705,871 635,702 867,451 764,374
Net earthquake losses and related expenses . . . . . . . 757,564 -- -- --
Policy acquisition costs . . . . . . . . . . . . . . . 34,701 35,067 48,375 41,996
Other operating expenses . . . . . . . . . . . . . . . 39,162 41,077 57,545 48,281
Proposition 103 expense . . . . . . . . . . . . . . . 71,581 2,606 3,474 3,474
Interest expense . . . . . . . . . . . . . . . . . . . 3,825 44 44 89
---------- -------- --------- ----------
Total Expenses 1,612,704 714,496 976,889 858,214
---------- -------- --------- ----------
Income (loss) before federal income taxes and cumulative
effect of change in accounting for income taxes . . . (707,780) 102,817 126,946 143,776
Federal income taxes (credit) . . . . . . . . . . . . . (258,413) 17,010 18,350 26,309
---------- -------- --------- ----------
Income (loss) before cumulative effect of change in
accounting for income taxes . . . . . . . . . . . . . (449,367) 85,807 108,596 117,467
Cumulative effect of change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . -- 3,959 3,959 --
---------- -------- --------- ----------
Net Income (loss) . . . . . . . . . . . . . . . . . . $ (449,367) $ 89,766 $ 112,555 $ 117,467
========== ======== ========= ==========
PER SHARE DATA:
Income (loss) before cumulative effect of change in
accounting for income taxes . . . . . . . . . . . . . $ (8.74) $1.67 $ 2.11 $ 2.29
Cumulative effect of change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . -- .08 .08 --
---------- -------- --------- ----------
Net Income (loss) . . . . . . . . . . . . . . . . . . . $ (8.74) $ 1.75 $ 2.19 $ 2.29
========== ======== ========= ==========
Dividends paid per share . . . . . . . . . . . . . . . $ .32 $ .48 $ .64 $ .52
========== ======== ========= ==========
YEARS ENDED DECEMBER 31,
-------------------------------------
1991 (1) 1990 (1) 1989 (1)
-------- -------- --------
INCOME DATA:
Net premiums earned . . . . . . . . . . . . . . . . . . . $810,636 $732,695 $650,073
Net investment income . . . . . . . . . . . . . . . . . . 90,043 81,056 68,319
Realized investment gains . . . . . . . . . . . . . . . . 9,137 3,569 1,414
Other revenue (expense) . . . . . . . . . . . . . . . . . (274) 146 124
-------- -------- --------
Total Revenues 909,542 817,466 719,930
-------- -------- --------
Net losses and loss adjustment expenses . . . . . . . . . 697,521 613,015 534,558
Net earthquake losses and related expenses . . . . . . . . -- -- --
Policy acquisition costs . . . . . . . . . . . . . . . . 38,372 36,338 31,289
Other operating expenses . . . . . . . . . . . . . . . . 42,523 37,088 31,435
Proposition 103 expense . . . . . . . . . . . . . . . . 6,195 21,022 15,018
Interest expense . . . . . . . . . . . . . . . . . . . . 141 87 241
-------- -------- --------
Total Expenses 784,752 707,550 612,541
-------- -------- --------
Income (loss) before federal income taxes and cumulative
effect of change in accounting for income taxes . . . . . 124,790 109,916 107,389
Federal income taxes (credit) . . . . . . . . . . . . . . 21,253 11,194 16,362
-------- -------- --------
Income (loss) before cumulative effect of change in
accounting for income taxes . . . . . . . . . . . . . . 103,537 98,722 91,027
Cumulative effect of change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
-------- -------- --------
Net Income (loss) . . . . . . . . . . . . . . . . . . . $103,537 $ 98,722 $ 91,027
======== ======== ========
PER SHARE DATA:
Income (loss) before cumulative effect of change in
accounting for income taxes . . . . . . . . . . . . . . . $ 2.02 $ 1.92 $ 1.77
Cumulative effect of change in accounting for income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . -- -- --
-------- -------- --------
Net Income (loss) $ 2.02 $ 1.92 $ 1.77
======== ======== ========
Dividends paid per share . . . . . . . . . . . . . . . . $ .42 $ .32 $ .24
======== ======== ========
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
----------------------
1994 1993 1992 (1)
------------- ---- --------
(UNAUDITED)
BALANCE SHEET DATA:
Total investments . . . . . . . . . . . . . . . . $ 970,626 $1,422,555 $1,307,031
Total assets . . . . . . . . . . . . . . . . . . 1,543,905 1,648,146 1,498,330
Unpaid losses and loss adjustment expenses . . . 708,287 577,490 554,541
Unearned premiums . . . . . . . . . . . . . . . . 301,691 299,941 267,556
Long-term debt . . . . . . . . . . . . . . . . . 153,631 -- --
Claims checks payable . . . . . . . . . . . . . . 120,765 41,535 39,329
Stockholders' equity . . . . . . . . . . . . . . 163,443 655,209 575,674
Book value per share . . . . . . . . . . . . . . $ 3.18 $ 12.74 $ 11.19
December 31,
---------------------------------------------
1991 (1) 1990 (1) 1989 (1)
-------- -------- ---------
BALANCE SHEET DATA:
Total investments . . . . . . . . . . . . . . . $1,200,067 $1,074,177 $ 912,434
Total assets . . . . . . . . . . . . . . . . . 1,372,628 1,238,060 1,061,753
Unpaid losses and loss adjustment expenses . . 548,377 526,258 472,451
Unearned premiums . . . . . . . . . . . . . . . 245,290 219,801 194,285
Long-term debt . . . . . . . . . . . . . . . . -- 3,333 6,667
Claims checks payable . . . . . . . . . . . . . 36,884 32,192 31,243
Stockholders' equity . . . . . . . . . . . . . 484,578 402,365 319,778
Book value per share . . . . . . . . . . . . . $ 9.43 $ 7.83 $ 6.22
______________
(1) Prior-year data has been restated to reflect amounts gross of
reinsurance in accordance with Statement of Financial Accounting
Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts". (See Note 1 of the Notes
to Consolidated Financial Statements, Reinsurance section) and
reclassifications to conform to the current presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Northridge, California earthquake, which occurred on January 17,
1994 ("Northridge Earthquake"), has significantly affected the financial
condition of the Company and its operating results for the first nine months
and the entire year of 1994. The Northridge Earthquake occurred in an area in
which the Company's homeowners and earthquake business was concentrated and the
forces of the earthquake were much greater and caused significantly more damage
than usually associated with an event of this Richter magnitude.
The resulting losses from the earthquake continue to place pressure on
the Company and its financial condition. The Company has experienced a
reduction in its historical pattern of growth, cessation of all advertising and
marketing for new policies, and suspension of its quarterly dividend for the
third and fourth quarters of fiscal 1994. As of September 30, 1994, total
estimated gross losses and allocated loss adjustment expenses from the
Northridge Earthquake reached $815 million.
On June 9, 1994, the Company announced an agreement with the
Department of Insurance ("DOI") designed to reduce the Company's earthquake
exposure. Pursuant to the agreement, the DOI ordered the Company's insurance
subsidiaries, 20th Century Insurance Company and 21st Century Casualty Company
(the "Insurance Subsidiaries") to discontinue writing new homeowners,
condominium owners and earthquake insurance and to discontinue renewal of
existing earthquake insurance. The DOI also approved a 17% rate increase for
the homeowners program. The Insurance Subsidiaries agreed to offer renewal
without earthquake coverage to existing homeowners and condominium owners
policyholders for two more annual renewal periods. The Company also agreed to
increase the combined statutory surplus of the Insurance Subsidiaries to at
least $250 million by June 30, 1994.
During the second quarter, the Company purchased an additional $400
million of reinsurance, in excess of the already existing coverage of $200
million. The additional $400 million layer of reinsurance decreases by $50
million per month starting on July 16, 1994 as the Company's earthquake
exposure lessens over time with the expiration of existing policies.
On June 30, 1994, the Company obtained a $175 million bank line (the
"Bank Credit Agreement") through the First National Bank of Chicago and Union
Bank (the "Lenders") of which $160 million has been borrowed and is currently
outstanding. Loan proceeds of $120 million were used to increase the statutory
surplus of the Insurance Subsidiaries. The five-and-one-half year
reducing-revolver loan features interest-only payments for the first 18 months,
after which time the Company will be required to make a principal payment of
$20 million on January 1, 1996 and principal repayments of $8,750,000 on the
first day of each calendar quarter thereafter until the full proceeds of the
loan are repaid with the last principal repayment occurring on January 1, 2000.
Under the terms of the Bank Credit Agreement, all of the outstanding shares of
capital stock of the Insurance Subsidiaries have been pledged as collateral.
On August 18, 1994, the California Supreme Court issued a decision
(the "Proposition 103 Ruling") reversing a lower court ruling that had upheld
the Company's challenge to the constitutionality of certain regulations and an
administrative order issued by the Commissioner pursuant to California
Proposition 103. The effect of the Proposition 103 Ruling was to reinstate the
Commissioner's order directing that the Company issue refunds totaling
approximately $78.3 million, plus interest at 10% per annum from May 8, 1989,
to policyholders who purchased insurance from the Insurance Subsidiaries
between November 8, 1988 and November 8, 1989.
On September 2, 1994, the Company filed a petition for rehearing with
the California Supreme Court. That petition was denied on September 29, 1994,
and the Company has directed its attorneys to prepare and file a petition for a
writ of certiorari with the United States Supreme Court, which is required to
be filed on or before December 28, 1994. No assurance can be given that the
U.S. Supreme Court will issue a writ of certiorari and accept the case for
review. In the event that it does elect to review the Proposition 103 Ruling,
the case is not likely to be briefed and argued until the 1995-96 Supreme Court
term. On November 10, 1994,
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the Los Angeles Superior Court stayed enforcement of the Commissioner's refund
order until such time as the U.S. Supreme Court rules on the Company's petition
for a writ of certiorari, or until December 28, 1994 if a petition to the
Supreme Court has not been filed by that date. The Company fully intends to file
its petition with the Supreme Court prior to December 28, 1994. The Commissioner
has also issued an order that the Company pay the Proposition 103 rollback by
November 14, 1994 or show cause why the payment cannot be made. In response to
the Commissioner's order, the Company intends to assert that, by virtue of the
stay order issued on November 10, 1994, any payment schedule must be deferred
until after the U.S. Supreme Court decides whether to issue a writ of certiorari
and accept the case for review.
Prior to the Proposition 103 Ruling, the Company had accrued
approximately $51 million with respect to its possible Proposition 103
liability. Barring action by the U.S. Supreme Court to reverse the Proposition
103 Ruling, the Commissioner's refund order obligates the Company to pay
approximately $121 million, which includes accrued interest through September
30, 1994. As of September 30, 1994, the Company has accrued this amount. The
Company continues to accrue interest at 10% per year on the principal amount.
On September 8, 1994, the Company revised upward its estimated gross
losses and allocated loss adjustment expenses from the Northridge Earthquake
expected to be sustained by the Insurance Subsidiaries to approximately $815
million. The increased estimate as well as the Proposition 103 Ruling caused
the Company to be in violation of the net worth maintenance and other financial
covenants under the Bank Credit Agreement. The statutory surplus of the
Insurance Subsidiaries was reduced from approximately $252 million on June 30,
1994 to approximately $71 million on September 30, 1994, the ratio of the
Insurance Subsidiaries' total net written premiums to statutory surplus
increased to 14:1 and the Company's stockholders' equity declined to
approximately $163 million. The adverse developments put a severe financial
strain on the Company.
The DOI, after discussions with the Company's management, requested
that the Company expeditiously implement a plan that would provide a
responsible level of surplus at the Insurance Subsidiaries. At the same time,
an agreement was reached among the DOI, two consumer intervenors and the
Company regarding the Company's proposed automobile insurance rate increase
that had been filed for approval in December, 1993. The agreement, which was
recommended in a proposed decision by an administrative law judge, was subject
to approval by the Commissioner. On September 14, 1994, the Commissioner
approved a 6% rate increase, which was estimated to generate an additional $56
million a year in revenues. The agreement provided that the 6% rate increase
would decrease to 3% when the Insurance Subsidiaries' total net written premium
to statutory surplus ratio had reached 3:1. The Commissioner also indicated
that he intended to require payment of the full $121 million, which includes
interest accrued through September 30, 1994, in rebates owed to policyholders
as a result of the Proposition 103 Ruling.
In addition to the pressure being asserted on the Company by the DOI
to take the necessary steps to restore the surplus of the Insurance
Subsidiaries, the Company also experienced pressure from the Lenders. On
September 8, 1994, the Company notified the Lenders that the Company was in
default under the Bank Credit Agreement and, on September 12, 1994, the Lenders
imposed the default rate of interest on outstanding loans and notified the
Company that no additional loans would be available while any default was
continuing. The Lenders also requested prompt information concerning the steps
the Company was taking to restore the capital of its Insurance Subsidiaries and
to cure the default. On September 20, 1994, the Lenders requested that the
Company deposit $25 million in a cash collateral account with one of the agent
banks to secure its obligations under the Bank Credit Agreement, and on
September 21, 1994, the Lenders proposed a "time-table/action plan" to resolve
the Company's capital issues requiring the Company to provide the Lenders with
a detailed listing by September 27, 1994 of the capital investment alternatives
available to the Company, requiring the receipt by the Company of a preliminary
letter of intent from at least one interested investor, or, in lieu thereof,
the Company's retention of an investment banker, by September 30, 1994 and
requiring a meeting with all the Lenders on October 4, 1994.
Pressure from the DOI to quickly take action to restore the surplus of
the Insurance Subsidiaries, as well as pressure from the Lenders, and the
possibility of a further downgrading from A.M. Best Company, led the Company to
look for outside sources of capital to bring the Insurance Subsidiaries'
surplus back to the necessary regulatory levels.
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PROPOSED CAPITAL TRANSACTION
As a result of the increased earthquake losses and the Supreme Court
decision discussed above, the Company began a search for outside capital to
raise the statutory surplus levels to meet regulatory requirements.
On October 17, 1994, the Company entered into an Investment and
Strategic Alliance Agreement dated as of October 17, 1994 (the "Investment
Agreement") with American International Group, Inc. ("AIG"), to provide $216
million of equity capital. The agreement provides for, among other things (a)
the sale to AIG, or to certain wholly-owned subsidiaries that AIG may
designate, for an aggregate purchase price of $216 million, of (i) 200,000
shares of Series A Convertible Preferred Stock stated value $1,000 per share
(the "Series A Preferred Stock"), which are convertible into shares of Common
Stock at a conversion price of $11.33 per share (subject to customary
antidilution provisions), and (ii) 16 million Series A Warrants to purchase an
aggregate of 16 million shares of Common Stock at an exercise price of $13.50
per share (subject to adjustment as described in the Investment Agreement); (b)
the issuance of shares of Common Stock upon conversion of shares of Series A
Preferred Stock and upon exercise of the Series A Warrants in accordance with
their terms; and (c) the issuance of additional shares of Series A Preferred
Stock on the terms described in the Investment Agreement at the election of the
Company in the event gross losses and allocated loss adjustment expenses
associated with the Northridge Earthquake exceed $850 million (the
"Transaction").
If the Transaction is consummated, holders of the Series A Preferred
Stock, voting separately as a class, will be entitled to elect two of the
Company's eleven directors. Holders of Common Stock will not be entitled to
vote in the election of such two directors. In the event that the Company's
gross losses and allocated loss adjustment expenses related to the Northridge
Earthquake exceed $850 million prior to or following the date of consummation
of the Transaction (the "Closing Date"), AIG shall, if requested by the
Company, contribute up to an additional $70 million to the Company in exchange
for shares of Series A Preferred Stock having an aggregate liquidation value
equal to the contributed amount plus an additional liquidation amount based on
a formula designed to compensate AIG for its proportional share of the
Company's after-tax loss resulting from the gross losses and allocated loss
adjustment expenses relating to the Northridge Earthquake in excess of $850
million. The Company may determine not to obtain some or all of the additional
capital from AIG in light of certain rules under the Internal Revenue Code
governing the Company's ability to utilize its net operating losses to offset
taxable income in future years. The Series A Preferred Stock will be entitled
to a per annum cumulative dividend equal to 9% payable quarterly. At the option
of the Company during the first three years after the consummation of the
Transaction, dividends may be paid in cash or in kind (whereby, a holder
receives, in lieu of cash, shares of Series A Preferred Stock having a
liquidation value equal to the dividends declared).
The Series A Warrants generally will be exercisable at any time
following the first anniversary of the consummation of the Transaction. The
initial exercise price of $13.50 per share and the number of shares of Common
Stock obtainable per Series A Warrant are subject to adjustment pursuant to
customary antidilution provisions. In the event the Company's gross losses and
allocated loss adjustment expenses from the Northridge Earthquake exceed $945
million and AIG contributes additional capital to the Company pursuant to the
Investment Agreement prior to the first anniversary of the Closing Date, the
effective date will be deferred to the second anniversary of the Closing Date.
The effective date may be accelerated in the event the Company's Board of
Directors approves such, and the effective date shall automatically be
accelerated to any earlier date that AIG is entitled to acquire additional
securities of the Company pursuant to the standstill provisions of the
Investment Agreement. The Series A Warrants will expire on the thirteenth
anniversary of the Closing Date. In addition, in the event the Company's total
gross losses and allocated loss adjustment expenses with respect to the
Northridge Earthquake exceed $945 million, the exercise price shall be reduced
by $0.08 per share for each million dollars of gross losses and allocated loss
adjustment expenses in excess of $945 million (provided that the exercise price
shall never be reduced to less than $1.00 per share as a result of Northridge
Earthquake losses); provided, however, that no adjustment to the Exercise Price
shall be made with respect to increases in gross losses and allocated loss
adjustment expenses reflected in financial statements following the 1995
year-end audited financial statements of the Company. The exercise of the
Series A Warrants will be subject to certain transfer restrictions that will be
included in the Company's
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Articles of Incorporation if such transfer restrictions are approved by the
Company's shareholders at the special meeting of shareholders scheduled for
December 15, 1994 called for the purpose of voting on the Investment Agreement
and other matters.
In connection with the Investment Agreement, upon consummation of the
Transaction, subsidiaries of AIG and each of the Insurance Subsidiaries shall
enter into a five-year quota share reinsurance agreement for 10% of each of the
subsidiaries' policies incepting on and after January 1, 1995. At AIG's option,
the agreements may be renewed annually for four years following the initial
term, with an annual reduction of 2% in the quota share percentage ceded to
AIG's subsidiaries.
The Investment Agreement also provides that, following the
consummation of the Transaction, the Company and AIG will use their respective
best efforts to negotiate and mutually agree upon a joint venture agreement
whereby the Company and AIG will form a new subsidiary or subsidiaries to
engage in the Company's automobile insurance business in states outside
California.
Between September 28 and October 17, 1994, the parties negotiated the
terms of the Investment Agreement. During this period, the Company also
negotiated with the Lenders the terms of an amendment and waiver to the Bank
Credit Agreement (the "Amendment and Waiver") in order to facilitate the
proposed transaction with AIG. The Amendment and Waiver, which was executed and
delivered by the Company and the Lenders on October 17, 1994, conditionally
waived the Lenders' rights to pursue remedies based on existing defaults
pending consummation of the Transaction, and made certain amendments to the
Bank Credit Agreement, effective upon the closing of the Transaction, as more
fully described therein.
In connection with the execution of the original letter of intent and
term sheet with AIG relating to the Transaction, the Company and AIG entered
into a Stock Option Agreement dated September 26, 1994 (the "Stock Option
Agreement"), pursuant to which the Company granted to AIG an option to acquire
up to 15% of the Company's outstanding shares of Common Stock under certain
circumstances at an exercise price of $11.33 per share, and which AIG can
require the Company to repurchase under certain circumstances. The Stock Option
Agreement will expire in the event the Transaction is consummated.
IMPACT OF NORTHRIDGE EARTHQUAKE
The Northridge Earthquake has resulted in substantial losses. Since
the event occurred, the Company and other members of the property and casualty
insurance industry have revised their estimates of claim costs and related
expenses several times. Because of the unusual nature of the ground motion
during the earthquake, the earthquake produced significant damage to structures
beyond normal expectations. Delayed discovery of the severity of damages has
caused claims to be reevaluated as the additional damage becomes known and has
made the estimation process extremely difficult. The Company estimates total
gross losses and allocated loss adjustment expenses for this catastrophe to be
$815 million at September 30, 1994. Unallocated loss adjustment, FAIR Plan
assessments and other earthquake related expenses are estimated to be an
additional $18.8 million. By mid-July, the Company had received all of the
$76.3 million in catastrophe and per-risk reinsurance recoverables due to this
event. As of September 30, 1994, the Company has received 34,617 homeowners and
condominium claims and 10,049 automobile claims. Because of the difficulties of
estimation noted above, it is possible that the Company's Northridge Earthquake
loss estimates will increase. Should the earthquake estimates increase, future
financial periods will be impacted and additional capital may be required. The
proposed Transaction with AIG includes provision for the Company to receive up
