10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission file no. 0-15176 SCOR U.S. CORPORATION (Exact name of registrant as specified in its charter) Delaware 75-1791342 (State or other jurisdiction (I.R.S. Employer incorporation or organization) Identification No.) 110 William Street (Suite 1800) New York, N.Y. 10038-3995 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, (212) 978-8200 including area code Securities registered pursuant to Section 12(b) of the Act: Title of each class New York Stock Exchange, Inc. Common Stock, $.30 par value (Registered exchange) Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes[X]No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value as of March 28, 1995 of the voting stock held by non-affiliates of the registrant was $28,934,912 calculated using the closing sale price of the shares on The New York Stock Exchange on that date. At March 28, 1995, there were 18,164,620 shares of Common Stock, $0.30 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Items 10, 11, 12 and 13 of Form 10-K is incorporated by reference into Part III hereof from the registrant's Proxy Statement (the "Proxy Statement") for its 1995 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year ended December 31, 1994. FORM 10-K INDEX PART I PAGE Item 1. Business 3 Item 2. Properties 33 Item 3. Legal Proceedings 33 Item 4. Submission of Matters to a Vote of Security Holders 33 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 34 Item 6. Selected Financial Data 35 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 37 Item 8. Financial Statements and Supplementary Data 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 PART III Item 10. Directors and Executive Officers of the Registrant 49 Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management 49 Item 13. Certain Relationships and Related Transactions 49 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50 SIGNATURES 50 CONSOLIDATED FINANCIAL STATEMENTS F-1 - F-40 SCHEDULES S-1 - S-7 EXHIBIT INDEX 2 PART I ITEM 1. BUSINESS GENERAL SCOR U.S. Corporation ("SCOR U.S." or, collectively with its subsidiaries, the "Company") is a holding company, the principal operating subsidiary of which is SCOR Reinsurance Company ("SCOR Re"). The Company also operates through SCOR Re's wholly owned subidiaries, General Security Insurance Company ("GSIC"), The Unity Fire and General Insurance Company ("Unity Fire") and General Security Indemnity Company ("GSIND"). (SCOR Re, GSIC, Unity Fire and GSIND are collectively referred to as the "Operating Subsidiaries"). The Company, through its subsidiaries, provides property and casualty insurance and reinsurance. Reinsurance is provided to primary insurance companies on both a treaty and facultative basis. SCOR Re specializes in underwriting treaties covering non-standard automobile, commercial and technical risks and provides property, casualty and special risk coverages on a facultative basis. SCOR Re writes treaty business almost exclusively through reinsurance intermediaries and writes facultative business directly with primary insurance companies and through reinsurance intermediaries. GSIC and Unity Fire provide commercial property and casualty insurance on both a primary and excess basis and underwrite alternative risk market coverages. GSIND provides commercial property and casualty coverages on a surplus lines basis. The Company's principal competitive strengths include (i) its consistent and disciplined underwriting strategy, (ii) its diversified products and sources of business, (iii) financial security offered ceding companies and reinsurance intermediaries, and (iv) its relationship with its principal shareholder, SCOR S.A., Paris, France. The Operating Subsidiaries have emphasized the development of long-term relationships with medium-size, regional and specialty companies. The Company has historically underwritten substantial amounts of both property and casualty reinsurance on both a treaty and facultative basis. In 1994, property risks and casualty risks each represented approximately one-half of the Company's net premiums written and its treaty operations generated approximately 82% of its net premiums written. SCOR Re's treaty and facultative property operations specialize in technical risks, such as boiler and machinery, oil, gas and chemical plants and non-standard automobile coverages, and also underwrite a broad range of other types of property risks. SCOR Re underwrites casualty business on both a treaty and facultative basis, primarily focusing on the short-tail automobile and general liability lines, as opposed to long-tail risks, such as medical malpractice and most products liability lines. The Company believes that its emphasis on technical risks and short-tail exposures provides it with a greater opportunity to attain favorable underwriting results. As part of its underwriting strategy, the Company generally underwrites each piece of business separately with the goal of 3 achieving favorable underwriting results rather than increasing market share. The Company has over time reduced its writings of business that fail to meet clearly defined profit margin standards, and increased its writings in certain targeted areas which it believes hold greater profit potential. The Company utilizes its actuaries to provide assistance in determining premiums to be charged for all significant treaties and facultative casualty contracts written on an excess of loss basis. The Company believes that its investment strategy, which emphasizes quality and liquidity, enhances the financial security it offers its ceding companies and reinsurance intermediaries. The Company's investment portfolio consists primarily of high-grade fixed maturity debt securities. As of December 31, 1994, virtually all of the Company's bond portfolio was rated A or better by Moody's Investors Services, Inc. The Company is protected against certain adverse loss reserve development through retrocessional agreements with SCOR S.A, its majority shareholder. Under those agreements, the Company has significant protection against adverse reserve development for all pre-1986 business and certain pre-1990 business. See "Retrocession Agreements". The Company believes that its relationship with SCOR S.A. strengthens its competitive position by providing the Company with management and underwriting expertise, increased underwriting capacity in certain business lines through retrocessional support, and assistance in identifying potential new products. With equity in excess of $1 billion, SCOR S.A., together with its reinsurance subsidiaries, ranks as the largest professional reinsurer in France and among the largest in the world. The Company is headquartered in New York and operates throughout the United States with SCOR Re facultative branches in Chicago, Dallas, Hartford, New York City and San Francisco. HISTORY SCOR U.S. was organized as a Delaware corporation in 1981 and prior to the completion of a public offering (the "Offering") in October 1986 of 4,000,000 shares of SCOR U.S. common stock, Societe Commerciale de Reassurance ("SCOR Paris"), a French reinsurer, and Caisse Centrale de Reassurance ("CCR"), a reinsurer wholly-owned by the French Government, owned 100% of the common stock of SCOR U.S. After the Offering, SCOR Paris and CCR owned approximately 68% of such stock. As a result of its participation in joint SCOR U.S.-SCOR Paris stock repurchase programs, as well as its purchase of CCR's shares of SCOR U.S. stock, SCOR Paris owned approximately 71% of the outstanding common stock of SCOR U.S. at December 31, 1989. A reorganization completed in France in November 1989 resulted in SCOR Paris and UAP Reassurances ("UAP Re"), a former subsidiary of Societe Commerciale Union des Assurances de Paris ("UAP"), becoming wholly- owned subsidiaries of SCOR S.A. In December 1990 SCOR Paris and UAP Re were merged into SCOR S.A. In March 1990, the Board of Directors of SCOR U.S. (the "Board") adopted an Agreement and Plan of Merger (the "Merger Agreement"), 4 which provided for the merger (the "Merger") with and into SCOR U.S. of Rockleigh Management Corporation ("Rockleigh"), a Delaware corporation. Rockleigh provided treaty and facultative property and casualty reinsurance through two operating subsidiaries, General Security Assurance Corporation of New York ("General Security") and Unity Fire. General Security and Unity Fire were commonly known as "The Unity Group". The Merger Agreement was executed as of March 6, 1990, and was approved by the stockholders of SCOR U.S. in June 1990. In connection with the merger, 5,353,427 shares of SCOR U.S. common stock were issued to UAP Re in exchange for all of the outstanding common stock of Rockleigh. SCOR S.A. owned approximately 80% of the outstanding common stock of SCOR U.S. at December 31, 1994. As part of a reorganization of The Unity Group, effective January 1, 1991, all reinsurance business of Unity Fire, including related assets and liabilities as of that date, were transferred to General Security pursuant to an assumption reinsurance agreement. Subsequently, Unity Fire became a subsidiary of General Security. Effective January 1, 1994, General Security was merged into SCOR Re. Throughout this report, all references to SCOR Re reflect the combined entity resulting from the merger of General Security into SCOR Re. The purpose of the merger was to form a single operating entity for the Company's assumed reinsurance business. SCOR Re was organized in 1974 by SCOR Paris as part of the expansion of SCOR Paris's operations in the United States reinsurance market. SCOR Re operated as a Texas-based reinsurance company until 1985 when, as part of a general restructuring of its operations, it was merged into a newly-formed New York domiciled reinsurer which changed its name to the present name. Unity Fire was incorporated in New York in 1942 under the name Unity Fire Insurance Corporation. It was formed as the successor to the U.S. branch of a French insurer known in the United States as The Union Fire Accident and General Insurance Company, which had operated in the United States since 1910. Unity Fire's current name was adopted in 1950. General Security had been formed in New York in 1941 to succeed to the business and affairs of the U.S. branch of a French insurer known in the United States as General Fire Assurance Company. On December 4, 1992, SCOR Re acquired GSIC, formerly named The International Insurance Company of Takoma Park, Maryland. GSIC was formed in Maryland in 1936 by the General Conference of Seventh-day Adventists ("General Conference") and prior to its acquisition had provided various types of insurance to the General Conference. All of its prior business was transferred prior to its purchase by SCOR Re. GSIND, formerly named Southwest International Reinsurance Company, was organized in 1984 as a joint venture between the Company and The Dai-Tokyo Fire and Marine Insurance Company, Ltd. and has been a wholly-owned subsidiary of SCOR Re since 1990. SCOR Re is licensed to conduct property and casualty insurance and/or reinsurance business in 32 states and is an approved reinsurer in fourteen additional states. In addition, primary insurers ceding to SCOR Re can take credit for reinsurance with respect to such business in the remaining four states, as a result of the fact that SCOR Re is domiciled in a state with substantially similar laws and maintains certain minimum requirements regarding surplus to policyholders. GSIC is licensed to conduct property and casualty 5 insurance and/or reinsurance business in 26 states. Unity Fire is licensed as a property and casualty insurer in 13 states and is an approved surplus lines insurer in one state. GSIND is a licensed property and casualty insurer in one state and is an approved surplus lines insurer in seven other states. In Canada, SCOR Re holds a Federal license and is licensed in the Province of Quebec, and Unity Fire holds a Federal license and is licensed in the Provinces of Alberta, British Columbia, New Brunswick and Ontario. SCOR U.S. believes that its combined reinsurance operations rank as the 17th largest professional reinsurance organization in the United States in terms of statutory surplus at December 31, 1994, based on a report by the Reinsurance Association of America (the "RAA"). When compared with companies in the RAA report that operate primarily in the brokered reinsurance market the Company ranks as the 11th largest professional reinsurance organization. The Company recently was notified by A.M. Best & Company, Inc. ("A.M. Best") that the rating of the Operating Subsidiaries has been reduced from "A+ (Superior)" to "A (Excellent)". A.M. Best attributed its action principally to the Company's volatile operating results. The only higher ratings obtainable from A.M. Best are "A++(Superior)" and "A+ (Superior)". A.M. Best is an independent insurance industry rating organization. A.M. Best's ratings are based on an analysis of the financial condition and operating performance of an insurance company as it relates to the industry in general. A.M. Best's publications indicate that the "A (Excellent)" rating is assigned to those companies which in A.M. Best's opinion have achieved excellent overall performance when compared to the standards established by A.M. Best and which have demonstrated a strong ability to meet their obligations to policyholders over a long period of time. A.M. Best's ratings are based upon factors of concern to policyholders and may not adequately reflect the considerations applicable to an investment in an insurance or reinsurance company. A.M. Best reviews its ratings at least annually and there is no assurance that SCOR Re, GSIC, Unity Fire and GSIND will be able to maintain their current A.M. Best ratings. INDUSTRY OVERVIEW Reinsurance Reinsurance is a transaction in which a primary insurer transfers, or cedes, a portion of its insurance risk to a reinsurance company. In consideration for reinsuring risks, the reinsurer is paid a premium by the primary insurer. Although reinsurance does not legally discharge the primary insurer from its liability for the coverage provided by its policies, it does make the reinsurer liable to the primary insurer with respect to losses sustained under the policy or policies issued by the primary insurer that are covered by the reinsurance transaction. Reinsurance provides primary insurers with three major benefits: increased premium writing capacity by reducing exposure on individual risks; protection against catastrophic losses; and stabilization of underwriting results. 6 In general, casualty insurance protects the insured against financial loss arising out of its obligation to others for loss or damage to persons or property. Property insurance protects the insured against financial loss arising out of the loss of property or its use caused by an insured peril. Property and casualty reinsurance protects the ceding company against loss to the extent of the reinsurance coverage provided. Property reinsurance involves a high degree of volatility but losses are generally reported within a relatively short time period after the event. A greater degree of unpredictability is associated with casualty risks because there tends to be a greater lag in the reporting and payment of casualty claims, due to the nature of the risk and the greater potential for litigation. Generally, there are two classes of reinsurance: treaty reinsurance and facultative reinsurance. Treaty reinsurance is a contractual arrangement that provides for the automatic reinsuring of an agreed type or category of risk underwritten by the primary insurer. In treaty reinsurance, the reinsurer generally does not evaluate each individual risk but rather evaluates the overall profit potential of the business assumed from the ceding company. Facultative reinsurance is the reinsurance of individual risks. Rather than agreeing to reinsure all or a portion of an entire class of risk, the reinsurer separately rates and underwrites each risk. Facultative reinsurance is traditionally purchased by primary insurers for individual risks not covered by their reinsurance treaties, for excess losses on risks covered by their reinsurance treaties, and for unusual risks. Typically, the demand for facultative reinsurance is inversely related to the supply of treaty reinsurance. The two major forms of reinsurance are proportional reinsurance and excess of loss reinsurance. Premiums received from both treaty and facultative reinsurance agreements vary according to, among other things, whether the reinsurance is on an excess of loss or on a proportional basis. Under proportional reinsurance, the reinsurer and the primary insurer share premiums and losses on a proportional basis. Under excess of loss reinsurance, the reinsurer indemnifies the primary insurer for all covered losses incurred on underlying insurance policies in excess of a specified retention. Premiums that the primary insurer pays to the reinsurer for excess of loss coverage are not directly proportional to the premiums that the primary insurer receives because the reinsurer does not assume a proportional risk. The price or rating of excess of loss reinsurance may be either a fixed percentage applied to the entire portfolio of business covered or may be calculated on a self-rating basis under which the rate is adjusted in accordance with actual losses, subject to a minimum and maximum premium. In proportional reinsurance, the reinsurer generally pays the primary insurer a ceding commission. The ceding commission is generally based on the primary insurer's cost of obtaining the business being reinsured (including commissions, local taxes, and miscellaneous administrative expenses). Furthermore, additional commissions may be paid to the ceding company based upon actual loss experience. The reinsurer generally does not pay any ceding 7 commissions to the primary insurer in connection with excess of loss reinsurance. A reinsurer often reinsures some of its business with other reinsurers called retrocessionaires. Reinsurance companies enter into retrocessional agreements for reasons similar to those that cause primary insurers to purchase reinsurance. Alternative Risk Market The volatility in cost and availability of traditional commercial insurance coverage has prompted many entities, both individually and in groups, to utilize a variety of mechanisms to insure their property and casualty risks. These vehicles include self-insurance, captive insurance companies, risk retention groups and government pools and trusts. SCOR U.S. and other reinsurance groups provide both insurance on an excess basis and reinsurance to such entities. UNDERWRITING SCOR Re provides property and casualty treaty and facultative reinsurance. Its treaty business is conducted out of its home office in New York City. Its facultative business is conducted out of its branch offices in Chicago, Dallas, Hartford, New York City and San Francisco. Unity Fire had operated as a property and casualty reinsurer, but subsequent to the above-mentioned 1991 reorganization of The Unity Group, it now provides property and casualty insurance coverages on a primary and excess basis. GSIC also operates as an insurer of such coverages in states where Unity Fire is not licensed. GSIND provides commercial property and casualty coverages on a surplus lines basis. It is the intent of the Company to merge Unity Fire and GSIC subject to approval by such companies' Boards of Directors and state regulatory authorities. The purpose of the merger is to form a single broadly licensed operating unit for the Company's primary and excess insurance business, including alternative risk business. GSIC, Unity Fire and GSIND wrote a limited amount of business in 1994. Intercompany Pooling Agreement Effective January 1, 1991, SCOR Re and the other Operating Subsidiaries operate under a reinsurance pooling agreement pursuant to which the net amounts under all new and renewal business written by each such company is pooled. The net balances of the pool are then distributed to each company in accordance with established proportions. UNDERWRITING STRATEGY SCOR Re specializes in underwriting treaties covering commercial, technical and non-standard automobile risks and in the provision of facultative property, casualty and special risk covers. SCOR Re writes treaty business almost exclusively through reinsurance 8 intermediaries and conducts its facultative operations directly with primary insurers and through reinsurance intermediaries. The underwriting strategies of the Company's operating subsidiaries are based upon long-term disciplined underwriting practices. These practices, which react to current industry conditions, may result in fluctuations in the Company's mix of business from year to year. The following table presents certain information with respect to the business written by the principal SCOR U.S. operating subsidiaries for the years indicated: (Dollars in thousands) TREATY Year Ended December 31, 1994 1993 1992 Gross Premiums Written $228,795 $268,333 $237,376 Net Premiums Written 190,361 209,311 169,330 Net Premiums Earned 187,833 200,663 156,095 Net Losses Incurred 164,566 140,961 147,854 Commissions 54,442 59,816 52,027 FACULTATIVE Year Ended December 31, 1994 1993 1992 Gross Premiums Written $77,997 $66,186 $67,452 Net Premiums Written 40,699 36,102 36,213 Net Premiums Earned 40,411 35,388 35,955 Net Losses Incurred 26,704 15,331 12,691 Commissions 4,992 1,508 3,933 TOTAL Year Ended December 31, 1994 1993 1992 Gross Premiums Written $306,792 $334,519 $304,828 Net Premiums Written 231,060 245,413 205,543 Net Premiums Earned 228,244 236,051 192,050 Net Losses Incurred 191,270 156,292 160,545 Commissions 59,434 61,324 55,960 Net losses incurred for 1994 were adversely affected by $32.2 million of losses resulting from property catastrophe events. The January 1994 Northridge earthquake ("Northridge Earthquake") accounted for $26.1 million of the total for 1994. Gross premiums written and net premiums written for 1994 were increased by $1.0 million and reduced by $5.0 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections primarily related to the Northridge earthquake. Net losses incurred for 1993 were adversely affected by $13.7 million of losses resulting from property catastrophe events. Net losses incurred for 1992 were adversely affected by $50.9 million of losses resulting from property catastrophe events (primarily Hurricane Andrew). Gross premiums written and net premiums written 9 for 1992 were increased by $5.6 million and reduced by $6.5 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections subsequent to Hurricane Andrew. SCOR Re has historically written substantial amounts of both casualty and property business. During 1994 the Company accelerated its withdrawal from property pro rata treaties that contained rates and/or conditions deemed to be inadequate. This strategy, along with the targeting of additional casualty business, has caused the Company's overall portfolio mix to continue to shift towards a more balanced split between property and casualty businesss. The following table presents gross premiums written and net premiums written segregated by the general nature of the risks underwritten: Gross Premiums Written (Dollars in thousands) Casualty Property % of % of Total Amount Total Amount Total Amount 1994 $142,703 46.5 $164,089 53.5 $306,792 1993 125,475 37.5 209,044 62.5 334,519 1992 91,448 30.0 213,380 70.0 304,828 Net Premiums Written (Dollars in thousands) Casualty Property % of % of Total Amount Total Amount Total Amount 1994 $114,988 49.8 $116,072 50.2 $231,060 1993 105,726 43.1 139,687 56.9 245,413 1992 74,094 36.0 131,449 64.0 205,543 Treaty Reinsurance Underwriting philosophy, quality of management, claims handling ability, financial strength of the ceding insurance company, and the pricing and make-up of the portfolio to be assumed, as well as historical loss experience and exposure data, are among the primary factors considered by SCOR Re in determining whether to accept and continue to participate on a particular treaty. Generally, the Company's treaty department (the "Treaty Department") performs underwriting audits before agreeing to enter into a significant new treaty relationship. Before the Treaty Department agrees to accept a significant new casualty treaty, the Company's claims department (the "Claims Department") generally performs claims audits of the prospective ceding company. In addition, the Company's actuarial department (the "Actuarial Department") provides assistance in determining the premium to be charged for all significant excess of loss contracts. The Actuarial Department utilizes both exposure rating and experience rating techniques in evaluating the rate adequacy of all significant excess of loss treaty submissions before they are bound. The Actuarial Department utilizes explicit trend 10 factors in its pricing activities. The factors are specifically designed to account for the impact of inflation. The amount of premium received and ultimate profitability of results experienced by the reinsurer for reinsuring risks on a proportional basis are generally tied to the primary insurer's initial pricing and underwriting standards. Thus, if the primary insurer does not accurately estimate the ultimate losses to be incurred on the risk insured, the reinsurer could incur substantial underwriting losses. Excess of loss reinsurance allows the reinsurer the flexibility to negotiate terms and conditions, as well as a premium based on the reinsurer's own estimate of its exposure to losses. As a practical matter, however, the amount of premium that the primary insurer charges, which may be subject to governmental regulation, may affect the rates that may be charged by the reinsurer. Once a treaty is written, a reinsurer is not involved in the day-to-day decisions of the ceding company with respect to the underwriting of insurance policies covered by the treaty. However, treaty contracts contain provisions that allow the reinsurer access to the ceding company's records in order to review any changes in underwriting philosophy, the quality of risks accepted, price adequacy and compliance with the terms of the treaty. SCOR Re undertakes such audits for a majority of its major accounts on an annual basis. Further, the Claims Department performs periodic audits of overall claims operations of significant ceding companies as well as of specific losses. SCOR Re writes treaty reinsurance almost exclusively through reinsurance intermediaries. SCOR Re seeks to be a lead reinsurer on treaties in which it participates, a factor that SCOR Re believes permits it to more effectively influence the terms and conditions of a treaty. SCOR Re is a lead reinsurer on treaties representing approximately 43% of its gross treaty premiums written for underwriting year 1994. SCOR Re's Treaty Department concentrates underwriting activity in "working layer" areas (generally the first $1 million to $5 million of limit) where loss frequency, quicker loss settlement and reporting factors, as well as the increased ability to analyze the reinsurer's exposure from ceded coverages and limits, can generally yield more accurate and credible pricing analyses. SCOR Re's Treaty Department emphasizes medium-size, regional, or specialty companies which are believed to offer a more stable environment for coverage conditions and rates. In addition, in this market SCOR Re believes that its technical underwriting process provides greater opportunity to influence underwriting results. Property underwriting reflects an emphasis on technical risks (as described below), while casualty underwriting emphasizes short-tail exposures in the automobile and general liability lines of business where claims develop over a shorter period of time than do claims arising in such lines of business as medical malpractice and products liability. A significant growth area in SCOR Re's treaty underwriting has been in non-standard automobile liability. For 1994, non-standard automobile represented 20% of the Treaty Department's net premium writings. SCOR Re typically writes gross capacity for property of up to $5.0 11 million as to any one ceding company program and for casualty of up to $2 million as to any one ceding company program. SCOR Re's gross capacity for catastrophe business is $8.0 million per program. See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re. The portion of SCOR Re's treaty business that was previously written by General Security prior to its merger into SCOR Re is predominantly property reinsurance, with emphasis on proportional reinsurance. In addition to participation in large programs, a special effort had been made to reinsure smaller regional companies. Because of their more modest size and resources, these companies generally concentrate on less complex types of business (such as homeowners and small commercial risks). In addition, such companies rely more extensively on the use of proportional reinsurance and tend to develop long-term relationships with the reinsurer. General Security had developed its reinsurance treaty operations over a period of almost fifty years using intermediaries as its source of business. Because of its long-term presence in the reinsurance market, the consistency of its underwriting approach and its continuous emphasis on service, General Security participated in a very broad cross-section of property reinsurance programs. Treaty operations generated approximately $190.4 million, or 82%, of SCOR Re's net written premium volume in 1994. Property and casualty treaties represented approximately 48% and 52%, respectively, of total treaty net written premium volume. As of December 31, 1994, SCOR Re was a party to 145 proportional treaties, representing 23% of treaties in force and accounting for 83% of treaty gross written premiums, and 499 excess of loss treaties, representing 77% of treaties in force and 17% of gross treaty premiums written. SCOR Re entered into reinsurance treaties with 290 ceding companies in 1994. As previously indicated the Company has accelarated its withdrawal from property pro rata treaties deemed to have inadequate terms and/or conditions. This strategy has contributed to approximately one third fewer treaties in force at December 31, 1994 compared with December 31, 1993. The Company's strategy continued in 1995 and following the January 1995 renewal season the number of treaties in force were further reduced by approximately 25%. The Company has been increasing its share of treaties written in an attempt to develop fewer but larger cedent relationships and maintain or increase its premium volume while reducing its treaty count. SCOR Re's Treaty Department comprises twelve underwriters, with an average of over 18 years industry experience. Effective January 1, 1992, General Security entered into a management agreement with California Reinsurance Management Corporation ("Cal Re"). Pursuant to that agreement Cal Re places property insurance business on a treaty basis with SCOR Re as the successor to General Security. SCOR Re retained approximately 21% of the business during 1994 and retroceded the remainder to a pool, managed by Cal Re, comprised of domestic and foreign reinsurers, most of which have been members prior to 1992. SCOR U.S. owns approximately 92% of the outstanding stock of Cal Re. 12 Facultative Reinsurance Facultative reinsurance involves separate negotiation of each risk being underwritten; therefore, the reinsurer is in a better position to influence the terms of the original insurance. The Actuarial Department assists in the pricing of complex facultative casualty submissions. The Facultative casualty unit conducts business both directly with ceding companies and through reinsurance intermediaries out of SCOR Re's Chicago, Dallas, Hartford, New York City and San Francisco branch offices. The Facultative property unit conducts business directly with ceding companies from these branch offices, and through reinsurance intermediaries from the intermediary unit located in Hartford. SCOR Re's facultative operations generated approximately $40.7 million, or 18%, of its net written premium volume in 1994. Property and casualty coverages represented 28% and 72%, respectively, of SCOR Re's total facultative net premium volume. Facultative Property SCOR Re's facultative property underwriting focus has been directed toward large technical risks such as boiler and machinery; oil, gas and chemical plants; operating utilities; manufacturing facilities; heavy commercial, industrial and builder's risks; and real estate. Generally, this business involves insurance policies covering property values in excess of $20 million. The Department operates with a gross capacity of $20 million per risk, on a maximum foreseeable loss basis (as determined by SCOR Re underwriters). See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re. In order to evaluate and underwrite these risks, SCOR Re believes that specialized technical analysis is required. SCOR Re has 13 underwriters in the Facultative property unit, substantially all of whom have engineering or closely related technical degrees and have joined SCOR Re from the engineering industry or specialized underwriting organizations that place considerable emphasis on the engineering aspects of the insured risks. In addition to an average engineering industry or related experience of seven years, the staff averages 12 years of insurance and reinsurance industry experience. Facultative property reinsurance is provided to targeted primary companies selected for their compatibility with SCOR Re's underwriting approach and experience in this specialized area. Marketing is accomplished by direct calls to ceding companies, attendance at key industry functions, technical presentations, participation in industry associations and through reinsurance intermediaries. During 1994, 20% of SCOR Re's facultative property certificates (accounting for 55% of gross premiums written) were written on a proportional basis, with the remaining 80% (accounting for 45% of gross premiums written) written on an excess of loss basis. Facultative Casualty SCOR Re's Facultative casualty unit primarily reinsures risks in the commercial automobile and general liability areas, focusing on working layer (generally the first $1 million of liability) and lower 13 excess and umbrella layer (generally the next $1 million to $10 million of liability) business, which SCOR Re believes permits more accurate claims prediction and, therefore, more accurate pricing, because the frequency and more rapid reporting and settlement of claims allows greater statistical reliability. During 1994, all of SCOR Re's facultative casualty certificates were written on an excess of loss basis. SCOR Re markets directly to ceding companies which generally retain a significant amount of liability for their own account and with which SCOR Re has established long-term relationships as well as through reinsurance intermediaries. The Facultative casualty unit's gross capacity is $5 million for any one risk. SCOR Re retains a large portion of its facultative casualty business. See "Retrocession Agreements" for a discussion of amounts retained by SCOR Re. SCOR Re has 15 underwriters in the Facultative casualty unit. The staff averages 17 years of insurance and reinsurance industry experience. Retrocession Agreements SCOR Re, like most reinsurance companies, enters into retrocession arrangements for many of the same reasons primary insurers seek reinsurance, including increasing their premium writing and risk capacity without requiring additional capital and reducing the effect of individual or aggregate losses. Historically, SCOR Re has retroceded risks to retrocessionaires on both a proportional and excess of loss basis. Since a reinsurer remains liable to a ceding company with respect to any risk subject to a retrocession agreement, such retrocessionaires are subject to an initial review of financial condition before final acceptability is confirmed and subsequent reviews on an annual basis. From 1974 through 1986, virtually all of SCOR Re's retrocessions had been to affiliates. Based on the increased surplus resulting from SCOR U.S.'s public offering in 1986, SCOR Re significantly decreased the total amount of reinsurance retroceded, a large portion of which continues to be retroceded to affiliates. All reinsurance agreements with affiliates must be submitted to the New York Insurance Department for prior review. In 1994, 11.5% of gross premiums written by the Company were retroceded to SCOR S.A., compared with 15.6% and 14.0% in 1993 and 1992, respectively. Under its 1995 retrocessional program, SCOR Re retains a maximum of $2.0 million as to any one ceding company program for treaty business. SCOR Re retains a maximum of $3.9 million and $1.0 million per risk for facultative property and facultative casualty business, respectively. Under its 1994 retrocessional program SCOR Re retained a maximum of $2.0 million as to any one ceding company program for treaty business and a maximum of $3.3 million and $1.1 million per risk for facultative property and facultative casualty business, respectively. SCOR Re purchases coverage against the accumulation of losses resulting from a single catastrophic event. As with most reinsurers, SCOR Re retains a share of its catastrophe exposures. In 1995, SCOR Re has general catastrophe retrocessional coverage, which 14 covers property exposures only, for generally 78% of $48 million in excess of $20 million per occurrence. The Company also has underlying coverage for $15 million in excess of $5 million per occurrence after a $5 million deductible. SCOR S.A. participates in SCOR Re's 1995 general catastrophe retrocessional program for a total limit of approximately $13.7 million. Pursuant to a Net Aggregate Excess of Loss Retrocessional Agreement dated as of July 1, 1986 ("the 1986 Retrocessional Agreement"), SCOR S.A. reinsured SCOR Re for adverse loss development from pre-1986 business that exceeded the total of loss reserves established as of June 30, 1986 and premiums earned after June 30, 1986 from such pre-1986 business. The 1986 Retrocessional Agreement provided protection to the Company for business underwritten by SCOR Re only and did not provide coverage for pre-1986 business underwritten by any other subsidiary. However, business underwritten by General Security and Unity Fire is protected against adverse development by a separate net aggregate excess of loss retrocessional agreement, as described below. The 1986 Retrocessional Agreement terminated on December 31, 1993, at which time, SCOR S.A.'s liability to SCOR Re was $16.2 million. This amount is the actuarially determined expected ultimate loss from the pre-1986 business in excess of the "aggregate deductible" (which is defined as the total of net outstanding loss and loss expense reserves, net incurred but not reported ("IBNR") loss reserves and net unearned premium reserves established as of June 30, 1986 for the pre-1986 business, plus all net premiums and future net premium adjustments earned after June 30, 1986 under retrospectively rated treaties for such business). During the first quarter of 1994, SCOR Re received $16.2 million from SCOR S.A. in settlement of its liability under this agreement. Given the remaining uncertainty of the ultimate liability of certain exposures underwritten in the pre-1986 SCOR Re business, SCOR Re and SCOR S.A. entered into a new Net Aggregate Excess of Loss Agreement ("the 1994 Retrocessional Agreement") effective January 1, 1994, which protects the same business covered under the 1986 Retrocessional Agreement. Under this Agreement, SCOR Re is responsible for any further adverse development up to $8.8 million beyond the $16.2 million of adverse development recognized under the 1986 Retrocessional Agreement, at which point the 1994 Retrocessional Agreement attaches and provides coverage for up to $10 million of any additional adverse development. Because the losses related to the 1986 Retrocessional Agreement settlement have not yet been paid, the Company earns interest on the funds received. Based on the Company's assumption of the expected payment pattern of these reserves, the Company expects that such investment income would at least equal any adverse development below the attachment point. SCOR Re paid a premium of $2 million for this coverage, which expires on December 31, 2004. At December 31, 1994, no recovery was recognized under the 1994 Retrocessional Agreement. In addition, based on the Agreement's experience, SCOR Re is eligible to receive a contingent commission of up to 27.75% of the premium. SCOR S.A. entered into a Net Aggregate Excess of Loss Retrocessional Agreement with each of Unity Fire and General Security, pursuant to which SCOR S.A. agreed to reinsure those companies to the extent that their net ultimate incurred losses (as 15 defined in the agreements) arising in 1989 and prior accident years exceed an aggregate deductible. As a result of the above-described assumption by General Security of the rights, liabilities and obligations of Unity Fire, the Net Aggregate Excess of Loss Retrocessional Agreement with Unity Fire was terminated and the Net Aggregate Excess of Loss Retrocessional Agreement with General Security was amended (as so amended, the "Agreement") to include the protection formerly provided to Unity Fire by its retrocessional agreement with SCOR S.A. As a result of the merger of General Security into SCOR Re, the protection under the Agreement is now for the benefit of SCOR Re. The aggregate deductible is defined as the sum of net outstanding loss and loss expense reserves and net IBNR loss reserves as of December 31, 1989, for 1989 and prior accident years, as documented in the 1989 statutory financial statements of Unity Fire and General Security. This amount has been established at a combined aggregate of $93.8 million. The annual premium for this protection is $210,000 through 2004. The Agreement continues in force until all covered losses are settled. At December 31, 1994, SCOR S.A.'s estimated liability to SCOR Re under the Agreement was approximately $11.7 million. The retrocession of risks underwritten by a reinsurer does not legally discharge it from liability for any part of the risk retroceded. Accordingly, the Operating Subsidiaries would be required to pay the full amount of the loss associated with the reinsured risk if for any reason SCOR S.A. or any other retrocessionnaire was unable or failed to meet its reinsurance obligations. Generally, under the New York Insurance Law, retrocessionaires which are not licensed or otherwise authorized reinsurers in New York must provide letters of credit or other permitted assets to secure their obligations to the ceding reinsurer (based on the ceding reinsurer's current estimate of the ceded liability) in order for the ceding reinsurer to take credit on its statutory financial statements for the reinsurance ceded. This security can be applied by the ceding reinsurer toward discharging its own liability in the event of a default by the retrocessionaire. At December 31, 1994, the amount of estimated liability for which retrocessionaires were liable to the Operating Subsidiaries was approximately $265.7 million, of which approximately $215.2 million was secured by letters of credit in favor of, or funds held by, the Operating Subsidiaries. Additionally, an amount of $37.6 million represents the liability on reinsurance ceded to New York licensed or authorized reinsurance companies, which are not required to provide additional security in order for the ceding reinsurer to take credit for the reinsurance ceded. The amounts of estimated liability recoverable from retrocessionaires at December 31, 1993 and 1992 were approximately $285.1 million and $289.2 million, respectively. The Operating Subsidiaries' exposure to amounts deemed unrecoverable from retrocessionaires has been limited and to the extent it has been exposed, paid losses, outstanding losses and incurred but not reported losses recoverable from retrocessionaires which are determined to be uncollectible are charged to operations. The following table sets forth certain information regarding insurers and reinsurers that are parties to retrocessional agreements with the Company for the periods indicated: 16
December 31, 1994 (Dollars in thousands) Paid Loss Unpaid Loss Unearned % of Total Company Recoverable Recoverable Premiums Total Recoverable SCOR S.A. 4,065 120,355 10,463 134,883 50.8% Dai-Tokyo Fire and Marine Insurance Co. 2,103 24,771 1,152 28,026 10.5% Zurich Versicherung Gesellschaft AG -0- 20,000 -0- 20,000 7.5% Other Affiliate 334 6,741 41 7,116 2.7% Non-Affiliate 17,253 50,805 7,651 75,709 28.5% ------ ------- ----- ------ ------ Total 23,755 222,672 19,307 265,734 100.0% ====== ======= ====== ======= ====== December 31, 1993 (Dollars in thousands) Paid Loss Unpaid Loss Unearned % of Total Company Recoverable Recoverable Premiums Total Recoverable SCOR S.A. 8,734 128,007 14,424 151,165 53.0% Dai-Tokyo Fire and Marine Insurance Company 720 28,538 1,080 30,338 10.6% Zurich Versicherung -0- 20,000 -0- 20,000 7.0% Gesellschaft AG Other Affiliate 764 6,147 154 7,065 2.5% Non-Affiliate 26,609 39,151 10,759 76,519 26.9% ------ ------- ------ ------- ----- Total 36,827 221,843 26,417 285,087 100.0% ====== ======= ====== ======= ====== 17 December 31,1992 (Dollars in thousands) Paid Loss Unpaid Loss Unearned % of Total Company Recoverable Recoverable Premiums Total Recoverable SCOR S.A. 13,703 100,622 12,754 127,079 44.0% Dai-Tokyo Fire and Marine Insurance Company 1,979 31,112 1,121 34,212 11.8 Zurich Versicherung Gesellschaft AG -0- 20,000 -0- 20,000 6.9 Other Affiliate 2,074 12,175 149 14,398 5.0 Non-Affiliate 24,599 56,742 12,205 93,546 32.3% ------ ------ ------ ------ ----- Total 42,355 220,651 26,229 289,235 100.0% ====== ======= ====== ======= ====== There is no amount recoverable and no percent of total recoverable from any other reinsurer greater than $4,640 (1.7%), $6,173 (2.2%) and $10,047 (3.5%) for the years ended December 31, 1994, 1993 and 1992, respectively.
18 MARKETING SCOR Re writes all treaty business out of its home office in New York City. Virtually all treaty business is written through reinsurance intermediaries, who represent the primary insurers in negotiations with SCOR Re for the purchase of reinsurance. Brokerage commissions paid to intermediaries vary from 1% to 10% of assumed premiums depending on the type of contract negotiated, with these payments constituting part of SCOR Re's total acquisition costs. For the underwriting year 1994 approximately 95% of the gross premiums written and recorded in 1994 by SCOR Re for treaty business was arranged through intermediaries. SCOR Re's three largest intermediary production sources are E. W. Blanch Co., John P. Woods Co., Inc. and Guy Carpenter & Company, Inc., which accounted for 24%, 17% and 11%, respectively, of gross premiums written for underwriting year 1994. SCOR Re believes that the loss of all or substantially all of the business provided by any of these intermediaries could have a material adverse effect on SCOR Re's operations. However, because of the nature and extent of these relationships, as well as SCOR Re's competitive position in the marketplace, such an eventuality is considered unlikely. The above-mentioned intermediaries are among the largest intermediaries in the reinsurance industry. The concentration of business written by SCOR Re through a small number of sources is consistent with the concentration of the property and casualty intermediary reinsurance market, in which a majority of the business is written through the top ten intermediaries. SCOR Re conducts its facultative business principally on a direct basis through its branch offices in Chicago, Dallas, Hartford, New York City and San Francisco. SCOR Re also uses intermediaries to produce business for its facultative operations. CLAIMS Individual claims reported to the Operating Subsidiaries are managed by the Claims Department. The Claims Department consists of seven professionals with an average of 19 years of insurance and reinsurance industry claims experience. In addition to managing reported claims and conferring with ceding companies on claim matters, the Claims Department conducts periodic audits of specific claims and the overall claims procedures at the offices of ceding companies. Prior to SCOR Re's acceptance of certain risks, the Claims Department often conducts claims audits of prospective ceding companies, which the Company believes benefit all parties to the reinsurance arrangement. SCOR Re attempts to monitor whether the ceding company uses proper adjusting techniques, reserves properly, has sufficient staff and follows proper claims processing procedures. During such audits, the ceding company's management is provided with a constructive review and assessment of its claims operation. Recommendations regarding procedures, processing and personnel are provided to the ceding company. Potentially contested material claims are reviewed with senior management of the respective companies and with the Company's Law Department ("Law Department"). 19 RESERVES Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the losses to the insurer and the reinsurer, the insurer's payment of that loss, and subsequent payments by the reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers establish loss and loss expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Loss and loss expense reserves have two components: case reserves, which are reserves for reported claims, and IBNR reserves, which are reserves for claims that have occurred but which have not yet been reported to the reinsurer. Loss reserves are only estimates at a given point in time of what the insurer or reinsurer expects to pay on losses, based on facts and circumstances then known, predictions of future events, estimates of further trends in claim severity and frequency, and other variable factors. During the loss settlement period, which may be many years in the case of casualty claims, additional facts regarding individual claims may become known. As the insurer or reinsurer learns additional facts, it often becomes necessary to refine and adjust the estimates of liability on a claim upward or downward, and even then ultimate liability may exceed or be less than the revised estimates. The IBNR reserving process is intended to provide implicit recognition of the impact of inflation and other factors affecting claim payments by taking into account changes in historical payment patterns and apparent trends. The inherent uncertainty of estimating loss reserves is exacerbated for reinsurers, especially casualty reinsurers, by the significant periods of time that often elapse between the occurrence of a loss and the reporting of the loss to the primary insurer and, ultimately, the reinsurer. Loss and loss expense reserves for individual claims are initially established when reports or notices of claims are received from the ceding company. They are based upon the amount of reserves recommended by the ceding company and any additional reserves deemed necessary by the Claims Department, after an evaluation of numerous factors, including coverage, liability, severity of injury or damage, jurisdiction, and ability of the ceding company to properly evaluate and handle the claim. It is the Claims Department's policy to establish case reserves in an amount at least equal to the amount recommended by any ceding company. The Company calculates IBNR reserves for the Operating Subsidiaries using loss development and premium based methods. In an effort to reduce the uncertainty of the reporting pattern of losses, the Company analyzes several different sources of industry data, extensively reviews the historical loss development patterns of its ceding companies which have many years of loss experience and uses the data and loss ratios developed by its own actuaries who are involved in the pricing of most treaty accounts and all excess of loss accounts. Loss development techniques are generally accepted within the industry to be appropriate for the common lines of casualty business (subsequent to the first several years). The Company's loss development techniques utilize both Company and industry development 20 patterns. SCOR U.S. uses premium based formulas to establish minimum IBNR amounts for the most recent underwriting years on casualty business. For such immature casualty business, premium based techniques are used since the loss reporting patterns for this business are not sufficiently credible at this stage to allow the proper use of loss development methods. SCOR U.S. also uses, where deemed appropriate, the Bornhuetter-Ferguson IBNR formula which blends both the loss development and premium based approaches. IBNR reserves are established for large treaties based on the loss experience encountered with respect to such treaties through the application of industry average loss development factors derived from RAA data. Smaller treaties, and treaties without adequate individual loss experience, are grouped both by class of business and by underwriting year or accident year relevant to IBNR calculations. The techniques applied by SCOR U.S. are generally accepted actuarial methods for establishing IBNR reserves. The Senior Vice President and Actuary of SCOR U.S., as well as senior management, monitor IBNR reserve development on a frequent basis by reviewing and analyzing the reserves established by the Claims Department and by comparing actual with predicted development. SCOR U.S. re-evaluates its reserves quarterly to reflect current information with respect to the development of loss experience. SCOR U.S. does not discount any of its reserves for reported or unreported claims to a present value basis. The actuarial staff consists of two Actuaries who are Fellows of the Casualty Actuarial Society and Members of the American Academy of Actuaries, and four actuarial assistants. SCOR Re is protected by net aggregate excess of loss retrocessional agreements with SCOR S.A. ("the SCOR S.A. Retrocessional Agreements"). (See "Underwriting - Retrocession Agreements" for a description of these agreements.) The operating subsidiaries of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental related claims. During the years ended December 31, 1994, 1993 and 1992, the Company has not experienced any significant amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from adverse development under the SCOR S.A. Retrocessional Agreements. Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental related claims is not material to the Company's financial position or results of operations. Net incurred losses for asbestos and environmental-related coverages during the year ended December 31, 1994 were estimated to be $2.4 million. The Company did not incur any net losses and loss expenses for asbestos and environmental related coverages during the years ended December 31, 1993 and 1992. Gross losses and loss expenses incurred for the year ended December 31, 1994 were estimated to be $8.6 million. At December 31, 1994, reserves for losses and loss expenses for asbestos and environmental related coverages, on a gross and net basis, were an estimated $30.5 million and an estimated $16.9 million, respectively. At December 31, 1994, reported case reserves represented an estimated $11.5 million of the 21 total gross reserves and an estimated $6.5 million of the total net reserves. The table below sets forth the changes in loss and loss expense reserves of the SCOR U.S. subsidiaries for each year in the three-year period ended December 31, 1994. The lower portion of the table sets forth the adjustment between Generally Accepted Accounting Principles ("GAAP") and Statutory Accounting Practices ("SAP") reserves for losses and loss expenses. The amounts set forth below are net of deductions for reinsurance. Year Ended December 31, 1994 1993 1992 (Dollars in thousands) Reserve for losses and loss expenses at beginning of year - GAAP, net $340,366 $341,162 $324,117 -------- -------- -------- Provision for losses and loss expenses: Occurring in current year 193,587 160,695 165,468 Occurring in prior years (2,317) (4,403) (4,923) ------- ------- ------- Total 191,270 156,292 160,545 ------- ------- ------- Payments for losses and loss expenses: Occurring in current year 55,155 36,018 51,514 Occurring in prior years 94,366 121,070 91,986 ------- ------- ------- Total 149,521 157,088 143,500 ------- ------- ------- Reserve for losses and loss expenses at end of year - GAAP, net 382,115 340,366 341,162 Adjustment(1) 11,700 26,724 7,600 ------- ------- ------- Reserve for losses and loss expenses at end of year - SAP $393,815 $367,090 $348,762 ======== ======== ======== Reserves for losses and loss expenses at end of year - GAAP, net $382,115 $340,366 $341,162 Reinsurance recoverable on unpaid losses 222,672 221,843 220,651 -------- ------- ------- Reserves for losses and loss expenses at end of year - GAAP, gross $604,787 $562,209 $561,813 ======== ======== ======== (1) The net GAAP reserve for losses and loss expenses reflected above is net of $11,700,000, $26,724,000 and $7,600,000 of recoveries in 1994, 1993 and 1992, respectively, under the Retrocessional Agreements with SCOR S.A. SAP requires that losses and loss expense reserves ceded under the SCOR S.A. Retrocessional Agreements be reported as an asset rather than a reduction to net losses and loss expense reserves. 22 The table on page 24 represents the development of balance sheet reserves for 1984 through 1994 calculated in accordance with GAAP. The top line shows the reserves at the balance sheet date for each of the indicated years, representing the estimated amounts of losses and loss expenses for claims arising during that year and in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported. The upper portion of the table shows the re-estimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about claims for individual years. The lower portion of the table shows the cumulative amounts paid as of successive years with respect to that reserve liability. The cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years. In evaluating information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the deficiency related to losses settled in 1985 but incurred in 1984 will be included in the cumulative deficiency amount for the year 1984. The table does not present accident or policy year development data. Conditions and trends that have affected the development of liability in the past will not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. Under the 1986 Retrocessional Agreement, SCOR Re was generally protected from any net adverse loss development, in the aggregate, for all pre-1986 underwriting business. However, while some adverse loss reserve development is included in the table set forth below, such adverse loss development is entirely offset by premiums subsequently earned on pre-1986 underwriting business, which are not reflected in the table. The reserve for losses and loss expenses is based upon estimates received from ceding reinsureds on treaty contracts, accumulation of case estimates for losses and loss expenses on claims reported on facultative contracts and estimates of losses and loss expenses incurred but not reported based upon the Company's expectations of what may have been incurred. Such provisions are necessarily based on estimates and, accordingly, there can be no assurance that the ultimate liability will not exceed such estimates and have a material adverse effect on the Company's results of operations and financial condition. Nevertheless, the Company believes that its reserves make reasonable provision for all unpaid losses and loss expense obligations, including sufficient provision for any potential future adverse development of previous years' reserves. 23
Development of Net GAAP Reserves Year Ended December 31, 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 (Dollars in thousands) Initial reserves for losses and loss expenses $86,501 $103,708 $138,068 $191,883$241,345 $289,085 $319,218 $324,117$341,162 $340,366 $382,115 Re-estimated as of: One year later 89,498 116,488 138,656 192,488 238,835 301,427 325,945 319,194 336,759 338,049 Two years later 98,116 114,577 132,416 183,458 234,012 296,696 318,322 301,917 334,706 Three years later 101,437 114,925 123,373 186,498 225,007 291,800 299,788 301,711 Four years later 105,787 120,358 133,223 180,011 222,747 274,016 298,112 Five years later 108,250 137,214 133,552 178,450 212,706 275,110 Six years later 122,641 136,977 131,180 170,840 212,497 Seven years later 119,358 135,469 126,900 173,179 Eight years later 117,846 131,352 129,188 Nine years later 117,534 133,025 Ten years later 116,813 Cumulative redundancy/(deficiency) (30,312) (29,317) 8,880 18,704 28,848 13,975 21,106 22,406 6,456 2,317 Percentage -35% -28% 6% 10% 12% 5% 7% 7% 2% 1% Cumulative amount of liability paid through: One year later $32,766 $32,853 $29,867 $42,010 $59,088 $61,893 $84,918 $91,986$121,070 $94,366* Two years later 48,034 52,540 48,080 73,005 88,776 112,953 138,758 144,536 161,448* Three years later 62,246 66,487 65,439 92,699 115,245 148,850 175,918 158,646* Four years later 70,512 80,434 78,729 106,022 139,352 174,114 180,337* Five years later 81,005 91,744 88,243 123,314 151,085 173,222* Six years later 87,208 99,658 98,176 130,680 142,583* Seven years later 92,985 107,317 103,548 118,144* Eight years later 97,358 111,285 90,721* Nine years later 99,854 101,103* Ten years later 92,333* see asterisk Amounts are net of $16.2 million of paid loss recoveries received in 1994 under the 1986 Retrocessional Agreement with SCOR S.A. The settlement was based upon incurred losses covered under the agreement. 24 Development of Gross GAAP Reserves Year ended December 31, 1984 l985 l986 l987 l988 l989 l990 1991 1992 1993 1994 (Dollars in thousands) Gross Liability - End of Year $561,813 $562,209 $604,787 Reinsurance Recoverable 220,651 221,843 222,672 Net Liability - End of Year 341,162 340,366 382,115 Gross Re-Estimated Liability - Latest 598,782 587,144 Re-Estimated Recoverable - Latest 264,076 249,097 Net Re-Estimated Liability - Latest 338,047 336,759 Gross Cumulative (Deficiency)/Redundancy (36,969) (24,938)
25 INVESTMENTS The investments of the Company's reinsurance and insurance subsidiaries must comply with the insurance laws of their respective states of domicile, and of certain other states in which they are regulated. The principal operating subsidiaries are all domiciled in the State of New York, except for General Security Insurance Company which is domiciled in Maryland. These laws prescribe the kind, quality, and concentration of investments which may be made by reinsurance and insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages and real estate. The Company's investments are managed by an investment officer, currently the Vice President and Treasurer of SCOR U.S., who presents proposed investment strategies quarterly to the Finance Committee of the SCOR U.S. Board of Directors and the Boards of Directors of SCOR U.S., SCOR Reinsurance Company, General Security Insurance Company, Unity Fire and General Insurance Company and General Security Indemnity Company for approval. The Finance Committee and the Boards of Directors approve all investment transactions and proposed adjustments to investment strategies on a quarterly basis. SCOR U.S.'s current investment policy (i) requires an amount at least equal to reserves to be invested in fixed income U.S. Government and agency obligations and corporate and municipal bonds with, in the aggregate, a weighted average Moody's rating of Aa and (ii) permits the remaining invested assets to be invested in common stocks, instruments deemed to be common stock equivalents and debt instruments. The Company's current investment strategy is to maximize after-tax investment income through a high quality diversified portfolio of primarily taxable and tax-exempt fixed maturity securities while maintaining an adequate level of liquidity and minimizing changes in the market value due to changes in interest rates. The following table sets forth carrying values, principally at market, of SCOR U.S.'s bond portfolio, as rated by Moody's, at December 31, 1994: BONDS CLASSIFIED BY RATING DECEMBER 31, 1994 (in thousands) NAIC Carrying % of Bond Classification Value Portfolio U.S. Treasuries and Agencies 1 $158,571 28.6% Foreign Government and Agencies 1 14,636 2.6% Aaa 1 202,626 36.5% Aa 1 89,607 16.2% A 1 86,346 15.6% Baa 2 2,787 0.5% Total $554,573 100% 26
The following table sets forth the components at their carrying values of the SCOR U.S. investment portfolio at December 31, for the last three years: 1994 1993 1992 1994 1993 1992 (in thousands) (% of Total Portfolio) Bonds $554,573 $572,074 $535,894 82.4% 79.8% 89.2% Redeemable preferred stocks 31,954 33,906 25,507 4.7 4.7 4.2 -------- -------- -------- ----- ----- ----- Total fixed maturities 586,527 605,980 561,401 87.1 84.5 93.4 -------- -------- -------- ----- ----- ----- Common stocks 476 12,068 16,751 0.1 1.7 2.9 Non-redeemable preferred stocks 1,262 6,883 6,229 0.2 1.0 1.0 ----- ------ ------ ---- ---- ---- Total equity securities 1,738 18,951 22,980 0.3 2.7 3.9 ----- ------ ------ ---- ---- ---- Other long-term investments 1,225 1,081 1,004 0.2 0.2 0.2 Short term investments 83,303 90,642 15,213 12.4 12.6 2.5 Total investments $672,793 $716,654 $600,598 100.0% 100.0% 100.0% ======== ======== ======== ====== ====== ====== The following table classifies fixed maturities, excluding redeemable preferred stocks, by taxable and tax-exempt instruments: 1994 1993 1992 1994 1993 1992 (in thousands) (% of Total Portfolio) Taxable bonds $312,791 $296,138 $312,645 56.4% 51.8% 58.3% Non-taxable bonds 241,782 275,936 223,249 43.6% 48.2 41.7 -------- -------- -------- ----- ----- ----- Total Bonds $554,573 $572,074 $535,894 100.0% 100.0% 100.0% ======== ======== ======== ====== ====== ======
At December 31, 1994, the aggregate amortized cost of the fixed maturities portfolio exceeded the aggregate fair market value by $33.7 million or 5.4% of the total amortized cost of fixed maturities. This amount consists of $1.4 million of unrealized gains and $35.1 million of unrealized losses. At December 31, 1993, fair value of the fixed maturities portfolio exceeded amortized cost by $24.5 million. The net unrealized loss on fixed maturities at the end of 1994 was attributable to rising interest rates. The weighted average life of SCOR U.S.'s fixed maturity portfolio was 5.8 years at December 31, 1994. The following table sets forth the investment results of SCOR U.S. and its subsidiaries for each of the years indicated: 27 Year Ended December 31. 1994 1993 1992 (in thousands) Net investment income $40,990 $42,044 $42,880 Average invested assets 694,785 658,626 604,770 Bond portfolio yield (a) 6.5% 7.1% 7.6% Equity portfolio yield (b) 6.9 4.8 4.2 Pre-tax yield (c) 5.9 6.4 7.1 After-tax yield 4.6 4.9 5.3 Realized gains $ 984 $12,930 $15,048 Unrealized gains (losses) (d) (40,116) 5,686 (10,439) --------------------------------- (a) Yield based on average amortized cost. (b) Yield based on average market value. (c) Net investment income divided by average invested assets at carrying value. (d) Represents the yearly change in net unrealized gains (losses) on fixed maturities and equity securities, net of any tax effect. Net investment income for 1994 decreased 3% to $41.0 million from $42.0 million in 1993. Net investment income (pre-tax) has been adversely affected by the high level of claim payments made since mid-1992 related to catastrophic events and the lower reinvestment rates available during 1993 and early 1994 as the Company sold securities to realize investment gains. On an after-tax basis net investment income was $31.6 million for 1994, a decrease of 2% from $32.3 million in 1993. Net realized investment gains for 1994 were $1.0 million, compared with $12.9 million for 1993. The following table provides a maturity profile of the SCOR U.S. fixed maturity investments based on carrying values at December 31 for the last three years: 1994 1993 1992 (in thousands) Maturity 1 year or less $21,955 $13,847 $21,478 Over 1 year - 3 years 62,109 77,028 52,214 Over 3 years - 5 years 107,826 101,393 94,713 Over 5 years - 10 years 359,809 392,340 363,570 Over 10 years - 15 years 30,023 15,975 20,355 Over 15 years - 20 years 1,348 2,392 5,754 Over 20 years 3,457 3,005 3,317 ------ ------- ------ Total fixed maturities $586,527 $605,980 $561,401 ======== ======== ======== REGULATION The terms and conditions of reinsurance agreements generally are not subject to regulation by any government authority with respect to rates or coverage terms and conditions. This is in contrast with primary policies which are generally closely regulated by state insurance departments. As a practical matter, however, in a competitive market, such as was the case in 1994, the lower rates charged by primary insurers influence downward the rates that can be charged by reinsurers. SCOR U.S. and its reinsurance operations are subject to regulation under the insurance statutes (including holding company regulations) of various states. These regulations vary from state to state, but generally require insurance holding companies and insurers and reinsurers that are subsidiaries of holding companies to register and file with 28 state regulatory authorities certain reports including information concerning their capital structure, ownership, financial condition and general business operations. State regulatory authorities monitor compliance with state mandated standards of solvency, licensing requirements, investment limitations, restrictions on the size of risks which may be reinsured, deposits of securities for the benefit of reinsureds, methods of accounting, and reserves for unearned premiums, losses and other purposes. In general, such regulations are for the protection of reinsureds and, ultimately, their policyholders, rather than securityholders. State laws also require prior notice or regulatory agency approval of changes in control of an insurer or its holding company and of certain intercorporate transfers of assets within the holding company structure. The insurance laws of New York and Maryland provide that no corporation or other person except an authorized insurer, may acquire control of a domestic insurance or reinsurance company unless it has given notice to such company and obtained prior written approval of the Superintendent of Insurance. Any purchaser of 10% or more of the outstanding voting securities of an insurance or reinsurance company is presumed to have acquired control, unless such presumption is rebutted. Therefore, an investor who intends to acquire 10% or more of the outstanding voting securities of SCOR U.S. could become subject to such regulations and would be required to file certain notices and reports with the New York Superintendent of Insurance and the Maryland Commissioner of Insurance prior to such acquisition. SCOR U.S.'s reinsurance and insurance subsidiaries are subject to periodic examinations of their affairs by the insurance departments of the states in which they are licensed and to triennial examination by the New York Insurance Department, the domiciliary state of SCOR Re, Unity Fire and GSIND and the Maryland Insurance Administration with respect to GSIC, which is domiciled in Maryland. Each of these subsidiaries is also required to file annual and other reports relating to its financial condition and other matters. SCOR U.S. is a holding company. Its principal sources of cash are cash dividends from SCOR Re, borrowings, and the issuance of equity securities. Generally, dividends which can be paid, without prior approval of the New York Insurance Superintendent, by insurers domiciled in New York State are limited for any twelve-month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. During the year ending December 31, 1994, $11.9 million of dividends were declared and paid to SCOR U.S. At December 31, 1994, the aggregate statutory surplus of the SCOR U.S. operating subsidiaries was $243.4 million. Based on the statutory surplus of the Company's operating subsidiaries at December 31, 1994, $24.3 million is the maximum amount available for dividends to the Company in 1995 without prior regulatory approval. A substantial number of states have adopted or are considering laws and regulations which, among other things, mandate rate decreases, or limit the ability of insurance companies to effect rate increases or to cancel or not renew existing policies principally in personal lines, such as automobile insurance. In an effort to improve state regulation of the insurance industry, the industry introduced various 29 regulatory and legislative changes which may impact reinsurers. There are also proposals for the Federal government's participation in the regulation of insurance, either in addition to or in lieu of the existing state regulatory system. The Federal government is considering two "tort reform" measures which, among other things, limit non-economic and punitive damages to the larger of $250,000 or three times economic injury. These proposals have been passed in the House of Representatives and are awaiting Senate review. SCOR U.S. is unable to predict what effect these developments may have on its operations and financial condition. The National Association of Insurance Commissioners ("NAIC"), an organization that assists state insurance regulators in achieving regulatory objectives, established minimum capital requirements, referred to as risk-based capital, by adopting a risk-based capital formula for property and casualty companies in December 1993. The risk-based capital formula is applied to statutory financial statements beginning for the year ended December 31, 1994. The essential elements of these requirements focus on a company's types of business, historical loss development patterns and asset quality. Based on the prescribed formula the statutory surplus of each of the Company's operating subsidiaries is sufficient to meet these risk based capital requirements and to conduct its respective operations. The NAIC's Insurance Regulatory Information System ("IRIS") is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective state. IRIS identifies eleven industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more of the ratios generally leads to inquiries from state insurance commissioners as to certain aspects of the Company's business. For the year ended December 31, 1994, SCOR Re fell outside the usual values for one of the eleven ratios, specifically its change in surplus ratio of -10%. The usual value assigned to the change in surplus ratio is up to but not including -10%. SCOR Re's departure from the usual value of the change in surplus ratio was principally attributable to the combined net loss of the Operating Subsidiaries, primarily caused by losses from the Northridge Earthquake and $11.9 million of dividends paid to SCOR U.S. SCOR Re Voting Trust The New York Insurance Law prohibits (with certain exceptions) the issuance of a license to a company that is owned or financially controlled in whole or in part by a government, unless an insurer was so owned or financially controlled prior to the effective date of such statute. Both Unity Fire and General Security were so owned or financially controlled prior to such effective date. Because SCOR S.A., the controlling stockholder of SCOR U.S., was indirectly partially owned by certain French insurance companies which were majority owned by the French Government, SCOR U.S., in 1984, to permit SCOR Re to obtain a New York insurance license, established a voting trust for its holdings of capital stock of SCOR Re. The voting trust was irrevocable for a period of ten years (through June 6, 1994), unless SCOR Re's New York license was withdrawn. In 1994, in order for SCOR Re to retain its New York license and obtain a California 30 insurance license, the voting trust was renewed for an additional period of three years. The five voting trustees under the voting trust possess and are entitled to exercise all the rights and powers of absolute owners of the capital stock of SCOR Re, except to pass any voting right or ownership interest to others. Decisions of the voting trustees may be made by majority vote, provided that such majority consists of at least two voting trustees who are not officers, directors or stockholders of SCOR S.A. The voting trustees are required to forward any dividends paid by SCOR Re to SCOR U.S. as the registered holder of the voting trust certificates evidencing beneficial ownership of SCOR Re's stock. Transfers of voting trust certificates may only be made by the registered holder thereof. The current voting trustees are as follows: Patrick Peugeot, Jacques P. Blondeau, Allan M. Chapin, Michel J. Gudefin, and David J. Sherwood. All of the voting trustees are directors of SCOR U.S. with the exception of Mr. Chapin. Although there can be no assurances as to the actions the voting trustees may or may not take in the future, since the establishment of the voting trust in June 1984, the actions of the voting trustees have been limited primarily to the election of directors of SCOR Re. General Security Voting Trust Effective February 1, 1993, a voting trust was established by SCOR U.S. for its holdings of capital stock of General Security in order to satisfy the insurance laws of the State of California. Upon completion of the merger of General Security into SCOR Re in 1994, the General Security voting trust was terminated. COMPETITION The reinsurance business traditionally has been competitive. From mid-1984 into 1987, there was a significant contraction of capacity in the reinsurance market which diminished competition. However, since 1987 the capacity of the reinsurance industry has expanded, and competition has increased. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The number of competitors of SCOR Re cannot reasonably be determined because there are virtually no barriers to entry to the U.S. reinsurance marketplace. Competitors include major domestic and international reinsurance companies, subsidiaries, affiliates or reinsurance departments of both domestic and international insurance companies, and underwriting syndicates. The reinsurance market has two basic segments: reinsurers that primarily obtain their business directly from ceding companies and those that obtain business from ceding companies through reinsurance intermediaries. Virtually all of SCOR Re's new treaty business is produced by intermediaries, while SCOR Re's Facultative Department produces its business directly and through intermediaries. Competition in the types of reinsurance business in which SCOR U.S.'s subsidiaries are engaged is based on many factors, including perceived overall financial strength of the reinsurer, premiums charged, contract terms and conditions, services offered, speed of 31 claims payment and reputation and experience in the line of business to be written. Some competitors of SCOR Re possess greater financial and other resources. SCOR U.S. believes that the A.M. Best's "A (Excellent)" rating of the Operating Subsidiaries, as well as their surplus position, reputation for prompt claims service and active marketing, coupled with their underwriting skills, targeted markets, SCOR Re's technical engineering expertise and ability to serve as a lead underwriter on treaties, available capacity and the benefits derived from being affiliated with one of the largest reinsurers in the world, such as increased product development and research capabilities, place its subsidiaries in a favorable position to compete for new reinsurance business. Another factor taken into consideration in the placement of business with SCOR U.S.'s subsidiaries is the number of jurisdictions in which they are either licensed or authorized to do business. SCOR U.S.'s management is committed to increasing the number of such jurisdictions. The Company believes that the reinsurance industry is currently experiencing a consolidation in which larger reinsurers will write a greater proportion of total industry premiums as ceding companies and intermediaries place increasing importance on size and financial strength in the selection of reinsurers. The aggregate statutory surplus of the Company's operating subsidiaries was $243.4 million as of December 31, 1994, making the Company's combined reinsurance operations the 17th largest in the United States, based on statutory surplus, according to industry statistics compiled by the RAA. SCOR U.S. has no significant foreign source business and currently has no plans for significant expansion into such markets. EMPLOYEES At December 31, 1994, SCOR U.S. and its subsidiaries employed a total of 182 employees. None of SCOR U.S.'s employees is represented by a labor union, and SCOR U.S. believes that its employee relations are good. 32 ITEM 2. PROPERTIES SCOR U.S. and its subsidiaries lease the following properties: Lease Square Expiration Feet 110 William Street, New York, New York 5/13/95 (1) 49,858 2 World Trade Center, New York, New York 8/31/98 (1) 16,632 One Commercial Plaza, Hartford, Connecticut 1/31/96 2,766 Xerox Centre, Irving, Texas 5/31/98 4,226 199 South Los Robles Avenue, Pasadena, Ca. 9/30/95 (2) 5,217 919 Conestoga Road, Rosemont, Pennsylvania 2/28/95 (3) 4,645 One Market, San Francisco, California 11/30/98 3,133 300 S. Wacker Drive, Chicago, Illinois 4/01/04 3,215 (1) In March 1995 the Company entered into a lease for its New York Headquarters for approximately 59,000 square feet of office space at 2 World Trade Center, New York, New York, which expires in 2011. The Company's existing lease at 2 World Trade Center will terminate upon taking possession of the new space. The Company also extended its lease at 110 William Street, New York, New York until September 30, 1995, at which time all New York operations will relocate to 2 World Trade Center. (2) The Company intends to relocate the Cal Re Pasedena, California operations to New York prior to the September 1995 lease expiration. (3) The Company relocated the operations of its subsidiary, Morgard, Inc., from Rosemont, Pennsylvania to New York at lease expiration. ITEM 3. LEGAL PROCEEDINGS The Company is party to various lawsuits arising in the normal course of its business. The Company does not believe that any of the litigation to which it is currently a party will have a material adverse effect on the operating results or financial condition of SCOR U.S. and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of 1994. 33 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Shares of SCOR U.S. Common Stock, par value $0.30 per share, have been listed on the New York Stock Exchange (the "NYSE") since 1988 under the symbol "SUR" and are principally traded on the NYSE. The following table sets forth, for the indicated calendar periods, the high and low sales prices per share of Common Stock as reported by the NYSE, and the cash dividends declared and subsequently paid per share: High Low Dividends Year Ended December 31, 1994: First Quarter $ 13 $ 10 1/4 $ .09 Second Quarter 12 1/4 10 1/8 .09 Third Quarter 12 1/4 11 .09 Fourth Quarter 11 3/8 7 1/2 .09 Year Ended December 31, 1993: First Quarter $ 20 3/4 $ 17 $ .08 Second Quarter 19 3/4 16 1/8 .08 Third Quarter 16 7/8 14 7/8 .08 Fourth Quarter 16 3/4 12 3/8 .08 On March 10, 1995, the Board of Directors of SCOR U.S. reduced the regular quarterly dividend rate to $.05 per share. On March 28, 1995, there were approximately 140 holders of record of SCOR U.S. Common Stock, and in excess of 300 beneficial holders. It is the intention of the Company to declare quarterly dividends to the extent deemed by the Board of Directors to be appropriate. Dividends are paid principally from amounts received by the Company as dividends from SCOR Re. Generally, dividends which can be paid, without prior approval of the New York Superintendent of Insurance, by insurers domiciled in New York State are limited for any twelve-month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. The non-insurer subsidiaries generally may pay dividends from surplus or, if none, out of profits for the current and preceding fiscal years. At December 31, 1994, the statutory surplus of SCOR Re was $243.4 million. Based on SCOR Re's statutory surplus at December 31, 1994, $24.3 million is available for dividends to SCOR U.S. during 1995. 34
ITEM 6. SELECTED FINANCIAL DATA Set forth below is certain selected consolidated financial information for the last five fiscal years. This information should be read in conjunction with the consolidated financial statements of SCOR U.S. Corporation and Management's Discussion and Analysis of Financial Condition and Results of Operations. Year Ended December 31, 1994 1993 1992 1991 1990 (in thousands, except per share data) Operations Data: Premiums written, gross $306,792 $334,519 $304,828 $231,435 $228,940 Premiums written, net 231,060 245,413 205,543 172,708 179,502 Net premiums earned 228,244 236,051 192,050 172,818 176,640 Net investment income 40,990 42,044 42,880 45,993 43,557 Net realized investment gains 984 12,930 15,048 3,526 2,654 Total revenues 270,218 291,025 249,978 222,337 222,851 Loss and loss expenses, net 191,270 156,292 160,545 113,184 116,551 Commissions, net 59,434 61,324 55,960 43,915 46,061 Other underwriting and administrative expenses 26,009 26,420 23,918 23,433 23,769 Other expenses (income) 4,039 4,073 4,346 (28) 1,664 Interest expense 8,920 8,005 4,579 3,833 3,500 Total expenses 289,672 256,114 249,348 184,337 191,545 Income (loss) from continuing operations before taxes (19,454) 34,911 630 38,000 31,306 Federal income taxes (benefit) (11,262) 6,983 (3,771) 7,091 6,445 Income (loss) from continuing operations (8,192) 27,928 4,401 30,909 24,861 Extraordinary gain on redemption of debentures, net of tax 351 -- -- -- -- Cumulative effect of accounting changes -- (2,600) 2,848 -- -- Net income (loss) $ (7,841) $ 25,328 $ 7,249 $ 30,909 $ 24,861 35 Year Ended December 31, 1994 1993 1992 1991 1990 (Dollars in thousands except per share data) Per Share Data: Primary Income (loss) from continuing operations$ (0.45) $ 1.52 $ 0.25 $ 1.72 $ 1.40 Extraordinary item 0.02 -- -- -- -- Cumulative effect of accounting changes -- (0.14) 0.15 -- -- Net income (loss) (0.43) 1.38 0.40 1.72 1.40 Fully diluted Income (loss) from continuing operations (0.45) 1.45 0.25 1.72 1.40 Extraordinary item 0.02 -- -- -- -- Cumulative effect of accounting changes -- (0.12) 0.15 -- -- Net income (loss) (0.43) 1.33 0.40 1.72 1.40 Cash dividends declared $ 0.36 $ 0.32 $ 0.28 $ 0.24 $ 0.20 Certain Balance Sheet Data: Total investments $672,793 $716,654 $600,598 $608,942 $592,681 Total assets 1,143,715 1,194,111 1,069,221 905,194 839,849 Losses and loss expenses 604,787 562,209 561,813 460,230 454,376 Unearned premiums 110,082 114,376 104,824 82,814 79,981 Long-term debt 102,350 106,250 28,000 28,000 28,000 Total liabilities 904,320 903,422 803,105 646,449 615,125 Total stockholders' equity 239,395 290,689 266,116 258,745 224,724 Book value per share $ 13.18 $ 16.05 $ 14.77 $ 14.43 $ 12.57 GAAP ratios (total company) Loss ratio 83.8% 66.2% 83.6% 65.5% 66.0% Underwriting expense ratio 39.2% 38.9 43.8 38.9 40.5 Combined ratio 123.0% 105.1% 127.4% 104.4% 106.5% Certain SAP Data: SAP ratios (insurance subs. only): Loss ratio 83.7% 71.1% 84.9% 65.5% 66.0% Underwriting expense ratio 35.1 32.6 38.4 37.0 36.6 Combined ratio 118.8% 103.7% 123.3% 102.5% 102.6% Net premiums written to surplus 0.95:1 0.87:1 0.97:1 0.77:1 0.87:1 Statutory surplus $243,416 $271,895 $210,855 $224,327 $207,404
36 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The operating results of the property and casualty insurance and reinsurance industry are subject to significant fluctuations due to competition, catastrophic events, general economic conditions, interest rates and other factors, such as changes in tax laws and regulations. The operating results of SCOR U.S. historically have been influenced by these cycles. In recent years, the results of certain casualty lines of business have become less predictable for some insurers and reinsurers as a result of expanding theories of tort and insurance liability and latent risks, such as asbestos and pollution liability whose effects may not be known for many years. The operating subsidiaries of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental related claims. The Company has not experienced any material amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from certain adverse loss reserve development through retrocessional agreements with SCOR S.A., its majority shareholder (see Note 4 to the Company's Consolidated Financial Statements). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental related claims is not material to the Company's financial position or results of operations. The industry experienced an extended down cycle from 1979 to the end of 1984. Underwriting losses in that period grew significantly as a result of an increase in the frequency and severity of reported losses. The industry was affected by expanding theories of tort and insurance liability and by growing exposure to long-tail risks, including asbestos and pollution claims, which were not adequately taken into account in the pricing, terms and conditions of insurance and reinsurance contracts being written during that period. At the same time, premium rates declined as interest rates increased and insurers and reinsurers sought premium income to invest at these higher rates. These conditions led to a decline in the surplus of reinsurers and the insolvency or voluntary withdrawal from the market of a number of insurance and reinsurance companies. From 1985 through 1987, the demand for reinsurance increased and reinsurance pricing and underwriting results improved. This attracted increased capacity into the industry as insurers and reinsurers strengthened their surplus through capital infusions and increased earnings. In the mid-1980's, the industry adopted contract language changes designed to exclude asbestos and pollution claims. However, asbestos and pollution claims result, and will continue to result, in numerous claims to the insurance industry under policies written prior to such changes, adversely affecting the operating results of certain of the Company's competitors. Beginning in mid-1987, the insurance and reinsurance industry experienced increased competition and reduced premium rates. In addition, ceding companies increased their retentions, resulting in 37 less available business to be reinsured, increased competition and lower premium rates in the reinsurance industry. This competitive environment, which has continued into 1995, has seen little improvement in rates compared with recent years, with the exception of rates for certain property reinsurance coverages. Property catastrophe losses in 1989 caused a reduction in London market reinsurance and retrocessional capacity for property reinsurers at the end of 1990, and a consequent increase in certain property reinsurance rates in 1991. Record insured catastrophe losses in 1992, which approximated $23 billion including those caused by Hurricanes Andrew and Iniki and the Los Angeles riots, led to increases in property catastrophe reinsurance rates, as well as improved rates, terms and conditions on certain other property coverages. These record losses in 1992 also caused a further shortage of catastrophe retrocessional capacity and led to an influx of new capital to reinsurers primarily providing catastrophe coverage. Approximately $5 billion of capital was raised by these companies, the majority of which are located in Bermuda. However, the demand for catastrophe protection has continued and conditions have remained at favorable levels for reinsurers as the occurrences of catastrophe losses has continued subsequent to the record 1992 year. Following a 1993 year that produced $5.7 billion of catastrophe losses, the estimated 1994 level of $15 billion has made the past 12 months the second most costly period for catastrophes in the history of the U.S. insurance industry. Of this total, $10.4 billion was produced by the earthquake in California ("Northridge earthquake") a loss that has been exceeded in magnitude only by Hurricane Andrew in 1992. The Company believes that the reinsurance industry currently is experiencing a consolidation in which larger reinsurers will write a greater proportion of total industry premiums, as ceding companies and intermediaries place increasing importance on size and financial strength in the selection of reinsurers. The aggregate statutory surplus of the Company's operating subsidiaries was $243.4 million as of December 31, 1994, ranking the Company's combined reinsurance operations as the 17th largest based on the statutory surplus of reinsurers reporting to the Reinsurance Association of America (RAA) as of December 31, 1994. Many of the factors that have resulted in the current down cycle continue and SCOR U.S. cannot predict if, when or to what extent general market conditions will improve for the insurance and reinsurance industry. Even so, SCOR U.S. believes that the consolidation in the industry, along with the impact of recent catastrophe losses on the property and casualty insurance industry and generally declining cash flow in recent years, may favorably influence property and casualty pricing, as well as reinsurance buying trends, in the future. During the first quarter of 1994, the Company merged its two principal operating subsidiaries, SCOR Reinsurance Company and General Security Assurance Corporation of New York, to form a single operating entity for the Company's assumed reinsurance business. The Company also intends to merge two of its other operating subsidiaries, The Unity Fire and General Insurance Company and General Security Insurance Company, subject to approval by such companies' Boards of Directors and state regulatory authorities, to form a single broadly 38 licensed operating unit for the Company's primary and excess insurance business. Both the completed merger and the intended merger are not expected to have a material effect on the Company's growth, liquidity or results of operations. UNDERWRITING RESULTS The underwriting results of a property and casualty insurer or reinsurer are discussed frequently by reference to its loss ratio, underwriting expense ratio and combined ratio. The loss ratio is the result of dividing losses and loss expenses incurred by net premiums earned. The underwriting expense ratio is the result of dividing underwriting expenses by net premiums written for purposes of Statutory Accounting Practices ("SAP") and net premiums earned for purposes of Generally Accepted Accounting Principles ("GAAP"). The combined ratio is the sum of the loss ratio and the underwriting expense ratio. A combined ratio under 100% generally indicates underwriting profits and a combined ratio exceeding 100% generally indicates underwriting losses. Underwriting profit is only one element of overall profitability, which also includes investment results, interest expense and the effects of income taxation. Accordingly, the combined ratio alone should not be used to measure overall profitability. Except as indicated, the ratios discussed below have been calculated on a GAAP basis. The following table sets forth the Company's GAAP combined ratios and the components thereof for the periods indicated, and the SAP combined ratio for the Company's insurance and reinsurance subsidiaries and for the reinsurance industry based on statistics distributed by the RAA. The GAAP ratios include the operating expenses of the holding company and the operations of the non insurance subsidiaries, in addition to the operating expenses of the insurance and reinsurance subsidiaries. The SAP expense ratios include only the operating expenses of the insurance and reinsurance subsidiaries. In addition, the GAAP loss ratio takes into consideration the recoveries under certain retrocessional agreements with SCOR S.A., whereas these recoveries are included in other income for SAP purposes. A reconciliation between the Company's GAAP consolidated net income and statutory net income of the insurance and reinsurance subsidiaries is included in Note 11 to the Company's Consolidated Financial Statements. Year Ended December 31, 1994 1993 1992 GAAP RATIOS (Total Company) Loss ratio 83.8% 66.2% 83.6% Commission ratio 26.0 26.0 29.1 U/W, admin. and other expense ratio 13.2 12.9 14.7 Expense ratio 39.2 38.9 43.8 Combined ratio 123.0% 105.1% 127.4% SAP COMBINED RATIOS Company (insur. subs. only) 118.8% 103.7% 123.3% Industry 106.7% 107.3% 117.4% 39 COMPARISON OF 1994 WITH 1993 Gross premiums written for 1994 decreased 8% to $306.8 million from $334.5 million in 1993. Net premiums written for 1994 decreased 6% to $231.1 million from $245.4 million for 1993. Gross premiums written and net premiums written for 1994 were increased by $1.0 million and reduced by $5.0 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections primarily related to the Northridge earthquake. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1994 decreased by 9% and 4%, respectively, compared with 1993. The decrease in premium volume was attributable principally to the Company's continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. More specifically, throughout 1994 the Company has been reducing its property business written on a pro rata basis. A combination of an acceleration in the reduction of this business and fewer attractive opportunities in targeted lines of business caused the reduction in 1994 premium volume. In general, a weak pricing environment persisted throughout 1994, with the exception of catastrophe-exposed risks and some specialized lines of business. Net losses and loss expenses incurred increased 22% in 1994 to $191 million from $156.3 million in 1993. The loss ratio was 83.8% for 1994 as compared with 66.2% for 1993. During 1994 the Company incurred $32.2 million of net losses ($62.7 million of gross losses) resulting from property catastrophe events, primarily the Northridge earthquake and the early 1994 winter freeze, which added 15.6 points to the loss ratio. Of these amounts, the Northridge earthquake accounted for $26.1 million of net incurred losses and $54.8 million of gross incurred losses. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points. During 1994 and 1993, the Company ceded $82.9 million and $88.9 million of earned premiums, respectively. The Company recovered from retrocessionnaires $78.4 million and $57.3 million of losses during 1994 and 1993, respectively. Ceded premiums in 1994 included $6.0 million of reinstatement premiums paid by the Company. Ceded losses in 1994 and 1993 included $30.5 million and $5.4 million, respectively, of losses resulting from property catastrophe events. Commission expenses decreased 3% to $59.4 million in 1994 from $61.3 million in 1993. The decrease was caused principally by the decline in the Company's net premium volume. The commission ratio was 26.0% for 1994 and 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added approximately 0.5 points to the 1994 commission ratio. Underwriting, administration and other expenses decreased 1% in 1994 to $30.0 million from $30.5 million in 1993. The underwriting, administration and other expense ratio was 13.2% for 1994 as compared with 12.9% for 1993. The effect of net reinstatement premiums related primarily to the Northridge earthquake added 0.3 points to the 1994 ratio. As discussed in Note 3 to the Company's Consolidated Financial 40 Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.8 million in 1994 compared with a charge of $2.6 million in 1993. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity, financial position or results of operations. The combined ratio was 123.0% for 1994, compared with 105.1% for 1993. The effect of property catastrophe events on the 1994 and 1993 combined ratio was 16.4 points and 5.8 points, respectively. Net investment income for 1994 decreased 3% to $41.0 million from $42.0 million for 1993. Net investment income (pre-tax) has been affected adversely by the high level of claim payments made since mid- 1992 related to catastrophe events and the lower reinvestment rates available during 1993 and early 1994 as the Company sold securities to realize investment gains. On an after-tax basis net investment income was $31.6 million for 1994, a decrease of 2% from $32.3 million in 1993. Net realized investment gains for 1994 were $1.0 million, compared with $12.9 million for 1993. Interest expense increased 11% to $8.9 million in 1994 from $8.0 million in 1993. The increase was principally due to a full year of interest expense recognized on the Company's 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") that were issued in March 1993, compared with nine months of interest expense in 1993. (See Liquidity and Capital Resources) During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax. As a result of the Company's implementation, as of January 1, 1993, of the FASB's Emerging Issues Task Force consensus regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"), $2.6 million (net of $1.4 million tax effect), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change. For 1994, the Company posted a net loss of $7.8 million, or $0.43 per share, on a primary basis, compared with a net income of $25.3 million, or $1.38 per share, for 1993. On a fully diluted basis, net income for 1993 was $1.33 per share. The 1994 results were affected by after-tax charges to operations, net of reinsurance, of $24.2 million, or $1.33 per share for property catastrophe events. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share, for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1994 were 18.2 million, compared with 18.4 million for 1993. SUBSEQUENT EVENT The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio. 41 Comparison of 1993 with 1992 Gross premiums written for 1993 increased 10% to $334.5 million from $304.8 million in 1992. Net premiums written for 1993 increased 19% to $245.4 million from $205.5 million for 1992. Gross premiums written and net premiums written for 1992 were increased by $5.6 million and reduced by $6.5 million, respectively, for additional premiums to reinstate catastrophe reinsurance protections subsequent to Hurricane Andrew. Excluding these reinstatement premiums, gross premiums written and net premiums written for 1993 increased by 12% and 16%, respectively, compared with 1992. The increase in premium volume was attributable principally to new and increased participations in treaty business. Much of the growth resulted from targeted market segments such as nonstandard auto, a line of business that experienced a 73% increase in net premiums written in 1993 to $38 million, or 16% of the total net volume. Offsetting a portion of the Company's premium growth was a continued withdrawal from certain property and casualty lines of business where the Company believes rates and/or conditions are inadequate. In general, a weak pricing environment persisted throughout 1993, with the exception of catastrophe-exposed risks and some specialized lines of business. Net losses and loss expenses incurred decreased 3% in 1993 to $156.3 million from $160.5 million in 1992. The loss ratio was 66.2% for 1993 as compared with 83.6% for 1992. During 1993 the Company incurred $13.7 million of net losses ($19.1 million of gross losses) resulting from property catastrophe events, primarily the World Trade Center bombing, the East Coast blizzard, the Midwest floods and the California fires, which adversely affected the loss ratio by 5.8 points. During 1992 the Company incurred $50.9 million of net losses ($162.6 million of gross losses) resulting from property catastrophe events, primarily Hurricanes Andrew and Iniki and the Los Angeles riots, which added 28.4 points to the loss ratio. Of these amounts, Hurricane Andrew accounted for $37.9 million of net incurred losses and $137.1 million of gross incurred losses. During 1993 and 1992, the Company ceded $88.9 million and $90.8 million of earned premiums, respectively. The Company recovered from retrocessionnaires $57.3 million and $177.1 million of losses during 1993 and 1992, respectively. Ceded premiums in 1992 included $12.1 million of reinstatement premiums paid by the Company. Ceded losses in 1992 included $111.7 million of losses resulting from property catastrophe events. Commission expenses increased 10% to $61.3 million in 1993 from $56.0 million in 1992. The commission ratio was 26.0% for 1993, compared with 29.1% for 1992. The decrease in the commission ratio for 1993 is primarily attributable to the current mix of business, on which the commission rate for certain new business is lower than the commission rate on canceled property pro rata treaties and the effect of net reinstatement premiums related to Hurricane Andrew, which added approximately one point to the 1992 commission ratio. Underwriting, administration and other expenses increased 8% in 1993 to $30.5 million from $28.3 million in 1992. The underwriting, administration and other expense ratio was 12.9% for 1993 as compared 42 with 14.7% for 1992. The effect of net reinstatement premiums related to Hurricane Andrew added 0.5 points to the 1992 ratio. The increase in underwriting, administration and other expenses in 1993 was principally related to compensation expenses, the majority of which was an increase in costs associated with the Company's retirement plans. In addition, as discussed in Note 3 to the Company's Consolidated Financial Statements, the Company has made various acquisitions. The pre-tax effect on operations from recent acquisitions, including the amortization of goodwill and acquired licenses, was a charge of $2.6 million in 1993 compared with a charge of $1.8 million in 1992. The operations of the acquired companies are not expected to have a material effect on the Company's liquidity or results of operations. The combined ratio was 105.1% for 1993, compared with 127.4% for 1992. The effect of property catastrophe events on the 1993 and 1992 combined ratio was 5.8 points and 29.8 points, respectively. Net investment income for 1993 decreased 2% to $42.0 million from $42.9 million for 1992. Net investment income (pre-tax) has been affected adversely by: 1) the high level of claim payments made over the past eighteen months related to catastrophic events; 2) the Company's managed shift toward a greater percentage of tax-exempt securities; and 3) the general decline in interest rates over the past several quarters which has had an adverse effect on available yields for new and reinvested funds. Offsetting the above factors was an increase in investment income related to the investment of the proceeds from the Debentures in March 1993. On an after-tax basis net investment income was $32.2 million for 1993, virtually unchanged from 1992. Net realized investment gains for 1993 were $12.9 million, compared with $15.0 million for 1992. Interest expense increased 75% to $8.0 million in 1993 from $4.6 million in 1992. The increase was due to $3.5 million of interest expense recognized on the Debentures. As a result of the Company's implementation, as of January 1, 1993, of EITF 93-6, $2.6 million (after an income tax benefit of $1.4 million), or $0.14 per share, is included as a reduction to 1993 income for the cumulative effect of this accounting change. Net income for 1993 increased 249% to $25.3 million, or $1.38 per share, on a primary basis, compared with $7.2 million, or $0.40 per share, for 1992. Net income for 1993 on a fully diluted basis was $1.33 per share, compared with $0.40 per share for 1992. The 1993 results were affected by after-tax charges to operations, net of reinsurance, of $8.9 million, or $0.48 per share ($0.43 per share on a fully diluted basis) for property catastrophe events. The 1992 results were affected by after-tax charges to operations, net of reinsurance, of $37.9 million, or $2.08 per share (on a primary and fully diluted basis) for property catastrophe events. Average common and common equivalent shares outstanding (on a primary basis) for 1993 were 18.4 million, compared with 18.3 million for 1992. INCOME TAXES SCOR U.S.'s Federal income tax provision (benefit) was ($11.3 million), $7.0 million and ($3.8 million) for the years ended 43 December 31, 1994, 1993 and 1992, respectively. Although the Company's income from operations before Federal income taxes and cumulative effect of accounting changes was $630,000 for 1992, a net operating loss for tax purposes resulted after the elimination of tax- exempt investment income. A reconciliation between income taxes computed at the statutory rate and SCOR U.S.'s provisions for income taxes for the years ended December 31, 1994, 1993 and 1992, is included in Note 9 to SCOR U.S.'s Consolidated Financial Statements. The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations. In addition, as a result of the new tax rate, it is likely that the Company will pay taxes at a higher effective rate in future years to the extent that the Company generates taxable earnings. GAAP requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits. ECONOMIC ENVIRONMENT The Company's commercial paper bears interest at short-term rates in effect at each respective issuance date. To the extent interest rates increased during 1994, interest expense has been affected adversely. In addition, prices of fixed maturity investments generally decline as market interest rates increase. Accordingly, the fair value of the Company's fixed maturity portfolio holdings has decreased during the recent period of increasing interest rates. SCOR U.S. also pursues an investment strategy that tends to mitigate interest rate risk by establishing a maturity distribution profile of fixed maturity investments sufficient to fund loss and loss expense obligations when they become due. In addition, management believes that SCOR U.S. and its operating companies pursue a conservative investment strategy which avoids significant exposure to credit risk. 44 LIQUIDITY AND CAPITAL RESOURCES SCOR U.S. is a holding company. Its principal sources of cash are cash dividends from its operating subsidiaries, borrowings, and the issuance of equity securities. Generally, dividends that can be paid by insurers domiciled in New York State, without prior approval of the New York Insurance Superintendent, are limited for any twelve- month period to the lesser of 10% of statutory surplus or adjusted net investment income (as defined by New York Insurance Law) for the previous twelve months. During the year ending December 31, 1994, $11.9 million of dividends were declared to SCOR U.S. At December 31, 1994, the aggregate statutory surplus of the SCOR U.S. operating subsidiaries was $243.4 million. Based on the statutory surplus of the Company's operating subsidiaries at December 31, 1994, $24.3 million is available for dividends to SCOR U.S. during 1995. On March 29, 1993, SCOR U.S. sold at par $86.25 million of 5.25% Convertible Subordinated Debentures due April 1, 2000 through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1.8 million were deferred and are being amortized over the life of the Debentures. The Company contributed $50 million of the net proceeds to SCOR Re. During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000, or $0.02 per share, net of tax. These purchases were executed under a $10 million program authorized by the Board of Directors. In January 1995, the Company repurchased an additional $6.0 million in principal amount of the Debentures under this authorization. Funding for the aggregate amount of repurchased Debentures, all of which settled in January 1995, was achieved through the issuance of the Company's commercial paper. In January 1995, the Board of Directors authorized the Company to repurchase up to an additional $20 million of Debentures in the open market, as market conditions permit. In connection with this additional authorization, SCOR U.S. has established a $20 million credit agreement with SCOR S.A. the proceeds of which are restricted to the repurchase of the Debentures or the repayment of any debt incurred to repurchase Debentures. On October 1, 1990 SCOR U.S. renewed a $20.0 million note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. The Company has entered into an interest rate swap agreement related to this note with a commercial bank. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which resets every six months and is capped at 12.380%, was 11.068% as of December 31, 1994. The Company most likely will refinance this debt when due and is currently exploring various options. 45 SCOR U.S. has established a commercial paper program which allows it to raise up to $50.0 million. At December 31, 1994, $11.3 million of commercial paper was outstanding. SCOR U.S. has a $30.0 million revolving line of credit with a bank which serves as a backstop for its commercial paper program. No borrowings have been made under this facility. At December 31, 1994, the amount remaining under the Company's existing stock repurchase program is approximately $1.4 million, which may be utilized as market conditions permit. During 1993, the Company repurchased 40,800 shares of its common stock for an aggregate cost of $616,000. The Company did not repurchase any shares under this program during 1994. The primary sources of liquidity for the SCOR U.S. insurance and reinsurance subsidiaries are net cash flow from operating activities, the maturity or sale of investments, and capital contributions from SCOR U.S. Net cash provided by operating activities was $1.3 million for 1994 compared with $27.8 million for 1993. Cash flow from operating activities during 1994 was adversely affected by continued property catastrophe paid loss activity as well as the payment of several large previously reserved casualty claims. The Company has not suffered any adverse effect in the timing of recoveries or credit worthiness of retrocessionnaires due to the recent catastrophe activity . Loss payments associated with the recent catastrophe activity are not expected to have an adverse material effect on the Company's short-term or long-term liquidity. During 1994 and 1993, the Company incurred $4.1 million and $9.4 million, respectively, of capital expenditures, which primarily related to the development of information systems. At December 31, 1994, the Company had no significant commitments for capital expenditures. Effective January 1, 1991, SCOR Re and certain of the Company's other operating subsidiaries operate under a reinsurance pooling agreement pursuant to which the net amounts under all new and renewal business written by each such company are pooled. The net balances of the pool are then distributed to each company in accordance with established proportions. At December 31, 1994, total investments and cash at carrying value were $677.6 million compared with $733.8 million at December 31, 1993. The decreased level of investments and cash is primarily attributable to the $58.9 million decrease in fair value of investments carried at fair value during the year. SCOR U.S.'s fixed maturity investments are substantially all investment grade, liquid securities with a weighted average maturity of 5.8 years. Approximately 99% of the fixed maturity portfolio is rated A or better. SCOR U.S. does not have any investment in real estate or high yield bonds. At December 31, 1994, the Company did not have any non income producing investments. SCOR U.S. believes that cash and short-term investments are maintained at an adequate level for payment of claims and expenses as they become due. In addition, SCOR U.S. maintains a maturity distribution profile of fixed maturity investments sufficient to fund 46 anticipated loss and loss expense obligations as they become due. The Company's long-term obligations primarily consist of the Debentures and the claims liabilities of its principal operating subsidiaries, which at December 31, 1994 averaged approximately 4.5 years. The Company may be subject to gains and losses resulting from currency fluctuations because some of its investments are denominated in currencies other than United States dollars, as are some of its net loss reserve liabilities. The Company makes investments denominated in foreign currencies to mitigate, in part, the effects of currency fluctuations on its results of operations. Investments denominated in foreign currencies do not constitute a material portion of the Company's investment portfolio and, in the opinion of management, are sufficient to meet its foreign currency obligations. Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were ($156,000), ($929,000) and $555,000, respectively. Stockholders' equity at December 31, 1994 was $239.4 million, a decrease of $51.3 million from December 31, 1993. This decrease resulted primarily from the net loss of $7.8 million for the year, unrealized depreciation of investments carried at fair value, net of tax effect, of $38.3 million and by cash dividends declared of $6.5 million. The ratio of net premiums written to surplus, sometimes referred to as "insurance exposure", relates to the amount of risk to which an insurer's statutory capital and surplus can be exposed, as measured by the amount of premiums written in relation to such surplus. Insurance practice and regulatory guidelines suggest that property and casualty insurance companies maintain a net premiums written to surplus ratio of less than 3 to 1. For the reinsurance industry, a ratio of 2 to 1 or less is generally considered prudent. SCOR U.S.'s net premiums written to surplus ratios were .95 to 1, .87 to 1 and .97 to 1 for 1994, 1993 and 1992, respectively. RATINGS Upon issuance in 1993, the Debentures were assigned an A3 rating from Moody's Investors Service Inc. ("Moody's") and were rated BBB- Plus by Standard & Poor's Corp. ("S&P"). The Company's commercial paper program has been rated P-1 by Moody's and A-1 by S&P since its establishment. On November 22, 1994 S&P lowered its ratings on the Debentures to BBB and on the commercial paper to A-2. S&P attributed its action to the Company's volatile earnings record and reduced surplus resulting from its past concentration in reinsuring property risks, while acknowledging that the Company maintains a good position in the brokered reinsurance market, a sound investment strategy and benefits from its ownership by SCOR S.A. Moody's has not changed any of the Company's ratings to date. Although the Company may experience increased future borrowing costs as a result of negative ratings changes, the Company has not experienced any significant adverse effect subsequent to the above action. The Company recently was notified by A.M. Best & Company, Inc., an independent insurance industry rating organization, that the rating of its principal operating companies has been reduced from A+ (Superior) to A (Excellent) for reasons similar to those noted above. 47 REGULATORY MATTERS The National Association of Insurance Commissioners ("NAIC"), an organization that assists state insurance regulators in achieving regulatory objectives, established minimum capital requirements, referred to as risk based capital, by adopting a risk-based capital formula for property and casualty companies in December 1993. The risk-based capital formula is applied to statutory financial statements beginning for the year ending December 31, 1994. The essential elements of these requirements focus on a company's types of business, historical loss development patterns and asset quality. Based on the prescribed formula the statutory surplus of each of the Company's operating subsidiaries is sufficient to meet these risk- based capital requirements and to conduct its respective operations. The NAIC is currently developing an Investments of Insurers Model Act, which, if adopted by the individual states, would establish uniform limitations upon the type and amounts of investments insurers may hold. Based upon the current proposals of this Model Act, which are subject to review and change, the Company does not believe a uniform standard would significantly affect the current investment mix or operations of its insurance and reinsurance subsidiaries. ACCOUNTING PRONOUNCEMENTS Effective as of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results from operations. The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 has had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, $2,600,000 (net of $1,400,000 tax effect), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000 or $0.14 per share. In the first quarter of 1993, the Company adopted Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations. In the first quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changed the method of accounting for income taxes. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2.4 million, or $0.13 a share, as of January 1, 1992. 48 In the first quarter of 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992. The FASB has issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Post Employment Benefits" ("SFAS 112"), which is effective for 1994 financial statements. SFAS 112 establishes accounting standards for employers who provide benefits for former or inactive employees after employment but before retirement. SCOR U.S. provides no such applicable post retirement benefits and therefore is not affected by SFAS 112. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See The Consolidated Financial Statements and Notes thereto and the Schedules on pages F-1 through F-40 and S-1 through S-7 below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is made to "Election of Directors" in the Proxy Statement for the 1995 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of SCOR U.S.'s fiscal year ended December 31, 1994 ("Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION Reference is made to "Compensation of Executive Officers and Directors" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to "Certain Transactions and Relationships with Directors and Officers" in the Proxy Statement. 49 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS The financial statements and schedules listed in the accompanying Index to Financial Statements (Page F-1) are filed as part of this Annual Report on Form 10-K. The exhibits listed in the accompanying Index to Exhibits are filed as part of this Annual Report on Form 10-K. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of 1994. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SCOR U.S. CORPORATION By: Jeffrey D. Cropsey Senior Vice President and Chief Financial Officer Dated: March 28, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE Jacques P. Blondeau* Chairman of March 28, 1995 the Board of Directors John R. Cox* Director March 28, 1995 Serge M. P. Osouf* Vice Chairman of March 28, 1995 the Board of Directors Raymond H. Deck* Director March 28, 1995 Michael J. Gudefin* Director March 28, 1995 Jerome Karter* President and March 28, 1995 Chief Executive Officer Richard M. Murray* Director March 28, 1995 Patrick Peugeot* Director March 28, 1995 50 SIGNATURE TITLE DATE John W. Popp* Director March 28, 1995 Francois Reach* Director March 28, 1995 David J. Sherwood* Director March 28, 1995 Jeffrey D. Cropsey Sr Vice President and March 28, 1995 Chief Financial Officer (Principal Financial Officer) Francis J. Fenwick Vice President & Controller March 28, 1995 (Controller) *By: John T. Andrews, Jr. Senior Vice President March 28, 1995 Attorney-in-Fact General Counsel and Corporate Secretary 51 INDEX TO REPORT AND CONSOLIDATED FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS OF SCOR U.S. Independent Auditors' Report F-2 Consolidated Balance Sheets at December 31, 1994 and 1993 F-3 - F-4 Consolidated Statements of Operations for the years ended December 31, 1994, 1993 and 1992 F-5 - F-7 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 F-8 - F-9 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 F-10 - F-11 Notes to Consolidated Financial Statements F-12 - F-40 Schedules: Schedule I -- Summary of Investments Other than Investments in Related Parties at December 31, 1994 S-1 Schedule II -- Condensed Financial Information of Registrant Balance Sheets at December 31, 1994 and 1993 S-2 Statements of Operations for the years ended December 31, 1994, 1993 and 1992 S-3 Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 S-4 - S-5 Schedule IV -- Reinsurance S-6 Schedule VI -- Supplementary Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 1994, 1993 and 1992 S-7 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders SCOR U.S. Corporation: We have audited the consolidated balance sheets of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994 as listed in the accompanying index of the 1994 Annual Report on Form 10-K of SCOR U.S. Corporation. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of SCOR U.S. Corporation and subsidiaries as of December 31, 1994 and 1993 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 2(k) to the consolidated financial statements, in 1993 the Company adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and also adopted the consensus opinion regarding the Financial Accounting Standards Board's Emerging Issues Task Force regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Related Contracts by Ceding and Assuming Enterprises". In 1992, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", and changed its method of accounting for deferred policy acquisitions costs. KPMG Peat Marwick LLP New York, New York February 2, 1995 F-2
SCOR U.S. CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) Year Ended December 31, 1994 1993 Assets Investments: Fixed maturities: Available for sale, at fair value (amortized cost: $596,791 and $558,882) $ 563,656 $ 581,104 Held to maturity, at amortized cost (fair value: $22,274 and $27,109) 22,871 24,876 Equity securities, at fair value (cost: $1,897 and $15,581) 1,738 18,951 Short-term investments, at cost 83,303 90,642 Other long-term investments 1,225 1,081 ------- ------- 672,793 716,654 Cash 4,763 17,096 Accrued investment income 10,339 10,169 Premiums receivable 72,018 80,319 Reinsurance recoverable on paid losses Affiliates 4,399 9,498 Other 19,356 27,329 Reinsurance recoverable on unpaid losses Affiliates 127,096 134,154 Other 95,576 87,689 Prepaid reinsurance premiums Affiliates 10,504 14,578 Other 8,803 11,839 Deferred policy acquisition costs 22,844 24,140 Deferred Federal income tax benefits 34,818 11,894 Investment in affiliates 11,532 10,789 Other assets 48,874 37,963 --------- --------- $1,143,715 $1,194,111 ======== ========= See notes to consolidated financial statements.
F-3
SCOR U.S. CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) Year Ended December 31, 1994 1993 Liabilities Losses and loss expenses $ 604,787 $ 562,209 Unearned premiums 110,082 114,376 Funds held under reinsurance treaties Affiliates 3,654 21,777 Other 17,104 17,825 Reinsurance balances payable Affiliates 15,328 18,196 Other 28,357 42,037 Convertible subordinated debentures 82,350 86,250 Notes payable 20,000 20,000 Commercial paper 11,310 10,721 Other liabilities 11,348 10,031 ------- ------- 904,320 903,422 ------- ------- Stockholders' Preferred stock, no par value, 5,000 Equity shares authorized; no shares issued -0- -0- Common stock, $0.30 par value, 50,000 shares authorized; 18,356 and 18,299 shares issued 5,507 5,490 Additional paid-in capital 114,556 112,670 Unrealized appreciation (depreciation) of investments, net of deferred tax effect (21,640) 16,634 Foreign currency translation adjustment (414) 12 Retained earnings 143,153 157,532 Treasury stock, at cost (192 and 190 shares) (1,767) (1,649) --------- --------- 239,395 290,689 --------- --------- $1,143,715 $1,194,111 ========== ========= See notes to consolidated financial statements.
F-4
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 Revenues Net premiums earned $228,244 $236,051 $192,050 Net investment income 40,990 42,044 42,880 Net realized investment gains 984 12,930 15,048 ------- ------- ------- 270,218 291,025 249,978 ------- ------- ------- Losses Losses and loss expenses, net 191,270 156,292 160,545 And Commissions, net 59,434 61,324 55,960 Expenses Other underwriting and administration expenses 26,009 26,420 23,918 Other expenses 4,039 4,073 4,346 Interest expense 8,920 8,005 4,579 ------- ------- ------- 289,672 256,114 249,348 ------- ------- ------- Income (loss) from operations before Federal income taxes (benefit) (19,454) 34,911 630 Federal income taxes (benefit) (11,262) 6,983 (3,771) ------- ------- ------- Income (loss) from operations (8,192) 27,928 4,401 Extraordinary gain on redemption of debentures, net of tax 351 -0- -0- Cumulative effect of accounting changes, net of tax -0- (2,600) 2,848 ------- ------- ------- Net income (loss) $(7,841) $25,328 $7,249 ======= ======= ======= See notes to consolidated financial statements.
F-5
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 Per Share Average common and common Data equivalent shares outstanding 18,166 18,395 18,256 Primary ======= ======= ======= Income (loss) from operations $ (0.45) $ 1.52 $ 0.25 Extraordinary item 0.02 -0- -0- Cumulative effect of accounting changes -0- (0.14) 0.15 ------- ------- ------- Net income (loss) $ (0.43) $ 1.38 $ 0.40 ======= ======= ====== Fully Average common and common Diluted equivalent shares outstanding 18,166 20,916 18,256 ======= ======= ======= Income (loss) from operations $ (0.45) $ 1.45 $ 0.25 Extraordinary item 0.02 -0- -0- Cumulative effect of accounting changes -0- (0.12) 0.15 ------- ------- ------- Net income (loss) $ (0.43) $ 1.33 $ 0.40 ======= ======= =======
F-6
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 Pro- Pro-forma amounts assuming forma retroactive application of the change in the method of accounting for multiple-year retrospectively rated reinsurance contracts: Income (loss) from operations $27,928 $1,801 ======= ====== Income (loss) from operations per share Primary $ 1.52 $ 0.10 ======= ======= Fully diluted $ 1.45 $ 0.10 ======= ======= Net income (loss) $27,928 $ 4,649 ======= ======= Net income (loss) per share Primary $ 1.52 $ 0.25 ======= ======= Fully diluted $ 1.45 $ 0.25 ======= ======= See notes to consolidated financial statements.
F-7
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 Common Stock Balance at beginning of year $5,490 $5,453 $5,431 Issuance of common stock 17 37 22 ------- ------- ------- Balance at end of year 5,507 5,490 5,453 ------- ------- ------- Additional paid-in capital Balance at beginning of year 112,670 112,068 111,361 Issuance of common stock 700 1,428 938 Change in unpaid stock options exercised (shares of 55, 87 and 97) 1,175 (768) (346) Deferred compensation 11 (58) 115 ------- ------- ------- Balance at end of year 114,556 112,670 112,068 ------- ------- ------- Unrealized appreciation (depreciation) of investments Balance at beginning of year 16,634 11,416 5,826 Change in unrealized appreciation (38,274) 5,218 5,590 ------- ------- ------- Balance at end of year (21,640) 16,634 11,416 ------- ------- ------- Foreign currency translation adjustment Balance at beginning of year 12 254 1,646 Change in foreign currency translation adjustment (426) (242) (1,392) ------- ------- ------- Balance at end of year $ (414) $ 12 $ 254 ------- ------- ------- See notes to consolidated financial statements.
F-8
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 Retained earnings Balance at beginning of year $157,532 $138,002 $135,786 Net income (loss) (7,841) 25,328 7,249 Dividends ($.36, $.32 and $.28 per share) (6,538) (5,798) (5,033) ------- ------- ------- Balance at end of year 143,153 157,532 138,002 ------- ------- ------- Treasury stock Balance at beginning of year (1,649) (1,077) (1,305) Net (purchases) reissuance of treasury stock (118) (572) 228 ------- ------- ------- Balance at end of year (1,767) (1,649) (1,077) ------- ------- ------- Total stockholders' equity at end of year $239,395 $290,689 $266,116 ======== ======== ======== Common stock shares Balance at beginning of year 18,299 18,176 18,105 Issuance of common stock 57 123 71 ------- ------- ------- Balance at end of year 18,356 18,299 18,176 ======= ======= ======= Treasury stock shares Balance at beginning of year 190 153 179 Net purchases (reissuance) of treasury stock 2 37 (26) ------- ------- ------- Balance at end of year 192 190 153 ======= ======= ======= See notes to consolidated financial statements.
F-9
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 1994 1993 1992 Cash flows Net income (loss) $(7,841) $25,328 $7,249 from Adjustments to reconcile net income operating (loss) to net cash provided by (used in) activities operating activities: Cumulative effect of accounting changes -0- 2,600 (2,848) Realized investment gains (984) (12,930) (15,048) Changes in assets and liabilities net of effects of acquisitions: Accrued investment income (170) 403 203 Premium balances, net (8,247) (13,732) 9,779 Prepaid reinsurance premiums 7,110 (188) (8,517) Reinsurance recoverable on paid losses 13,072 5,528 (23,302) Deferred policy acquisition costs 1,296 (1,969) (5,367) Losses and loss expenses 42,578 396 101,583 Unearned premiums (4,294) 9,552 22,010 Reinsurance recoverable on unpaid losses (829) (1,192) (84,538) Funds held under reinsurance treaties (18,844) 967 7,663 Federal income taxes (11,174) 11,219 (11,769) Other (10,403) 1,794 (5,172) ------- ------- ------- Net cash provided by (used in) operating activities $ 1,270 $27,776 $(8,074) ------- ------- ------- See notes to consolidated financial statements.
F-10
SCOR U.S. CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 1994 1993 1992 Cash flows Sales, maturities or redemptions of from fixed maturities $246,868 $349,423 $464,094 investing Sales of equity securities 19,920 12,105 15,279 activities Net sales (purchases) of short-term investments 9,899 (73,940) 15,181 Investments in fixed maturities (266,174) (375,024) (436,138) Investments in equity securities (16,161) (6,999) (25,316) Acquisitions, net of cash acquired -0- -0- (8,153) Investment in affiliate -0- -0- (9,900) Other (4,138) (9,422) (3,400) -------- ------- ------- Net cash provided by (used in) investing activities (9,786) (103,857) 11,647 ------- ------- ------- Cash flows Dividends paid (6,538) (5,798) (5,033) from Proceeds from issuance of convertible financing subordinated debentures -0- 85,172 -0- activities Proceeds from issuance of commercial paper - net 30 96 10,247 Repayment of notes payable -0- (8,000) -0- Proceeds from stock options exercised 1,533 967 364 Other 1,158 362 (17) ------- ------- ------- Net cash provided by (used in) financing activities (3,817) 72,799 5,561 ------- ------- ------- Net increase (decrease) in cash (12,333) (3,282) 9,134 Cash at beginning of year 17,096 20,378 11,244 ------- ------- ------- Cash at end of year $ 4,763 $17,096 $20,378 ======== ======= ======= See notes to consolidated financial statements.
F-11 SCOR U.S. CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION SCOR U.S. Corporation ("SCOR U.S.") is a Delaware corporation that was formed in December 1981. Prior to the offering of 4,000,000 shares to the public on September 25, 1986, SCOR U.S. was owned by Societe Commerciale de Reassurance ("SCOR Paris"), a French reinsurance company, and by Caisse Centrale de Reassurance ("CCR"), a reinsurer wholly owned by the French government which also owned approximately 30% of SCOR Paris. As a result of a corporate reorganization completed in France in November 1989, SCOR Paris became a wholly owned subsidiary of SCOR S.A. In December 1990, SCOR Paris and another subsidiary of SCOR S.A., UAP Reassurances ("UAP Re") were merged into SCOR S.A. In June 1990, Rockleigh Management Corporation ("Rockleigh"), a wholly owned subsidiary of UAP Re, was merged into SCOR U.S. Rockleigh owned 100% of both The Unity Fire and General Insurance Company ("Unity Fire") and General Security Assurance Corporation of New York ("General Security"), each of which was a professional reinsurance company. On January 1, 1994, General Security was merged into SCOR Reinsurance Company ("SCOR Re"), the Company's principal operating subsidiary. As a result of the issuance of common shares of SCOR U.S. to UAP Re in the Rockleigh merger, SCOR Paris' participation in SCOR U.S. stock repurchase programs and various other purchases, as well as SCOR Paris' purchase of CCR's shares of SCOR U.S., SCOR S.A. owned approximately 80% of the outstanding common stock of SCOR U.S. at December 31, 1994. The remaining 20% is held publicly and represents 3,616,864 shares of the outstanding shares of SCOR U.S. common stock. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements are presented in conformity with generally accepted accounting principles ("GAAP"). The consolidated financial statements of SCOR U.S. Corporation and subsidiaries (the "Company") include the accounts of SCOR U.S. and its wholly owned subsidiaries, SCOR Re, Unity Fire, General Security Indemnity Company ("GSIND") (formerly Southwest International Reinsurance Company), Morgard, Inc. ("Morgard"), General Security Insurance Company ("GSIC") (formerly The International Insurance Company of Takoma Park, Maryland ("IIC")), SCOR Services, Inc., and BIND, Inc., and its majority owned subsidiary, California Reinsurance Management Corporation ("Cal Re") and its equity affiliate Commercial Risk Partners Limited ("Commercial Risk"). The Company operates primarily in one significant industry segment; property and casualty reinsurance. Substantially all of the Company's gross premiums written are assumed from domestic ceding companies. All significant intercompany transactions have been eliminated in consolidation. F-12 (b) Premium Income Premium income is recognized as earned on a pro rata basis over the terms of the policies. Unearned premiums are calculated primarily on a pro rata basis on facultative business and as reported by ceding reinsureds on treaty business. (c) Policy Acquisition Costs Costs applicable to the acquisition of new business, principally commissions, are deferred when paid and expensed as the related premiums are earned. Deferred policy acquisition costs considers anticipated losses and loss expenses and maintenance expenses that will be incurred as those premiums are earned. Deferred policy acquisition costs are reviewed periodically to determine that they do not exceed recoverable amounts after allowing for anticipated investment income. Amortization of acquisition costs for 1994, 1993 and 1992 was $59,434,000, $61,324,000 and $55,960,000, respectively. (d) Loss Reserves The reserve for losses and loss expenses is based upon estimates received from ceding reinsureds on treaty contracts, accumulation of case estimates for losses and loss expenses on claims reported on facultative contracts and estimates of losses and loss expenses incurred but not reported ("IBNR") based upon the Company's expectations of what may have been incurred. Such provisions are necessarily based on estimates and, accordingly, there can be no assurance that the ultimate liability will not exceed such estimates. The reserves are reviewed continually during the year and changes in estimates are reflected in operating results currently. (e) Property and Equipment Depreciation and amortization of property and equipment have been provided principally on the straight-line method with estimated useful lives of fifteen years for property and five to ten years for equipment. Leasehold improvements are amortized on a straight-line basis over the term of the corresponding lease. Depreciation and amortization amounted to $1,651,000, $765,000 and $603,000 for the years ended December 31, 1994, 1993 and 1992, respectively. (f) Investments The Company has categorized substantially all of its investments in fixed maturities as securities "available for sale" and, in conformity with Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities", which was adopted December 31, 1993, carries such investments at fair value. Fixed maturities purchased with the intent to hold to maturity are categorized as securities "held to maturity" and are carried at amortized cost. Equity securities are carried at fair value. Short- term investments are carried at cost, which approximates fair value. The Company's policy is to determine realized gains and losses on investments sold on the specific identification method. The Company includes unrealized gains and losses on equity securities and fixed maturities categorized as available for sale in stockholders' equity, F-13 net of any tax effect. For cash flows statement purposes, the Company does not consider any of its investments to be cash equivalents. (g) Earnings per Share Primary earnings per share data are based on the weighted average number of common shares outstanding during the period and, if dilutive, common shares assumed to be outstanding which are issuable under stock option plans. Fully diluted earnings per share are based on the additional assumption that the Debentures (as defined in Note 6) are converted into common shares, if dilutive. (h) Reclassification of Certain Amounts Certain amounts from prior financial statements have been reclassified to conform with current classifications. (i) Intangibles (1) Goodwill The Company has classified as goodwill the cost in excess of net assets of companies acquired in purchase transactions. Goodwill is amortized on a straight-line basis over a period of 10 years. Amortization charged to operations amounted to $596,000, $542,000 and $499,000 for the years ended December 31, 1994, 1993 and 1992, respectively. (2) Insurance Licenses In conjunction with its acquisition of IIC, the Company acquired licenses for approximately $3,200,000, which are amortized on a straight-line basis over 10 years. Amortization charged to operations amounted to $317,000 and $343,000 for the years ended December 31, 1994 and 1993, respectively. No amount was charged to operations for 1992. (j) Foreign Currency Transactions Revenues and expenses denominated in foreign currencies are translated at the rate of exchange at the transaction date. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange at the end of a reporting period. Gains or losses resulting from foreign currency transactions are included in the Company's results from operations. Net gains (losses) resulting from foreign currency transactions during 1994, 1993 and 1992 were $(156,000), $(929,000) and $555,000, respectively. (k) Accounting Changes In the first quarter of 1993, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short- Duration and Long-Duration Contracts" ("SFAS 113"). The adoption of SFAS 113 did not have a material effect on the Company's financial position or its results from operations. F-14 The FASB's Emerging Issues Task Force ("EITF") reached a consensus on July 22, 1993 regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 had an impact on certain of the Company's retrocessional agreements. As a result of the Company's implementation of the change in accounting method, as of January 1, 1993, a charge of $2,600,000 (after an income tax benefit of $1,400,000), or $0.14 per share, is included as a reduction to income as a cumulative adjustment. The effect of this change, excluding the cumulative adjustment, for the year ended December 31, 1993 was to increase net income by $2,600,000, or $0.14 per share. The pro-forma amounts shown in the statements of operations have been adjusted for the effect of retroactive application of the adoption of EITF 93-6, net of related income taxes. Effective as of December 31, 1993, SCOR U.S. adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have any effect on the Company's financial position or its results of operations. During 1992, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"), which changes the method of accounting for income taxes under GAAP. As a result of adopting SFAS 109, the Company recognized a cumulative benefit of the change in accounting principle of $2,367,000, or $0.13 per share, as of January 1, 1992. The effect of this change, excluding the cumulative benefit, for the year ended December 31, 1992 was to decrease net income by $480,000. During 1992, the Company also changed its accounting method for deferred policy acquisition costs to consider anticipated investment income in evaluating the recoverability of such costs. This new method is preferable because it is the prevalent method used in the insurance industry. The newly adopted accounting method also allows for a more appropriate matching of the income statement amounts of commissions expense with the related earned premiums and the balance sheet amounts of deferred policy acquisition costs with the related unearned premiums. This change resulted in the recognition of a cumulative benefit of the change in accounting principle of $481,000 (after reduction for income taxes of $248,000), or $0.02 per share, as of January 1, 1992. This change had no effect on net income, excluding the cumulative benefit, for the year ended December 31, 1992. (3) ACQUISITIONS (a) Purchase of Morgard On March 10, 1992, SCOR U.S. acquired 100% of the stock of Morgard, a developer, marketer and administrator of an insurance product that indemnifies monthly mortgage payments after involuntary unemployment. The purchase price was approximately $2,549,000 and the transaction was accounted for using the purchase method of accounting F-15 and, accordingly, Morgard's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. In March 1994, the Company issued 31,500 shares of its common stock at an approximate market value of $360,000 as additional consideration pursuant to the Morgard purchase agreements. (b) Investment in Commercial Risk During January 1992, SCOR U.S. acquired 19.8% of the stock of Commercial Risk, a Bermuda holding company for two insurance subsidiaries engaged in writing shared-risk products. The majority shareholder of Commercial Risk is SCOR S.A. The purchase price was approximately $9,900,000, which included equity and debt. As a result of a recapitalization of Commercial Risk in 1994, all of SCOR U.S.'s investment was converted to equity, with SCOR U.S. owning approximately 13% of Commercial Risk. The investment in Commercial Risk is accounted for using the equity method of accounting and, accordingly, the accompanying consolidated financial statements reflect the Company's proportionate share of Commercial Risk's stockholders' equity and operating income. SCOR U.S. accounts for its proportionate share of Commercial Risk's income in its statements of operations under the caption "other expenses (income)". Income (loss) from Commercial Risk amounted to $743,000, $678,000 and ($110,000) in 1994, 1993 and 1992, respectively. (c) Purchase of The International Insurance Company of Takoma Park, Maryland On December 4, 1992, SCOR U.S. acquired 100% of the stock of IIC. The purchase price was approximately $8,200,000 and the transaction was accounted for using the purchase method of accounting and, accordingly, IIC's purchased assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The acquisition did not have a material pro forma impact on operations. During 1993, IIC's name was changed to GSIC. (4) REINSURANCE SCOR U.S.'s operating subsidiaries assume reinsurance from SCOR S.A. and other affiliated companies primarily on a quota share or surplus share basis. Written premiums assumed from these companies (and the percentage of gross written premiums) were approximately $7,845,000 (2.6%), $8,375,000 (2.5%) and $6,699,000 (2.2%) for the years ended December 31, 1994, 1993 and 1992, respectively. Of these amounts, approximately $6,959,000, $7,925,000 and $6,278,000 for 1994, 1993 and 1992, respectively, were assumed from SCOR S.A. SCOR U.S.'s operating subsidiaries also retrocede reinsurance to SCOR S.A. and other affiliated companies, primarily on a quota share or surplus share basis. F-16 The effects of ceded reinsurance on the Statement of Operations for the years ended December 31, 1994, 1993 and 1992 are as follows: Loss and Loss Premiums Premiums Expenses Written Earned Incurred (in thousands) December 31, 1994 Direct $13,667 $13,927 $ 9,554 Assumed 293,125 297,159 260,073 Ceded - affiliate (35,644) (39,718) (37,651) Ceded - other (40,088) (43,124) (40,706) ------- ------- ------- Net $231,060 $228,244 $191,270 ======= ======= ======= December 31, 1993 Direct $ 11,972 $ 8,677 $ 6,944 Assumed 322,547 316,292 206,603 Ceded - affiliate (51,453) (49,778) (37,986) Ceded - other (37,653) (39,140) (19,269) -------- ------- -------- Net $245,413 $236,051 $156,292 ======== ======== ======== December 31, 1992 Direct $ 4,922 $ 2,682 $ 1,645 Assumed 299,906 280,136 335,954 Ceded - affiliate (43,523) (39,134) (59,473) Ceded - other (55,762) (51,634) (117,581) -------- -------- -------- Net $205,543 $192,050 $160,545 ======== ======== ======== For the years ended December 31, 1994, 1993 and 1992 the percentage of assumed premiums written to net premiums written was 126.9%, 131.4% and 145.9%, respectively. Reinsurance does not discharge or diminish the primary liability to insureds of the Company on risks reinsured; however, it does permit the Company to recover the applicable portion of any loss from its retrocessionaires. Retrocessionaires of SCOR U.S. are subject to an initial review of financial condition before final acceptability is confirmed and subsequent reviews on an annual basis. The Company, like most reinsurance companies, enters into retrocession arrangements for many of the same reasons primary insurers seek reinsurance, including increasing their premium writing and risk capacity without requiring additional capital and reducing the effect of individual or aggregate losses. Historically, SCOR Re has retroceded risks to retro- cessionaires on both a proportional and excess of loss basis. Under its 1994 retrocessional program, SCOR Re retained a maximum of $2.0 million as to any one ceding company program for treaty business and a F-17 maximum of $3.3 million and $1.1 million per risk for facultative property and facultative casualty business, respectively. Paid losses, outstanding losses and IBNR recoverable from retrocessionaires which are determined to be uncollectible are charged to operations. There were no such amounts charged to operations for the years ended December 31, 1994, 1993 and 1992. Pursuant to a Net Aggregate Excess of Loss Retrocessional Agreement dated as of July 1, 1986 ("the 1986 Retrocessional Agreement"), SCOR S.A. reinsured SCOR Re for adverse loss development from pre-1986 business that exceeded the total of loss reserves established as of June 30, 1986, and premiums earned after June 30, 1986, from such pre-1986 business. The 1986 Retrocessional Agreement provided protection to the Company for business underwritten by SCOR Re only and did not provide coverage for pre-1986 business underwritten by any other subsidiary. However, business underwritten by General Security and Unity Fire is protected against adverse development by a separate net aggregate excess of loss retrocessional agreement, as described below. The 1986 Retrocessional Agreement terminated on December 31, 1993, at which time SCOR S.A.'s liability to SCOR Re was $16,224,000. This amount is the actuarially determined expected ultimate loss from the pre-1986 business in excess of the "aggregate deductible" (which is defined as the total of net outstanding loss and loss expense reserves, net incurred but not reported loss reserves and net unearned premium reserves established as of June 30, 1986 for the pre-1986 business, plus all net premiums and future net premium adjustments earned after June 30, 1986 under retrospectively rated treaties for such business). During the first quarter of 1994, SCOR Re received $16,224,000 from SCOR S.A. in settlement of its liability under this agreement. SCOR Re and SCOR S.A. entered into a new Net Aggregate Excess of Loss Agreement ("the 1994 Retrocessional Agreement") effective January 1, 1994, which protects the same business covered under the 1986 Retrocessional Agreement. Under this Agreement, SCOR Re is responsible for any further adverse development up to $8,800,000, at which point the 1994 Retrocessional Agreement attaches and provides coverage for up to $10,000,000 of any additional adverse development. SCOR Re paid a premium of $2,000,000 for this coverage, which expires on December 31, 2004. At December 31, 1994, no recovery was recog- nized under this agreement. In addition, based on the experience of the 1994 Retrocessional Agreement, SCOR Re is eligible to receive a contingent commission of up to 27.75% of the premium. SCOR S.A. entered into a Net Aggregate Excess of Loss Retrocessional Agreement ("the 1990 Retrocessional Agreement") with each of Unity Fire and General Security, pursuant to which SCOR S.A. agreed to reinsure those companies to the extent that their net ultimate incurred losses (as defined in the agreements) arising in 1989 and prior accident years exceed an aggregate deductible. As a result of the January 1, 1991 assumption by General Security of the rights, liabilities and obligations of Unity Fire, the Net Aggregate Excess of Loss Retrocessional Agreement with Unity Fire was terminated and the Net Aggregate Excess of Loss Retrocessional Agreement with General Security was amended (as so amended, the "Agreement") to include the protection formerly provided to Unity Fire by its retrocessional agreement with SCOR S.A. As a result of the merger of F-18 General Security into SCOR Re, the protection under the Agreement is now for the benefit of SCOR Re. The aggregate deductible is defined as the sum of net outstanding loss and loss expense reserves and net incurred but not reported loss reserves as of December 31, 1989, for 1989 and prior accident years, as documented in the 1989 statutory financial statements of Unity Fire and General Security. This amount has been established at a combined aggregate of $93,830,000. The annual premium for this protection is $210,000 through 2004. The Agreement continues in force until all covered losses are settled. At December 31, 1994, SCOR S.A.'s estimated liability under the Agreement was approximately $11,700,000. SCOR S.A. provides letters of credit in amounts equal to its estimated liability under its reinsurance agreements (as reestimated on a quarterly basis). The amount of letters of credit provided by SCOR S.A. at December 31, 1994 was approximately $134,500,000. The amounts recoverable under the Net Aggregate Excess of Loss Retrocessional Agreements are included in "Retrocessions to Affiliates" above and have the effect of reducing the Company's net losses and loss expenses incurred. The Company withholds funds from retrocessionaires in accordance with the retrocessional agreements. Under the terms of the agreements, the Company pays interest on the principal sums of amounts withheld at annual rates of 6% to 7.5% computed and rendered quarterly. The Company incurred interest expense (income) of $1,882,000, $2,191,000 and $1,755,000 in 1994, 1993 and 1992, respectively, of which $(2,000), $1,161,000 and $1,003,000, respectively, relates to SCOR S.A. (5) INVESTMENTS Net investment income of the Company, comprised primarily of interest and dividends, was derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Fixed maturities $38,555 $39,859 $41,736 Equity securities 776 999 1,036 Short-term investments 2,855 2,120 1,485 Other 175 428 196 ------- ------- ------- 42,361 43,406 44,453 Investment expense (1,371) (1,362) (1,573) ------ ------- ------- Net investment income $40,990 $42,044 $42,880 ======= ======= ======= F-19 Net realized investment gains (losses) of the Company were derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Net realized investment gains (losses): Fixed maturities $ (814) $10,921 $13,245 Equity securities 1,497 1,791 1,642 Other 301 218 161 ----- ------- ------- $ 984 $12,930 $15,048 ======= ======= ======= Proceeds from sales of available for sale securities during 1994, 1993 and 1992 were $260,902,000, $358,168,000 and $480,864,000, respectively. Gross gains of $7,162,000, $14,722,000 and $19,212,000, and gross losses of $6,479,000, $2,016,000 and $4,325,000 during 1994, 1993 and 1992, respectively, were realized on those sales. The changes in net unrealized gains (losses) on investments of the Company (including unrealized gains and losses on fixed maturities held to maturity that are not reflected in stockholders' equity) are derived from the following sources: Year Ended December 31, 1994 1993 1992 (in thousands) Decrease during period in difference between fair value and cost of investments in equity securities $(3,529) $(722) $(651) Deferred income tax benefit 1,235 212 221 ------- ------- ------- Decrease in net unrealized losses on equity securities (2,294) (510) (430) ------- ------- ------- Increase (decrease) during period in difference between fair value and cost of investments in fixed maturities (58,187) 9,758 (15,165) Deferred income tax benefit (expense) 20,365 (3,562) 5,156 ------- ------- ------- Increase (decrease) in net unrealized gains (losses) on fixed maturities (1) (37,822) 6,196 (10,009) ------- ------- ------- Total increase (decrease) in net unrealized gains (losses) on equity securities and fixed maturities $(40,116) $ 5,686 $(10,439) ======= ======= ======== (1) Includes changes in net unrealized gains (losses) of ($55,357,000), $9,017,000 and $9,118,000, and deferred tax expense (benefit) of ($19,377,000), $3,288,000 and $3,100,000 on fixed maturities carried at market value for 1994, 1993 and 1992, respectively, which is reflected in stockholders' equity. F-20 At December 31, 1994 and 1993, approximately $22,871,000 and $24,876,000, respectively, of bonds carried at amortized cost were on deposit with various regulatory authorities as required by law. The following table presents gross unrealized gains and losses and the related deferred taxes on equity securities and fixed maturities carried at fair value. Year Ended December 31, 1994 1993 (in thousands) Equity securities: Gross unrealized gains $251 $3,987 Gross unrealized losses (410) (617) ----- ------- Net unrealized gains (losses) (159) 3,370 ----- ------- Fixed maturities, at fair value: Gross unrealized gains 1,112 25,937 Gross unrealized losses (34,247) (3,715) ------- ------- Net unrealized gains (losses) (33,135) 22,222 ------- ------- Total net unrealized gains (losses) (33,294) 25,592 Deferred tax asset (liability) 11,654 (8,958) ------- ------- Unrealized appreciation (depreciation) of investments $(21,640) $16,634 ======== ======= The amortized cost and estimated fair values of investments by major security type at December 31, 1994 and 1993 are as follows: F-21 Held to Maturity December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $14,199 $53 $(824) $13,428 Debt securities issued by foreign governments 8,672 226 (52) 8,846 Total fixed maturities held to maturity $22,871 $279 $(876) $22,274 ======== ======= ======== ======== Available for Sale December 31, 1994 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $96,097 $272 $(4,556) $91,813 Obligations of states and political subdivisions 254,196 135 (12,549) 241,782 Debt securities issued by foreign governments 5,992 77 (106) 5,963 Corporate securities 114,321 474 (6,363) 108,432 Mortgage-backed securities 91,439 148 (7,875) 83,712 Redeemable preferred stocks 34,746 6 (2,798) 31,954 ------- ------- ------- ------- Total fixed maturities available for sale 596,791 1,112 (34,247) 563,656 Equity securities 1,897 251 (410) 1,738 ------- ------- ------- ------- Total investments carried at fair value $598,688 $1,363 $(34,657) $565,394 ======= ======= ======= ======== F-22 Held to Maturity December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $15,792 $ 976 $ (6) $ 16,762 Obligations of states and political subdivisions 499 21 -0- 520 Debt securities issued by foreign governments 8,459 1,242 -0- 9,701 Corporate securities 126 -0- -0- 126 ------- ------- ------- ------- Total fixed maturities held to maturity $ 24,876 $ 2,239 $ (6) $ 27,109 ======== ======= ======= ======== Available for Sale December 31, 1993 Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value (in thousands) U.S. Treasury securities and obligations of U.S. government corpor- ations and agencies $ 64,362 $ 3,780 $ (2,035) $ 66,107 Obligations of states and political subdivisions 265,111 12,677 (396) 277,392 Debt securities issued by foreign governments 3,985 503 -0- 4,488 Corporate securities 132,494 7,243 (538) 139,199 Mortgage-backed securities 59,353 1,116 (457) 60,012 Redeemable preferred stocks 33,577 618 (289) 33,906 ------- ------- ------- ------- Total fixed maturities available for sale 558,882 25,937 (3,715) 581,104 Equity securities 15,581 3,987 (617) 18,951 ------- ------- ------- ------- Total investments carried at fair value $574,463 $ 29,924 $(4,332) $600,055 ======== ======== ======== ======== F-23 The amortized cost and estimated fair value of fixed maturities at December 31, 1994, by contractual maturity, are shown below (expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties): Available for Sale Held to Maturity ----------------- ----------------- Amortized Fair Amortized Fair Cost Value Cost Value (in thousands) Due in one year or less $13,212 $13,126 $228 $222 Due after one year - five years 136,872 133,061 10,461 10,521 Due after five year - ten years 302,681 284,758 12,022 11,392 Due after ten years 17,841 17,045 160 139 ------- ------- ------- ------- 470,606 447,990 22,871 22,274 Mortgage-backed securities 91,439 83,712 -0- -0- Redeemable preferred stocks 34,746 31,954 -0- -0- ------- ------- ------- ------- Total $596,791 $563,656 $22,871 $22,274 ======== ======= ======== ======== (6) NOTES PAYABLE AND CREDIT ARRANGEMENTS On March 29, 1993, SCOR U.S. sold at par $86,250,000 of 5.25% Convertible Subordinated Debentures due April 1, 2000 ("Debentures") through a private offering. The Debentures are not redeemable by the Company prior to April 3, 1996 and are convertible into approximately 3.4 million shares of SCOR U.S. common stock at a conversion price of $25.375 per share. Expenses incurred in the offering of approximately $1,800,000 were deferred and are being amortized over the life of the Debentures. The Company contributed $50,000,000 of the net proceeds to SCOR Re. Interest expense incurred on the Debentures during 1994 and 1993 was $4,465,000 and $3,484,000, respectively. On October 1, 1990 SCOR U.S. renewed a $20,000,000 note which was payable on that date. The new note is due and payable on October 3, 1995 and bears interest at a fixed annual rate of 9.575%. On March 12, 1993, the Company entered into an intermediate-term interest rate swap agreement with a commercial bank related to this note. The swap agreement has a maturity date of October 1, 1995 and provides for the Company to make floating rate payments in exchange for fixed rate payments due on the loan. The floating rate, which is reset every six months and is capped at 12.375%, was 11.068% as of December 31, 1994, and 8.693% as of December 31, 1993. In addition, SCOR U.S. had an $8,000,000 note at market interest rates which was repaid on May 10, 1993. Interest expense incurred for these notes, including the effect of the interest rate swap, during 1994, 1993 and 1992 was $2,072,000, $1,953,000 and $2,261,000, respectively. In 1990, SCOR U.S. established a commercial paper program that allows the Company to raise up to $50,000,000. The weighted average interest rate of commercial paper outstanding at December 31, 1994 was 6.29%. The maximum outstanding at any month end during 1994 was F-24 $11,310,000, and the average outstanding during 1994 was $10,269,000. The weighted average interest rate during 1994 was 5.68%. Interest expense incurred on commercial paper during 1994, 1993 and 1992 was approximately $501,000, $378,000, $450,000, respectively. Interest paid including interest paid on reinsurance funds withheld, during 1994, 1993 and 1992 was $8,647,000, $6,928,000 and $4,250,000, respectively. (7) RETIREMENT OF DEBENTURES During 1994 the Company repurchased in the open market $3.9 million in principal amount of the Debentures and recognized an extraordinary gain of $351,000 (after deduction for income taxes of $189,000), or $0.02 per share. Funding for the repurchased Debentures which settled in January 1995, was achieved through the issuance of the Company's commercial paper. (8) FINANCIAL INSTRUMENTS Off-Balance-Sheet Risk On March 12, 1993, the Company entered into an interest rate swap agreement to effectively convert underlying fixed-rate debt into variable-rate debt based on LIBOR (See Note 6). The notional principal amount of this agreement, which matures in October 1995, is $20,000,000. The Company has entered into this agreement with a creditworthy international financial institution and considers the risk of nonperformance to be remote. The Company is exposed to market risk due to the possibility of exchanging a lower interest rate for a higher interest rate. The net interest effect of this swap transaction is reported as an adjustment of interest income as incurred. Concentration of Credit Risk At December 31, 1994 the Company did not have a material concentration of financial instruments in any single investee, industry or geographic location. All of the Company's investments in fixed maturities are investment grade securities and virtually all are rated A or better. The Company's client base and their dispersion throughout the United States limits the concentration of credit risk on amounts due from clients. At December 31, 1994, the Company had no significant concentrations of credit risk. Fair Value of Financial Instruments The following methods and assumptions were used by the Company to estimate the fair value disclosures for its assets and liabilities as of December 31, 1994 and 1993: Fixed maturities and equity securities: Fair values are based on quoted market prices or dealer quotes. If a quoted market price is F-25 not available, fair value is estimated using quoted market prices for similar securities. Cash and short-term investments: The carrying amount is a reasonable estimate of fair value. Convertible subordinated debentures: Fair value is based on the prevailing market bid. Notes payable: Fair value is based on the discounted amount of future cash flows using the Company's current estimated borrowing rate for a similar liability. Commercial paper: The carrying amount is a reasonable estimate of fair value due to the short-term variable market rate nature of this liability. Interest rate swap: Fair value is based on the estimated amount that the Company would pay or (receive) to terminate the swap agreement at the reporting date, taking into account current interest rates and current creditworthiness of the counterparty. The estimated fair values of the Company's financial instruments are as follows: December 31, 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value (in thousands) Assets Fixed maturities at fair value $563,656 $563,656 $581,104 $581,104 Fixed maturities at amortized cost 22,871 22,274 24,876 27,109 Equity securities 1,738 1,738 18,951 18,951 Short-term investments 83,303 83,303 90,642 90,642 Cash 4,763 4,763 17,096 17,096 Liabilities Convertible subordinated debentures 82,350 69,998 86,250 81,075 Notes payable 20,000 20,000 20,000 21,897 Commercial paper 11,310 11,310 10,721 10,721 Interest rate swap -0- 341 -0- (266) F-26 (9) FEDERAL INCOME TAXES SCOR U.S. and its subsidiaries file a consolidated Federal income tax return. The components of the provision for Federal income taxes attributed to income from operations were as follows: Year Ended December 31, 1994 1993 1992 (in thousands) Current tax expense (benefit) $ (9,171) $7,882 $(1,853) Deferred tax benefit (2,091) (899) (1,918) -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ====== ======= Income taxes paid $ 1,800(1) $3,546(1) $8,001 ======== ====== ====== (1) Excludes refunds received in 1994 and 1993 of $1,700,000 and $7,782,000, respectively. Total income tax expense (benefit) for the years ended December 31, 1994, 1993 and 1992 was allocated as follows: Year Ended December 31, 1994 1993 1992 (in thousands) Income (loss) from continuing operations $(11,262) $6,983 $(3,771) Extraordinary item 189 -0- -0- Cummulative effect of accounting changes -0- (1,400) 2,119 Stockholders' equity: Unrealized appreciation (depre- ciation) of investments (20,611) 3,077 2,877 Foreign currency translation (229) (125) (717) ------- ----- ----- $(31,913) $8,535 $508 ======== ====== ==== F-27 The components of the net deferred Federal income tax benefits recognized in the Company's consolidated balance sheet at December 31, 1994 and 1993 were as follows: Deferred Tax Asset (Liability) (in thousands) 1994 1993 Deferred policy acquisition costs $(7,995) $(8,449) Unearned premium reserve 6,354 6,157 Loss reserves 25,052 23,352 Other (469) (214) ------- ------- Tax effect of temporary differences 22,942 20,846 Unrealized (appreciation) depreciation of investments 11,653 (8,958) Foreign currency translation 223 6 ------- ------- $34,818 $ 11,894 ======= ======= SFAS 109 requires the establishment of a valuation allowance for deferred income tax benefits where it is more likely than not that some portion of the deferred income tax benefits will not be realized. Management believes, based on the Company's historical record of generating taxable income and its expectations of future earnings, that the Company's taxable income in future years will be sufficient to realize the net deferred income tax benefits which are reflected on its consolidated balance sheet as of December 31, 1994. In addition, management believes certain tax planning strategies exist, including its ability to alter the mix of its investment portfolio to taxable investments from tax-exempt investments, which could be implemented if necessary to ensure sufficient taxable income to realize fully its net deferred income tax benefits. Management also believes that the Company's net deferred income tax benefits related to unrealized depreciation of fixed maturity investments is recoverable through its ability to hold these investments to maturity. Accordingly, SCOR U.S. has not established a valuation allowance with respect to its net deferred income tax benefits. The Omnibus Budget Reconciliation Act of 1993 (the "Act") was signed into law in August 1993. The Act provided for an increase in the corporate tax rate to 35% from the previous 34% rate. As a result of the revaluation of the Company's net deferred tax assets to reflect the change in tax rates, the Company recognized a net benefit of $472,000, or $0.03 per share, in 1993. This benefit is included in the provision for Federal income taxes attributable to income from operations. F-28 A reconciliation of income tax expense (benefit) computed by applying the United States Federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income (loss) from operations before Federal income taxes (benefit) to the provision for Federal income taxes (benefit) is as follows: Year Ended December 31, 1994 1993 1992 (in thousands) Computed tax expense (benefit) at U.S. Federal rate $(6,809) $12,219 $ 214 Tax-exempt interest (4,282) (4,262) (3,587) Dividends received deduction (638) (672) (605) Tax rate change -0- (472) -0- Other 467 170 207 -------- ------- ------- $(11,262) $6,983 $(3,771) ======== ======= ======= (10) RESERVES FOR LOSSES AND LOSS EXPENSES Changes in the Company's reserves for losses and loss expenses for each year in the three year period ended December 31, 1994 is summarized as follows: December 31, 1994 1993 1992 (in thousands) Reserve for losses and loss expenses at beginning of year, net $340,366 $341,162 $324,117 -------- -------- -------- Provision for losses and loss expenses: Occuring in current year 193,587 160,695 165,468 Occuring in prior years (2,317) (4,403) (4,923) ------- -------- ------- Total 191,270 156,292 160,545 ------- ------- ------- Payment for losses and loss expenses, net of amounts recoverable Occuring in current year 55,155 36,018 51,514 Occuring in prior years 94,366 121,070 91,986 ------ ------- ------- Total 149,521 157,088 143,500 ------- ------- ------- Reserve for losses and loss expenses at end of year, net 382,115 340,366 341,162 Reinsurance recoverable on unpaid losses 222,672 221,843 220,651 -------- ------- ------- Reserve for losses and loss expenses at end of year, gross $604,787 $562,209 $561,813 ======== ======== ======== F-29 The operating companies of SCOR U.S. have not underwritten significant amounts of business in those classes or with those insurers that are known to be exposed to asbestos and environmental- related claims. During the years ended December 31, 1994, 1993 and 1992, the Company has not experienced any significant amount of net loss reporting or development on claims related to these exposures. In addition, the Company is significantly protected from adverse development under the SCOR S.A. Retrocessional Agreements (see Note 4). Any recoveries under such agreements are considered to be fully realizable. Based on the above information, the Company believes that its exposure to asbestos and environmental-related claims is not material to the Company's financial position or results of operations. (11) STATUTORY REQUIREMENTS The Insurance Department of the State of New York ("Department"), in which SCOR Re, GSIND and Unity Fire are domiciled, and the Maryland Insurance Administration, in which GSIC is domiciled, recognizes as net income and surplus (stockholder's equity) those amounts determined in conformity with statutory accounting practices prescribed or permitted by the respective jurisdiction, which differ in certain respects from GAAP. Reconciliations of statutory surplus and net income, as determined using statutory accounting principles, to the amounts included in the accompanying financial statements are as follows: December 31, 1994 1993 (in thousands) Statutory surplus of insurance subsidiaries $243,416 $271,895 Deferred policy acquisition costs 22,844 24,140 Unauthorized reinsurance 12,931 7,076 Non-admitted assets 4,589 3,052 Unrealized appreciation (depreciation) on fixed maturities carried at fair value (33,135) 22,222 Deferred Federal income taxes 34,818 11,894 Parent company and non-insurance subsidiaries' net assets 56,282 56,660 Long-term debt (102,350) (106,250) --------- -------- GAAP stockholders' equity $239,395 $290,689 ======== ======== F-30 Year Ended December 31, 1994 1993 1992 (in thousands) Statutory net income (loss) of insurance subsidiaries $(1,109) $ 34,735 $ 5,164 Deferred policy acquisition costs (1,296) 1,969 5,367 Deferred Federal income taxes 2,091 899 1,918 Cumulative effect of accounting changes -0- -0- 2,848 Parent company operations (5,018) (8,128) (7,377) Non-insurance subsidiary operations (2,509) (4,147) (671) ------- ------- ------- GAAP net income (loss) $(7,841) $25,328 $7,249 ======= ======= ======= Cash dividends of the Company's reinsurance subsidiaries may be paid only out of their statutory earned surplus. For the operating subsidiaries domiciled in New York (which represents approximately 89% of the Company's statutory surplus), the payment of dividends is subject to statutory restrictions imposed by New York insurance law. Generally the maximum amount of dividends that may be paid in any twelve-month period without the prior approval of the Department is the lesser of net investment income or 10% of statutory surplus, as such terms are defined in the New York insurance law. During the year ending December 31, 1994, $11,900,000 of dividends were declared and paid to SCOR U.S. Based on 1994 year-end statutory surplus, the maximum dividend distribution that may be made by the Company's reinsurance subsidiaries during 1995 without prior approval is approximately $24,342,000. The amount of the Company's reinsurance subsidiaries' net assets (stockholders' equity) restricted from payment of dividends to SCOR U.S. without prior approval is approximately $219,074,000, which is 92% of total consolidated net assets. SCOR Re Voting Trust As a result of New York Insurance Department licensing requirements regarding government financial control and ownership of insurers, all of the capital stock of SCOR Re is held in an irrevocable voting trust. The voting trust, which was to expire during 1994, was renewed for an additional three years. The five voting trustees, four of whom are directors of SCOR U.S., are entitled to exercise all of the rights and powers of absolute owners of the capital stock of SCOR Re, subject to certain limitations specified in the voting trust agreement. General Security Voting Trust The Insurance Laws of the State of California generally prohibit the issuance or renewal of a license to a company owned, operated or controlled, in whole or in part, by a government. In connection with F-31 the continuation of General Security's California license, on February 1, 1993, with the approval of the New York Insurance Department, a voting trust was established by SCOR U.S. for its holdings of capital stock in General Security. This voting trust was terminated upon the merger of General Security into SCOR Re, effective January 1, 1994. (12) EMPLOYEE BENEFITS Pension Plans: SCOR U.S. has a qualified defined benefit pension plan ("SCOR U.S. Group Pension Plan") covering substantially all employees of SCOR U.S. and its affiliates. Benefits under the SCOR U.S. Group Pension Plan are based on an employee's years of service and compensation. SCOR U.S.'s funding policy is to contribute at least the minimum amount required by ERISA but not more than the maximum amount that can be deducted for Federal income tax purposes. The SCOR U.S. Group Pension Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. In 1994, 1993 and 1992, there were no contributions required. The following table sets forth the SCOR U.S. Group Pension Plan funded status and amounts recognized in the SCOR U.S. consolidated balance sheet at December 31, 1994 and 1993 (in thousands): 1994 1993 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $2,892 and $2,391 in 1994 and 1993, respectively $(3,295) $(3,312) ======= ======= Projected benefit obligation for service rendered to date $(4,678) $(5,656) Plan assets at fair value 5,912 5,560 ------- ------- Plan assets in excess of projected benefit 1,234 (96) obligation Unrecognized transition asset (885) (1,033) Unrecognized net loss from past experience 184 1,495 Unrecognized prior service costs (293) 150 ------- ------ Prepaid pension cost included in other assets $ 240 $ 516 ======= ======= F-32 Net pension expense for 1994, 1993 and 1992 included the following components (in thousands): 1994 1993 1992 Service cost-benefits earned during the period $534 $592 $406 Interest cost on projected benefit obligation 325 333 230 Actual return on plan assets (413) (412) (250) Net amortization and deferral (170) (100) (279) ---- ----- ------ Net pension expense $276 $413 $107 ====== ===== ====== The weighted-average discount rate and the average rate of compensation increase used in determining the actuarial present value of the projected benefit obligation were 8% and 5.5% in 1994, 7.5% and 6.0% in 1993, 8.0% and 6.0% in 1992, respectively. The expected long- term rate of return on assets was 7.5% in 1994 and 8% in 1993. Savings Plans: The SCOR U.S. Group Savings Plan ("SCOR U.S. Savings Plan") is qualified under Sections 401 (a) and 401 (k) of the United States Internal Revenue Code of 1986 as amended. Substantially all employees of SCOR U.S. and affiliates are eligible to participate in the savings plan. The SCOR U.S. Savings Plan excludes expatriates who are temporarily assigned to the U.S. and covered by other plans sponsored or funded by the Company or a member of the SCOR S.A. Group. Contributions to the savings plan are determined by the Board of Directors and are made from the net profits of the current taxable year or the accumulated net profits of SCOR U.S. Contributions for the years ended December 31, 1994, 1993 and 1992 were $575,000, $585,000 and $556,000, respectively. The pension and savings plans may be terminated at any time by the Board of Directors of SCOR U.S. Supplemental Retirement Plan: SCOR U.S. also sponsors the SCOR U.S. Group Supplemental Retirement Plan ("Supplemental Retirement Plan"), an unfunded nonqualified plan established in 1989 which covers a select group of management employees. This plan enables participants in the pension plan and savings plan to earn pension benefits and tax-deferred savings benefits on the same percentage of pay basis without regard to current IRS restrictions. The Supplemental Retirement Plan incurred expenses of approximately $226,000, $133,000 and $143,000 for the years ended 1994, 1993 and 1992, respectively. Employment Contracts: The Company has entered into employment contracts that provide minimum pension benefits to four executives. The benefits under these contracts are unfunded, and expenses of approximately $70,000, $53,000 and $45,000 were accrued in 1994, 1993 and 1992, respectively. F-33 (13) INCENTIVE AND STOCK OPTION PLANS In July 1986, the Company adopted a Stock Incentive Plan for Key Executives ("Incentive Plan"), pursuant to which 786,000 shares of the common stock were reserved for issuance through options for all key executives of the Company, defined to include officers and employees of the Company and those employees of SCOR S.A. who serve on the Executive Committee of the Board of Directors of SCOR U.S. In March 1994, the number of shares available for issuance under the Incentive Plan was increased to 856,740. Nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock awards and stock bonus awards were available under the Incentive Plan. Certain of these awards may result in future compensation expense to the Company. Incentive stock options were available to be granted at not less than fair market value of the Company's common stock on the date of grant. Non-qualified options were available to be granted at not less than 85% of fair market value of the Company's common stock on the date of grant. Options become exercisable as specified at the date of grant and expire ten years and one month from the date of grant. On September 19, 1990 the shareholders of SCOR U.S. approved a Stock Option Plan for Directors. Under this plan 220,000 shares of the common stock of SCOR U.S. have been reserved for issuance. Grants of options to purchase 3,000 shares will be made to each Director, except Directors employed by the Company, three business days following each SCOR U.S. Annual Meeting. Each option granted becomes exercisable with respect to one-half the shares of SCOR U.S. common stock covered thereby on the first anniversary of the date upon which it was granted and with respect to the balance of the shares on the second anniversary thereof. Under the Stock Option Plan for Key Employees ("SOP") approved by the shareholders of SCOR U.S. at the Annual Meeting in June 1991, 1,426,000 shares of common stock have been reserved for issuance through options for all key employees of SCOR U.S. Corporation and its subsidiaries. In March 1994, the number of shares available for issuance under the SOP was increased to 1,554,340. The per share option price shall never be less than 100% of the fair market value of the shares at the time of the grant. Unless otherwise provided by the Board of Directors, each option granted would become exercisable to the extent of one-third of the total number of the shares of common stock subject to the option on each anniversary of the grant and expire ten years from the date the option is granted. F-34 Information regarding the above option plans is summarized below: Number of Option Price Shares Per Share Range --------- --------------- Outstanding at December 31, 1991 1,045,605 $ 8.00 -- $15.50 Options granted 21,000 $16.75 -- $16.75 Options exercised (71,296) $ 8.00 -- $14.25 Options cancelled (19,535) $12.25 -- $14.25 --------- ---------------- Outstanding at December 31, 1992 975,774 $ 8.00 -- $16.75 Options granted 552,693 $15.50 -- $17.00 Options exercised (123,418) $ 8.00 -- $14.25 Options cancelled (30,284) $14.25 -- $17.00 --------- ---------------- Outstanding at December 31, 1993 1,374,765 $ 8.00 -- $17.00 Options granted 458,175 $ 9.00 -- $11.125 Options exercised (57,100) $ 8.00 -- $ 9.99 Options cancelled (198,889) $ 9.00 -- $17.00 --------- --------------- Outstanding at December 31, 1994 1,576,951 $ 8.00 -- $17.00 =========== =============== The number of options exercisable at December 31, 1994 was 856,000. The number of shares available for future grant at December 31, 1994 was 552,000. As indicated above, the Incentive Plan allows for the granting of restricted stock awards. The following table summarizes information regarding stock awards, for each year in the three-year period ended December 31, 1994. 1994 1993 1992 Non vested restricted stock grants at the beginning of the year 4,552 -0- 19,263 Restricted stock awards granted -0- 4,552 -0- Restricted stock awards vested -0- -0- (19,263) ----- ------ ------ Non-vested restricted stock awards at the end of the year 4,552 4,552 -0- ===== ===== ====== The Company recognized compensation expense of $11,000, $-0- and $115,000 in 1994, 1993 and 1992, respectively, in connection with these awards. At December 31, 1994, the amount of deferred compensation relating to these grants which will be recognized over the remaining vesting period is $47,000 which is included in additional paid-in capital. During 1993 and 1992 the Company issued 44,000 shares and 40,000 shares of its common stock in exchange for notes receivable from various officers of $523,000 and $358,000, respectively. These shares were issued as a result of stock options exercised under the Company's stock option plans. The balance of unpaid stock options exercised at F-35 December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively, and is recorded as a reduction to additional paid-in capital. The Company has outstanding loans with various officers related to stock options exercised and restricted stock grants. These loans bear interest at rates ranging from 4% to 10%. The aggregate unpaid principal balance at December 31, 1994 and 1993 was $27,000 and $1,202,000, respectively. (14) COMMITMENTS The Company conducts its operations in leased premises. The Company also leases data processing equipment and automobiles. Total rental expense for the years ended December 31, 1994, 1993 and 1992, amounted to $2,412,000, $2,438,000 and $2,088,000, respectively. At December 31, 1994, future minimum rental commitments are as follows (in thousands): Year Ending December 31, 1995 $2,246 1996 1,437 1997 848 1998 776 1999 526 Thereafter 68 ------ $5,901 ====== (15) CONTINGENCIES SCOR Re, GSIC, GSIND and Unity Fire are each party to various lawsuits arising in the normal course of their business. SCOR U.S. does not believe that any of the litigation to which SCOR Re, General Security, GSIC, GSIND or Unity Fire is currently a party will have a material adverse effect on the operating results or financial condition of SCOR U.S. and its subsidiaries. At December 31, 1994 and 1993, the Company's reinsurance subsidiaries had letters of credit outstanding aggregating approximately $1,731,000 and $16,352,000, respectively, in favor of certain insurance companies under terms of reinsurance agreements. The Company guarantees to a commercial bank payment when due of three mortgage loans, with original principal amounts aggregating approximately $2.8 million, issued to former excecutive officers of the Company. The guarantees are secured by the residential premises. (16) FOREIGN OPERATIONS The Company conducts reinsurance business in Canada through branches established for that purpose. The functional currency of such branches is the Canadian dollar. The assets and liabilities of such branches included herein have been translated into United States dollars at exchange rates in effect at the balance sheet dates, and F-36 operations at average exchange rates in effect during the relevant periods. Foreign currency translation adjustments have been recorded as follows: Translation Income Adjustment Taxes Net ----------- ------ ---- (in thousands) Balance, December 31, 1991 $2,494 $ 848 $1,646 Change during the year (2,109) (717) (1,392) ------- ------ ------- Balance, December 31, 1992 385 131 254 Change during the year (367) (125) (242) ------- ------ ------- Balance, December 31, 1993 18 6 12 Change during the year (655) (229) (426) ------- ------ ------- Balance, December 31, 1994 $(637) $(223) $ (414) ======= ====== ======= F-37
(17) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Three Months Ended, March 31, June 30, September 30, December 31, 1994 1994 1994 1994 (in thousands, except per share data) Net premiums earned $62,685 $54,983 $55,542 $55,034 Net investment income 9,998 10,208 10,157 10,627 Net realized investment gains (losses) 323 413 323 (75) Total revenues 73,006 65,604 66,022 65,586 Total expenses 97,570 66,593 64,047 61,462 Income (loss) from operations (14,418) 603 2,447 3,176 Extraordinary gain on redemption of debentures -0- -0- -0- 351 Net income (loss) $(14,418) $ 603 $2,447 $ 3,527 ======= ======= ======= ======= Per share data: Primary Average common and common equivalent shares outstanding 18,221 18,191 18,212 18,214 ======= ======= ======= ======= Income (loss) from operations $(0.79) $0.03 $0.13 $0.17 Extraordinary item -0- -0- -0- 0.02 ------- ------- ------- ------- Net income (loss) $(0.79) $0.03 $0.13 $0.19 ======= ======= ======= ======= Fully diluted Average common and common equivalent shares outstanding 18,221 18,191 18,212 18,214 ======= ======= ======= ======= Income (loss) from operations $(0.79) $ 0.03 $ 0.13 $ 0.17 Extraordinary item -0- -0- -0- 0.02 ------- ------- ------- ------- Net income (loss) $(0.79) $ 0.03 $ 0.13 $ 0.19 ======= ======= ======= ======= Dividends declared $ 0.09 $ 0.09 $ 0.09 $ 0.09 ======= ======= ======= ======= Stock prices (a) High $13 $12 1/4 $12 1/4 $11 3/8 Low 10 1/4 10 1/8 11 7 1/2 Close 10 3/8 11 11 1/4 8 3/8 F-38 Three Months Ended, March 31, June 30, September 30, December 31, 1993 1993 1993 1993 (in thousands, except per share data) Net premiums earned $ 53,760 $ 56,722 $ 59,847 $ 65,722 Net investment income 10,032 10,866 10,893 10,253 Net realized investment gains 3,328 2,029 2,068 5,505 Total revenues 67,120 69,617 72,808 81,480 Total expenses 55,516 62,452 66,428 71,718 Income from operations 8,773 5,873 5,808 7,474 Cumulative effect of accounting changes (2,600) -0- -0- -0- Net income $ 6,173 $ 5,873 $ 5,808 $ 7,474 ======= ======= ======= ======= Per share data: Primary Average common and common equivalent shares outstanding 18,494 18,472 18,425 18,309 ======= ======= ======= ======= Income from operations $ 0.47 $ 0.32 $ 0.32 $ 0.41 Cumulative effect of accounting changes (0.14) -0- -0- -0- ------- ------- ------- ------- Net income $ 0.33 $ 0.32 $ 0.32 $ 0.41 ======= ======= ======= ======= Fully diluted Average common and common equivalent shares outstanding 18,494 18,472 21,819 21,679 ======= ======= ======= ======= Income from operations $ 0.47 $ 0.32 $ 0.30 $ 0.38 Cumulative effect of accounting changes (0.14) -0- -0- -0- ------- ------- ------- ------- Net income $ 0.33 $ 0.32 $ 0.30 $ 0.38 ======= ======= ======= ======= Dividends declared $ 0.08 $ 0.08 $ 0.08 $ 0.08 ======= ======= ======= ======= Stock prices (a) High $20 3/4 $19 3/4 $16 7/8 $16 3/4 Low 17 16 1/8 14 7/8 12 3/8 Close 19 3/4 16 3/4 16 3/4 13 (a) High, low and closing sales price per share per NYSE composite tape.
F-39 (18) SUBSEQUENT EVENTS The Company believes that its potential for losses from January 17, 1995 Nambu-Jishin earthquake in Kobe, Japan is limited since foreign writings represent an insignificant portion of its portfolio. On March 3, 1995 the Company entered into a lease for office space for its New York headquarters. The term of the lease is approximately 16 years with aggregate minimum rental payments of approximately $30 million. F-40 SCHEDULE I SCOR U.S. CORPORATION SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 1994 (in thousands) Amount at Which Amortized Market Shown on Cost Value Balance Sheet Type of investment Fixed Maturities: United States Government and government agencies and authorities $201,735 $188,953 $189,724 States, municipalities and political subdivisions 254,196 241,782 241,782 Foreign Governments 14,664 14,809 14,635 Convertibles and bonds with warrants attached -0- -0- -0- All other corporate bonds 114,321 108,432 108,432 Redeemable preferred stocks 34,746 31,954 31,954 ------- ------- ------- Total fixed maturities 619,662 585,930 586,527 ------- ------- ------- Equity securities: Common stocks 225 476 476 Non-redeemable preferred stocks 1,672 1,262 1,262 ------- ------- ------- Total equity securities 1,897 1,738 1,738 ------- ------- ------- Short-term investments 83,303 83,303 83,303 Other long-term investments 1,225 1,225 1,225 ------- ------- ------- Total investments $706,087 $672,196 $672,793 ======== ======== ======== S-1 SCHEDULE II SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (In thousands) December 31, 1994 1993 ----------------- ASSETS Investment in subsidiaries and affiliates $297,772 $348,232 Fixed maturities, available for sale 20,156 18,811 Short-term investments, at cost 10,256 18,957 Other long-term investments 1,225 1,081 Cash 512 1,645 Receivables from subsidiaries and affiliates 8,847 6,335 Other assets 23,029 19,816 ------- -------- $361,797 $414,877 ======= ======== LIABILITIES Convertible subordinated debentures $82,350 $86,250 Notes payable 20,000 20,000 Commercial paper 11,310 10,721 Other liabilities 8,742 7,217 ------- -------- 122,402 124,188 ------- -------- STOCKHOLDERS' EQUITY Preferred stock, no par value, 5,000 shares authorized; no shares issued -0- -0- Common stock, $.30 par value, 50,000 shares authorized; 18,356 and 18,299 shares issued 5,507 5,490 Additional paid-in capital 114,556 112,670 Unrealized appreciation (depreciation) of investments, net of deferred tax effect (21,640) 16,634 Foreign currency translation adjustment (414) 12 Retained earnings 143,153 157,532 Treasury stock, at cost (192 and 190 shares) (1,767) (1,649) ------- -------- 239,395 290,689 ------- -------- $361,797 $414,877 ======= ======== S-2 SCHEDULE II (CONTINUED) SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS (In thousands) Year Ended December 31, 1994 1993 1992 Revenues: Net investment income $1,682 $1,569 $ 753 Net realized investment gains (losses) 324 236 (2) ------- ------- ------- 2,006 1,805 751 ------- ------- ------- Expenses: Other operating expenses 2,977 8,495 8,824 Interest expense 7,038 5,815 2,824 ------- ------- ------- 10,015 14,310 11,648 ------- ------- ------- Loss from operations before Federal income tax benefits and equity in income of subsidiaries and affiliate (8,009) (12,505) (10,897) Federal income tax benefit (2,992) (4,377) (3,520) ------- ------- ------- (5,017) (8,128) (7,377) Equity in income (loss) of subsidiaries and affiliate (3,175) 36,056 11,778 ------- ------- ------- Income (loss) from operations (8,192) 27,928 4,401 Extraordinary gain on redemption of debentures, net of tax 351 -0- -0- Cumulative effect of accounting changes -0- (2,600) 2,848 ------- ------- ------- Net income (loss) ($7,841) $25,328 $7,249 ======= ======= ======= S-3
SCHEDULE II (CONTINUED) SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 1994 1993 1992 Cash flows from operating activities: Net income (loss) ($7,841) $25,328 $ 7,249 Cumulative effect of accounting changes -0- 2,600 (2,848) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Equity in (income) loss of subsidiaries and affiliate 3,175 (36,056) (11,778) Accrued investment income (136) (173) (79) Dividends received from subsidiaries 11,900 23,650 12,000 Federal income taxes (1,156) (2,683) (208) Other (7,851) 3,479 (971) ------- ------- ------- Net cash provided by (used in) operating activities (1,909) 16,145 3,365 ------ ------ ------- Cash flows from investing activities: Sales, maturities or redemptions of fixed maturities 3,655 2,841 999 Sales of equity securities -0- 30 -0- Net sales (purchases) of short-term investments 9,078 (18,232) 9,961 Investments in fixed maturities (2,857) (15,343) (5,560) Investments in equity securities -0- -0- (21) Acquisitions, net of cash acquired -0- -0- (896) Investment in affiliate -0- (50,000) (9,900) Other (4,125) (9,371) (3,508) ------- ------- ------- Net cash provided by (used in) investing activities 5,751 (90,075) (8,925) ------- ------- -------
S-4
SCHEDULE II (CONTINUED) SCOR U.S. CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 1994 1993 1992 Cash flows from financing activities: Dividends paid (6,538) (5,798) (5,033) Proceeds from issuance of convertible subordinated debentures -0- 85,172 -0- Proceeds from issuance of commercial paper - net 30 96 10,247 Repayment of notes payable -0- (8,000) -0- Proceeds from stock options exercised 1,533 967 364 Other -0- -0- (4) ------- ------- ------- Net cash provided by (used in) financing activities (4,975) 72,437 5,574 ------- ------- ------- Net increase (decrease) in cash (1,133) (1,493) 14 Cash at beginning of year 1,645 3,138 3,124 ------- ------- ------- Cash at end of year $ 512 $ 1,645 $ 3,138 ======= ======== ========
S-5
SCHEDULE IV SCOR U.S. CORPORATION REINSURANCE (in thousands) Percent Ceded to Assumed of amount Gross other from other Net assumed to amount companies companies amount net ------ --------- ---------- ------ ---------- December 31, 1994 ----------------- Premiums written $13,667 $75,732 $293,125 $231,060 126.9% December 31, 1993 ----------------- Premiums written $11,972 $89,106 $322,547 $245,413 131.4% December 31, 1992 ----------------- Premiums written $4,922 $99,285 $299,906 $205,543 145.9%
S-6 SCHEDULE VI SCOR U.S. CORPORATION SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (In thousands) Claims and Claims Expenses Incurred Related to -------------------------- Paid Current Prior Claims Year Years Net ------- ----- ------ Consolidated subsidiaries: Year ended December 31, 1994 $193,587 $(2,317) $149,521 Year ended December 31, 1993 $160,695 $(4,403) $157,088 Year ended December 31, 1992 $165,468 $(4,923) $143,500 S-7 INDEX TO EXHIBITS Exhibit Number Exhibit ------ ------- 3(a) Certificate of Incorporation of SCOR U.S. (Incorporated by reference to Exhibit 3(a) to Registration Statement on Form S-1, File No. 33-7695). 3(b)* Bylaws of SCOR U.S. (Adopted September 6, 1986, as amended March 17, 1988, March 16, 1989, September 26, 1989, June 26, 1990, June 11, 1992 and June 16, 1994) 4(a) Form of Common Stock Certificate (Incorporated by reference to Exhibit 4 to Registration Statement on Form S-1, File No. 33-7695). 4(b) Indenture, dated as of March 15, 1993 between SCOR U.S. Corporation and The Bank of New York, related to the 5.25% Convertible Subordinated Debentures due April 1, 2000 (Incorporated by reference to Exhibit 4(b) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993). 9(a) SCOR Reinsurance Company 1994 Voting Trust Agreement, dated as of June 6, 1994 among SCOR Reinsurance Company, SCOR U.S. Corporation and the Voting Trustees designated therein. (Incorporated by reference to Exhibit 9(c) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1993). 10(a)+ 1986 Stock Incentive Plan for Key Executives of SCOR U.S. (adopted July 10, 1986, as amended March 25, 1994). (Incorporated by reference to Exhibit 10(a) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(b) Amended Service Agreement dated as of June 11, 1992 between SCOR U.S. and SCOR S.A. (Incorporated by reference to Exhibit 10(i) to the Company's Annual Report on Form 10-K for the period ended December 31, 1992). 10(c)+ Employment Agreement dated as of February 27, 1989 between SCOR Re and Jerome Karter (amended March 14, 1991)(Incorporated by reference to Exhibit 10(m) to the Company's Annual Report on Form 10K for the year ended December 31, 1989). 10(d)+ Employment Agreement dated as of November 13, 1989 between SCOR U.S. and John T. Andrews, Jr (Incorporated by reference to Exhibit 10(n) to the Company's Annual Report on Form 10-K for the year ended December 31,1989). * Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). EXHIBIT NUMBER EXHIBIT ------- ------- 10(e) Agreement and Plan of Merger dated as of March 6, 1990, among SCOR U.S., Rockleigh Management Corporation, SCOR Paris, and UAP Reassurances (Incorporated by reference to Exhibit 10(q) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990). 10(f)* Net Aggregate Excess of Loss Retrocessional Agreement, dated July 3, 1990, between SCOR Re and SCOR S.A. (amended August 21, 1992 and May 6, 1994). 10(g)* Expense Allocation Agreement dated as of January 1, 1991, among SCOR U.S., SCOR Re, and other named subsidiaries (as amended December 10, 1992, May 5, 1994 and January 6, 1995). 10(h)* Amended Consolidated Federal Income Tax Liability Allocation Agreement dated as of December 10, 1992, among SCOR U.S., SCOR Re, and other named subsidiaries (amended May 5, 1994). 10(i) SCOR U.S. Performance Incentive Plan (Incorporated by reference to Exhibit 10(r) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1991). 10(j)*+ SCOR U.S. 1991 Stock Option Plan for Key Employees (amended March 25, 1994 and September 30, 1994). 10(k)+ SCOR U.S. 1990 Stock Option Plan for Directors (adopted September 19, 1990 and amended June 16, 1994 by vote of the stockholders). (Incorporated by reference from Exhibit 10(t) to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 1994). 10(l) Pooling Agreement dated as of April 23, 1991 among SCOR Re, General Security Insurance Corporation, General Security Indemnity Company and The Unity Fire and General Insurance Company, as amended by the Amendment to the Pooling Agreement dated as of June 10, 1993, effective as of July 1, 1993. (Incorporated by reference to Exhibit 10(w) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(m)+ SCOR U.S. Group Pension Plan. (Incorporated by reference from Exhibit 10(x) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(n)+ SCOR U.S. Group Savings Plan.(Incorporated by reference from Exhibit 10(y) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). * Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). EXHIBIT NUMBER EXHIBIT ------- ------- 10(o)+ SCOR U.S. Group Supplemental Retirement Plan.(Incorporated by reference from Exhibit 10(z) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(p)+ SCOR U.S. Annual Incentive Plan for 1994.(Incorporated by reference from Exhibit (10aa) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(q) Second Net Aggregate Excess of Loss Retrocessional Agreement, effective as of January 1, 1994, between SCOR Re and SCOR S.A. (Incorporated by reference from Exhibit 10(bb) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(r)+ Special Severance and Pension Benefits Agreement dated as of October 25, 1993 between SCOR U.S. and Jeffrey D. Cropsey. (Incorporated by reference from Exhibit 10(cc) to the Company's Annual Report on Form 10-K for the period ended December 31, 1993). 10(s)*+ Employment Agreement dated July 25, 1994 between SCOR Re and John D. Dunn, Jr. 10(t)* Investment Advisory Agreement between New England Asset Management Firm and SCOR Re dated March 1, 1995. 10(u)* Agreement of Lease between The Port Authority of New York and New Jersey and SCOR U.S. dated January 10, 1995. 11* Statement on computation of per share earnings. 12* Computation of Ratio of Consolidated Earnings to Fixed Charges 18 Letter regarding Change in Accounting Principles (Incorporated by reference to Exhibit 18 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 1992). 21* Subsidiaries of SCOR U.S. 24* Consent of Independent Public Accountants. 25* Power of Attorney. 29* Information from reports furnished to state insurance regulatory authorities (Schedule P) Submitted as a paper filing under Form SE in accordance with rule 311(c) of Regulation S-T. *Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c). EX-3 2 EXHIBIT 3(b) Adopted: September 6, 1986 Amended: March 17, 1988 Amended: March 16, 1989 Amended: September 26, 1989 Amended: June 26, 1990 Amended: June 11, 1992 Amended: June 16, 1994 BY LAWS OF SCOR U.S. CORPORATION ARTICLE I Stockholders SECTION 1. Annual Meeting. The annual meeting of the stockholders of SCOR U.S. Corporation (the "Corporation") shall be held on a day and at a place and time set by the Board of Directors sometime during the calendar year or as to the Board of Directors. Any business may be transacted at an annual meeting, except as otherwise provided by law or by these by-laws. SECTION 2. Special Meeting. A special meeting of stockholders may be called upon the request of the Chairman of the Board or the Board of Directors, who shall convene the stockholders at a meeting to be held at the principal office of the Corporation or such place and time as may be designated in the notice of meeting. SECTION 3. Notice. The President or Secretary of the Corporation shall notify each stockholder of the date of the annual or special meetings at least ten (10) days in advance thereof by depositing in any post office in the United States, such notice properly directed to the person for whom it is intended at the last post office address shown on the Corporation's record of stockholders. Any stockholder who wishes to conduct business which has not been brought before a stockholder's meeting by or at the direction of the Board of Directors must give prior written notice to the Secretary of the intention to bring such business before the meeting. In all cases, to be timely, notice must be received by the Corporation not less than 70 days nor more than 90 days prior to the meeting (or if fewer than 80 days' notice or prior public disclosure of the meeting date is given or made to stockholders, not later than the tenth day following the day on which the notice of the date of the meeting was mailed or such public disclosure was made). Any stockholder who wishes to nominate any person for the position of director shall provide notice in a similarly timely manner. Such notice shall contain certain information about that person, including age, business and residence addresses, principal occupation, the class and number of shares of the corporation beneficially owned and such other information as would be required to be included in a proxy statement soliciting proxies for the election of the proposed nominee, and certain information about the stockholder proposing to nominate that person. SECTION 4. Quorum. Except as otherwise provided by law, a quorum at all meetings of stockholders shall consist of the holders of record of at least a majority in value of the shares entitled to vote thereat, present in person or by proxy. SECTION 5. Record Date. The record date for determining stockholders qualified to vote at any annual or special meeting of stockholders shall be the date on which the notice of meeting is mailed to stockholders, except in those cases where the Board of Directors shall (a) order the stock transfer books be closed for a stated period preceding the meeting, or (b) fix a date as the record date for such determination of stockholders qualified. SECTION 6. Proxies. At all meetings of stockholders, a stockholder may vote either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney-in- fact. Such proxies shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless expressly provided therein to be irrevocable and in no event shall it remain irrevocable for a period of more than eleven (11) months. SECTION 7. Meetings. Stockholder meetings shall be presided over by the Chairman of the Board, or, if he is not present, a Vice Chairman, or, if a Vice Chairman is not present, the President of the Corporation shall preside. In the absence of such persons, the stockholders entitled to vote at the meeting present in person or by proxy, shall elect a chairman to preside at the meeting. SECTION 8. Voting of Shares. Each outstanding share entitled to vote upon a matter submitted to a vote at a meeting of stockholders shall be entitled to one (1) vote on such matter, except as may otherwise be specified in the Articles of Incorporation of the Corporation. Cumulative voting by stockholders for directors is prohibited. ARTICLE II Board of Directors SECTION 1. Number and Term of Office. The business and property of the Corporation shall be managed and controlled by the Board of Directors, and subject to the restrictions imposed by law, by the Certificate of Incorporation, or by these by-laws, it may exercise all the powers of the Corporation. The Board of Directors shall consist of not fewer than three (3) members, and shall be divided into three classes, in 2 which membership shall be as equal in number as possible. The number of directors may be increased or decreased (provided such decrease does not shorten the term of any incumbent director) from time to time by a majority vote of the Board of Directors. Each director shall hold office for the term for which he is elected and until his successor shall have been elected and qualified. Terms of directors shall be staggered by class, with classes being elected for successive terms, so that a different class of directors shall be elected at each election. Directors need not be stockholders, and they need not be residents of Delaware. Any director may be removed from office by an affirmative vote of two-thirds of the stockholders entitled to vote for election of directors at any meeting at which a quorum of stockholders is present. Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office. No individual shall be elected or re-elected as a member of the Board of Directors subsequent to his/her attaining the age of seventy-two (72). SECTION 2. Meetings of Directors. The directors may hold their meetings and have an office and keep books of the Corporation, except as otherwise provided by statute, in such place or places as the Board of Directors may from time to time determine. The directors shall keep a full and correct record of their transactions to be open during business hours to the inspection of stockholders and others interested therein. Directors may receive a fee for their service as directors, and, in addition, by resolution of the Board, a fixed fee and expense reimbursement may be allowed for attendance at such regular or special meetings of the Board or any committee thereof; provided that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. SECTION 3. Regular Meetings. In addition to the annual meeting of the Board of Directors, at least three (3) regular meetings shall be held in each year at the time and place designated by the Chairman of the Board for the purpose of transacting any business within the powers of the Board of Directors. Notice of such regular meeting or meetings shall be given as provided herein, but failure to give notice of any regular meeting shall not invalidate the meeting or any of the proceedings thereat. SECTION 4. Special Meeting. Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board or the President, whenever he deems it necessary or whenever requested to do so in writing or by a quorum of the Board. 3 SECTION 5. Notice. The Secretary shall give notice of each regular and special meeting upon giving at least five (5), but no more than thirty (30) days notice before such meeting to each director. In case of a special meeting the purpose of such meeting shall be specified in the notice and only such specified business shall be transacted at the meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of business on the grounds that the meeting was not lawfully called or convened. SECTION 6. Quorum. A majority of the directors in office shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there be less than a quorum present, a majority of those present or any directors solely present may adjourn the meeting from time to time without further notice. The act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the Board of Directors, unless the act of a greater the number is required by the articles of incorporation or by these by-laws. SECTION 7. Election of Officers. At each annual meeting of the Board of Directors, said Board shall convene for the purpose of organization and the transaction of business, if a quorum be present, and shall proceed to electing such officers as are provided for in Article 3, Section 1. SECTION 8. Presiding Officers and Secretary. At meetings of the Board of Directors, the Chairman of the Board shall preside, and in the absence of the Chairman of the Board, a Vice Chairman shall preside, and in the absence of all such persons, a chairman shall be chosen by the Board from among the directors present. The Secretary of the Corporation shall act as secretary of all meetings of the Board of Directors, but in the absence of the Secretary, the Presiding Officer may appoint any person to act as secretary of the meeting. SECTION 9. Payment of Dividends. Subject always to the provisions of law and the Certificate of Incorporation, the Board of Directors shall have full power to determine whether any, and if so, what part, of the funds legally available for the payment of dividends shall be declared in dividends and paid to the stockholders of the Corporation in cash or property. Record dates for determining the eligibility of stock to participate in any cash or stock dividend shall be set by the directors. SECTION 10. Executive Committee. The Board of Directors of the Corporation, by resolution passed by a majority of the Board of Directors, may designate from among its members three (3) or more directors to constitute an Executive Committee, which Committee, except insofar as limited by law or further limited by resolution of the Board of Directors, shall have and may exercise all of the authority of the Board of Directors; provided, however, that no person shall be elected a Senior Officer of the Corporation by the Executive Committee unless such 4 person is first nominated for office by the Chairman or the President. Two (2) members of the Executive Committee shall constitute a quorum. Regular meetings of the Executive Committee shall be held at such times and places as the committee may determine and no notice of such meetings shall be necessary. Special meetings of the Executive Committee shall be called by the Secretary whenever the Chairman of the Executive Committee shall so request, and may be called at any time by any member of the Committee. Reasonable notice shall be given of such meetings, but the action of a majority of the Executive Committee, at any meeting at which a quorum is present shall be valid, notwithstanding any defect in the notice for such meeting. SECTION 11. Finance Committee. The Board of Directors of the Corporation, by resolution passed by a majority of the Board of Directors, may elect three (3) or more Directors, among whom shall be the Chairman of the Board of Directors and the President to constitute a Finance Committee, which committee, except insofar as further limited by the resolution of the Board of Directors or by law, shall have and may exercise the following powers: (1) Supervise the investment program as directed by the Board of Directors. (2) Provide advice to the Board of Directors of Scor Reinsurance Corporation concerning Scor Re's investment decisions. (3) Designate by appropriate resolution the officers who shall be authorized and empowered to buy, sell and/or exchange any stock and/or bonds and/or any other securities or commercial paper now owned by or that may hereafter be acquired by this Corporation and to make, execute and deliver, in the name of this Corporation as its act and deed and under its corporate seal, any and all written instruments necessary and proper to carry into effect any and all such purchases, exchanges and/or sales. The Chairman of the Board of Directors shall be the ex- officio Chairman of the Finance Committee; in case of his absence from any meeting of the Committee, the President shall preside; in case of the absence of the named Officers, a Chairman may be chosen by the Committee to preside. Two (2) members of the Finance Committee shall constitute a quorum. Regular meetings of the Committee shall be held at such times and places as the Committee shall determine and no notice of such meetings shall be necessary. Special meetings shall be called by the Secretary whenever the Chairman of the Finance Committee shall so request, and may be called at any time by any member of the Committee. Reasonable notice shall be given of such meetings, but the action of a majority at any meeting at which a quorum is present shall be valid, notwithstanding any defect in the notice for such meeting. 5 SECTION 12. Audit Committee. The Board of Directors of the Corporation, by resolution passed by a majority of the Board of Directors, may elect three (3) or more directors to constitute an Audit Committee, which committee, except insofar as further limited by the resolution of the Board of Directors or by law, shall have and may exercise the following powers: (1) Supervise the audits to be conducted by the Corporation's independent certified public accounting firm. (2) Periodically review the Corporation's policies and practices and make recommendations to the Board of Directors and the management of the Corporation. Two (2) members of the Audit Committee shall constitute a quorum. Regular meetings of the Audit Committee shall be held at such times and places as the committee shall be held at such times and places as the committee may determine and no notice of such meetings shall be necessary. Special meetings of the Audit Committee shall be called by the Secretary whenever the Chairman of the Audit Committee shall so request, and may be called at any time by any member of the Committee. Reasonable notice shall be given of such meetings, but the action of a majority of the Audit Committee at any meeting at which a quorum is present shall be valid, notwithstanding any defect in the notice for such meeting. SECTION 13. Compensation Committee. The Board of Directors of the Corporation, by resolution passed by a majority of the Board of Directors, may elect three (3) or more directors to constitute a Compensation Committee, which committee, except insofar as further limited by the resolution of the Board of Directors or by law, shall have and may exercise the following powers: (1) Administer the Corporation's stock option plans, including, but not limited to, the granting of options and the entering into of option agreements pursuant thereto. (2) Review and approve the compensation of all individuals at or to be elected to Vice President rank or above and/or who have current or proposed salary of $100,000 or above. (3) Review the employee benefit programs of the Corporation and its subsidiaries. (4) Recommend to the Board of Directors of the Corporation as to changes in, or establishment of, incentive plans, thrift plans and retirement and deferred compensation plans for the employees of the Corporation and its subsidiaries. (5) Recommend to the Board of Directors as to reasonable compensation of Directors for service to the Company. 6 Two (2) members of the Compensation Committee shall constitute a quorum. Regular meetings of the Compensation Committee shall be held at such times and places as the Committee may determine and no notice of such meetings shall be necessary. Special meetings of the Compensation Committee shall be called by the Secretary whenever the Chairman of the Compensation Committee shall so request, and may be called at any time by any member of the Committee. Reasonable notice shall be given of such meetings, but the action of a majority of the Compensation Committee at any meeting at which a quorum is present shall be valid, notwithstanding any defect in the notice for such meeting. ARTICLE III Officers SECTION 1. Number, Titles and Term of Office. The Officers of the Corporation shall be a Chairman of the Board, two Vice Chairman of the Board, a President, and Executive Vice President, a Secretary, a Treasurer, and such other officers as the Board of Directors may from time to time elect or appoint (such as Executive Vice Presidents, Senior Vice Presidents, Assistant Secretaries, Assistant Treasurers, etc.). Each officer shall hold office for the term for which he is elected and until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in manner hereinafter provided. Any two (2) or more offices may be held by the same person, except that the President shall not hold the office of Secretary. The Chairman of the Board of Directors and the President shall be directors, but none of the other officers need be a Director. SECTION 2. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment and the best interest of the Corporation will be served thereby; provided, however, that no director can be removed from his position as a director except as provided for in Article II, Section 1. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. SECTION 3. Vacancies. Any vacancy in the office of any officer may be filled by vote of a majority of the Board of Directors. SECTION 4. Powers and Duties of the Chairman of the Board. The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors and have such other powers and duties as may be assigned to him by the Board of Directors. SECTION 5. Powers and Duties of the Vice Chairmen of the Board. Each Vice Chairman shall, in the absence of the Chairman of the Board of Directors, or at the direction of the Board of Directors or its Chairman, serve as the Chairman of the 7 Board of Directors, with all of the powers and duties that attache thereto, a provided in Section 4. SECTION 6. Powers and Duties of the President. The President shall be the Chief Executive Officer of the corporation and, subject to the guidance and direction of the Board of Directors, shall be primarily responsible for determining Corporation policy and shall have general charge of the business of the Corporation and control of its affairs; in the absence of the Chairman of the Board and a Vice Chairman he shall preside at all meetings of the stockholders and of the Board of Directors; shall have authority to execute all legal instruments necessary for the transaction of the Corporation's business, he may sign all certificates for shares of capital stock of the Corporation make reports to the stockholders and the Board of Directors; act as ex-officio member of all committees unless otherwise directed by the Board of Directors; prescribe duties for officers and employees which are not otherwise defined in the by-laws or by the Board of Directors, including the power to employ and discharge such employees as may be necessary for the proper conduct of the business of the corporation, and may delegate such powers with such restrictions as he may deem proper to the other officers to the extent that such powers affect the performance of the officers' duties in their respective departments. He shall also have such other powers and duties as may be assigned to him by the Board of Directors. SECTION 7. Powers and Duties of the Vice President. Each Vice President shall have such powers and duties as may be assigned to him by the Board of Directors and shall exercise the powers of the President during the officer's absence or inability to act. Any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. SECTION 8. Powers and Duties of the Treasurer. The Treasurer shall have custody to all the funds and securities of the corporation which come into his hands. When necessary or proper he may endorse, on behalf of the Corporation, for collection, checks, notes and other obligations and shall deposit the same to the credit of the Corporation in such bank or banks or depositories as shall be designated in the manner prescribed by the Board of Directors; he may sign all receipts and vouchers for payments made to the Corporation, either alone or jointly with such other officer as is designated by the Board of Directors. Whenever required by the Board of Directors, he shall render a statement of his cash accounts; he shall enter all costs to be entered regularly in the books of the Corporation to be kept by him for that purpose for an accurate account of all moneys received and paid on account of the Corporation; he shall perform all acts incident to the position of Treasurer subject to the control of the Board of Directors. SECTION 9. Powers and Duties of the Secretary. The Secretary shall attend all meetings of the stockholders, the Board of Directors and the Executive Committee, and shall prepare and maintain as permanent records the minutes of all such 8 meetings. he shall attend to the giving and serving of all notices; he may sign with the President the name of the Corporation on contracts of the corporation and affix the seal of the Corporation thereto; he shall direct the issuance of insurance policies and the collection of premiums thereon; he may sign with the President all certificates for shares of the capital stock of the Corporation; he shall have charge of the certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct all of which shall at all reasonable times be open to inspection of any Director upon application to the office of the Corporation during business hours; and he shall in general perform all duties incident to the office of Secretary, subject to the control of the Board of Directors. SECTION 10. Other Duties of Officers. The officers of the Corporation shall perform such other and further duties in addition to those specifically named as may from time to time be required of them by the Chairman of the Board, President, Vice President or Board of Directors. SECTION 11. Absence or Disability of Officers. In case of the absence or disability of any officer of the Corporation and of any person hereby authorized to act in this place during such period of absence or disability, the Board of Directors may from time to time delegate the powers and the duties of such officer to any other officer, or any director, or any other person whom it may select. SECTION 12. Compensation of Officers and Employees. The compensation of all officers under contract with the Corporation shall be fixed by the Board of Directors. Unless otherwise provided by law, the compensation of all employees shall be fixed by the President. ARTICLE IV Indemnification Provisions SECTION 1. Indemnification. Each director and each officer or former director or officer of this Corporation or each person who may have served at its request as a director or officer of another Corporation in which it owned shares of capital stock or of which it is a creditor, may be indemnified by the Corporation against liabilities imposed upon him and expenses reasonably incurred by him in connection with any claim made against him, or any action, suit or proceeding to which he may be a party by reason of his being, or having been such director or officer, and against such sums as independent counsel selected by the Board of Directors shall deem reasonable payment made in settlement of any such claim, action, suit or proceeding primarily with a view of avoiding expenses of litigation; provided, however, that no director or officer shall be indemnified with respect to matters as to which he shaLl be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in performance of duty, or with respect to any matters which such indemnification would be against public 9 policy. Such indemnification shall be in addition to any other rights to which directors or officers may be entitled. SECTION 2. Fiduciary Duty. No director shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except that this provision shaLl not eliminate the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of Title 8 of the Delaware code, or (iv) for any transaction from which the director derived an improper personal benefit. ARTICLE V Capital Stock SECTION 1. Certificate of Shares. The certificates for shares of the capital stock of the Corporation shall be in such form and shall be approved by the Board of Directors. The certificates shall be signed by the President or any Vice President and also by the Secretary or the Treasurer and may be sealed with the seal of this Corporation or a facsimile thereof. Where any such certificate is countersigned by a Transfer Agent or registered by a Registrar, either of which is other than the Corporation itself or an employee of the Corporation, the signatures of any such President or Vice President and Secretary or Treasurer may be facsimiles. They shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. SECTION 2. Transfer of Shares. The shares of stock of the Corporation shall be transferable only on the books of the Corp[oration by the holders thereof in person or by the duly authorized attorneys or legal representatives, upon surrender and cancellation of certificates for a like number of shares. The person surrendering the said certificates, in the absence of notice to the contrary, shall be conclusively presumed to be the owner thereof; and after the transfer and delivery of new certificate or certificates the title of the holder thereof shall not be subject to question against the Corporation by any previous holder thereof. SECTION 3. Regulations. The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration or the replacement of certificates for shares of the capital stock of the Corporation. ARTICLE VI Miscellaneous Provisions 10 SECTION 1. Voting Securities Held by the Corporation. Unless ordered by the Board of Directors, the President shall have full power and authority on behalf of the Corporation to attend, to act, and to vote for whatever management suggests is its position in the proxy material at any meeting of security holders of other corporations in which the Corporation may hold securities, except in the case of securities of corporations controlled by the Corporation, in which case the Board of Directors shall exercise any and all rights and powers incident to the ownership of such securities which the Corporation might have possessed and exercised if it had been present. The Board of Directors may, from time to time, confer like powers upon any other person or persons. SECTION 2. Appointment of Attorneys-In-Fact. The President may, from time to time. appoint by written certificates attorneys-in-fact to act on behalf of the Corporation in the execution of policies of insurance, bonds, undertakings, and other obligatory instruments of like nature. Such attorneys-in- fact, subject to the limitations set forth in their respective certificates of authority, shall have full power to bind the Corporation by their signature and execution of any such instruments and to attach the seal of the Corporation thereto. The President, any Vice President or the Board of Directors may at any time revoke all power and authority previously given to any attorney-in-fact. SECTION 3. Resolutions. Every resolution heretofore or hereafter passed by the Board of Directors or stockholders of this Corporation with reference to any of the several matters in each respectively set forth, when to inconsistent with these by- laws or subsequent resolution of the Board of Directors, shall remain in full force and effect until repealed, modified, amended, or changed by a subsequent resolution or a subsequent amendment to these by-laws. SECTION 4. Fiscal Year. The fiscal year of the Corporation shall be from January 1 through December 31 of each year. SECTION 5. Seal. The seal of the Corporation shall be such as from time to time may b approved by the Board of Directors. The Secretary shall have custody of the corporate seal and shall affix the same to all instruments requiring it. SECTION 6. Notice and Waiver of Notice. Whenever any notice whatever is required to be given under the provisions of these by-laws, said notice shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed, postpaid wrapper addressed to the person entitled thereto at this post office address, as it appears on the books of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. A waiver of notice, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 11 ARTICLE VII Amendments These by-laws may be altered, amended or repealed, except as provided in Article II, Section 1, by the affirmative vote of the holders of a majority of the outstanding stock at any annual meeting, or at any special meeting if notice of the proposed amendment be contained in the notice of such special meeting, or by the affirmative vote of a quorum of Board of Directors at any regular or special meeting, provided notice of said proposed amendment be contained in the notice of meeting. 12 EX-10 3 EXHIBIT 10(f) NET AGGREGATE EXCESS OF LOSS RETROCESSIONAL AGREEMENT NO. between GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK New York, New York (hereinafter referred to as General Security) and SCOR S.A. Paris, France (hereinafter referred to as the "Reinsurer") Reinsurer's Reference No. RETROCESSIONAL AGREEMENT NO. INDEX ARTICLE SUBJECT PAGE I SCOPE OF AGREEMENT 3 II DEFINITIONS 3 A. Aggregate Deductible 3 B. All Business Underwritten 3 C. Ultimate Net Losses 3 D. Net Ultimate Incurred Losses 4 E. Loss Adjustment Expenses 4 F. Extra Contractual Obligations 4 III REINSURANCE PROVIDED 5 IV CONDITIONS 5 A. Errors and Omissions B. Right of Offset 5 C. Currency 5 D. Territory 6 E. Taxes 6 F. Access to Records 6 G. Federal Excise Tax 6 V PREMIUM AND COMMISSION 6 VI REPORTS AND REMITTANCES 6 VII LETTERS OF CREDIT 7 VIII LOSS SETTLEMENTS 8 IX ARBITRATION 9 X INSOLVENCY 10 XI SERVICE OF SUIT 11 XII COMMENCEMENT AND TERMINATION 11 XIII EXTENSION 11 B. RETROCESSIONAL AGREEMENT ARTICLE I - SCOPE OF AGREEMENT General Security will cede to the Reinsurer and the Reinsurer will accept as reinsurance from General Security all business defined as "All Business Underwritten". ARTICLE II - DEFINITIONS A. Aggregate Deductible - The term "Aggregate Deductible" shall mean Forty Seven Million, Four Hundred Ninety Two Thousand, Six Hundred and Six Dollars ($47,492,606) which is the sum of; 1. Twenty Million, Five Hundred Fifty One Thousand, Two Hundred Seventy Eight Dollars ($20,551,278) which is the amount of net outstanding loss and loss adjustment expense reserves of General Security at December 31, 1989 for all accident years 1989 and prior as documented in its 1989 Statutory Annual Statement; and 2. Twenty Six Million Nine Hundred Forty One Thousand, Three Hundred Twenty Eight Dollars ($26,941,328), which is the amount of net incurred but not reported losses of General Security at December 31, 1989 for all accident years 1989 and prior as documented in its 1989 Statutory Annual Statement. B. All Business Underwritten - The term "All Business Underwritten" shall mean all insurance and reinsurance business underwritten by General Security for all accident years 1989 and prior. C. Ultimate Net Losses - The term "Ultimate Net Losses" shall mean all payments made by General Security commencing January 1, 1990 with respect to "All Business Underwritten" in the settlement or satisfaction of claims, losses, suits or proceedings within the terms and amounts of the insurance policies issued by and agreements covering reinsurance assumed by General Security after making deductions for all salvages or reinsurances, whether collectible or not. "Ultimate Net Losses" shall include: (i) interest accrued prior to judgement where such interest is part of a judgement; (ii) loss adjustment expenses as defined below in Article II, subparagraph E; and (iii) extra contractual expenses as defined below in Article II, subparagraph F. D. Net Ultimate Incurred Losses: The term "Net Ultimate Incurred Losses" shall initially mean General Security's: (i) net losses including net "Loss Adjustment Expenses"; plus (ii) net incurred but not reported losses; outstanding on January 1, 1990 with respect to "All Business Underwritten," after making deductions for all salvages and amounts paid or due from all other insurances or reinsurances, whether collectible or not. "Net Ultimate Incurred Losses" shall include "Ultimate Net Losses." "Net Ultimate Incurred Losses" shall be reestimated as of the last day of each calendar quarter as provided in Article VI. E. Loss Adjustment Expenses: The term "Loss Adjustment Expenses" shall mean all net expenditures made by General Security including without limit taxed court costs, statutory penalties and interest accrued after judgment which are incurred in connection with the settlement, satisfaction, or defense of a claim, loss, suit or proceeding, excluding General Security's office expenses and salaries and expenses of its employees. F. Extra Contractual Obligations: The term "Extra Contractual Obligations" shall mean those liabilities not covered under any other provision of this Agreement and which arise from handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to the following: failure by General Security to settle within the policy or reinsurance contract limit, or by reason of alleged or actual negligence, in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of any appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by General Security shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence, giving rise to such obligation. ARTICLE III - REINSURANCE PROVIDED This is a Net Aggregate Excess of Loss Agreement issued to General Security by the Reinsurer covering the "Ultimate Net Losses" and "Net Ultimate Incurred Losses" arising from "All Business Underwritten" by General Security. The Reinsurer shall be liable, as provided below in Article VI and VII, for the amount by which General Security's "Net Ultimate Incurred Losses" or "Ultimate Net Losses" from January 1, 1990 to termination or extinction for "All Business Underwritten" exceed the "Aggregate Deductible". The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of General Security to collect from any other reinsurers, whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. ARTICLE IV - CONDITIONS A. Errors and Omissions: Inadvertent errors or omissions made by General Security in reporting any claim or loss under any business reinsured under this Agreement shall neither increase nor reduce the liability of the Reinsurer from what that liability would have been had no such error or omission taken place, provided that as soon as General Security has notice thereof General Security shall correct such error or omission retroactively to the time such error or omission occurred and advise the Reinsurer. B. Right of Offset: General Security or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvages or any other amount due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between General Security and the Reinsurer or its predecessor whether acting as assuming reinsurer or as retrocessionaire. If General Security becomes insolvent, this provision shall be modified in accordance with the provisions of ARTICLE X - INSOLVENCY and with Section 7427 of the New York Insurance Laws. C. Currency: Premiums or losses payable under this Agreement shall be in United States Dollars. D. Territory: This Agreement applies to all business of General Security written worldwide. E. Taxes: General Security shall not be liable for paying any taxes that the Reinsurer would be obligated to pay arising specifically from this Agreement. F. Access to Records: The Reinsurer or its authorized representative shall have the right to inspect at any reasonable time, all papers, books, accounts, documents, claims files and other records of General Security relating to the business reinsured under this Agreement. The Reinsurer's right of inspection shall continue to exist after the termination of this Agreement. G. Federal Excise Tax: As the present treaty will be retained on a pure net basis by the Reinsurer, no Federal Excise Tax will be payable as French reinsurers are exempt from Federal Excise Tax in accordance with the Tax Treaty between France and the United States. The Reinsurer will provide on demand any required proof that the present treaty is not retroceded by the Reinsurer. ARTICLE V - PREMIUM AND COMMISSION General Security shall pay to the Reinsurer an annual flat premium of One Hundred Seven Thousand and One Hundred Dollars (($107,100) commencing on January 1, 1990, and continuing annually through December 31, 2004. The annual premium shall be due in advance on January 1 of each year. The commission allowed by the Reinsurer to General Security under this Agreement shall be NIL. ARTICLE VI - REPORTS AND REMITTANCES General Security shall furnish quarterly to the Reinsurer, in such manner as is acceptable to General Security and the Reinsurer as statement, within forty-five (45) days after the close of each quarter showing, as of the last day of the quarter: 1. The amount of the "Aggregate Deductible"; 2. The amount of the "Ultimate Net Losses" paid by General Security during such quarter and a reestimation of "Net Ultimate Incurred Losses" as of the last day of the quarter and, 3. The change, if any, during the quarter in the "Ultimate Net Losses" and "Net Ultimate Incurred Losses" since the last quarterly report. If the "Ultimate Net Losses" do not exceed the "Aggregate Deductible", no payments are due under this Agreement. If at the close of any quarter, the "Ultimate Net Losses" exceed the "Aggregate Deductible" for the first time, the Reinsurer will remit payment, in cash of an amount equal to the excess of "Ultimate Net Losses" over the "Aggregate Deductible". Thereafter, the Reinsurer will remit payment, in cash, for the increase, if any, in the "Ultimate Net Losses" since the last report. Any payments due under this paragraph will be made within thirty (30) days after receipt of the quarterly report. At the Reinsurer's request, General Security's evaluation of "Ultimate Net Losses" and/or "Net Ultimate Incurred Losses" will be reviewed by an independent actuary mutually agreed upon the parties, as soon as possible after the Reinsurer's request. If such actuary disagrees with General Security's evaluation and such disagreements are not promptly resolved with General Security, the calculation of "Ultimate Net Losses" and/or "Net Ultimate Incurred Losses" by such actuary shall be final and binding on both General Security and the Reinsurer and not subject to arbitration as provided in Article IX. Remittance by General Security or the Reinsurer of any amounts due based upon such analysis will be made within thirty (30) days after the written determination of the independent actuary is delivered to the parties. ARTICLE VII - LETTERS OF CREDIT If the "Net Ultimate Incurred Losses" exceed the "Aggregate Deductible", at the end of any quarter, the Reinsurer shall provide General Security with a Letter of Credit for the difference between the "Net Ultimate Incurred Losses" and the "Aggregate Deductible", less any payments made to General Security by the Reinsurer for "Ultimate Net Losses" as provided in Article VI. The Reinsurer shall provide and maintain such Letter of Credit in any amount sufficient to allow General Security in its quarterly and annual financial statements to take full credit for reinsurance ceded under this Agreement in full compliance with applicable laws and regulations. The Letter of Credit fees shall be paid by the Reinsurer. At its option, the Reinsurer may substitute for the Letter of Credit a trust agreement or any cash or cash equivalent that satisfies applicable credit for reinsurance laws and regulations. Any Letter of Credit required under this paragraph will be issued within thirty (30) days after the receipt of the quarterly report. Reinsurer and General Security agree that any letter of credit provided by the Reinsurer may be drawn upon at any time, notwithstanding any other provisions in the Reinsurance Agreement, and be utilized by General Security or any successor by operation of law of General Security including, without limitation, any liquidator, rehabilitator, receiver or conservator of General Security for the following purposes: (i) to reimburse General Security for the Reinsurer's share of premiums returned to the owners of policies reinsured under this Agreement on account of cancellations of such policies; (ii) to reimburse General Security for the Reinsurer's share of surrenders and benefits or losses paid by General Security under the terms and provisions of the policies reinsured under this Agreement; (iii) to fund an account with General Security in an amount at least equal to the deduction, for reinsurance ceded, form General Security's liabilities for policies ceded under this Agreement. Such amount shall include, but not be limited to, amounts for policy reserves, reserves for claims and losses incurred (including losses incurred but not reported), loss adjustment expenses, and unearned premiums; and (iv) to pay any other amount General Security claims are due under this Agreement: All of the foregoing shall be applied without diminution because of insolvency on the part of General Security or the Reinsurer. Any Letter of Credit required under this paragraph will be issued within thirty (30) days after receipt of the quarterly report. ARTICLE VIII - LOSS SETTLEMENTS The Reinsurer agrees to abide by the loss settlements of General Security, it being understood, however, that when so requested, General Security will afford the Reinsurer an opportunity to be associated with General Security, at the expense of the Reinsurer, in the defense of any claim or suit or proceeding involving this reinsurance, and that General Security will cooperate in every respect in the defense or control of such claim, suit, or proceeding. ARTICLE IX - ARBITRATION All unresolved differences of opinion between General Security and the Reinsurer relating to this Agreement, including its formation and validity, whether arising during or after the period of this Agreement, shall be submitted to arbitration, except any differences of opinion with respect to the calculation of "Ultimate Net Losses" or "Net Ultimate Incurred Losses", which shall be resolved by the independent actuary as provided in Article VI and Article XIII. The Board of Arbitration (hereinafter, the "Board") shall consist of one arbitrator chosen by General Security, one arbitrator to be chosen by the Reinsurer, and a third arbitrator to be chosen as promptly as possible by the two arbitrators. The party demanding arbitration shall communicate its demand therefor, identifying the nature of the dispute and the name of the arbitrator to the other, and the latter shall then be bound to name its arbitrator within thirty days after receipt of the demand. Failure or refusal to do so shall empower the demanding party to name the second arbitrator as well. If the two arbitrators are unable to agree upon a third arbitrator within thirty days after the second arbitrator is named, each arbitrator shall name three candidates within ten days thereafter, two of whom shall be declined by the other arbitrator within fifteen days after receiving their names, and the choice shall be made immediately between the two remaining candidates by the party demanding arbitration drawing lots. The arbitrators shall be impartial and shall be present or former officials of insurance or reinsurance companies. The Board shall have the power to fix all procedural rules for the holding of the arbitration, including discretionary power to make orders as to any matters which it may consider proper in the circumstances of the case with regard to pleading, discovery, inspection of documents, examination of witnesses, and any other matter whatsoever relating to the conduct of the arbitration. The Board shall have the power to receive and act upon such evidence, whether oral or written, strictly admissible or not, as it shall in its discretion think fit. It is expressly agreed that the jurisdiction of the Board to make or render any decision or award shall be limited by the limits of liability expressly set forth in this Agreement, and that the Board shall have no jurisdiction to make any decision or render any award exceeding such expressly stated liability limit of the parties under this Agreement. The decision of the majority of the Board shall be in writing and shall be final and binding upon the parties. If either of the parties fails to comply with this decision, the other party may apply for its enforcement to a court of competent jurisdiction in which the party in default is domiciled, or has assets, or carries on business. Each party shall bear the cost of its own arbitrator and shall jointly and equally bear with the other party the expense of the third arbitrator. The remaining costs of the arbitration proceeding shall be allocated by the Board. The arbitration shall be held in New York, New York at the times and places agreed upon by the Board. The laws of the State of New York shall govern the arbitration. ARTICLE X - INSOLVENCY In the event of the insolvency of General Security, claims under this Agreement shall be payable by the Reinsurer directly to such insolvent insured or its liquidator, receiver or statutory successor without diminution because of such insolvency. The Reinsurer shall be given written notice of the pendency of each claim which may involve the reinsurance afforded by this Agreement within a reasonable time after such claim is filed in the insolvency proceeding. The Reinsurer shall have the right to investigate each such claim and interpose, at its own expense, in the proceeding where the claim is to be adjudicated, any defense which it may deem available to General Security or its liquidator, receiver or statutory successor. A proportionate share of the expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent General Security as part of the expense of liquidation to the extent of the benefit accruing to such insolvent insurer solely as a result of the defense undertaken by Reinsurer. The reinsurance shall be payable by the Reinsurer to General Security or to its liquidator, receiver, conservator or statutory successor, except as provided by Section 4118 (a) of the New York Insurance Law or except (a) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of General Security, and (b) where the Reinsurer with the consent of the direct insured or insureds have assumed such policy obligations of General Security as direct obligations of the Reinsurer to the payee under such policies and in substitution of the obligations of General Security to such payees. ARTICLE XI - SERVICE OF SUIT In the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder, the Reinsurer at the request of General Security will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court. ARTICLE XII - COMMENCEMENT AND TERMINATION This Agreement shall commence at 12:01 AM Eastern Standard Time on January 1, 1990 and, subject to General Security's right to extend this Agreement as provided in Article XIII - EXTENSION below, shall expire at Midnight, December 31, 2004 unless, prior to such date, this Agreement has terminated due to the ultimate extinction, via final payment, of all "Ultimate Net Loss". ARTICLE XIII - EXTENSION General Security shall have the right, at its sole option, to continue this Agreement beyond December 31, 2004 by requesting same, in writing, prior to the termination of this Agreement. Any such continuation of this Agreement shall be upon such terms and conditions, including provisions for any additional premium, or return premium, as General Security and the Reinsurer may agree. Any dispute between General Security and the Reinsurer with respect to the amount of the "Net Ultimate Incurred Losses" or "Ultimate Net Losses" which serves as the basis of any additional premium or return premium, shall be resolved by the independent actuary, as provided in Article VI. IN WITNESS, WHEREBY, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives. In New York, New York, this 3rd day of July, 1990 ATTEST: GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK John T. Andrews By: Rene Daniel Brooks In Paris, France, this day of , 19 ATTEST: SCOR S.A. Patrick Peugeot AMENDMENT NO. 1 TO NET AGGREGATE EXCESS OF LOSS RETROCESSIONAL AGREEMENT NO. between GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK New York, New York (hereinafter referred to as General Security) and SCOR S.A. Paris, France (hereinafter referred to as the "Reinsurer") Reinsurer's Reference No. This Amendment No. 1 to the Net Aggregate Excess of Loss Retrocessional Agreement between General Security Assurance Corporation of New York ("General Security") and SCOR S.A. ("Reinsurer"), dated July 3, 1990 ("Net XOL Agreement") is made and entered into this day of , 1992. WHEREAS, effective January 1, 1991 General Security assumed from its wholly-owned subsidiary, The Unity Fire and General Insurance Company ("Unity"), all of Unity's outstanding liabilities for business written on or before December 31, 1990; WHEREAS, Reinsurer reinsures Unity for business written on or before January 1, 1990 under a Net Aggregate Excess of Loss Retrocessional Agreement dated July 3rd, 1990 ("Unity Agreement"); WHEREAS, Unity has assigned, and Reinsurer has consented to the assignment, to General Security of all of Unity's rights, benefits and obligations under the Unity Agreement; WHEREAS, the New York State Department of Insurance ("Department") has directed General Security to amend the Net XOL Agreement in order to comply with 11NYCRR Chapter IV-D Part 112; and, WHEREAS, General Security and Reinsurer intend to terminate the Unity Agreement and desire to amend the Net XOL Agreement to incorporate the coverage provided under the Unity Agreement and to affect the changes required by the Department. NOW, THEREFORE, in consideration for the covenants and promises set forth herein, and other good and valuable consideration, the parties hereto mutually agree as follows: 1. That Article II - Definitions, subparagraphs A. and B. shall be amended to and shall read as follows: "ARTICLE II" - DEFINITIONS A. Aggregate Deductible - The term "Aggregate Deductible shall mean Ninety Three Million, Eight Hundred Twenty Nine Thousand Six Hundred and Six Dollars ($93,829,606) which is the sum of: 1. Forty Nine Million, Six Hundred Eighteen Thousand and Seventy Eight Dollars ($49,618,078) which is the amount of net outstanding loss and loss adjustment expense reserves of General Security and Unity at December 31, 1989 for all accident years 1989 and prior as documented in the 1989 Statutory Annual Statements of General Security and Unity; and, 2. Forty Four Million, Two Hundred Eleven Thousand Five Hundred and Twenty Eight Dollars ($44,211,528) which is the amount of net incurred but not reported losses of General Security and Unity at December 31, 1989 for all accident years 1989 and prior as documented in the 1989 Statutory Annual Statements of General Security and Unity. B. All Business Underwritten - The term "All Business Underwritten" shall mean all business underwritten by General Security for all accident years 1989 and prior, and all business assumed by General Security from Unity which was underwritten by Unity for all accident years 1989 and prior." 2. That Article V - Premium and Commission be amended to and shall read as follows: "ARTICLE V - PREMIUM AND COMMISSION As premium for the reinsurance provided hereunder General Security shall pay to the Reinsurer an annual flat premium of Two Hundred and Ten Thousand Dollars ($210,000), payable on January 1 of each year until and including January 1, 2004. The commission allowed by the Reinsurer to General Security under this Agreement shall be NIL." 3. That ARTICLE XII - COMMENCEMENT AND TERMINATION be amended to and shall read as follows: "ARTICLE XII - COMMENCEMENT AND TERMINATION This Agreement shall commence at 12:01 AM Eastern Standard Time on January 1, 1990 and shall terminate at the ultimate extinction via final payment of all "Ultimate Net Losses," unless commuted as provided in Article XIII or, in the event of the insolvency of General Security, unless cancelled by the Superintendent of Insurance, acting as its rehabilitator, liquidator, receiver, conservator or statutory successor." 4. That Article XIII - Extension be deleted in its entirety and be replaced with a new Article XIII - Commutation which shall read as follows: "ARTICLE XIII - COMMUTATION In the event General Security desires to terminate this Net XOL Agreement at December 31 of any year and finally determine and settle all liabilities and obligations of Reinsurer hereunder, General Security shall submit to Reinsurer on or before November 15 of that year a notice of its intent to terminate and a statement showing the "Net Ultimate Incurred Losses" for "All Business Underwritten" as the end of the immediately preceding calendar quarter; such statement shall show the elements considered reasonable to establish the "Net Ultimate Incurred Losses" ("Preliminary Statement"). Reinsurer shall indicate in writing its acceptance of the Preliminary Statement within thirty (30) days from the date of the Preliminary Statement. If Reinsurer accepts the Preliminary Statement, General Security shall submit to Reinsurer within sixty (60) days from the end of the calendar year a final statement showing the "Net Ultimate Incurred Losses" as of December 31 ("Final Statement") and the Reinsurer shall pay the amount set forth in the Final Statement. If Reinsurer does not agree with the calculation set forth in the Preliminary Statement, Reinsurer shall have the right to have the "Net Ultimate Incurred Losses" determined by an independent actuary or appraiser. Within fifteen (15) days from the date of the Preliminary Statement Reinsurer shall notify General Security of its rejection of the Preliminary Statement and its request for an independent actuarial determination of the "Net Ultimate Incurred Losses" ("Rejection Notice"). Upon receipt of the Rejection Notice General Security and the Reinsurer shall mutually appoint any independent actuary or appraiser to investigate and determine such losses as of December 31. The determination in writing of the actuary shall be filed with the parties hereto on or before the immediately succeeding March 1 and shall be final and binding on both parties. The Reinsurer shall pay the amount so determined to be the value of such losses within fifteen (15) days from the date of the final actuarial determination. The actuary shall be regularly engaged in the valuation of casualty claims and shall be a Fellow of the Casualty Actuarial Society or of the American Academy of Actuaries, and shall not be under the control or be an affiliate of either party to this Net XOL Agreement. The expense of the actuary shall be equally divided between the two parties." IN WITNESS WHEREBY, the parties hereto have caused this Amendment No. 1 to be executed in duplicate by their duly authorized representatives. In New York, New York, this 21st day of August, 1992 ATTEST: GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK BY: Maxine H. Verne John T. Andrews, Jr. In Paris, France, this 18th day of September, 1992 ATTEST: SCOR S.A. BY: ---------------- Jacques Blondeau AMENDMENT NO. 2 TO NET AGGREGATE EXCESS OF LOSS RETROCESSIONAL AGREEMENT NO. between GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK New York, New York (hereinafter referred to as General Security) and SCOR S.A. Paris, France (hereinafter referred to as the "Reinsurer") Reinsurer's Reference No. This Amendment No. 2 to the Net Aggregate Excess of Loss Retrocessional Agreement between General Security Assurance Corporation of New York ("General Security") and SCOR S.A. ("Reinsurer"), dated July 3, 1990 ("Net XOL Agreement") is made and entered into this 6th day of May, 1994. WHEREAS, effective January 1, 1994 General Security was merged with and into SCOR Re; WHEREAS, pursuant to the terms of the Plan and Agreement of Merger between General Security and SCOR Re, dated January 8, 1993 ("Merger Agreement"), SCOR Re assumed all of General Security's outstanding obligations and liabilities, including liabilities for business written on or before December 31, 1990; WHEREAS, Reinsurer reinsures General Security for business written on or before January 1, 1990 under a Net Aggregate Excess of Loss Retrocessional Agreement dated July 3, 1990 (" GS Agreement"); WHEREAS, by operation of law, all of General Security's rights, benefits and obligations under the GS Agreement were transferred to and assumed by SCOR Re; WHEREAS, the parties desire to amend the GS Agreement to reflect the merger of General Security into SCOR Re and to properly identify the parties. NOW, THEREFORE, in consideration for the covenants and promises set forth herein, and other good and valuable consideration, the parties hereto mutually agree as follows: 1. That any and all references in the Agreement to General Security Assurance Corporation of New York shall be amended to SCOR Reinsurance Company. 2. That any and all references to the defined term "General Security" shall be amended to "SCOR Re". 3. That Article XIII - Commutation be deleted in its entirety. IN WITNESS WHEREBY, the parties hereto have caused this Amendment No. 2 to be executed in duplicate by their duly authorized representatives. In New York, New York, this 6th day of May, 1994 ATTEST: GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK Maxine H. Verne BY: Sylvain R. Boueil In New York, New York, this 5th day of May, 1994 ATTEST: SCOR S.A. --------------------- BY: Jacques Blondeau EX-10 4 EXHIBIT 10(g) EXPENSE ALLOCATION AGREEMENT Agreement entered into as of the 1st day of January 1991 by and between SCOR U.S. Corporation, a Delaware corporation ("SCOR U.S."), Scor Reinsurance Company, a New York domestic reinsurer ("Scor Re"), Scor Services, Inc., a Delaware corporation, ("SSI"), Bind, Inc., a Texas domestic reinsurance intermediary ("Bind"), The Unity Fire and General Insurance Company, a New York domestic reinsurer ("Unity"), and General Security Assurance Corporation of New York, a New York domestic reinsurer ("General Security"). WHEREAS, on July 3, 1990, Rockleigh Management Corporation ("Rockleigh") was merged into SCOR U.S.; and WHEREAS, prior to such merger, Rockleigh owned 100% of the stock of Unity and General Security; and WHEREAS, prior to such merger, SCOR U.S. owned 100% of the stock of Scor Re; and WHEREAS, as a result of such merger, SCOR U.S. now owns 100% of the stock of each of Scor Re, Unity and General Security; and WHEREAS, SSI is a wholly-owned subsidiary of SCOR U.S. and Bind is a wholly-owned subsidiary of SSI; and WHEREAS, there is currently an Expense Allocation Agreement between SCOR U.S. and Scor Re, and WHEREAS, SCOR U.S. now desires to include SSI and Bind under its Expense Allocation Agreement; and WHEREAS, there is currently an Expense Allocation Agreement between SCOR U.S., (as successor to Rockleigh) and Unity and General Security; and WHEREAS, SCOR U.S., Scor Re, SSI, Bind, Unity and General Security (collectively referred to as the "Companies") desire to enter into one agreement providing for the exchange of services between each other; and WHEREAS, the Companies are willing to reimburse each other for their allocated share of such services; NOW, THEREFORE, the Companies in consideration of the mutual premises contained herein, hereby agree as follows: 1.a. The Companies agree that their personnel, including officers, will act for and on behalf of the other parties on an as needed basis in the same capacity as they act for and on behalf of each such company, subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties to this Agreement. b. SCOR U.S., Scor Re, and Unity (Bind, General Security and SSI having no employees of their own) agree to make their employees available to each other to act for and on behalf of the Companies subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties to this Agreement. c. Services to be provided by such personnel and employees will include those indicated on Exhibit I annexed hereto and made a part hereof and such other services as may be necessary and proper to conduct the business and operations of the Companies. 2. The Companies each mutually agree to reimburse the other for the costs and expenses incurred in providing all services rendered pursuant to this Agreement and in accordance with Section 1505(a) of the New York Insurance Law. 3. The total costs and expenses for the services provided will be allocated to the Companies based on actual costs and utilizing the applicable bases. Such bases will include, but are not limited to, time records, base compensation, head count, direct costs for compensation and benefits of employees of each of the Companies, rent, leasehold improvements, floor space, fixed assets, property taxes, disk storage space and the actual number of terminals and workstations. Such costs and expense shall be allocatedon an equitable basis in conformity with customary insurance accounting practices, however, in no event will such allocations exceed the costs and expenses each of the Companies would have incurred in providing the services individually. 4. Specifically, compensation for services rendered by the Companies shall be based on the following: a. for personnel - such personnel's monthly compensation, including salary, payroll taxes, social security taxes and fringe benefits based on the time spent rendering such services. b. for office space - the pro rata share of the actual monthly charges for the space based on actual square footage, property taxes, fixed assets and utilities usage. c. for data processing - actual costs based on the number of workstations and terminals and disc storage space. 5. SCOR U.S. will prepare and deliver to each of the Companies within 30 days from the end of each month a monthly statement of the services provided, the allocation of costs and expenses related thereto for each of the Companies and the amounts due from any of the Companies to another, and the companies will remit any amounts due not later than 45 days after the end of the month. All statements rendered to the Companies shall be accompanied by sufficient documentation to meet the requirements of Section 1217 of the New York Insurance Law. The basis for such cost expense reimbursement shall be reviewed on a quarterly basis in accordance with review procedures established by the audit committees of the Board of Directors of the Companies, and the results of such reviews shall be reported to the Board of Directors. 6.a. The parties hereto agree to keep records, in such format as is in compliance with new York Insurance Department Regulation No. 30 (11 NYCRR Parts 105-109) and as may be mutually agreed upon, of all time spent and actual costs and expenses incurred in providing the services pursuant to this Agreement. b. The separate books, accounts and records of each party to this Agreement shall be so maintained as to clearly and accurately disclose the nature and details of each transaction undertaken, including such accounting information as is necessary to support the reasonableness of the reimbursements made hereunder, and shall be sufficient detail to meet the requirements of statutory examinations conducted by the New York Insurance Department. c. The Companies will have the right to audit and review such books, accounts and records at any time upon reasonable notice and during regular business hours. Upon completion of such review, the allocations may, if necessary, be revised to satisfy the requirements of Section 1505(a) of the New York Insurance Law and New York Insurance Department Regulation No.30 (11 NYCRR Parts 105-109). 7. All books and records established by the Companies in connection with the providing of services and office space, as provided for under this Agreement shall at all times, remain the property of the company establishing such records. 8. The parties agree that each may, at any time, demand and receive copies of any and all documents, materials, papers, books and records of any kind, pertaining to the services pursuant to this Agreement. If any regulatory body shall request any records or data of any kind relating to either of the parties under this Agreement, the parties agree that such shall be made available. 9. All books, records, files, securities and other documents of the Companies shall be separately kept and maintained for each individual company; and each company shall be managed as to maintain their separate operating identities. 10. Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in New York City in accordance with the rules then obtaining of the American Arbitration Association, and judgment upon the award rendered may be entered in any court having competent jurisdiction. 11. This Agreement shall remain in effect with respect to each party until terminated by any party by giving at least 30 days prior written notice mailed to the other parties by certified or registered mail, return receipt requested, upon expiration of such notice period this Agreement will terminate with respect to the party giving such notice. 12. This Agreement may not be assigned by any party without the prior written consent of the other parties hereto and the Superintendent of Insurance of the State of New York. 13. Any amendment or modification of this Agreement shall be in writing, signed by the parties and no such amendment or modification shall be executed without the prior approval of the Superintendent of Insurance of the State of New York. 14. All of the terms of this Agreement, whether so expressed or not, shall be binding upon the respective personal representatives, successors and assigns of the parties hereof and shall inure to the benefit of and be enforceable by the parties hereto and their respective personal representatives, successors and assigns. 15. All of the terms, provisions and conditions of this Agreement shall be construed according to the laws of the State of New York. 16. If any provision of this Agreement shall be held invalid or in conflict with the laws of any state, this Agreement shall be deemed amended to comply with the minimum requirements of such laws without affecting the remaining provisions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be affixed hereto on the dates executed as indicated below. SCOR U.S. CORPORATION By: Jerome Karter Executive Vice President Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) SCOR REINSURANCE COMPANY By: John T. Andrews, Jr. Senior Vice President, General Counsel and Secretary Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) THE UNITY FIRE AND GENERAL INSURANCE COMPANY By: John T. Andrews, Jr. Senior Vice President, General Counsel and Secretary Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK By: John T. Andrews, Jr. Senior Vice President, General Counsel and Secretary Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) BIND, INC. By: John T. Andrews, Jr. Senior Vice President, General Counsel and Secretary Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) SCOR SERVICES, INC. By: John T. Andrews, Jr. Senior Vice President, General Counsel and Secretary Date: ATTEST: Maxine H. Verne Vice President, Associate General Counsel and Assistant Secretary (SEAL) Exhibit I Services Services Provided by To --------------------------------------------------------- Accounting/ SCOR U.S. Bind Financial Management General Security Scor Re SSI Unity Scor Re General Security Unity Unity Scor Re -------------------------------------------------------- Actuarial SCOR U.S. General Security Scor Re Unity -------------------------------------------------------- Claims Scor Re General Security Unity Unity Scor Re Data Processing Scor Re Bind General Security SCOR U.S. SSI Unity Unity Scor Re ------------------------------------------------------------ Human Resources SCOR U.S. Bind General Security Scor Re SSI Unity ------------------------------------------------------------ Investment Management SCOR U.S. Bind General Security Scor Re SSI Unity Services Provided by To -------------------------------------------------------------------- Legal SCOR U.S. Bind General Security Scor Re SSI Unity ------------------------------------------------------------------ Services Provided by To --------------------------------------------------------- Marketing SCOR U.S. Bind General Security Scor Re SSI Unity ------------------------------------------------------------------ Office Space Scor Re SCOR U.S. Treasury SCOR U.S. Bind General Security Scor Re SSI Unity EXHIBIT 10(g) AMENDMENT TO EXPENSE AGREEMENT This Amendment to Agreement made this 11th day of December, 1992, by and between SCOR U.S. Corporation ("SCOR U.S."); SCOR Reinsurance Company; SCOR Services, Inc.; Bind, Inc.; General Assurance Corporation of New York; The Unity Fire and General Insurance Company , NARG, Inc. (collectively, the "Companies") is intended to amend the Expense Allocation Agreement dated January 1, 1991, (" Agreement") between the above-named parties. WHEREAS, subsequent to the date of the Agreement, SCOR U.S. acquired all of the capital stock of Morgard, Inc. ("Morgard"), effective as of February 21, 1992; and WHEREAS, all of the oustanding capital stock of the International Insurance Company of Takoma Park, Maryland ("IIC"), was acquired by SCOR Reinsurance Company, a wholly-owned subsidiary of SCOR U.S., effective December 4, 1992; and WHEREAS, SCOR U.S., on the one hand, and Morgard and IIC, on the other hand, desire that Morgard and IIC each become a party to the Agreement, effective as of the respective dates of acquisition; and WHEREAS, SCOR U.S. on the one hand, and Southwest International Reinsurance Company ("SIRCO") a subsidiary of SCOR U.S., on the other hand, desire that SIRCO become a party to this Agreement effective January 1, 1993; and WHEREAS, the parties desire to amend the Agreement to reflect the aforesaid and to include Morgard, IIC and SIRCO as parties to the Agreement. NOW, THEREFORE, in consideration of the premises and covenants set forth herein, the parties hereto agree that the Agreement shall be amended as follows: 1. That, for the purposes of this Amendment to Agreement, the term "Companies" shall include Morgard, IIC and SIRCO effective as of February 21, 1992, December 4, 1992 and January 1, 1993 respectively. 2. That, for the purposes of this Amendment to Agreement, Section 1.b of the Agreement is hereby amended in its entirety to read as follows: "b. SCOR U.S., SCOR Re, General Security and Morgard, Inc. (Bind, Unity, SSI, IIC and SIRCO having no employees of their own), agree to make their employees available to each other to act for and on behalf of the Companies subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties to this Agreement." 3. That, for the purposes of this Amendment to Agreement, Exhibit I to the Agreement is hereby amended in its entirety to be substantially in the form attached hereto as Exhibit A. 4. That, aside from the foregoing, the Agreement shall continue to be binding upon the parties with regard to all the provisions contained therein. IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to Expense Agreement to be executed the day and year first- above written. SCOR U.S. CORPORATION Maxine H. Verne William K. Lowry, Jr. Assistant Secretary Senior Vice President SCOR REINSURANCE COMPANY Maxine H. Verne William K. Lowry, Jr. Assistant Secretary Senior Vice President SCOR SERVICES, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President BIND, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President MORGARD, INC. Mark A. Welshons Phillip L. Chapman Assistant Secretary President THE INTERNATIONAL INSURANCE COMPANY OF TAKOMA PARK, MARYLAND Mark A. Welshons John T. Andrews, Jr. Assistant Secretary Senior Vice President SOUTHWEST INTERNATIONAL REINSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President MORGARD, INC. Maxine H. Verne Richard T. Harris Assistant Secretary President Exhibit I Services Services Provided by To ----------------------------------------------------------- Investment Management SCOR U.S. Bind General Security SCOR Re SSI Unity Morgard IIC SIRCO ------------------------------------------------------------ Legal SCOR U.S. Bind General Security SCOR Re SSI Unity ` Morgard IIC SIRCO ------------------------------------------------------------ Marketing SCOR U.S. Bind General Security SCOR Re SSI Unity Morgard IIC SIRCO ------------------------------------------------------------ Office Space SCOR Re SCOR U.S. ------------------------------------------------------------ Treasury SCOR U.S. Bind General Security SCOR Re SSI Unity Morgard IIC SIRCO EXHIBIT 10(g) AMENDMENT NO. 2 TO EXPENSE AGREEMENT This Amendment No. 2 to Expense Allocation Agreement made this 5th day of May, 1994, by and between SCOR U.S. Corporation ("SCOR U.S."); SCOR Reinsurance Company; SCOR Services, Inc.; Bind, Inc.; California Reinsurance Management Corporation; The International Insurance Company of Takoma Park, Maryland, now known as General Security Insurance Company; Southwest International Reinsurance Company, now known as General Security Indemnity Company; The Unity Fire and General Insurance Company and NARG, Inc.(collectively, the "Companies") is intended to amend the Expense Allocation Agreement dated January 1, 1991, as amended December 11th, 1992 ("Amended Agreement") between the above-named parties. WHEREAS, effective January 1, 1994 General Security Assurance Corporation of New York ("GSANY"), an original party to the Amended Agreement, was merged with and into SCOR Reinsurance Company; and, WHEREAS, effective January 12, 1993 the charter of the International Insurance Company of Takoma Park, Maryland was amended to change the name of the company to General Security Insurance Company and such amendment was approved by and filed with the Commissioner of Insurance of the State of Maryland; and, WHEREAS, effective August 30, 1993 the charter of Southwest International Reinsurance Company was amended to change the name of the company to General Security Indemnity Company, which amendment was approved by and filed with the Superintendent of Insurance of the State of New York; and WHEREAS, SCOR U.S. and its subsidiary, California Reinsurance Management Corporation ("Cal Re"), each desire that Cal Re become a party to the Amended Agreement effective April 1, 1994; and WHEREAS, the parties now desire to amend the Amended Agreement to reflect the aforesaid and to include Cal Re, as a party to the Amended Agreement. NOW, THEREFORE, in consideration of the premises and covenants set forth herein, the parties hereto agree that the Amended Agreement shall be amended as follows: 4. That any and all references in the Amended Agreement to GSANY shall be deleted in their entirety; and, that any all references to International Insurance Company of Takoma Park, Maryland ("IIC") shall be changed to and shall read as General Security Insurance Company ("GSIC"); and that any and all references to Southwest International Reinsurance Company ("SIRCO") shall be changed to and shall read as General Security Indemnity Company ("GSInd"). 2. That effective April 1, 1994 the term "Companies" shall include Cal Re. 3. That Section 1.b. of the Amended Agreement is hereby amended in its entirety to read as follows: "b. SCOR U.S., SCOR Re, Cal Re and Morgard, Inc. (Bind, Unity, SSI, GSIC and GSInd having no employees of their own), agree to make their employees available to each other to act for and on behalf of the Companies subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties to this Agreement." 5. That Exhibit I to the Amended Agreement is hereby amended in its entirety to be substantially in the form attached hereto as Exhibit A. 6. That, aside from the foregoing, the Amended Agreement shall continue to be binding upon the parties with regard to all the provisions contained therein. IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. to Expense Agreement to be executed the day and year first-above written. SCOR U.S. CORPORATION Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR REINSURANCE COMPANY Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR SERVICES, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President BIND, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President MORGARD, INC. Mark A. Welshons Phillip L. Chapman Assistant Secretary President GENERAL SECURITY INSURANCE COMPANY Mark A. Welshons John T. Andrews, Jr. Assistant Secretary Senior Vice President GENERAL SECURITY INDEMNITY COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President Exhibit I Services Services Provided by To ------------------------------------------------------------ Accounting/ SCOR U.S. Bind Financial Management Cal Re GSIC Morgard GSInd SCOR Re SSI UCA Unity ------------------------------------------------------------ Actuarial SCOR U.S. GSIC GSInd SCOR Re Unity ------------------------------------------------------------ Claims SCOR Re Cal Re GSIC GSInd Unity ------------------------------------------------------------ Data Processing SCOR Re Bind GSIC GSInd SCOR U.S. SSI Unity ------------------------------------------------------------ Human Resources SCOR Re Bind Cal Re GSIC GSInd Morgard SCOR Re SSI ------------------------------------------------------------ Investment Management SCOR U.S. Bind Cal Re GSIC GSInd Morgard SCOR Re SSI Unity Services Services Provided by To ------------------------------------------------------------ Legal SCOR U.S. Bind Cal Re GSIC GSInd Morgard SCOR Re SSI Unity ------------------------------------------------------------ Marketing SCOR U.S. Bind GSIC GSInd Morgard SCOR Re SSI Unity ------------------------------------------------------------ Office Space SCOR Re SCOR U.S. ------------------------------------------------------------ Treasury SCOR U.S. Bind GSIC GSInd SCOR U.S. SSI Unity ------------------------------------------------------------ EXHIBIT 10(g) AMENDMENT NO. 3 TO EXPENSE AGREEMENT This Amendment No. 3 to Expense Allocation Agreement made this 6th day of January, 1995, by and between SCOR U.S. Corporation ("SCOR U.S."); SCOR Reinsurance Company; SCOR Services, Inc.; Bind, Inc.; California Reinsurance Management Corporation; The International Insurance Company of Takoma Park, Maryland, now known as General Security Insurance Company; Southwest International Reinsurance Company, now known as General Security Indemnity Company; The Unity Fire and General Insurance Company , NARG, Inc. and Unistrat Corporation of America (collectively, the "Companies") is intended to amend the Expense Allocation Agreement dated January 1, 1991, as amended December 11th, 1992 and May 5, 1994 ("Amended Agreement"). WHEREAS, effective January 1, 1995 SCOR U.S. intends to transfer all of its employees to SCOR Reinsurance Company and shall thereafter have no employees of its own; and, WHEREAS, Unistrat Corporation of America ("UCA") is an affiliate of SCOR U.S.; and, WHEREAS UCA is a managing general agent for certain subsidiaries of SCOR U.S.; and, WHEREAS, SCOR U.S. and UCA each desire that SCOR U.S. and its subsidiaries provide certain services to UCA pursuant to the Amended Agreement effective January 1, 1995; and WHEREAS, the parties now desire to amend the Amended Agreement to reflect the aforesaid and to include UCA, as a party to the Amended Agreement. NOW, THEREFORE, in consideration of the premises and covenants set forth herein, the parties hereto agree that the Amended Agreement shall be amended as follows: 1. That effective January 1, 1995 the term "Companies" shall include UCA. 3. That Section 1.b. of the Amended Agreement is hereby amended in its entirety to read as follows: "b. SCOR Re, Cal Re and Morgard, Inc. (SCOR U.S. Bind, Unity, SSI, GSIC and GSInd having no employees of their own), agree to make their employees available to each other to act for and on behalf of the Companies subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties; and agree to make clerical and administrative employees available to UCA, subject to the supervision, standards, and guidelines established by the Board of Directors of the respective parties hereto." 2. That Exhibit I to the Amended Agreement is hereby amended in its entirety to be substantially in the form attached hereto as Exhibit A. 3. That, aside from the foregoing, the Amended Agreement shall continue to be binding upon the parties with regard to all the provisions contained therein. IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. 3 to Expense Agreement to be executed the day and year first-above written. SCOR U.S. CORPORATION Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR REINSURANCE COMPANY Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR SERVICES, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President BIND, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President MORGARD, INC. Mark A. Welshons Phillip L. Chapman Assistant Secretary President GENERAL SECURITY INSURANCE COMPANY Mark A. Welshons John T. Andrews, Jr. Assistant Secretary Senior Vice President GENERAL SECURITY INDEMNITY COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President UNISTRAT CORPORATION OF AMERICA Secretary Senior Vice President Exhibit I Services Services Provided by To ------------------------------------------------------------ Accounting/ SCOR Re Bind Financial Management Cal Re GSIC Morgard GSInd SCOR U.S. SSI UCA Unity ------------------------------------------------------------ Actuarial SCOR Re GSIC GSInd Scor U.S. UCA Unity ------------------------------------------------------------ Claims SCOR Re Cal Re GSIC GSInd UCA Unity ------------------------------------------------------------ Data Processing SCOR Re Bind GSIC GSInd SCOR U.S. SSI UCA Unity ------------------------------------------------------------ Human Resources SCOR Re Bind Cal Re GSIC GSInd Morgard SCOR U.S. SSI UCA ------------------------------------------------------------ Investment Management SCOR Re Bind Cal Re GSIC GSInd Morgard SCOR U.S. SSI Unity UCA Services Services Provided by To ------------------------------------------------------------ Legal SCOR Re Bind Cal Re GSIC GSInd Morgard SCOR U.S. SSI Unity UCA ------------------------------------------------------------ Marketing SCOR Re Bind GSIC GSInd Morgard SCOR U.S. SSI Unity UCA ------------------------------------------------------------ Office Space SCOR U.S. Cal Re Morgard SCOR Re UCA ------------------------------------------------------------ Treasury SCOR Re Bind GSIC GSInd SCOR U.S. SSI UCA Unity ------------------------------------------------------------ EX-10 5 EXHIBIT 10(h) AMENDED CONSOLIDATED FEDERAL INCOME TAX LIABILITY ALLOCATION AGREEMENT between SCOR U.S. CORPORATION hereinafter call the "Parent Company," on the one part and SCOR REINSURANCE COMPANY, SCOR SERVICES, INC. BIND, INC. THE UNITY FIRE AND GENERAL INSURANCE COMPANY, GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK, NARG, INC. All six being subsidiaries of the Parent Company, hereinafter called individually the "Subsidiary" and collectively the "Subsidiaries," on the other part, WHEREAS, it appears that certain benefits might be derived jointly by the Parent Company and its Subsidiaries from the filing of consolidated federal income tax returns, as legally permitted under the Internal Revenue Code; and WHEREAS, each of the Subsidiaries agrees to be a party to the consolidated federal income tax agreement, and the Parent Company agrees to file the consolidated federal income tax return on behalf of the participating affiliated Group; NOW, THEREFORE, the parties upon their individual participation and effective with tax year 1990, hereto agree as follows: 1. Each Subsidiary will furnish all necessary information and data to the Parent Company so as to enable it to prepare and file consolidated federal income tax returns, as required under the Internal Revenue Code and the regulations of the Internal Revenue Service. 2. Each Subsidiary will provide the Parent Company with sufficient funds corresponding to its individual federal income tax liability, so as to enable the Parent Company to proceed to the payment of the consolidated income taxes as required under the Federal Tax Laws and Regulations. All settlements under this Agreement shall be made within 30 days of the filing of the applicable estimated or actual consolidated federal corporate income tax return with the Internal Revenue Service, except where a refund is due to Parent Company, in which case, it may defer payment to the Subsidiary to within 30 days of receipt of such refund. 3. The tax charge to any Subsidiary under this Agreement shall not be more than it would have paid if it had filed on a separate return basis. The Subsidiary shall be "paid" for any foreign tax credits, investment credits, losses or nay loss carry over (collectively herein referred to as "credits") generated by it, to the extent actually used in the consolidated return. Payment shall be equal to the "savings" generated by its credits. All payments shall be recorded on the Subsidiary's books as contributed surplus. 4. To help assure any Subsidiary's enforceable right to recoup federal income taxes in the event of future net losses an escrow consisting of assets eligible as an investment for such Subsidiary shall be established and maintained by the Parent Company in an amount equal to the excess of the amount paid by such Subsidiary to the Parent Company for federal taxes over the actual payment made by the Parent Company to the Internal Revenue Service. The escrow account shall be established at such time as the amount any Subsidiary pays the Parent Company for federal income taxes exceeds the actual amount of income taxes ICNA Holding pays to the Internal Revenue Service. Escrow Assets may be released to the Parent Company from the escrow account at such time as the permissible period for loss carrybacks has elapsed. The terms of the escrow account will be those set forth in the proposed Escrow Agreement attached hereto as Exhibit A. 5. Tax losses carried forward shall be treated in accordance with Generally Accepted Accounting Principles. 6. Adjustments shall be made if taxable income, special deductions or credits reported in a consolidated return are revised by the Internal Revenue Service, or other appropriate authority. 7. The Agreement may be terminated if: a. The parties hereto agree in writing to such termination; or b. membership in the affiliated Group ceases or is terminated for any reason whatsoever; or c. the affiliated Group fails to file a consolidated return for any taxable year. 8. Notwithstanding the termination of this Agreement, its provisions will remain in effect, with respect to any period of time during the tax year in which termination occurs, for which the income of the terminating party must be included in the consolidated return. 9. The Agreement shall not be assignable to any party without the prior written consent of the others. 10. Should any difference of opinion arise between or among any of the parties to this Agreement which cannot be resolved in the normal course of business with respect to the interpretation of this Agreement or the implementation of performance of the respective obligation of the parties under this Agreement, the difference shall be submitted to standard arbitration. 11. Notwithstanding the termination of this Agreement, all materials including, but not limited to, returns, supporting schedules, workpapers, correspondence and other documents relating to the consolidated return shall be made available to any party to the agreement during regular business hours. IN WITNESS THEREOF, the parties hereto, by their respective duly authorized officers, have executed this Agreement in quintuplicate at: New York, New York, this 19th day of September, 1990 SCOR U.S. CORPORATION Maxine H. Verne William K. Lowry, Jr. Assistant Secretary Sr. Vice President SCOR REINSURANCE COMPANY Maxine H. Verne William K. Lowry, Jr. Assistant Secretary Sr. Vice President SCOR SERVICES, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Sr. Vice President BIND, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Sr. Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Sr. Vice President GENERAL SECURITY ASSURANCE CORPORATION OF NEW YORK Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Sr. Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Sr. Vice President EXHIBIT 10(h) AMENDMENT No. 2 TO TAX AGREEMENT This Amendment No. 2 to Tax Agreement made this 5th day of May, 1994, by and between SCOR U.S. Corporation ("Parent Company") and SCOR Reinsurance Company; SCOR Services, Inc.; Bind, Inc.; California Reinsurance Management Company; General Security Insurance Company, formerly known as International Insurance Company of Takoma Park, Maryland; General Security Indemnity Company, formerly known as Southwest International Reinsurance Company; Morgard, Inc.; and The Unity Fire and General Insurance Company and NARG, Inc. (individually, a "Subsidiary" and collectively, the "Subsidiaries") is intended to amend an Amended Consolidated Federal Income Tax Liability Allocation Agreement dated May 2, 1991, ("Agreement") between the above-named parties. WHEREAS, effective August 30, 1993, the charter of Southwest International Reinsurance Company was amended to change the name of the company to General Security Indemnity Company ("GSInd"); WHEREAS, effective January 12, 1993, the charter of International Insurance Company of Takoma Park, Maryland was amended to change the name of the company to General Security Insurance Company ("GSIC"); and WHEREAS, effective January 1, 1994 General Security Assurance Corporation of New York ("GSANY"), an original party to the Agreement, was merged with and into SCOR Reinsurance Company; and WHEREAS, the parties desire to amend the Agreement to reflect the aforesaid events. NOW, THEREFORE, in consideration of the premises and covenants set forth herein, the parties hereto agree that the Agreement shall be amended as follows: i. That, the terms "Subsidiary" or "Subsidiaries" as defined in the Agreement shall not include GSANY and all references to GSANY shall be deleted in their entirety, effective as of January 1, 1994. ii. That, any and all references in the Agreement to (a) Southwest International Reinsurance Company ("SIRCO") shall be deleted and General Security Indemnity Company ("GSInd") shall be substituted in lieu thereof, and to (b) International Insurance Company of Takoma Park, Maryland shall be deleted and General Security Insurance Company ("GSIC") shall be substituted in lieu thereof. 3. That aside from the foregoing, the Agreement shall continue to be binding upon the parties with regard to all the provisions contained therein. IN WITNESS WHEREOF, the Parties hereto have caused this Amendment No. 2 to Tax Agreement to be executed the day and year first-above written. SCOR U.S. CORPORATION Maxine H. Verne Jeffrey D. Cropsey Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR REINSURANCE COMPANY Maxine H. Verne Jeffrey D. Cropsey Maxine H. Verne Jeffrey D. Cropsey Assistant Secretary Senior Vice President SCOR SERVICES, INC. Maxine H. Verne John T. Andrews, Jr. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President BIND, INC. Maxine H. Verne John T. Andrews, Jr. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President THE UNITY FIRE AND GENERAL INSURANCE COMPANY Maxine H. Verne John T. Andrews, Jr. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President NARG, INC. Maxine H. Verne John T. Andrews, Jr. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President GENERAL SECURITY INDEMNITY COMPANY Maxine H. Verne John T. Andrews, Jr. Maxine H. Verne John T. Andrews, Jr. Assistant Secretary Senior Vice President CALIFORNIA REINSURANCE MANAGEMENT CORPORATION Maxine H. Verne R. Daniel Brooks Maxine H. Verne R. Daniel Brooks Secretary President MORGARD, INC. Mark A. Welshons Phillip L. Chapman Mark A. Welshons Phillip L. Chapman Assistant Secretary President GENERAL SECURITY INSURANCE COMPANY Mark A. Welshons John T. Andrews, Jr. Mark A. Welshons John T. Andrews, Jr. Assistant Secretary Senior Vice President EX-10 6 EXHIBIT 10(j) Board Approval: March 14, 1991 Stockholder Approval: June 6, 1991 Amended: June 6, 1991 Amended: December 11, 1991 Amended: March 25, 1994 Amended: September 30, 1994 SCOR U.S. CORPORATION STOCK OPTION PLAN FOR KEY EMPLOYEES 1. Purpose of the Plan. The purpose of this Stock Option Plan (the "Plan") is to provide certain key employees of SCOR U.S. Corporation (the "Company") and its subsidiaries with an additional incentive to contribute to the success of the Company by enabling them to acquire an ownership stake in the Company. 2. Stock Subject to the Plan. The stock subject to the options and other provisions of the Plan shall be shares of the Company's common stock, par value .$30 per share (the "Common Stock"), which are authorized and unissued or issued shares of Common Stock which have been reacquired and held in its treasury. Except as provided in Section 9 hereof, the aggregate number of shares of Common Stock that may be purchased pursuant to stock options granted under the Plan shall not exceed in the aggregate 1,554,340 shares. 3. Administration. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the "Committee"). Subject to the provisions of the Plan, the Committee shall have sole authority, in its absolute discretion, to determine which of the employees of the Company and its subsidiaries shall receive stock options, the time and frequency when stock options shall be granted, the terms of such options, and the number of shares for which options shall be granted; provided that the number of shares of common stock that may be purchased pursuant to stock options granted under the Plan to an employee of a subsidiary of the Company, which is an insurance company domiciled in the State of New York ("New York Subsidiary"), shall not exceed ten percent of the total number of shares of common stock that may be purchased pursuant to stock options granted under the Plan. The Committee shall have the authority to do everything necessary and appropriate to administer the Plan, including, without limitation, interpreting the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all optionees, and upon their successors and assigns, and upon all other persons claiming under or through any of them. Each member of the Committee or the Board, when acting in connection with the Plan, shall be considered to be acting in his 1 capacity as a director of the Company. Members of the Committee or the Board acting under the Plan shall be fully protected in relying in good faith upon the advice of counsel and shall incur no liability except for willful misconduct in the performance of their duties. The fact that a member of the Board is, or shall theretofore have been or thereafter may be, a person who has received or is eligible to receive an option under this Plan shall not disqualify him from taking part in and voting at any time as a member of the Board in favor of or against any amendment or repeal of the Plan. 4. Eligibility. Subject to the provisions of Section 3 hereof, the Committee may grant stock options to any key employee of the Company or its subsidiaries. 5. Terms and Conditions of Options. All stock options granted pursuant to the Plan shall be in such form as the Committee shall from time to time determine and shall be subject to such terms, conditions, restrictions and limitations as deemed appropriate by the Committee and, in addition, to the following terms and conditions: (a) Option Price The option price per share with respect to each option shall be determined by the Committee but shall in no event be less than 100% of the fair market value of the Company's Common Stock at the time the option is granted as determined by reference to the Fair Market Value of the Common Stock on the Trading Day immediately preceding the date of such grant; provided that in no event shall such option price be less than the par value of the Common Stock at the time the option is granted. "Fair Market Value" of the Common Stock shall be the closing sale price of the Common Stock as reported on the New York Stock Exchange Composite Tape and published in the Wall Street Journal and "Trading Day" shall mean any day on which shares of the Common Stock are traded on the New York Stock Exchange or, if the Common Stock is no longer traded on the New York Stock Exchange, any other exchange on which the Common Stock is traded; (b) Term of Option Each stock option shall expire no later than ten years from the date the option is granted. (c) Exercise of Stock Option Except as provided in Section 8 hereof, any stock option issued under the Plan may not be exercised for one year after the date on which the stock option is granted, and thereafter may be exercised in such installments as shall be determined by the Committee at the time the stock option is granted. Unless 2 otherwise provided by the Committee at the time of grant of an option, an option shall be exercisable to the extent of (i) on the first anniversary of the date of grant, one-third (1/3) of the total number of shares of Common Stock subject to the option; (ii) on the second anniversary of the date of grant, two-thirds (2/3) of the total number of shares of Common Stock subject to the option; and (iii) on the third anniversary of the date of grant, all of the shares of Common Stock subject to the option. Any shares under an exercisable option not purchased on the applicable installment date may be purchased thereafter at any time prior to the final expiration of the stock option; provided, however, that an option may not be exercised for less than 100 shares of Common Stock unless such exercise is for all the shares then remaining subject to the option. Each stock option granted under the Plan shall be subject to the requirement that if at any time the Committee shall determine that the listing, registration or qualification of the shares subject thereto upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, are necessary or desirable in connection with the issue or purchase of the shares subject thereto, no such option may be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. If an optionee so requests, shares purchased may be issued in the name of the optionee and another jointly with the right of survivorship. (d) Payment for Shares To exercise a stock option, the optionee shall give irrevocable written notice to the Company, which notice shall specify the number of shares to be purchased and the date of payment therefor which shall be at least one business day after delivery of such notice. On the date fixed for payment, the optionee shall deliver the option to be exercised accompanied by payment either (i) in cash, (ii) through the delivery of shares of Common Stock with a Fair Market Value (as defined in paragraph (a)) on the immediately preceding Trading Day equal to the total option price or (iii) by a combination of the methods described in (i) and (ii) for the full purchase price therefor; provided that, in the case of payment pursuant to methods described in (ii) or (iii) above, the shares of Common Stock delivered to the Company shall have been held by the optionee for at least six months and shall not secure any obligation of the optionee to the Company. Any person exercising a stock option shall make such representations and agreements and furnish such information as the Committee may in its discretion deem necessary or desirable to assure compliance by the Company, on terms acceptable to the Company, with the provisions of the Securities Act of 1933 and any other applicable legal requirements. If so provided under the terms of a stock option, the Committee may, at its sole discretion, permit an optionee, in lieu of the methods of payment set forth in the immediately preceding paragraph, to pay for any portion of the purchase price of the shares of Common Stock to be issued or transferred that exceeds 3 the par value of such shares, by delivery of a full recourse promissory note of the optionee in such form as the Committee may approve. Any such promissory note shall be secured by shares of Common Stock having a Fair Market value on the Trading Day immediately prior to the date of delivery of the note equal to at least two times the principal amount of the note. The promissory note shall have a maturity of five years or less, as the Committee may determine in its sole discretion, and shall be payable in equal installments of principal and interest at least annually, or more frequently as the Committee may determine in its sole discretion. The Committee shall determine in its sole discretion the interest rate to be charged by the Company with respect to the loan evidenced by the promissory note, but such rate shall in no event cause the loan to be considered a below- market loan to which Section 7872 of the Internal Revenue Code of 1986, as amended (the "Code"), applies. 6. Terms and Conditions of Incentive Stock Options. At the time of grant of any stock option pursuant to the Plan, the Committee may designate the stock option as an incentive stock option. Any stock option designated as an incentive stock option shall be subject to the requirements of Section 422 of the Code in addition to the requirements set forth in Section 5 of the Plan. 7. Non-Transferability. Stock options under the Plan may not be sold, pledged, assigned or transferred in any manner otherwise than by will or the laws of descent or distribution, and, subject to the provisions of this Plan, may be exercised during the lifetime of a holder of a stock option only by such holder. 8. Termination or Forfeiture of Option. (a) Any option granted to an optionee under the Plan shall be forfeited unless each of the following conditions with respect to the optionee is met: (i) The optionee shall not, directly or indirectly, except as required in the course of his or her employment by the Company, furnish, divulge, or use at any time any information of a proprietary nature owned by the Company which is in the nature of confidential information or trade secrets. (ii) The optionee's employment by the Company shall not have terminated as a result of gross negligence or willful misconduct and he or she shall not, while employed by the company, have engaged in conduct which, had it been known at the time, would have resulted in the termination of his or her employment by the Company on the grounds of gross negligence or willful misconduct. If in the judgment of the Committee, reasonably exercised, 4 an optionee shall have failed at any time to comply with any of the foregoing conditions, any option held by such optionee shall be automatically forfeited. (b) No stock option granted under the Plan may be exercised at any time after termination of employment of a holder with the Company, except that (i) if such termination of employment is at retirement (which shall mean and include "Early Retirement Date" and "Normal Retirement Date" as defined in the SCOR U.S. Group Pension Plan) or due to death or disability (as defined in the Company's long-term disability insurance plan), any portion of an option exercisable at the time of such retirement, death or disability may be exercised by the holder or the holder's estate within twelve months after such retirement, death or disability, as the case may be; provided that, in no event shall the option be exercisable after the expiration of ten years from the date the options is granted; and (ii) if such termination of employment is involuntary and without cause, and is for any reason other than retirement, death, or disability, any portion of an option exercisable at the time of such termination may be exercised by the holder within such period as determined by the Committee. (c) Notwithstanding this Section 8, in no event shall any stock option be exercisable more than ten years from the date the option is granted. 9. Adjustments upon Changes in Capitalization. The aggregate number of shares of Common Stock provided by Section 2 hereof which may be purchased pursuant to the options granted under the Plan, and the number of shares of Common Stock covered by each outstanding option or the price per share in each such option, as the Committee shall determine, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a division or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Company; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. Subject to any required action by the shareholders, if the Company shall be the surviving or resulting corporation in any merger or consolidation, any option granted hereunder shall pertain to and apply to the securities or rights to which a holder of the number of shares of Common Stock subject to the option would have been entitled. 10. Change in Control; Merger or Consolidation into Another Corporation. 5 In the event of Change in Control of the Company (as defined below) or a merger or consolidation of the Company into another corporation after which the Company shall not be the surviving corporation: (a) All outstanding stock options on the date of such Change in Control or, in the case of such merger or consolidation, on the day immediately prior to the date on which shareholders of record of the Company entitled to receive any consideration in such merger or consolidation is determined, shall become fully and immediately exercisable, notwithstanding any provision in Section 5(c) of this Plan to the contrary, and such options shall not be subject to termination except as provided in Section 5(b) or Section 8 of this Plan; provided, however, that any stock option held by an optionee who is subject to Section 16(b) of the Securities and Exchange Act of 1934 (the "Exchange Act") with respect to shares of Common Stock covered by such option shall not be exercisable until six months after the date of grant of such option. (b) Notwithstanding any provision of this Plan to the contrary, neither the Board nor the Committee shall, at any time following a Change in Control, impose any conditions upon the exercise of an option that have not been previously imposed as of the date of such Change in Control, unless, in the written opinion of independent counsel to the Company, such condition is necessary to comply with any federal, state or local securities or other law or regulation, or the rules of any applicable securities exchange, and compliance with such law, regulation or rule without the imposition of such condition would, in the good faith opinion of the Board, be impracticable. (c) For purposes of the Plan, Change in Control shall mean (i) any person, corporation or group which is not a beneficial owner of the Company's Common Stock on the date this Plan is approved by shareholders of the Company acquiring 35% or more of the outstanding voting shares of the Company or any beneficial owner of the Common Stock of the Company on such date increases its beneficial ownership of the outstanding voting shares of the Company by 35 percentage points or more (or by such lesser percentage required to beneficially own all of the outstanding shares of the Company), (ii) a change in a majority of the members of the Board of Directors, excluding new directors approved by the incumbent Board, over any three-year period, or (iii) sale of substantially all the assets of the Company, unless, in the case of (i), a majority of the disinterested Directors of the Board of Directors of the Company determines, in good faith, that no Change in Control has occurred. 11. Rights as a Stockholder. A holder of a stock option granted under this Plan shall have no rights as a stockholder with respect to any shares of Common Stock covered by such option until the date of issuance of a stock certificate for such shares. 6 12. Withholding Taxes. Whenever shares of the Common Stock are to be issued in satisfaction of stock options granted under this Plan, the Company shall have the right to require the optionee to remit to the Company an amount sufficient to satisfy all applicable withholding obligations of the Company prior to the delivery of any certificate or certificates for such shares. The optionee may satisfy the requirement to remit such amount to the Company in the same manner and subject to the same limitations as the methods of payment (but not including payment by promissory note) set forth in Section 5(d) hereof. 13. Term of the Plan. The Plan was adopted by the Board on March 14, 1991 and shall become effective upon its adoption and approval by a vote of the shareholders of the Company. Any option granted prior to the approval of this Plan by the shareholders shall be subject to the approval of the shareholders. The Plan shall terminate on December 31, 1995, after which date no option shall be granted under the Plan. 14. Amendment or Termination of the Plan. (a) The Board may amend the Plan from time to time in such respects as the Board may deem advisable, provided that no change may be made in any option theretofore granted which would impair the rights of a holder without consent of the holder, and further, that without the approval of stockholders, no alteration or amendment may be made which would (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the number of shares of Common Stock which may be issued under the Plan (except by operation of Section 9), or (iii) materially modify the requirements as to eligibility for participation in the Plan. (b) The Board may at any time terminate the Plan. Any such termination of the Plan shall not affect options already granted and such options shall remain in full force and effect as if the Plan had not been terminated. 7 EX-10 7 EXHIBIT 10(s) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made this 25th day of July 1994, by and between SCOR Reinsurance Company, a New York corporation having its principal place of business at 110 William Street, New York, New York (the "Company") and John D. Dunn, Jr., an individual residing at 94 Susan Drive Chatham, New Jersey 07928 (the "Employee"). WHEREAS, Company desires to employ Employee in connection with its insurance business and operations and Employee desires to accept such employment on the terms and conditions hereinafter set forth. NOW, THEREFORE, upon the premises and conditions set forth herein the parties hereto mutually agree as follows: 1. Employment. The Company agrees to employ Employee to serve the Company as a Senior Vice President, and as manager of its treaty department, or in such other capacities as the Board of Directors or executive management of the Company may from time to time determine, and to perform such services and duties for the Company and/or its subsidiaries and affiliates as the Company may determine. Employee agrees to serve the Company in such capacity and to perform said duties and services faithfully and the best of his ability; and to devote his full business time and attention to the performance of his duties hereunder, to the exclusion of any other business, except charitable, educational or other public interest purposes. 2. Employment Period. Employee's employment hereunder shall commence on July 25, 1994 ("Commencement Date"), and shall continue for a period of two (2) years until July 25, 1996 ("Employment Period"), unless terminated sooner pursuant to Paragraph 3 below, or extended as provided herein. At the conclusion of the initial term of the Employment Period and each period thereafter, the Employment Period shall be automatically extended for periods of one (1) year each unless terminated by either party giving written notice to the other party of its intention to so terminate not less than three (3) months prior to the expiration of the then-current Employment Period, whereupon, upon the expiration of such Employment Period the Employee's employment hereunder and this Agreement shall terminate. 3. Termination. (a) If Employee should die during the Employment Period, the Employment Period and Employee's employment hereunder shall terminate as of the date of death. (b) In the event that Employee, by reason of illness or physical or mental disability shall be unable to perform the 1 services required of him hereunder for more than one hundred and eighty (180) calendar days in the aggregate (excluding infrequent and temporary absences due to ordinary transitory illness) during any twelve (12) month period, Employee's employment by Company shall be terminable by Company and shall terminate at the end of the month following the month in which Company has given written notice to Employee of its intention to so terminate because of disability, but without prejudice to any payments due Employee in respect of disability. The term "disability" for the purposes of this Agreement shall have the same meaning as under the short term disability benefit plan of the Company as in effect at the time of the Employee's disability. (c) If Employee's employment hereunder is terminated by the Company prior to July 25, 1996 for any reason other than pursuant to subparagraphs (a), (b) and (d) hereof, (subject to compliance by the Employee with the provisions of Paragraphs 8, 9 and 10 below), as liquidated damages, and/or severance pay, and as additional consideration for the Employee's undertakings under Paragraphs 8, 9 and 10 below, the Company shall (i) for the longer of a period of one (1) year from the date of termination or the remaining term of the Employment Period, make bi-weekly payments to the Employee, in an amount equal to the bi-weekly salary payable to the Employee immediately prior to such termination, and (ii) use its best efforts to provide for Employee's continued participation, for the longer of a period of one (1) year or the remaining term of the Employment Period, but in no event to exceed eighteen (18) months, in all death, medical and dental benefit plans of the Company as if Employee were still employed under this Agreement during such period; provided that Employee shall continue to pay for participation in such plans such amounts as would have been payable if his employment had not been terminated. The payments under this subparagraph 3(c) shall be in lieu of any compensation or benefits under Paragraph 4 below accruing after the date of such termination or under any severance plan of the Company. (d) Employee's employment hereunder may be terminated by the Company for "good cause" on not less than five (5) days' prior written notice of termination to Employee. The term "good cause" shall mean and include: (i) Employee's failure to substantially perform his duties hereunder for any reason or failure to devote his full business time to the affairs of the Company and such failure is not discontinued within a reasonable period of time, in no event to exceed thirty (30) days, after Employee recieves written notice from the Company of such failure; or (ii) Employee's commission of an act or acts of dishonesty resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company; or (iii) if Employee is grossly negligent or engages in misconduct or insubordination in the performance of his duties hereunder; or (iv) Employee's breach of his obligations under paragraph 9 below, relating to confidential information; or (v) if Employee engages in or commits any other serious dereliction of duty not specified above; or (vi) the willful violation by Employee of any law or regulation thereunder governing his activities affecting the performance of his duties hereunder or the violation of any law or regulation thereunder by the Company by willful action or 2 omission for which the Employee is responsible. (e) If, during the Employment Period, the Employee's employment by the Company is terminated by the Company pursuant to Paragraphs 3(a), (b) or (d) above, or is terminated by the Employee for any reason, the Employee shall not be entitled to receive any compensation under Paragraph 4 accruing after the date of such termination or any payment under subparagraph 3(c) above, and the Employment Period and this Agreement shall terminate forthwith upon such termination of employment. 4. Compensation and Benefits. As compensation for the performance by Employee of his duties under this Agreement during the Employment Period including the undertakings set forth in Paragraphs 8 and 9 below, Company agrees as follows: (a) The Company shall pay to Employee a salary at the annual rate of not less than $215,000 payable in equal bi-weekly installments, subject to periodic review and adjustments to be in the Company's discretion in accordance with the Company's customary practices for executive salaries. It is further agreed that if any change in the Employee's salary occurs during the term of employment under this Agreement, such change shall not be construed as a cancellation, amendment or rescission of this Agreement, and this Agreement shall nevertheless continue in full force and effect, in accordance with its terms and provisions, for the full term thereof. (b) The Company shall, within fifteen (15) days from the Commencement Date, pay to Employee a one-time bonus of twenty- five thousand ($25,000) dollars. In addition, commencing as of January 1, 1995 Employee shall participate in the Company's current bonus plan in accordance with current practice or, upon adoption by the Company, in any new bonus plan in accordance with its terms. (c) Employee shall participate during the Employment Period in the Company's Stock Option Plan for Key Employees. At the first stock option grant date after the commencement of the Employment Period Employee shall be awarded, subject to approval of the Compensation Committee of the Board of Directors of the Company ("Compensation Committee"), a stock option grant of fifteen thousand (15,000) shares. Nothing in this subparagraph (c) shall preclude the Company from amending or terminating any such plan at any time. (d) As performance based incentive compensation for 1994, and if Employee achieves certain performance objectives for 1994 as established by the Executive Management of the Company and to be annexed hereto within 60 days from the Commencement Date, Employee shall be granted an award which shall not be less than Fifty Thousand ($50,000) Dollars. Such award shall be payable on or about March of 1995. 3 (e) Employee shall participate in all Company health, welfare, pension and other employee benefit plans, fringe benefit plans (including insurance plans and vacation plans or policies) and all incentive plans in which all other officers of the Company are eligible to participate during the Employment Period, subject in all events to the terms and conditions of such plans as in effect from time to time. Nothing in this subparagraph (e) shall preclude the Company from amending or terminating any such plans at any time. (f) Employee shall be entitled to an automobile to be leased by the Company for a period of three (3) years for Employee's business and personal use during the Employment Period, such lease expense not to exceed $550.00 per month; and payment or reimbursement for automobile insurance expenses for such three (3) year period; and to payment or reimbursement of the annual fees and dues for one country club membership, such fees and dues not to exceed $3,600 or such other amount as is specifically approved from time to time by the President of the Company, and payment or reimbursement of a non-negotiable proprietary certificate currently in the amount of $4,500 relating to such country club membership and subject to periodic adjustment as requested by the club; provided that the Company shall hold such certificate and, in the event of termination of Employee's employment hereunder, for any reason, Employee will reimburse the Company for the entire amount of such certificate and, upon recipt of such reimbursement, the Company shall release the certificate to Employee. All compensation payable under this Paragraph 4 will be subject to such deductions and imputed income as may from time to time be legally required. 5. Supplemental Retirement Benefit. In addition to the other compensation and benefits Employee shall receive pursuant to Paragraph 4 above, the Company shall provide Employee with a supplemental retirement benefit to be paid at the earlier of termination of Employee's employment with or retirement from the Company. (a) When expressed as a single life annuity commencing on Employee's Normal Retirement Date, as such term is defined in the SCOR U.S. Group Pension Plan (the "Qualified Plan"), the supplemental retirement benefit shall equal the amount in excess of (x) minus (y) where: (x) is the aggregate retirement benefits that, when expressed as a single life annuity commencing on Employee's Normal Retirement Date, the Employee would have been entitled to receive under the Qualified Plan, the SCOR U.S. Group Supplemental Retirement Plan (the "SRP") and under any and all other defined benefit, target benefit or money purchase pension plans of the Company, its subsidiaries and affiliates that may hereafter be applicable to the Employee 4 during the Employment Period (collectively, with the Qualified Plan and the SRP, the "Retirement Plans") if Employee's employment had commenced on July 25, 1989 (and had continued without interruption until termination of his employment hereunder) and the Company had paid him compensation for the five year period prior to the Employment Period at an annual rate equal to a total of $265,000; and, (y) is the aggregate retirement benefits that, when expressed as a single life annuity commencing on Employee's Normal Retirement Date, the Employee in fact is or becomes entitled to receive under the Retirement Plans. For purposes of this Agreement, the value of any benefit paid under the Retirement Plans commencing at a time other than the Employee's Normal Retirement Date or in a form other than a single life annuity shall be calculated using the mortality and interest rate assumptions then in use for calculating optional forms of benefits under the Qualified Plan. (b) The supplemental retirement benefit provided herein shall not be forfeitable for any reason other than a termination of Employee's employment by the Company for "good cause" pursuant to Paragraph 3(d) above. The Company's obligation to provide such supplemental retirement benefit shall survive the termination of this Agreement. No provision of this Paragraph 5 shall prevent the Company from amending or terminating any of the Retirement Plans at any time. 6. Placement of Insurance. During the Employment Period, Employee agrees that all policies of insurance, reinsurance and other related business solicited by the Employee shall be placed by the Employee only through such facilities of the Company and its affiliates, as may be made available by the Company in its discretion. Employee agrees to comply with Company's manuals, rules, restrictions and specific underwriting instructions relative thereto. Employee further agrees not to solicit any other insurance, reinsurance or related business except for the benefit of the Company. During the Employment Period, Employee shall not, directly or indirectly, in any manner solicit, accept or service for or on behalf of himself or any third party, or divert or cause to be diverted to any third party, any insurance, reinsurance or related business. Employee further agrees that, during the Employment Period, Employee shall not act for the benefit of any competitor of Company or in any way inconsistent with Company's best interests. 5 7. Ownership of Accounts. All insurance, reinsurance and related business accounts produced by Employee during the period of the employment relationship with Company shall be for the account of Company or other third parties designated by Company and Employee shall not acquire nor retain any right, title or interest in said accounts. All renewals and expirations on all such insurance, reinsurance business produced, as well as all correspondence, reports, files and other data relating thereto, shall be and remain the absolute and exclusive property of Company. 8. Non-Solicitation. Employee agrees that for a period of one (1) year following the date of termination of Employee's employment relationship with Company, by Employee for any reason or by Company pursuant to Paragraph 3 above, Employee will not, directly or indirectly, in any capacity whatsoever (either as an employee, officer, director, shareholder, proprietor, partner, joint venturer, consultant or otherwise), in any way seek to induce, bring about, promote, facilitate, or encourage the discontinuance of, or in any way solicit, sell to, divert, serve, quote rates on, given proposals on, or accept or receive any insurance or reinsurance business which Employee personally, alone or in combination with others, handled, serviced or solicited at any time during the one (1) year period immediately preceding termination of the employment relationship. The provisions of this paragraph 8 shall survive the termination of this Agreement. 9. Confidential Information. Employee acknowledges and recognizes that in the course of his employment he has had and will continue to have access to confidential accounts or information of Company relating to persons, firms and corporations which are customers of Company during the term of the employment relationship, such confidential information includes but is not limited to insurance and reinsurance contract expiration dates, terms, conditions and rates, and familiarity with customer's risk characteristics. Employee agrees that he will not, without prior written consent of Company during the term of employment and for one (1) year thereafter, except as may be required during the course of his employment hereunder, directly or indirectly disclose, communicate, divulge, copy, or make use of any such confidential information. The provisions of this paragraph 9 shall survive the termination of this Agreement. 10. Non-Piracy. Employee agrees that, for a period of one (1) year following the date of termination of Employee's employment relationship with Company, by Employee for any reason or by Company pursuant to Paragraph 3 above, he will not employ, or engage, or seek to employ, or engage for himself or for others any person who has 6 worked for Company during the one (1) year period immediately preceding the date of any such termination, nor shall he have an interest in, directly or indirectly, any business entity in any insurance or related business which shall, with Employee's direct or indirect participation, employ, or engage or seek to employ any person who has worked for Company as aforesaid, nor shall he directly or indirectly urge or attempt to urge, request, advise, entice or attract any employee of Company to terminate their employment with Company for any reason or purpose whatsoever. (a) Employee shall be deemed to have an interest in a business entity if he owns, directly or indirectly, more than FIVE PERCENT (5%) of any class of stock of such business entity, or if he manages, operates, controls, participates in or is connected, directly or indirectly, with such business entity in any manner, including without limitation, as a director, officer, employee, owner, partner, agent, advisor, or consultant. The provisions of this Paragraph 10 shall survive the termination of this Agreement. 11. Remedies. Employee acknowledges that a breach of the agreements set forth in Paragraphs 7, 8, 9 and 10 hereof would result in irreparable and continuing damage to Company for which there will be no adequate remedy at law, and Employee agrees that any violation or threatened violation of such agreements may be enjoined through proper action filed in a court of competent jurisdiction, and that any such injunction shall be in addition to any other remedies available to the Company. In addition to and not in lieu of any other remedies to which Company may be entitled, in the event of a failure to comply with any of the provisions of Paragraphs 7, 8, 9 and 10 hereof, Employee agrees to pay, or to cause his new employer or affiliate or other business entity in which he has an interest to pay, promptly to Company an amount equal to 50% of any premiums, commissions, fees or other monies received or derived by reason of such breach, violation or failure to comply during the one (1) year period following such breach, violation or failure to comply, together with all sums expended or costs incurred by Company to enforce such provisions. 12. Copy of Agreement. In the event of the termination of the Employee's employment relationship with Company, Employee agrees, prior to the commencement of any new employment, to advise any new employer in the insurance or related business of the terms of this Agreement, and to furnish (and to consent to furnishing by Company) such new employer with a copy of this Agreement. 13. Waiver of Breach. 7 The waiver by Company of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach of Employee. 14. Entire Agreement. The Agreement and attached addendum, if any, constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes any previous communications, representations, arrangements or agreements, whether oral and written. 15. Notice. Any notices or other communications to be given under this Agreement shall be in writing and shall be given by delivering personally or by mailing, by certified or registered mail, return receipt requested, addressed as follows: To Company: SCOR Reinsurance Company 110 William Street New York, NY 10038 Attn: General Counsel To Employee: John D, Dunn, Jr. 94 Susan Drive Chatham, NJ 07928 or to such other address as either party may give to the other by written notice given in the manner herein provided. 16. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if the invalid or unenforceable provision had been omitted. 17. Assignment. This Agreement shall be binding upon and inure to the benefit of Company, its successor and assigns and to the benefit of Employee, his heirs and legal representatives. This Agreement is not assignable by Employee and the right of Employee to receive payment for his services is hereby expressly agreed to be non-assignable and non-transferrable, except as otherwise specifically provided herein. 18. Governing Law. This Agreement shall be governed by and interpreted under the laws of the State of New York. 8 19. Captions. The headings and captions contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 20. Amendment. This Agreement may only be amended by a written document signed by the parties. IN WITNESS WHEREOF, the parties have executed this Agreement, as of the day and year first above written. SCOR Reinsurance Company By: Jerome Karter President John D. Dunn, Jr., Employee 9 EX-10 8 EXHIBIT 10(t) NEW ENGLAND ASSET MANAGEMENT INVESTMENT ADVISORY SCOR Reinsurance Company AGREEMENT Name of Account ("Account") (for Institutional and Fiduciary Accounts) The undersigned ("Client") by its duly authorized representative ("Client Representative"), hereby agrees to employ New England Asset Management ("Firm"), and the Firm agrees to serve as the adviser for the Account named above as of 3/1/95, upon the following terms and conditions: 1. Discretionary Authority of the Firm. The Firm shall supervise and direct the investments of and for the Account without prior consultation with Client; subject, however, to the Investments Guidelines, attached and incorporated herein, and further subject to such limitations and restrictions as Client may have imposed, or may hereafter impose by notice in writing to the Firm. This discretionary authority makes the Firm agent and attorney-in-fact with full power and authority on behalf of the Account (a) to buy, sell, exchange, convert and otherwise trade in any and all stocks, bonds, mutual funds, options and futures, and other securities as the Firm may select, and (b) to establish and deal through accounts with one or more securities brokerage firms, dealers or banks. This discretionary Authority shall remain in full force and effect until the Firm receives written notice from the Client of its termination. 2. Reports to Client. The firm shall send an inventory and appraisal of the securities in the Account to Client at the beginning of each monthly period unless otherwise specified. Also, the Firm shall send advices to the Client regarding purchases and sales by the Firm for the Account at the time of execution. 3. Custody of Assets. The Firm shall not act as custodian for assets of the Account, or take or have possession of any assets of the Account. Client is responsible for all costs incurred by Custodial Account. 4. Documents and Authorities. Client represents and warrants that the appointment of the Firm on the basis set forth in this agreement is authorized by and has been accomplished in accordance with procedures specified in the charter, by-laws, certificate, trust agreement, or other document(s) governing the Account, and shall furnish the Firm with true copies of all resolutions, notices, and consents as may be required to be taken or made pursuant to such procedures. Client agrees to indemnify and hold harmless the Firm from all liability and costs (including costs of defense) which may be asserted or incurred by reason of any defect in the Client's authority to appoint the Firm on the basis set forth in this agreement, or any defect in conduct of the Client, in making such appointment notwithstanding the fact that the Firm may give notice of any such defect. The Firm represents and warrants that it is registered as an investment adviser with the Securities and Exchange Commission pursuant to the Investment Advisers Act of 1940 as amended, and that such registration is currently effective. 5. Brokerage. Client may, by written instrument delivered to the Firm, direct that transactions for the Account be placed with specific brokers, dealers or banks. The Client hereby represents and warrants that any such direction shall be properly authorized pursuant to the by-laws, charter, certificate, trust agreement, or other document(s) governing the Account, and within applicable standards of fiduciary conduct. Client hereby agrees to indemnify and hold harmless the Firm from all liability and costs (including costs of defense) which may asserted or incurred by reason of the Firm's good faith compliance with any such direction. Client recognizes that any such direction may result in the Account paying higher brokerage commissions or receiving less favorable prices than might otherwise be possible. 6. Voting Rights of Portfolio Securities. The Firm shall be responsible for the voting of proxies at its discretion unless specifically directed by Client as to positions on particular issues. 7. Compensation of the Firm. The compensation of the Firm shall be paid quarterly in arrears in accordance with the Schedule of Fees attached here-to as Exhibit A, and hereby incorporated herein. The schedule of fees set forth in Exhibit A shall be applied to the net asset value of the assets of the Account as reasonably determined by the Firm as of the last business day of each month and the cumulative amounts will be charged quarterly in arrears. 8. Confidential Relationship. All information and recommendations furnished by either party to the other shall at all times be treated in strictest confidence, and shall not be disclosed to third persons except as may be required by law, or except upon the prior written approval of the other party to this agreement or except when information is available to general public. 9. Non-Exclusive Contract. It is understood that the Firm renders investment advisory services for clients and customers other than the Account. Client recognizes that transactions in a specific security may not be accomplished for all client accounts at the same time or at the same price. Neither the Firm's acceptance of investment objectives, nor any other provision of this agreement shall be considered a guarantee that any specific result will be achieved. 10. Agreement not Assignable. This agreement is not assignable by either party without the written consent of the other. The Firm shall notify the Client of any changes in its principals within a reasonable time after such change. 11. Notices. Any notice, direction, instruction, acknowledgement, or other communication required or contemplated by this agreement shall be in writing, delivered in person by fax or mail, and addressed as follows: 2 To the Client: SCOR Reinsurance Company 110 William Street, 18th Floor New York, NY 10038 Attention: Linda Grant, Vice President and Treasurer To the Firm: New England Asset Management, Inc. 30 Waterside Drive Farmington, CT 06032 Attention: Gerard T. Lynch, President Any party hereto by notice hereunder to the other may designate a different address. 12. Governing Law. The validity of this Agreement and the rights and liabilities of the parties hereunder shall be determined in accordance with the laws of the State of New York. 13. Termination. This agreement may be terminated as of the end of any quarterly inventory period upon 30 days prior written notice by either party. 14. Acknowledgement of Disclosure. Termination by Client: Client hereby acknowledges receipt of the Firm's Disclosure Statement as required pursuant to Rule 204-3 (17 CFR 275.204-3) under the Investment Advisers Act of 1940 prior to or on the date (shown below) of the Client's signing of this agreement. Client shall have the option to terminate this agreement in its entirety, exercisable at Client's sole option, and without penalty, for five days from the date (shown below) of the Client's signing of this Agreement; provided, however, that any investment action taken by the Firm with respect to the Account during such five day period in reliance upon this agreement and prior to receipt of actual notice of the Client's exercise of this right of termination, shall be at the sole risk of the client. Agreed and accepted by: NEW ENGLAND ASSET MANAGEMENT, INC. CLIENT: Authorized signatory SCOR Reinsurance Company by its authorized Representative(s): Gerard T. Lynch Linda Grant Date: 2/24/95 Date: 2/23/95 Taxpayer Identification Number 75-1444207 3 Exhibit A INVESTMENT ADVISORY CONTRACT SCHEDULE SCOR Reinsurance Company (Name of Account) Billing will commence 3/1/95 on the basis of the following schedule: Annual fee of .20 of 1% on first $50,000,000 of market value of invested assets and .15 of 1% on remaining market value of invested assets. Such fee is calculated and payable in accordance with Section 7 of the Investment Advisory Agreement. 4 SCOR REINSURANCE COMPANY Investment guidelines for the management of the tax-exempt municipal bond portfolio ("Portfolio") of SCOR Reinsurance Company (the "Company") by New England Asset Management Corporation. General The Company's Portfolio is to be managed to maximize after-tax investment total return, consistent with the preservation of capital and New York State law regarding investments of property and casualty insurance companies. The performance of the Portfolio will be measured on a total return basis consistent with AIMR standards. Issuers The Portfolio is to be invested entirely in U.S. dollar denominated fixed income securities which are in compliance with the New York State Insurance Department law. Permitted investments include: 1. Obligations, not in default, issued, assumed, guaranteed or insured by a. any state, territory or possession and political subdivisions of states, territories and possessions within the United States of America. b. any agency or instrumentality of any governmental unit referred to in item (a). provided that such obligations are by law payable, as both principal and interest, from taxes levied or by law required to be levied or from adequate special revenues pledged or otherwise appropriated or by law required to be provided for the purpose of such payment. In no event shall obligations be eligible for investment under this paragraph if payable solely out of special assessments on properties benefitted by local improvements. Insured issues and pre-refunded issues are permitted. Investment Limitations Rating - All securities held in the Portfolio are to be rated A or better by at least one of the major rating agencies. The Portfolio should be maintained so that the average rating for the Portfolio is not less than AA. Maturity - No security shall be purchased with an expected maturity date more than 12 years from the date of purchase unless there is a put option within 12 years. Duration - The duration of the Portfolio should be maintained in the range of 3 to 7 years. 5 Hedging - Hedging is not permitted as the company does not have a plan filed with and approved by the New York State Insurance Department. Leverage - In no way will the Portfolio employ leverage, directly or indirectly through securities using leverage. Capital Gains/Losses - The Portfolio shall be managed as to minimize the net realized capital loss. Size Limit - For any new securities purchased, the Portfolio will not own more than 10% of the total issue. Issue Limit - No one security should represent more than 5% of the Portfolio. Issuer Limit - No one issuer should represent more than 10% of the Portfolio. Securities with returns that are linked to or derived from non- U.S. dollar interest or exchange rates are not permitted. "Inverse Floaters" whose rates move counter to market rates are not permitted. These guidelines can be amended by the Company's Finance Committee. 6 EX-10 9 EXHIBIT 10(u) THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY WORLD TRADE CENTER -------------- AGREEMENT OF LEASE between THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY and SCOR U.S. CORPORATION TABLE OF CONTENTS Section 1. Letting 1 Section 2. Term 1 Section 3. Rights of User by the Lessee 2 Section 4. Basic Rental 3 Section 5. Governmental Requirements 4 Section 6. Rules and Regulations 5 Section 7. Responsibilities of the Lessee 5 Section 8. Maintenance and Repair 8 Section 9. Casualty 9 Section 10. Indemnity 11 Section 11. Ingress and Egress 12 Section 12. Construction by the Lessee 12 Section 13. Signs 21 Section 14. Injury and Damage to Person or Property 21 Section 15. Additional Rent and Charges 21 Section 16. Rights of Entry Reserved 22 Section 17. Condemnation 24 Section 18. Abatement of Rental 25 Section 19. Assignment and Sublease 26 Section 20. Termination 33 Section 21. Right of Re-entry 35 Section 22. Survival of the Obligations of the Lessee 36 Section 23. Reletting by the Port Authority 37 Section 24. Waiver of Redemption 38 Section 25. Remedies and Suits Against the Lessee 38 Section 26. Surrender 38 Section 27. Acceptance of Surrender of Lease 39 Section 28. Brokerage 39 Section 29. Notices 39 Section 30. Payments 40 Section 31. Late Charges; Monetary and Non-Monetary Disputes 41 Section 32. Quiet Enjoyment 44 Section 33. Non-Liability of Individuals 44 Section 34. Headings 44 Section 35. Construction and Application of Terms 44 Section 36. Definitions 45 Section 37. Force Majeure 46 Section 38. Premises 47 Section 39. Governmental Compliance 47 Section 40. Services and Utilities 48 Section 41. Liability Insurance 52 Section 42. Port Authority Work; Additional Lessee Work 56 Section 43. Additional Space 60 Section 44. Lessee's Right to Extend the Letting 68 Section 45. No Gifts, Gratuities, Offers of Employment, etc. 70 Section 46. Security Deposit or Letter of Credit 71 Section 47. Additional Services 73 Section 48. Entire Agreement 75 THIS AGREEMENT, made as of the 10th day of January, 1995, by and between THE PORT AUTHORITY OF NEW YORK AND NEW JERSEY (hereinafter called the "Port Authority"), a body corporate and politic, created by Compact between the States of New Jersey and New York, with the consent of the Congress of the United States of America, having an office at One World Trade Center, in the Borough of Manhattan, City, County, and State of New York, and SCOR U.S. CORPORATION, a corporation organized and existing under the laws of the State of Delaware, having an office and place of business at 2 World Trade Center, New York, New York 10048 (hereinafter called the "Lessee"), whose representative is Ann Sue Mushnick, WITNESSETH, That: The Port Authority and the Lessee, for and in consideration of the rents, covenants and agreements hereinafter contained, mutually covenant and agree as follows: Section 1. Letting The Port Authority hereby lets to the Lessee and the Lessee hereby hires and takes from the Port Authority, at the World Trade Center (sometimes hereinafter referred to as the "Facility") in the Borough of Manhattan, City, County and State of New York, the space as shown in diagonal hatching, vertical hatching, horizontal hatching, diagonal crosshatching, crosshatching and stipple on the sketch annexed hereto, made a part hereof and marked "Exhibit A", together with the fixtures, improvements and other property of the Port Authority located or to be located therein or thereon, and the space as shown in diagonal hatching on the sketch annexed hereto, made a part hereof and marked "Exhibit A-1", together with the fixtures, improvements and other property of the Port Authority located or to be located therein or thereon, the spaces, fixtures, improvements and other property of the Port Authority shown on Exhibit A and Exhibit A- 1 being hereinafter collectively referred to as the "premises". The Port Authority and the Lessee hereby acknowledge that the aforesaid premises constitutes non-residential real property. Section 2. Term (a) The term of the letting of the premises under this Agreement shall commence at 12:01 o'clock A.M. on the earlier of the following dates: (i) the two hundred fourteenth (214th) day following the Prior Entry Date, as such term is defined in paragraph (c) of this Section, or (ii) such date as the Lessee commences business operations in the premises. The term of the letting shall expire, unless sooner terminated, or unless extended, at 11:59 o'clock P.M., on the day preceding the fifteenth (15th) anniversary of the Rent Commencement Date, as such term is defined in the Section of this Agreement entitled "Basic Rental". (b) If on March 22, 1995 the premises are not available or ready for the commencement therein by the Lessee of its proposed construction and finishing work pursuant to and in accordance with the provisions of the Section of this Agreement entitled "Lessee's Finishing Work" by reason of the fact that the Port Authority has not then completed those provisions of the "Port 1 Authority Work", as such term is defined in the Section of this Agreement entitled "Port Authority Work", which are required to be completed on or prior to the Prior Entry Date or by reason of a casualty of the type described in the Section of this Agreement entitled "Casualty", then the Port Authority may postpone the Prior Entry Date for the premises and the Port Authority shall not be subject to any liability for such postponement or failure to give possession of the premises on such date except as provided in paragraph (d) below. No such postponement or failure to give possession of the premises on March 22, 1995 shall affect the validity of this Agreement or the obligations of the Lessee hereunder. However, in such event, the Prior Entry Date shall not occur until possession thereof is tendered by the Port Authority to the Lessee; tender shall be made by notice given at least five (5) days prior to the effective date of the tender. In the event that notice of tender of the premises is not given for possession thereof to commence on or prior to March 21, 1996 for the reasons set forth in this paragraph (b), then the letting of the premises under this Agreement shall be deemed cancelled, and each party does release and discharge the other from any and all claims and demands in any way related to the letting of the premises based on this Agreement, or a breach or alleged breach thereof. (c) For purposes of this Agreement "Prior Entry Date" shall mean March 22, 1995, as such date may be postponed pursuant to the provisions of paragraph (b) above of this Section. The Lessee shall be permitted entry into the premises on the Prior Entry Date for the purpose of performing its construction and installation work and the Lessee's use of the premises during the period commencing with the Prior Entry Date and continuing up to the day preceding the commencement date of the term of the letting shall be subject to and in accordance with all the terms and conditions of this Agreement except those relating to payment of rental and rights of user. (d) In the event that the Prior Entry Date does not occur on or before April 1, 1995 due to the Port Authority's inability to complete those portions of the Port Authority Work which the Port Authority has agreed to complete prior to the Prior Entry Date, then the two hundred seventy-one (271) day period from the commencement date of the term of the letting used to determine the Rent Commencement Date shall be increased by the sum of the following: (i) one (1) day for each of the first sixty (60) excess days plus (ii) one and three quarter days (1 ) for each excess day, if any, after the first sixty (60) excess days. For purposes of this paragraph (d) "excess days" shall be the number of days in the period commencing April 2, 1995 and ending on the day preceding the Prior Entry Date less the number of days in the period subsequent to execution of this Agreement by the parties hereto that the Port Authority or its contractor is prevented from performing such portions of such Port Authority Work by forces and conditions beyond the control of the Port Authority. Section 3. Rights of User by the Lessee The Lessee shall use the premises for the following purposes only and purposes incidental thereto and for no other purpose whatsoever: as clerical, executive and administrative offices for the Lessee's business of providing reinsurance services to firms providing 2 insurance services to entities engaged in world trade and commerce and such other type or types of business or operations engaged in or previously engaged by other office tenants at the World Trade Center whose eligibility and qualifications are determined by the Port Authority under the provisions of Chapter 5 of Title 17 of the Unconsolidated Law of the State of New York strictly on the basis of their functions, activities and services in world trade and commerce. In the event the Port Authority transfers fee title to the World Trade Center or to the building in which the premises are located to other than a governmental or quasi governmental entity, then notwithstanding the foregoing sentence the Lessee from and effective the effective date of such transfer may use the premises for general office purposes consistent with the operation of a first class office building. Section 4. Basic Rental (a) The Lessee agrees to pay to the Port Authority a basic rental for the premises as follows: (i) During the period from and after the Rent Commencement Date through the day preceding the fifth anniversary of the Rent Commencement Date at the rate of One Million Eight Hundred Twenty-two Thousand Two Hundred Seventy- two Dollars and No Cents ($1,822,272.00) per annum, in advance in monthly installments of One Hundred Fifty-one Thousand Eight Hundred Fifty-six Dollars and No Cents ($151,856.00) each, on the Rent Commencement Date and on the first day of each calendar month thereafter throughout such period. (ii) During the period from and after the fifth anniversary of the Rent Commencement Date through and including the day preceding the tenth (10th) anniversary of the Rent Commencement Date, at the rate of One Million Nine Hundred Eighty-three Thousand Nine Hundred Twenty-four Dollars and No Cents ($1,983,924.00) per annum, in advance in monthly installments of One Hundred Sixty-five Thousand Three Hundred Twenty-seven Dollars and No Cents ($165,327.00) each, on the fifth (5th) anniversary of the Rent Commencement Date and on the first day of each calendar month thereafter throughout such period. (iii)During the period from and after the tenth (10th) anniversary of the Rent Commencement Date through the balance of the term of the letting under this Agreement, at the rate of Two Million One Hundred Forty-five Thousand Five Hundred Seventy-six Dollars and No Cents ($2,145,576.00) per annum, in advance in monthly installments of One Hundred Seventy-eight Thousand Seven Hundred Ninety-eight Dollars and No Cents ($178,798.00) each, on the tenth (10th) anniversary of the Rent Commencement Date and on the first day of each calendar month thereafter 3 through the balance of the term of the letting under this Agreement. (b) If the Rent Commencement Date shall be other than the first day of a calendar month, the installment of basic rental payable on the Rent Commencement Date shall be the amount of the monthly installment stated in subparagraph (a)(i), above, multiplied by a fraction the numerator of which shall be the number of days the letting was in effect in the calendar month in which the Rent Commencement Date fell and the denominator of which shall be the number of days in that calendar month and if the expiration or termination date of the letting is other than the last day of a month, the basic rental for the portion of the month during which the letting is effective shall be the amount of the applicable monthly installment similarly prorated. If any basic rental increase is effective on a day other than the first day of a calendar month there shall be payable in advance on the effective date of the rental increase an installment of rental equal to one-twelfth of the annual rental increase multiplied by a fraction, the numerator of which shall be the number of days from and including the effective date of the rental increase to the end of the month in which the rental increase was effective and the denominator of which shall be the number of days in that month. (c) For purposes of this Agreement "Rent Commencement Date" shall mean the two hundred seventy first (271st) day from the commencement date of the term of the letting as such two hundred seventy-one (271) day period may be increased by the provisions of paragraph (d) of the Section of this Agreement entitled "Term" and the provisions of the Section of this Agreement entitled "Construction by the Lessee". (d) The basic rental for the premises set forth above in this Section shall be subject to adjustment during the term of the letting of the premises in accordance with the provisions of Schedule A attached to this Agreement and hereby made a part hereof. Section 5. Governmental Requirements The Lessee shall procure all licenses, certificates, permits or other authorization from all governmental authorities having jurisdiction over the operations of the Lessee at the premises or at the World Trade Center which may be necessary for the conduct of its operations. The Lessee shall promptly observe, comply with and execute the provisions of any and all present and future governmental laws, rules and regulations, requirements, orders and directions which may pertain or apply to the operations of the Lessee on the premises or at the World Trade Center or its occupancy of the premises which are applicable or which would be applicable if the Port Authority were a private corporation, and the Lessee shall, in accordance with and subject to the provisions of the Section of this Agreement entitled "Construction by the Lessee", make any and all improvements, alterations or repairs of the premises that may be required at any time hereafter by any such present or future law, rule, regulation, requirement, order or direction, provided such improvements, alterations or repairs are not required generally throughout the building in which the premises are located unless such general requirement results from the Lessee's particular manner of use of or 4 its particular operations in the premises which are not common to other tenants in the building in which the premises are located. The provisions of this Section are not to be construed as a submission by the Port Authority to the application to itself of such requirements, or any of them. Section 6. Rules and Regulations The Lessee covenants and agrees to observe and obey (and to compel its officers, members, employees, agents, representatives, contractors, customers, guests, invitees and those doing business with it to observe and obey) the Rules and Regulations of the Port Authority (a copy of which is attached hereto, hereby made a part hereof and marked "Exhibit R") for the government of the conduct and operations of the Lessee, and such further reasonable rules and regulations (including amendments and supplements thereto) as may from time to time and throughout the letting be promulgated by the Port Authority for reasons of safety, health or preservation of property, or for the maintenance of the good and orderly appearance of the premises and the World Trade Center or for the safe or efficient operation of the World Trade Center, provided, however, that in case of any conflict or inconsistency between the provisions of this Agreement and any of the Rules and Regulations, the provisions of this Agreement shall control. The Port Authority agrees that, except in cases of emergency, it will give notice to the Lessee of every such further rule or regulation adopted by it at least fifteen (15) days before the Lessee shall be required to comply therewith. The Port Authority shall not enforce any of the Rules and Regulations in such manner as to discriminate against the Lessee. Section 7. Responsibilities of the Lessee (a) The Lessee shall conduct its operations in an orderly and proper manner and so as not to annoy, disturb or be offensive to others at the World Trade Center, and the Lessee shall control the conduct of its officers, members, employees, agents, representatives, contractors, customers, guests, invitees and those doing business with it. Upon objection from the Port Authority concerning the conduct of any such the Lessee shall immediately take all steps necessary to cure or remove the cause of the objection. (b) The Lessee shall not knowingly commit or knowingly continue any nuisance on the premises, or do or permit to be done anything which may result in the creation or commission of a nuisance on the premises, and the Lessee shall not knowingly cause or knowingly permit or continue to be caused or produced upon the premises, to permeate the same or to emanate therefrom, any unusual, noxious or objectionable smokes, gases, vapors, odors or objectionable noises. (c) The Lessee shall not use or connect any equipment or engage in any activity or operation in the premises which will cause or tend to cause an overloading of the capacity of any existing or future utility, mechanical, electrical, communication or other systems, or portion thereof, serving the premises, nor shall the Lessee do or permit to be done anything which may interfere with the effectiveness or accessibility of existing and future utility, mechanical, electrical, communication or other systems or portions 5 thereof on the premises or elsewhere at the World Trade Center. Nothing in this paragraph (c) shall be construed to impose any liability on the Lessee for unknowingly overloading the electrical system, which such overloading results from the Port Authority's failure to supply electricity in accordance with the specifications set forth in Schedule D. (d) The Lessee shall not overload any floor, roadway, passageway, pavement or other surface or any wall, partition, column or other supporting member, or any elevator or other conveyance, in the premises or at the World Trade Center and without limiting any other provision of this Agreement, the Lessee shall repair, replace or rebuild any such damaged by overloading. The Port Authority hereby represents that the floor load for the premises is as stated in Schedule D, attached hereto and hereby made a part hereof. Subject to the provisions of the Section of this Agreement entitled "Construction by the Lessee", the Lessee at its cost and expense may perform the work necessary to reinforce the existing floor load in the premises. (e) Except as hereinafter provided in this paragraph (e), the Lessee shall not install, maintain or operate or permit the installation, maintenance or operation on the premises of any vending machine or service designed to dispense or sell food, beverages, tobacco products or merchandise of any kind, whether or not included in the above categories, or any restaurant, cafeteria, kitchen, stand or other establishment for the preparation, dispensing or sale of food, beverages, tobacco or tobacco products, or merchandise of any kind or any equipment or device for the furnishing to the public of a service of any kind, including without limitation thereto any telephone pay-stations. Subject to all the terms and provisions of this Agreement, and notwithstanding the provisions of the preceding sentence of this paragraph (e) and Rule 20, the Lessee may install an eating facility in the premises pursuant to an approved construction application as provided in the Section of this Agreement entitled "Construction by the Lessee" and may operate such eating facility with its own employees, or arrange for the operation thereof by an independent contractor or operator selected by the Lessee unless the Port Authority reasonably determines that the said contractor or operator will adversely affect or interfere with operations at the Facility or will cause or contribute to the causing of labor problems or disturbances thereat, and the Lessee may install food and non- alcoholic beverage vending machines or arrange for the installation and operation of such machines, subject to the Port Authority's reasonable approval of the type and method of installation thereof, and the Lessee may use an independent contractor, operator or supplier for such machines selected by the Lessee unless the Port Authority reasonably determines that said contractor, operator or supplier will adversely affect or interfere with operations at the Facility or will cause or contribute to the causing of labor problems or disturbances thereat, provided that such eating facility and vending machines shall be installed and operated solely for use by the Lessee's officers, members, employees, contractors, customers, guests, and invitees. The Lessee's agreement with any contractor, operator or supplier of eating facilities or vending machines shall permit cancellation by the Lessee on short term notice in the event the Port Authority notifies the Lessee that such contractor, operator or supplier fails to meet the standards described in this paragraph. In the event any of the aforesaid installations shall require modifications or alterations to 6 building systems or equipment (including heating, ventilating or air- conditioning systems), and whether such modifications or installation thereof are performed by the Lessee or by the Port Authority, the Lessee shall be responsible for the cost of any such modifications or alterations, and no such alteration or modification shall be commenced until the Lessee has received an approved construction application therefor. The Port Authority reserves the right from time to time to make additional reasonable charges to the Lessee for any and all utilities or other building services used in connection with any eating facilities or any of the aforesaid machines, provided, however that the provisions of this sentence shall not be applicable to utilities and building services for which a charge or fee is specifically provided for in this Agreement or for which this Agreement specifically states that there will be no charge or fee. The Lessee covenants and agrees that upon notification from the Port Authority that objectionable odors emanate from the premises as the result of the operation of any eating facility equipment or food vending machines in the premises (whether through the building heating, ventilating or air-conditioning systems or otherwise), the Lessee will immediately take all necessary steps to eliminate such odors, or if such odors cannot be so eliminated, the Lessee will discontinue use of such eating facility or food vending machines and shall not resume the use or operation thereof until written consent therefor has been obtained from the Port Authority. Nothing herein shall be deemed to permit the operation on the premises of any public food or other merchandise or vending operation or service of any kind. (f) The Lessee shall not use or make any reference, by advertising or otherwise, to the names "World Trade Center" (except to designate the Lessee's business address and then only in a conventional manner and without emphasis or display and except in connection with any contemplated subletting or assignment), "The Port Authority of New York and New Jersey", "Port Authority" or any simulation or abbreviation of any such names, or any emblem, picture or reproduction of the World Trade Center, for any purpose whatsoever. Upon notice from the Port Authority the Lessee shall immediately discontinue any such use or reference. (g) The Lessee recognizes that the Port Authority has undertaken the planning, construction and operation of the World Trade Center as a facility of commerce pursuant to concurrent legislation of the State of New York, Chapter 209, Laws of New York, 1962 and the State of New Jersey, Chapter 8, Laws of New Jersey, 1962. The purpose, character and scope of the Lessee's occupancy, operation and usage of the premises as described in the Section of this Agreement entitled "Rights of User by the Lessee" are of primary importance and inducement to the Port Authority in entering into this Agreement of lease with the Lessee. The Lessee has represented to the Port Authority that all its occupancy, operation and usage, throughout the term of the letting hereunder, will be in strict accordance with and subject to the provisions and requirements of the Section of this Agreement entitled "Rights of User by the Lessee" and the Port Authority has relied on such representations in entering into this Agreement. Without affecting the Lessee's liability for any breach of this representation and its obligations hereunder, in the event that the Lessee has not complied with all the requirements of this Section and the Section of this Agreement entitled "Rights of User by the Lessee", within a period of ten (10) days after notice from the Port 7 Authority of such non-compliance, the Port Authority may by five (5) days' notice terminate this Agreement and the letting hereunder and the same shall be and operate as a conditional limitation and have the same effect as if it were specifically included as a ground for termination under paragraph (a) of the Section of this Agreement entitled "Termination". Section 8. Maintenance and Repair (a) Except to the extent of such items of cleaning service as may be supplied by the Port Authority as stated in the Section of this Agreement entitled "Services and Utilities", the Lessee shall at all times keep the premises in a clean and orderly condition and appearance, together with all fixtures, equipment and personal property of the Lessee located in or on the premises, including without limitation thereto the interior surface of windows and both sides of all entrance doors. (b) The Lessee shall repair, replace, rebuild and paint all or any part of the premises which may be damaged or destroyed by the acts or omissions of the Lessee's contractors, customers, guests, invitees or other persons who are doing business with the Lessee or who are on or at the premises or the World Trade Center with the consent of the Lessee (such damage or destruction occurring while such contractors, customers, guests, invitees or other persons are at the premises or the World Trade Center in connection with business being transacted with the Lessee or are at the premises or the World Trade Center with the consent of the Lessee) and the Lessee shall repair, replace, rebuild and paint all or any part of the World Trade Center, including the premises which may be damaged or destroyed by the acts or omissions of the Lessee, its officers, members, employees, agents and representatives. (c) The Lessee shall take good care of the premises, including therein, without limitation thereto, walls, partitions, floors, ceilings, doors and exteriors of columns, and all parts thereof, and all equipment and fixtures, and shall do all non- structural preventive maintenance and make all necessary non- structural repairs, replacements, rebuilding and painting necessary to keep the premises in good condition befitting office space in a first class office building and to keep any improvements, additions and fixtures made or installed during the term of the letting in good condition befitting office space in a first class office building. (d) In the event the Lessee fails to commence so to make or do any repair, replacements, rebuilding or painting required by this Agreement within a period of ten (10) days after notice from the Port Authority so to do, or fails diligently to continue to completion the repair, replacement, rebuilding or painting of all of the premises required to be repaired, replaced, rebuilt or painted by the Lessee under the terms of this Agreement, the Port Authority may, at its option, and in addition to any other remedies which may be available to it, repair, replace, rebuild or paint all or any part of the premises included in the said notice, the Port Authority's reasonable cost thereof to be paid by the Lessee on demand. This option or the exercise thereof shall not be deemed to create or imply any obligation or duty to the Lessee or others. 8 (e) The Port Authority agrees that during the term of the letting hereunder it will maintain and operate those portions of the Facility affecting the premises and those portions of the Facility utilized by the Lessee for access to the premises and will provide services to the premises and will maintain the systems providing such services to the premises all substantially in the manner and at the level existing on the date of this Agreement. The Port Authority further agrees to maintain the public areas in the building of which the premises are a part, to clean the exterior of windows in the premises and to make structural repairs to the exterior walls, floor slab and structural building supporting members in the premises to the extent necessary to keep the premises in a reasonably good condition for the operations of the Lessee under this Agreement, provided that nothing herein shall relieve the Lessee from the requirements of the Section of this Agreement entitled "Governmental Requirements". Section 9. Casualty (a) In the event that, as a result of a casualty insurable under the New York standard form of fire insurance policy and extended coverage endorsement, the premises or areas at the World Trade Center other than the premises are damaged (such areas other than the premises as may be damaged hereinafter in this Section called the "damaged areas") without the fault of the Lessee, its officers, members, employees, customers, guests, invitees or other persons who are doing business with the Lessee or who are on the premises with the Lessee's consent, so as to render the premises untenantable in whole or part, then (1) if the Port Authority finds that the necessary repairs or rebuilding can be completed within two hundred seventy (270) days after the occurrence of the damage, the Port Authority shall repair or rebuild with due diligence, and the rental hereunder shall be abated, as hereinafter provided in the Section of this Agreement entitled "Abatement of Rental", only for the period from the occurrence of the damage to the earlier of (i) fifteen (15) days from the notification of the completion of the repairs or rebuilding or (ii) the commencement of business operations by the Lessee in the damaged areas of the premises; or (2) if the Port Authority finds that such repairs or rebuilding cannot be completed within two hundred seventy (270) days after the occurrence of the damage, then the Port Authority shall have options: (i) to proceed with due diligence to repair or to rebuild the premises or damaged areas as necessary in which event the rental hereunder shall be abated as provided in the Section of this Agreement entitled "Abatement of Rental" only for the period from the occurrence of the damage to the earlier of (x) fifteen (15) days from notification of the completion of the repairs or rebuilding or (y) the commencement of business operations by the Lessee in the damaged areas of the premises; or (ii) to terminate the letting as to the entire premises. (b) In the event of damage to the premises or damaged areas under circumstances described in paragraph (a) of this Section 9 9, the Port Authority within thirty (30) days after the occurrence of the damage will furnish to the Lessee in writing a good faith estimate of the time required to complete the repairs or rebuilding, such good faith estimate to be arrived at by the Port Authority after consulting with its Chief Engineer. In the event the Port Authority estimates that the repairs or rebuilding cannot be completed within two hundred seventy (270) days after the occurrence of the damage, then, upon written notice to the Port Authority within twenty (20) days following its receipt of the Port Authority's estimate, the Lessee shall have the right to terminate the letting as to the entire premises under this Agreement, provided that prior to or contemporaneously with the exercise of such right to terminate this Agreement and the letting hereunder, a responsible officer of the Lessee shall certify to the Port Authority that on an economic and operational basis the premises cannot be used by the Lessee for the operations described in Section 3 of this Agreement prior to the substantial completion of the repairs or rebuilding and provided further that the Lessee is not under a notice of termination from the Port Authority either on the date of the giving of its notice to the Port Authority or on the effective date thereof. Termination pursuant to this paragraph (b) shall have the same force and effect as if the termination date were the original expiration date provided in this Agreement. (c) If damage to the premises or damaged areas under circumstances described in paragraph (a) of Section 9 occurs during the period which constitutes the last two (2) years of the term of the letting, the provisions of this Section 9 shall be applicable, except that for the purpose of applying such provisions the two hundred seventy (270) day periods referred to in paragraphs (a) and (b) above of this Section 9 shall in each instance be deemed changed to ninety (90) days. (d) The parties do hereby stipulate that neither the provisions of Section 227 of the Real Property Law of the State of New York nor those of any other similar statute shall extend or apply to this Agreement. (e) The Lessee shall give the Port Authority immediate notice in case of any fire, accident or casualty in the premises or elsewhere in the World Trade Center if the occurrence elsewhere in the World Trade Center is known to and involves the Lessee, its officers, members, employees, agents, representatives, contractors, or is known to any of them and involves customers, guests or invitees of the Lessee. (f) In the event of a partial or total destruction of the premises, the Lessee shall as soon as practicable remove any and all of its property and all debris from the premises or the portion thereof destroyed and if the Lessee does not promptly so remove, the Port Authority may discard the same after giving the Lessee five (5) days' prior notice of such or may remove the Lessee's property to a public warehouse for deposit or retain the same in its own possession and at its discretion may sell the same at either public auction or private sale, the proceeds of which shall be applied first to the expenses of removal, storage and sale, second to any sums owed by the Lessee to the Port Authority, with any balance remaining to be paid to the Lessee; if the expenses of such removal, storage and sale shall exceed the proceeds of sale, the Lessee shall pay such excess to the 10 Port Authority upon demand. Notwithstanding anything in this Agreement to the contrary, the Lessee's restoration obligations under this Agreement which would otherwise apply upon expiration or termination of this Agreement shall not be applicable upon termination of this Agreement pursuant to this Section 9 to the portion or portions of the premises damaged under the circumstances described in paragraph (a) above except to the extent that the Lessee shall be required to remove all of its trade fixtures, equipment and any other personalty from such damaged portion or portions of the premises. (g) The provisions of paragraph (a) of this Section 9 shall also be applicable to damage to the premises and the damaged areas caused by the fault of the Lessee, its officers, members, employees, customers, guests, invitees and other persons who are doing business with the Lessee, or who are on the premises with the Lessee's consent, but notwithstanding such application or any action taken by the Port Authority or the Lessee pursuant to paragraph (a) of this Section 9, including without limitation, termination of the letting, the Lessee's obligation to repair and rebuild under paragraph (b) of Section 8 shall continue in full force and effect except to the extent released pursuant to the provisions of the Section of this Agreement entitled "Liability Insurance". In connection with damage to the premises or the damaged areas which is due to the fault of the Lessee, its officers, employees, customers, invitees or other persons doing business with the Lessee, the Lessee shall not be entitled to an abatement of rentals unless and only to the extent that the Port Authority actually receives proceeds of rental insurance in connection with such damage, it being understood that the Port Authority shall not be obligated to maintain or procure such insurance. Section 10. Indemnity (a) The Lessee shall indemnify and hold harmless the Port Authority, its Commissioners, officers, agents and employees from (and shall reimburse the Port Authority for the Port Authority's costs or expenses including reasonable legal expenses and the costs to the Port Authority of its in-house legal counsel incurred in connection with the defense of) all claims and demands of third persons including but not limited to those for death, for personal injuries, or for property damages, arising out of any default of the Lessee in performing or observing any term or provision of this Agreement, or out of the use or occupancy of the premises by the Lessee or by others with its consent, or out of any of the acts or omissions of the Lessee, its officers, members, employees, agents, representatives, contractors, customers, guests, invitees and other persons who are doing business with the Lessee or who are at the premises with the Lessee's consent where such acts or omissions are on the premises, or arising out of any acts or omissions of the Lessee, its officers, members, employees, agents and representatives where such acts or omissions are elsewhere at the World Trade Center. (b) If so directed, the Lessee shall at its own expense defend any suit based upon any such claim or demand (even if such suit, claim or demand is groundless, false or fraudulent), and in handling such it shall not, without obtaining express advance permission from the General Counsel of the Port Authority, raise any defense involving in any way the jurisdiction of the tribunal over the person of the Port Authority, the immunity of the Port Authority, its 11 Commissioners, officers, agents or employees, the governmental nature of the Port Authority or the provision of any statutes respecting suits against the Port Authority. Section 11. Ingress and Egress The Lessee solely for itself, its officers, employees and such business invitees as are at the premises in connection with the transaction of the regular business of the Lessee, shall have the right of ingress and egress between the premises and the City streets outside the World Trade Center. Such right shall be exercised by means of such corridors, lobbies, public areas and pedestrian or vehicular ways, and by means of such elevators, escalators or other facilities for movement of persons or property, to be used subject to all the provisions of this Agreement and in common with others having rights of passage and movement within the World Trade Center, as may from time to time be designated by the Port Authority for the use of the public. The use of any such facility, way or other area shall be subject to the rules and regulations of the Port Authority which are now in effect or which may hereafter be promulgated for the safe and efficient operation of the World Trade Center. The Port Authority may, at any time, temporarily or permanently close, move, change or limit the use of, or consent to or request the closing, moving, changing or limitation of the use of, any such facility, way or any other area at or near the World Trade Center presently or hereafter used as such, so long as a reasonably comparable means of ingress and egress as provided above remains available to the Lessee. The Lessee shall not do or permit anything to be done which will interfere with the free access and passage of others to space adjacent to the premises or in any areas, streets, ways, facilities and walks near the premises. Section 12. Construction by the Lessee (a) Except as expressly provided in this Section 12, the Lessee shall not erect any structures, make any modifications, alterations, additions, improvements, repairs or replacements or do any construction work on or to the premises, or install any fixtures in or on the premises (other than trade fixtures, removable without injury to the premises and other than purely decorative changes such as painting, the Lessee to notify the Port Authority not less than five (5) business days prior to making any decorative changes and the Lessee shall not commence or continue such changes if the Port Authority advises the Lessee that such changes are not decorative and require the prior approval of the Port Authority) without the prior consent of the Port Authority, and in the event any construction, improvement, alteration, modification, addition, repair or replacement is made or done with or without such consent and unless the consent of the Port Authority shall expressly provide otherwise, the same shall immediately become the property of the Port Authority and any change or removal of same by the Lessee, except for trade fixtures removable without injury to the premises, either during the term or at the expiration thereof shall be in accordance with and pursuant to the terms of this Section. Notwithstanding the foregoing, immediately upon notice from the Port Authority given at any time during the letting, the Lessee shall remove or change any of the same made or done by it without the Port Authority's consent, and in the case of any of the same made or done with the Port Authority's consent, the 12 Lessee if so required by notice from the Port Authority, shall remove and restore the following improvements and installations made or installed by the Lessee in the premises immediately upon the expiration or termination of the letting, or immediately upon receipt of such notice as may be given within thirty (30) days after such expiration or termination: modular furniture, computer and telecommunications equipment and wiring, all standard office equipment, inventories, removable fixtures and other personal property of the Lessee or for which the Lessee is responsible, and the Lessee shall repair any damage caused by any of such removal work. In addition, immediately upon expiration or termination of the letting or immediately upon receipt of notice from the Port Authority as may be given within thirty (30) days after such expiration or termination, the Lessee shall be required to restore all floor slabs or other vertical penetrations and to restore all other structural work performed by the Lessee to the condition existing at the time the premises were made available to the Lessee, including the removal of all stairwells installed in the premises by the Lessee. In the event the Lessee removes electrical or plumbing fixtures, the Lessee shall be required to cap all altered electrical and plumbing lines flush with walls, floors and ceilings but nothing in this sentence shall be construed as an obligation of the Lessee to remove electrical or plumbing fixtures unless such obligation is imposed elsewhere in this Section. Nothing herein shall be deemed to affect or impair the Lessee's maintenance and repair obligations set forth elsewhere in this Agreement. With respect to any modifications, additions, alterations, improvements, installations or construction made or done by the Port Authority at the request of the Lessee either prior to or during the term of the letting, the Lessee shall have the same obligations as provided above with respect to that made or done by the Lessee with the Port Authority's consent. (b) The Lessee has thoroughly examined and inspected the premises and agrees, except for the work described in the Section of this Agreement entitled "Port Authority Work", to take the premises in its "as is" condition on the date of this Agreement, provided, however that if there is a latent condition existing in the premises on the Prior Entry Date requiring structural work, which condition was not known by the Lessee at the time of its execution of this Agreement, then the Lessee shall notify the Port Authority expeditiously upon its discovery of such condition and the Port Authority, at its cost and expense, will correct same. The Lessee acknowledges that it has not relied upon any representation or statement of the Port Authority or of its Commissioners, officers, agents or employees as to the suitability of the premises for the operations permitted thereon by this Agreement. The Port Authority, except for the work described in the Section of this Agreement entitled "Port Authority Work", shall have no obligation hereunder for finishing work or preparation of the premises for the Lessee's use. The Lessee, subject to the provisions of paragraph (g) of this Section 12, agrees to perform at its sole cost and expense all construction and installation work that it may require to finish off and decorate the premises. Without limiting the generality of the foregoing, the Lessee acknowledges that facilities for heat, ventilation and air cooling have heretofore been installed in the premises pursuant to a certain design configuration and the Port Authority makes no representations that such heat, ventilation and air-cooling shall be adequate for the Lessee's needs and in the event any alteration to 13 such facilities shall be required the cost of the same shall be borne by the Lessee. Nothing in the preceding sentence shall be construed to relieve the Port Authority from providing heat, ventilation and air cooling in accordance with the specifications set forth in Schedule D attached hereto. (c) With respect to all modifications, alterations, additions, improvements, repairs, replacements or other construction or installation work proposed to be performed in or on the premises (hereinafter referred to as the "construction and installation work") the Lessee shall submit to the Port Authority for its approval a construction application for the premises in the form attached hereto as Exhibit TAA setting forth in detail and by appropriate plans and specifications the construction and installation work proposed by the Lessee to finish off and decorate the premises and the manner of and time periods for performing the same. No construction and installation work shall be commenced by the Lessee in the premises until the construction application and plans and specifications have been approved by the Port Authority. In the event of any incon- sistency between the provisions of this Agreement and the construction application, the provisions of this Agreement shall control. The data to be supplied by the Lessee shall describe in detail the fixtures, equipment and systems, if any, to be installed by the Lessee or, if already installed, to be modified by the Lessee including those for the emission, handling and distribution of heat, air conditioning, domestic hot and cold water and electrical and other systems and shall show the proposed method of tying in the same to the utility lines or connections provided by the Port Authority either on or off the premises. The Lessee shall install all electrical distribution equip- ment required, including but not limited to, service switches, excluding the disconnect switches, current transformer cabinets and, if the consumption and demand for electricity by the Lessee is to be metered, meter pans suitable for the installation by the Port Authority of an electric meter or meters, the Port Authority to provide and install such meter or meters at its sole cost and expense. The Lessee shall be responsible at its sole expense for retaining all architectural, engineering and other technical consultants and services as may be reasonably required by the Port Authority and for developing, completing and submitting detailed plans and specifi- cations for the work. The plans and specifications to be submitted by the Lessee to the Port Authority shall bear the seal of a qualified architect or professional engineer and shall be in sufficient detail for a contractor to perform the work. If the Lessee's plans and specifications shall satisfy and be in conformance with the applicable requirements of the Port Authority's Tenant Construction Review Manual issued by the Port Authority Engineering Department dated March, 1984, revised March, 1990, together with Amendment No. 1 dated October, 1990, (and as the same may be further amended prior to the date the Lessee submits its plans and specifications) the Port Authority will approve same. In the event the Lessee disputes an interpretation or application by the Port Authority of any of the provisions of the Construction Manual with respect to any work to be performed by the Lessee pursuant to this Section 12, then and in such event such dispute shall be diligently resolved by the Port Authority's Chief Engineer. In the event that the Lessee in connection with the performance of the initial construction and finishing work in the premises shall give to the Port Authority not less than twenty (20) business days' notice of the date that the Lessee intends to deliver 14 its construction application and plans and specifications to the Port Authority and the Lessee shall actually deliver such construction application and plans and specifications to the Port Authority on such date and such construction application and plans and specifications shall cover all of the initial construction and installation work necessary to finish off and decorate the premises (hereinafter called the "Pre-Appointment Process"), then the Port Authority will review the same and forward its comments thereon to the Lessee within seven (7) business days after the Port Authority's receipt of such construction application and plans and specifications and the Port Authority will review and comment on any resubmission of corrected, modified or amended plans and specifications within seven (7) business days after the Port Authority's receipt thereof. All comments made by the Port Authority to the Lessee pursuant to this Section shall be made in writing and all comments by the Port Authority with respect to the Lessee's plans and specifications shall be made with specificity. If the total of the number of business days actually required by the Port Authority for review of all submissions and resubmissions of the Lessee's construction application and plans and specifications for the initial construction and finishing work during the Pre-Appointment Process should be in excess of the total of the number of business days allocated for the Pre-Appointment Process to all such reviews of the Lessee's submissions and resubmissions of its plans and specifications as provided above, then the two hundred seventy-one (271) day period from the commencement date of the term of the letting used to determine the Rent Commencement Date shall be increased by one (1) day for each of such excess business days. The Lessee hereby agrees that such increase in the number of days from the commencement date of the letting to the Rent Commencement Date shall be the sole remedy available to the Lessee in the event the Port Authority fails, within the time provided herein for the Port Authority to respond to the Lessee's submission or resubmission of its construction application and plans and specifications during the Pre-Appointment Process. In the event the Lessee does not elect to use the "Pre- Appointment Process", then the Port Authority shall review the construction application and all plans and specifications submitted by the Lessee for the initial work and will forward its comments on same within fifteen (15) business days after its receipt of the aforesaid submission, provided such construction application and plans and specifications cover all of the initial construction and installation work necessary to finish off and decorate the premises (unless the estimated amount of the work to be performed by the Lessee as shown on the construction application is in excess of $3,000,000.00, in which case the Port Authority will so respond within twenty (20) business days after such submission by the Lessee) and will review and comment on any resubmissions within twelve (12) business days (unless the estimated amount of the work to be performed by the Lessee as shown on the construction application is greater than $3,000,000.00, in which case the Port Authority will so respond in 14 business days). If the total of the number of business days actually required by the Port Authority for the review of all submissions and resubmissions of the Lessee's plans and specifications for the initial work shall be in excess of the total of the number of business days allocated to all reviews of the Lessee's submissions and resubmissions as provided in the preceding sentence, then the two hundred seventy-one (271) day period from the commencement date of the term of the letting used to determine the Rent Commencement Date shall be increased by one (1) day for each of such excess business days. The Lessee hereby agrees that 15 such increase in the number of days from the commencement date of the letting to the Rent Commencement Date shall be the sole remedy available to the Lessee in the event the Port Authority fails within the time provided for above in this paragraph to respond to the Lessee's submission or resubmission. The Lessee shall not engage any contractor or permit the use of any subcontractor unless and until each such contractor or subcontractor shall have been approved by the Port Authority. The Port Authority hereby approves the AJ Contracting Company, Inc. as the Lessee's general contractor. The Port Authority further agrees that within five (5) business days after a request is made by the Lessee, it will notify the Lessee as to whether it approves or disapproves any contractor or subcontractor as to which the Lessee seeks Port Authority approval. If the Port Authority shall fail to notify the Lessee in writing within such five (5) business day period that such contractor or subcontractor is approved or disapproved, such contractor or subcontractor shall be deemed to have been approved by the Port Authority for performance of the work for which such contractor or subcontractor was submitted. The Lessee shall include in each such contract or subcontract such provisions as the Port Authority may reasonably approve or reasonably require including, without limitation thereto, provisions regarding labor harmony. The Lessee hereby assumes the risk of loss or damage to all of the construction and installation work prior to the completion thereof. If such loss or damage shall occur prior to the delivery by the Port Authority's Assistant Director Physical Facilities, World Trade Department, of the certificate of substantial completion to the Lessee and the Port Authority as hereinafter provided in this paragraph (c), the Lessee, subject to the provisions of paragraph (f) of the Section of this Agreement entitled "Liability Insurance", shall forthwith repair, replace and make good the construction and installation work and the property of the Port Authority without cost or expense to the Port Authority. If such loss or damage shall occur subsequent to delivery of such certificate, the provisions of the Section of this Agreement entitled "Casualty" shall be applicable. The Lessee shall itself and shall also require its contractors to indemnify and hold harmless the Port Authority, its Commissioners, officers, agents and employees from and against all claims and demands, just or unjust, of third persons (including employees, offi- cers, and agents of the Port Authority) arising or alleged to arise out of the performance of the construction and installation work and for all expenses, including without limitation thereto legal expenses (including the costs to the Port Authority of its in-house legal counsel), incurred by it and by them in the defense, settlement or satisfaction thereof, including without limitation thereto, claims and demands for death, for personal injury or for property damage, direct or consequential, whether they arise from the acts or omissions of the Lessee, of any contractors of the Lessee, of the Port Authority, or of third persons, or from acts of God or of the public enemy, or otherwise, excepting only claims and demands which result from affirmative willful acts done by the Port Authority, its Commissioners, officers, agents and employees with respect to the construction and installation work, provided, however, that the Lessee shall not be required to indemnify the Port Authority where such indemnity would be precluded pursuant to the provisions of Section 5- 322.1 of the General Obligations Law of the State of New York. Notwithstanding the provisions of the foregoing sentence, with respect to the Additional Lessee Work, as such term is defined in the Section of this Agreement entitled "Port Authority Work; Additional Lessee 16 Work", the Lessee's indemnification obligations therein shall be limited to claims and demands arising or alleged to arise out of the negligent acts of the Lessee, its officers and employees, but nothing herein shall limit the indemnification obligations of the Lessee's contractor as stated aforesaid. The Lessee shall, and shall cause each of its contractors and subcontractors to, obtain and maintain in force such insurance coverage, including without limitation a contractual liability endorsement covering the obligations assumed by the Lessee in the three preceding sentences. All work to be performed by the Lessee hereunder shall be in accordance with the said construction application and final plans and specifications approved by the Port Authority, except that all aspects of the construction and installation work which affect life safety shall be performed strictly in accordance with the construction application and final plans and specifications approved by the Port Authority, shall be subject to inspection by the Port Authority during the progress of the work and after the completion thereof and the Lessee shall redo or replace at its own expense any work not done in accordance therewith. In connection therewith the Lessee agrees not to install ceiling tiles in the premises or otherwise cover up the ceiling until the Port Authority has inspected any ceiling work performed by the Lessee in the premises and the Port Authority agrees to inspect any ceiling work performed by the Lessee within five (5) business days after such request is made by the Lessee. Upon substantial completion of the initial construction and installation work to be performed by the Lessee pursuant to the construction application the Lessee shall deliver to the Port Authority a certificate by an authorized officer of the Lessee and a certificate by the Lessee's qualified architect and/or professional engineer, each certifying that the initial con- struction and installation work has been performed in accordance with the construction application and the final plans and specifications approved by the Port Authority (or strictly in accordance with the plans and specifications approved by the Port Authority in the case of life-safety matters) and the provisions of this Agreement and in compliance with the Port Authority's Tenant Construction Review Manual and all applicable governmental laws, ordinances, enactments, resolutions, rules, regulations and orders. Notwithstanding the foregoing, with respect to the certification set forth in the preceding sentence, the Lessee may notify the Port Authority in writing that the certification of the Lessee's architect or professional engineer shall also be deemed to be the certification of the Lessee with the same force and effect as if given directly by the Lessee. The Port Authority shall inspect the initial construction and installation work and within fifteen (15) business days after receipt of such certification (or within ten (10) business days after receipt of a resubmission of such certification), the Port Authority's Assistant Director, Physical Facilities, World Trade Department, shall do either of the following (i) if the initial construction and installation work has been substantially completed as certified by the Lessee and such architect and/or engineer, the Assistant Director shall so certify to the Port Authority and to the Lessee, subject to the condition that all risks thereafter with respect to the construction and installation work covered by such construction application and any liability therefor for negligence or other reason shall be borne by the Lessee, or (ii) notify the Lessee and the Port Authority that the work has not been substantially completed as so certified by the Lessee and its architect or professional engineer, such notification to specifically state the objections with respect to 17 such certification. For purposes of this Section "substantial completion" shall mean completion of all non life-safety working in accordance with the approved plans and specifications except for minor, insubstantial "punch list" items and completion of all work relating to life-safety strictly in accordance with the approved plans and specifications. If the total of the number of business days actually required by the Port Authority's Assistant Director, Physical Facilities, World Trade Department, to respond to all certifications and recertifications of the Lessee and its architect or professional engineer with respect to the initial work should be in excess of the total of the number of business days allocated, then the two hundred seventy-one (271) day period from the commencement date of the letting used to determine the Rent Commencement Date shall be increased by the number of such excess business days. The Lessee shall not use or permit the use of any portion of the premises in which the construction and installation work is being performed for conducting its business operations until such certification is received from said Assistant Director, Physical Facilities, and the Lessee shall not use or permit the use of such portion of the premises even if such certification is received with respect to a portion of the construction and installation work if said Assistant Director, Physical Facilities, states in any such certification that such portion of the premises cannot be used until other specified portions of the construction and installation work are completed. Upon completion of the initial work the Lessee shall supply the Port Authority with "as built" drawings in form and number requested by the Port Authority. (d) The Lessee shall be solely responsible for the plans and specifications used by it, except for the plans and specifications prepared by the Port Authority and furnished to the Lessee for the performance of the Lessee's Additional Work, and for the adequacy and sufficiency of such plans and specifications and all the improvements depicted thereon or covered thereby, regardless of the consent thereto or approval thereof by the Port Authority or the incorporation therein of any Port Authority requirements or recommendations. The Port Authority shall have no obligations or liabilities in connection with the performance of the work performed by the Lessee or on its behalf or the contracts for the performance thereof entered into by the Lessee. Any warranties extended or available to the Lessee in connection with the aforesaid work shall be for the benefit of the Port Authority as well as the Lessee. (e) Title to and property in the construction and installation work and to all fixtures, equipment and systems installed pursuant to this Section and any replacements thereof shall vest in the Port Authority upon the construction, installation or replacement thereof and the Lessee shall execute such necessary documents confirming the same as the Port Authority may require. (f) Without limiting or affecting any other term or provision of this Agreement, the Lessee shall be solely responsible for the design, adequacy and operation of all utility, mechanical, electrical, communications and other systems made or installed by the Lessee in the premises and shall do all preventive maintenance and make all repairs, replacements and rebuilding necessary to keep such systems and all other improvements, additions and fixtures, finishes and decorations made or installed by the Lessee (whether the same 18 involves structural or non-structural work) in good condition befitting a tenancy in a first class office building. The Lessee has advised the Port Authority that it may elect as part of its construction and finishing work to reinforce the floor located in the portion of the premises shown on Exhibit A attached to this Agreement and to perform poke throughs and install drains therein. The Port Authority will cooperate with the Lessee to gain access to space located on the 22nd floor of the South Tower Building for the purpose of enabling the Lessee to perform such reinforcement work, but the Lessee understands that the Port Authority is offering no assurances that such tenant currently in occupancy on said 22nd floor will grant access to the Lessee or on what terms and conditions such access will be granted and the Lessee further understands and agrees that there will be no liability to the Port Authority if such tenant refuses to grant access. If such access is so granted the Lessee hereby agrees to indemnify the Port Authority from and against all claims made against the Port Authority arising or resulting from performance of such reinforcement work by the Lessee. In the event that during performance of such work the Lessee discovers the presence of asbestos or asbestos-containing materials in the ceiling of the said 22nd floor space, then the Lessee shall immediately notify the Port Authority who will diligently remove same at its cost and expense and will refireproof, if necessary, the ceiling area containing asbestos or asbestos-containing materials, provided that such asbestos or asbestos-containing materials were not placed therein by the Lessee or its contractor. The Lessee shall not commence performance of any reinforcement work unless and until the Port Authority has approved the Lessee's construction application and plans and specification with respect to same. (g) The Port Authority in connection with the Lessee's initial construction and installation work performed in the premises will pay to the Lessee an amount equal to the lesser of (1) the cost of such initial construction and installation work performed in the premises or (2) the sum of Three Million Six Hundred Forty-four Thousand Five Hundred Forty-six Dollars and No Cents ($3,644,546.00), such lesser amount being hereinafter referred to as the "Lessee's Finishing Allowance." "Cost" as used herein shall mean the sum of (i) direct labor and material costs and contract costs for the purchase and installation of fixtures, equipment, mill work and other finishing and decorating work, including the cost of purchase and installation of modular partition systems and other employee work stations, telecommunications equipment and wiring, to the extent all of same are actually installed in, affixed or annexed to the premises, (ii) construction management, engineering, architectural, project consulting, planning and design and similar professional fees and expenses which, taken together, do not exceed thirty percent (30%) of the total of the aforesaid costs set forth in clause (i) above, (iii) moving and relocation expenses incurred by the Lessee in connection with the relocation to the premises of its property and equipment from its current space at 110 William Street, New York, New York and from the space currently leased by Unity Fire and General Insurance Company (a wholly owned subsidiary of the Lessee) from the Port Authority on the 29th floor of the South Tower Building at the World Trade Center and (iv) utility, freight elevator and standby labor charges incurred during construction, inspection, filing, sign off and all other charges and fees imposed by the Port Authority in connection with such work. In no event whatsoever shall "cost", as defined and computed in 19 this paragraph, include any expenses, outlays or charges whatsoever by or for the account of the Lessee for or in connection with any work performed by the Lessee pursuant to paragraphs (c), (d) and (e) of the Section of the Agreement entitled "Port Authority Work; Additional Lessee Work", or in connection with equipment or fixtures or the making of any finishing or decorating work unless such are actually and completely installed in and or made to the premises, nor shall "cost" include the cost of any equipment, fixtures or improvement which is secured by liens, mortgages, other encumbrances or conditional bills of sale, nor shall "cost" include any payment made to organizations which are owned by or in common ownership with the Lessee. The Lessee's Finishing Allowance will be paid to the Lessee as follows: not more than once each calendar month following the calendar month in which the Lessee commences the construction and installation work in the premises pursuant to the provisions of this Section 12, the Lessee shall deliver a certificate to the Port Authority signed by a designated representative of the Lessee which shall certify the amount of the payments made by the Lessee which are properly includible in the Lessee's cost of performing the construction and installation work during the preceding calendar month, each such certificate to set forth the total cumulative payments constituting the Lessee's cost made by the Lessee from the commencement of the construction and installation work to the date of the certificate and each such certificate also to contain a certification by the Lessee or at the Lessee's option, the Lessee's architect or professional engineer (provided that if such certification is made by such architect or engineer, then it shall be with the same force and effect as if such certification had been made directly by the Lessee itself) that the portion of the Lessee's construction and installation work performed by the Lessee since the last such certificate and covered by such certificate has been performed in accordance with the terms of this Agreement and the Construction Application. Within 30 days after the delivery of each such certificate by the Lessee, the Port Authority shall pay to the Lessee the amount constituting the Lessee's cost of performing the construction and installation work and paid by the Lessee during the preceding calendar month, less ten percent (10%) of the portion of such cost attributable to clause (i) above (but only less five percent (5%) thereof subsequent to the date that the Lessee's architect or engineer certifies to the Port Authority that at least fifty percent (50%) of the entire finishing and installation work proposed to be performed by the Lessee has been installed in the premises), provided that the total of such periodic payments made by the Port Authority shall not exceed the Lessee's Finishing Allowance. Upon substantial completion of the construction and installation work in the premises to the satisfaction of the Port Authority's Assistant Director, Physical Facilities, World Trade Department, and his certification thereof to the Port Authority and to the Lessee, the Port Authority will pay to the Lessee the amount so certified by the Lessee which shall equal the total of the ten percent (10%) and five percent (5%) deductions made in connection with all previous periodic payments less the amount of the Port Authority's periodic payments which a preliminary determination of the Lessee's cost discloses exceeds the Lessee's Finishing Allowance and less a retainage amount, such retainage amount to be equal to one hundred fifty percent (150%) of the amount reasonably established by the Port Authority as the cost of fully completing such work but nothing herein shall be construed to relieve the Lessee of its obligation to expeditiously complete such 20 work, such payment to be made within 30 days after such certification. Also, upon full completion of all the construction and installation work to be performed by the Lessee pursuant to the provisions of this Section 12, the Lessee shall supply to the Port Authority a full statement of the cost thereof, certified by a designated representative of the Lessee. After examination and approval of such certified statement and after such further examination of the records and books of account of the Lessee relating to the costs of the construction and installation work as the Port Authority may deem reasonable, the Port Authority to promptly examine such certified statement and such books and records, the Port Authority will promptly finally determine the cost of the construction and installation work performed in the premises and if such final determination discloses that a part of the Lessee's Finishing Allowance remains unpaid, the Port Authority will pay the same to the Lessee within fifteen (15) days after such final determination, and if the final determination discloses that the payments previously made exceed the Lessee's Finishing Allowance, the Lessee shall repay to the Port Authority the amount of such excess within fifteen (15) days after notice from the Port Authority of the amount thereof. The Lessee prior to a final determination of cost shall permit the Port Authority, by its agents, employees and representatives at all reasonable times and upon reasonable prior notice, to examine and audit the records and other documentation of the Lessee which pertain to and will substantiate the cost. The Port Authority agrees that it will not impose a fee upon the Lessee during the Lessee's initial move into the premises for the use of freight elevators solely to relocate the Lessee's furniture, equipment, trade fixtures and other items of personalty into the premises from its current space at 110 William Street and from the Unity space at the Facility. Section 13. Signs Except with the prior consent of the Port Authority, the Lessee shall not erect, maintain or display any signs, advertising, posters or similar devices at or on the exterior parts of the premises or in the premises so as to be visible through the windows, glass walls or exterior doors thereof. The Port Authority hereby agrees that it will not withhold its approval to any sign submitted to it for approval by the Lessee to the extent such sign is in accordance with the Tenant Construction Review Manual. Upon the expiration or termination of the letting, the Lessee shall remove, obliterate or paint out, as the Port Authority may direct, any and all signs and advertising, posters or similar devices, and in connection therewith shall repair any damage resulting from such removal. Section 14. Injury and Damage to Person or Property The Port Authority shall not be liable to the Lessee or others for any personal injury, death or property damage from falling material, water, rain, hail, snow, gas, steam, dampness, explosion, smoke, radiation, and/or electricity, whether the same may leak into or fall, issue, or flow from any part of the premises or of the World Trade Center, including without limitation thereto any utility, mechanical, electrical, communication or other systems therein, or from any other place or quarter unless said damage, injury or death shall be due to the negligent acts or willful misconduct of the Port Authority, its employees or agents. Notwithstanding the foregoing 21 provisions of this Section, the Lessee covenants and agrees that (a) any rights of the Lessee to make a claim against the Port Authority as contemplated herein shall be subject to the waiver of subrogation provisions set forth in the Section of this Agreement entitled "Liability Insurance" and (b) in no event shall the Lessee be entitled to make a claim for consequential, indirect or special damages pursuant to this Section. Section 15. Additional Rent and Charges (a) If the Lessee shall fail or refuse to perform any of its obligations under this Agreement, the Port Authority, in addition to all other remedies available to it, shall have the right (but shall not be obligated to) to perform any of the same after five (5) days' notice to the Lessee of its intention to perform the same, and the expiration of any applicable grace period and the Lessee shall pay the Port Authority's cost thereof on demand. Notwithstanding the foregoing the Port Authority need not give prior notice of its intention to perform any of the same in case of emergency. If the Port Authority has paid any sum or sums or has incurred any obligations, expense or cost which the Lessee has agreed to pay or reimburse the Port Authority for, or if the Port Authority is required or elects to pay any sum or sums or incurs any obligations, expense or cost by reason of the failure, neglect or refusal of the Lessee to perform or fulfill any one or more of the conditions, covenants or agreements contained in this Agreement, or as a result of an act or omission of the Lessee contrary to the said conditions, covenants and agreements, including any legal expense or cost in connection with any actions or proceeding brought by the Port Authority against the Lessee or by third parties against the Port Authority, the Lessee agrees to pay the sum or sums so paid or the expense and the Port Authority's reasonable cost so incurred, including all interest costs, damages and penalties, and the same may be added to any installment of rent thereafter due hereunder and each and every part of the same shall be and become additional rent, recoverable by the Port Authority in the same manner and with like remedies as if it were originally a part of the basic rental as set forth in the Section of this Agreement entitled "Basic Rental". (b) "Cost" or "costs" of the Port Authority in this Agreement shall mean and include (1) payroll costs including but not limited to contributions to the retirement system, or the cost of participation in other pension plans or systems, insurance costs, sick leave pay, holiday, vacation, authorized absence pay or other fringe benefits; (2) cost of materials, supplies and equipment used (including rental thereof); (3) reasonable payments to contractors; and (4) any other reasonable direct costs. Section 16. Rights of Entry Reserved (a) The Port Authority, by its officers, employees, agents, representatives and contractors shall have the right at all times and without notice during an emergency and during normal business hours and upon reasonable oral notice in non-emergency situations to enter upon the premises for the purpose of inspecting the same, for observing the performance by the Lessee of its obligations under this Agreement, and for the doing of any act or 22 thing which the Port Authority may be obligated or have the right to do under this Agreement or otherwise. (b) Without limiting the generality of the foregoing, the Port Authority, by its officers, employees, representatives and contractors, shall have the right, for its own benefit, for the benefit of the Lessee or for the benefit of others at the World Trade Center, to maintain initially existing and future utility, mechanical, electrical, communication and other systems or portions thereof on the premises, and to enter upon the premises at all times without prior notice during emergency situations and at all reasonable times upon reasonable oral notice to make such repairs, alterations and replacements as may, in the opinion of the Port Authority, be deemed necessary or advisable and, from time to time, to construct or install over, in, under or through the premises new lines, pipes, mains, wires, conduits, equipment and other such provided that to the extent feasible same are placed within the then existing interior walls, floors, existing columns or ceilings or else alongside thereof and boxed in, and the finish thereof to be consistent with that existing before such work and the Port Authority agrees to consult with the Lessee as to the most appropriate or feasible place for construction or installation of any item, provided, however, the actual location of same shall be as reasonably determined by the Port Authority and provided further that the Port Authority during performance of such work makes reasonable efforts to minimize disruption to the Lessee's operations; and to use the premises for access to other portions of the World Trade Center not otherwise conveniently accessible; and to take all material into and upon the premises that may be required for such repairs, alterations and replacements; provided, however, that such repair, alteration, replacement, construction or access shall not unreasonably interfere with the use of the premises by the Lessee. The Port Authority agrees to store only those materials in the premises as are necessary to perform the work described in this paragraph (b) and the Port Authority further agrees to clean up the premises to the Lessee's reasonable satisfaction subsequent to completion of the work and to repair any damage resulting from such work. The Port Authority agrees, unless there is no practical alternative, or unless required by law, to perform such maintenance, repair, alteration, replacement, installation or construction so as not to effectuate a permanent material reduction of the usable footage in the premises. A material reduction of the usable square footage shall have occurred if the usable square footage is reduced by more than twenty (20) usable square feet, and in the event of such permanent material reduction, the basic rental and additional basic rental shall be abated as provided in the Section of this Agreement entitled "Abatement of Rental". (c) In the event that any property of the Lessee shall obstruct the access of the Port Authority, its employees, agents or contractors to any of the existing or future utility, mechanical, electrical, communication and other systems and thus shall interfere with the inspection, maintenance, repair or modification of any such system, the Lessee shall move such property as requested by the Port Authority, in order that the access may be had to the system or part thereof for its inspection, maintenance, repair or modification. (d) Nothing in this Section shall or shall be construed to impose upon the Port Authority any obligations so to 23 construct or maintain or to make repairs, replacements, alterations or additions, or shall create any liability for any failure so to do, but nothing herein shall be construed to relieve the Port Authority from performance of obligations specifically imposed elsewhere in this Agreement. The Lessee is and shall be in exclusive control and possession of the premises and the Port Authority shall not in any event be liable for any injury or damage to any property or to any person happening on or about the premises nor for any injury or damage to the premises nor to any property of the Lessee or of any other person located therein or thereon (other than those occasioned by the negligent acts or willful misconduct of the Port Authority). (e) At any time and from time to time during normal business hours within the six (6) months next preceding the expiration of the letting, the Port Authority, by its agents and employees, whether or not accompanied by prospective lessees, occupiers or users of the premises, shall have the right, upon reasonable advance notice, to enter thereon for the purpose of exhibiting and viewing all parts of the same. The Lessee shall have the right to accompany the Port Authority at all such times and the Port Authority agrees to use reasonable efforts to minimize disruption to the Lessee's business. (f) The exercise of any or all of the foregoing rights by the Port Authority or others shall not be or be construed to be an eviction of the Lessee nor be made the grounds for any abatement of rental or any claim or demand for damages, consequential or otherwise. Section 17. Condemnation (a) In any action or proceeding instituted by any governmental or other authorized agency or agencies for the taking for a public use of any interest in all or any part of the premises, or in case of any deed, lease or other conveyance in lieu thereof (all of which are in this Section referred to as "taking or conveyance") the Lessee shall not be entitled to assert any claim to any compensation, award or part thereof made or to be made therein or therefor or any claim to any consideration or rental or any part thereof paid therefor, or to institute any action or proceeding or to assert any claim against such agency or agencies or against the Port Authority for or on account of any such taking or conveyance, except for a possible claim to an award for moving expenses or for trade fixtures owned and installed by the Lessee, provided that such claim is independent of and in addition to any claim of the Port Authority and provided further that the Port Authority's award is not thereby reduced or otherwise adversely affected, it being understood and agreed between the Port Authority and the Lessee that except for such claims the Port Authority shall be entitled to all the compensation or awards made or to be made or paid and all such consideration or rentals, free of any claim or right of the Lessee. No taking by or delivery to any governmental authority under this paragraph (a) shall be or be construed to be an eviction of the Lessee or be the basis for any claim by the Lessee for damages, consequential or otherwise. (b) In the event of a taking or conveyance of the entire premises by any governmental or other authorized agency or agencies, then the letting under this Agreement shall, as of the date possession is taken from the Port Authority by such agency or 24 agencies, cease and determine in the same manner and with the same effect as if the term of the letting had on that date expired. (c) In the event of a taking or conveyance by any governmental or other authorized agency or agencies of a part of the premises then the letting as to such part only shall, as of the date possession thereof is taken from the Port Authority by such agency or agencies, cease and determine, and the rental thereafter to be paid by the Lessee to the Port Authority shall be abated as provided in the Section of this Agreement entitled "Abatement of Rental" from and after the date of such taking or conveyance. (d) In the event that the taking or conveyance or the delivery by the Lessee or taking by the Port Authority pursuant to the Section of this Agreement entitled "Governmental Compliance" covers fifty percent (50%) or more of the total usable area of the premises, then the Lessee and the Port Authority shall each have an option exercisable by notice given within thirty (30) days after such taking or conveyance, to terminate the letting hereunder, as of the date of such taking, and such termination shall be effective as if the date of such taking were the original date of expiration hereof. (e) In the event that the taking or conveyance or the delivery by the Lessee or taking by the Port Authority pursuant to the Section of this Agreement entitled "Governmental Compliance" covers ten percent (10%) or more of the total usable area of the premises but less than fifty percent (50%) of the total usable area of the premises, the Lessee shall have the option exercisable by notice given to the Port Authority within thirty (30) days after such taking or delivery to terminate this Agreement and the letting hereunder with respect to the balance of the premises provided, however, that the Lessee's notice to the Port Authority be accompanied by a statement from a responsible officer of the Lessee acting in good faith that on an economic and operational basis the remaining portion of the premises cannot be used by the Lessee or is inadequate for use by the Lessee for the operations described in the Section of this Agreement entitled "Rights of User by the Lessee", and provided, further that the Lessee shall not be in default under any term or provision of this Agreement beyond any applicable cure period, or under notice of termination from the Port Authority either on the date of its giving of notice to the Port Authority, or on the effective date. Section 18. Abatement of Rental (a) In the event that the Lessee shall at any time become entitled to an abatement of rent, the basic rental set forth in the Section of this Agreement entitled "Basic Rental" and the additional basic rental set forth in Schedule A attached to this Agreement shall be abated for the period the abatement is in effect by the same percentage that the area of the part of the premises the use of which is denied to the Lessee is of the total area of the premises. (b) For the purposes of this Section, the number of square feet contained in the premises or parts thereof shall be computed as follows: By measuring from the inside surface of outer building walls to the surface of the public area side, or of the non- exclusive area side, as the case may require, of all partitions separating the space measured from adjoining areas designated for the 25 use of the public or for use by the Lessee in common with others, and to the center of partitions separating the space measured from adjoining space exclusively used by others; no deduction will be made for columns, partitions, pilasters or projections necessary to the building and contained within the space measured. Permanent partitions enclosing elevator shafts, stairs, fire-towers, vents, pipe-shafts, meter-closets, flues, stacks and any vertical shafts have the same relation to the space measured as do outer building walls. (c) In the event that during the term of the letting under this Agreement the Lessee shall be partially evicted and shall remain in possession of the premises or the balance thereof, the Lessee agrees that notwithstanding it might have the right to suspend payment of the rent in the absence of this provision, it agrees to pay and will pay at the times and in the manner herein provided, the full rent reserved less only an abatement thereof computed in accordance with the above. Section 19. Assignment and Sublease (a) Subject to the provisions of this Section 19, the Lessee expressly covenants that it shall not assign, mortgage or encumber this Agreement nor sublet, or suffer or permit the premises or any part thereof to be used by others, without the prior written consent of the Port Authority in each instance. A merger or consolidation shall not be deemed a violation of this paragraph (a) provided the conditions set forth in paragraph (a)(5) of the Section of this Agreement entitled "Termination" are met. (b) Notwithstanding the provisions of paragraph (a) of this Section 19, the Lessee shall have the right to assign this agreement and the letting hereunder in its entirety to, or to sublet to or to permit the use of desk space by a Related Entity; such assignment, subletting or desk space use to continue only as long as the proposed assignee maintains the relationship of Related Entity to the Lessee provided that any such assignee, sublessee or desk space user of the premises shall use the premises solely for the purposes set forth in the Section of this Agreement entitled "Rights of User by the Lessee" and for no other purpose whatsoever. Any such assignment pursuant to this paragraph (b) shall not be effective until an agreement in the form attached hereto as Exhibit Y has been executed by the Port Authority, the Lessee and the proposed assignee and no such subleasing pursuant to this paragraph (b) shall be effective until an agreement in the form attached hereto as Exhibit X has been executed by the Port Authority, the Lessee and the proposed subtenant. The Lessee, and the assignee, subtenant, or the desk-space user, as the case may be, shall furnish to the Port Authority such information, data and documents as may be requested by the Port Authority from time to time to substantiate the relationship between the Lessee and such assignee, subtenant or desk-space user. The Port Authority agrees to execute the said agreement annexed hereto as Exhibit Y within ten (10) business days after receipt of (i) such agreement duly executed by the Lessee and the proposed assignee and (ii) the documents, information and other data referred to in the immediately preceding sentence establishing the requisite relationship between the Lessee and proposed assignee. The Port Authority with respect to a proposed subletting pursuant to this paragraph (b) shall execute the Consent to 26 Sublease Agreement, or shall specify to the Lessee its reasons for refusing to do so, within a period of fifteen (15) business days following receipt by the Port Authority of (i) a written sublease agreement fully executed by the Lessee and a proposed subtenant and (ii) any other documents, information and data reasonably required by the Port Authority with respect to such subletting. In addition to the foregoing, the Lessee, subject to the provisions of this paragraph (b) shall have the right to assign this Agreement and the letting hereunder to a corporation into which the Lessee is merged or consolidated, provided the requirements of paragraph (a)(5) of the Section of this Agreement entitled "Termination" are met and the Lessee shall also have the right, subject to the provisions of this paragraph (b) to assign this Agreement and the letting hereunder to an entity to which all or substantially all of the Lessee's assets have been transferred. "Related Entity" as used herein shall mean a corporation, partnership or limited liability company which shall control, is controlled by or is under common control with the Lessee. "Control", as used herein, shall mean, in the case of a corporation, legal or beneficial ownership by one person, firm or corporation, or by a group acting in concert, of a majority of the capital stock and voting rights (with power to exercise such rights) of the corporation (provided, however that in connection with the proposed use of desk space by a single corporate entity not to exceed 3,000 usable square feet, control shall mean ownership of not less than thirty-five percent (35%) of the capital stock and voting rights (with power to exercise such rights) of the corporation by the Lessee or by a corporation which directly or indirectly controls or is directly or indirectly controlled by the Lessee or by a corporation which is directly or indirectly controlled by a corporation which directly controls the Lessee, and in the case of such indirect control, each of the entities in the chain between the Lessee and proposed desk space user shall directly control or be directly controlled by the immediately adjacent entity in such chain), and in the case of a partnership or limited liability company it shall mean the power to direct the management and policies of such entity, whether by legal or beneficial ownership, or otherwise. The Port Authority hereby consents to the use of desk space in the premises by Unistrat Corporation of America, a New York corporation, such use not to exceed 1,000 usable square feet. (c) Notwithstanding the provisions of paragraph (a) of this Section 19 and in addition to the rights contained in paragraph (b) of this Section, the Lessee may, after the commencement of the letting, sublet a part or all of the premises (but under no circumstances shall there be more subtenants in the premises at any one time pursuant to the provisions of paragraph (b) of this Section and this paragraph (c), collectively then the whole number obtained by dividing 9,000 into the total number of rentable square feet in the premises) provided that all of the following conditions precedent and requirements have been met or satisfied: (1) Each proposed subtenant shall, in the opinion of the Port Authority, be eligible, suitable and qualified as a World Trade Center tenant, it being understood that the Port Authority in exercising such opinion will not declare a proposed subtenant to be ineligible unsuitable or unqualified to be a World Trade Center tenant if such proposed subtenant engages in a type or types of business or operations engaged in or previously engaged in by other office tenants at the World Trade Center whose eligibility and qualifications were determined by the Port Authority under the 27 provisions of Chapter 5 of Title 17 of the Unconsolidated Law of the State of New York strictly on the basis of their functions, activities and services in world trade and commerce; (2) The rental payable by the subtenant to the Lessee for or in connection with its use or occupancy of the subleased space shall be not less than the rental charged by the Port Authority for comparable space for a comparable term on the date of such subletting; (3) If the rental rate (taking into account all concessions given by the Lessee and all consideration payable by the subtenant to the Lessee for or in connection with its use or occupancy of the subleased space) shall be in excess of the rental rate (taking into account all concessions given by the Port Authority) provided for in this Agreement for the term of the proposed subletting, the Lessee shall so notify the Port Authority and the Lessee subject to the deductions set forth in paragraph (f) of this Section 19, shall pay fifty percent (50%) of such excess to the Port Authority as received; (4) The proposed subtenant is not a current occupant of the World Trade Center and has not been in discussion with the Port Authority toward its current or future occupancy of space in the World Trade Center within six (6) months prior to the Lessee's request to the Port Authority to enter into the Consent to Sublease Agreement provided the restrictions in this subdivision (4) shall not be applicable if the proposed subtenant has been notified by the Port Authority that it does not have available at the World Trade Center for the term sought by the proposed subtenant space comparable in size to that being sought by such proposed subtenant; and (5) The Lessee, the subtenant and the Port Authority have executed the form of agreement entitled "Consent to Sublease Agreement", annexed to this Agreement and marked "Exhibit X". (d) Execution of the Consent to Sublease Agreement referred to in paragraph (c) above by the Port Authority and return thereof to the Lessee shall constitute the determination referred to in subdivision (1) of paragraph (c) above. The Lessee and subtenant shall present in advance all documents, information and other data which the Port Authority may reasonably require relating to the matters covered in subdivisions (1), (2), (3) and (4) of paragraph (c) above and the subtenant shall supply during the continuance of any approved subletting such additional or current documents, information or other data as the Port Authority may from time to time reasonably require. The Port Authority with respect to a proposed subletting pursuant to paragraph (c) above shall execute the Consent to Sublease Agreement or shall specify to the Lessee its reasons for failing to do so, within a period of fifteen (15) business days following receipt by the Port Authority of (i) a written sublease agreement duly executed by the Lessee and a proposed subtenant and (ii) any other documents, information and data reasonably required by the Port Authority with respect to such proposed subletting. (e) If the Lessee assigns, sells, conveys, transfers, mortgages, pledges or sublets or permits the use of desk space in the premises in violation of paragraphs (a), (b) or (c) of this Section or if the premises are occupied by anybody other than the Lessee, the Port Authority may upon Lessee's default collect rent from any assignee, sublessee, desk-space user or anyone who claims a right to this Agreement or letting or who occupies the premises, and shall apply the net amount collected to the basic rental herein reserved; and no such collection shall be deemed a waiver by the Port Authority of the covenants contained in paragraphs (a), (b) or (c) of this 28 Section nor an acceptance by the Port Authority of any such assignee, sublessee, desk-space user, claimant or occupant as Lessee, nor a release of the Lessee by the Port Authority from further performance by the Lessee of the covenants contained herein. The granting of consent by the Port Authority to any assignment or subletting shall not be deemed to operate as a waiver of the requirement for obtaining the express prior written consent of the Port Authority to any other or subsequent assignment or subletting. (f) If, in connection with any subletting pursuant to the provisions of paragraph (c) hereof consented to by the Port Authority as provided herein, the Lessee (1) has paid a brokerage commission or commissions (at the customary and usual rates prevailing in the City of New York) to a real estate broker or brokers licensed to do business in the State of New York, which brokerage commission or commissions are not reimbursed to the Lessee by the subtenant, provided such brokerage commission or commissions are actually paid for services and are incurred solely in connection with such subletting and would not have been required to have been paid except for such subletting; or (2) has incurred any cost for finishing such sublet space to prepare the same for such subtenant which is not reimbursed to the Lessee by the subtenant; or (3) has granted to a subtenant a basic rental concession for or in connection with its use or occupancy of the sublease space; or (4) has incurred a legal fee solely in connection with the negotiation, preparation and execution of a sublease in connection with subletting; or (5) has incurred advertising and marketing expenses solely in connection with such subletting or (6) has actually incurred an interest expense in connection with such subletting, such interest expense to be allowed solely to the extent that the Lessee has actually borrowed funds from a third party lender and has actually used such funds solely for the expenses incurred in items (1) through (5) herein; (the total of items (1), (2), (3), (4), (5) and (6) being hereinafter referred to as the "subleasing expenses"), then the Lessee shall divide the subleasing expenses by the number of calendar months and the proportionate part of any partial calendar month comprising the term of such sublease, and the amount resulting from such division shall be deducted from the amount of the rental or other consideration payable by the subtenant to the Lessee each month which is in excess of the rental rate payable by the Lessee to the Port Authority applicable to the subleased space for that month, and fifty percent (50%) of the balance of such excess of the rental and other consideration shall be payable by the Lessee to the Port Authority for that month. If requested by the Port Authority, the Lessee shall make available from time to time for examination by the Port Authority the Lessee's books and records relating to the receipt of sublease rental and to the subleasing expenses. (g) In the event the Lessee intends to sublet all or a portion of the premises pursuant to the provisions of paragraph (c) of this Section 19, and the rental which the Lessee proposes to obtain in connection with the proposed subletting is less than the rental being then charged by the Port Authority for comparable space for a comparable term, then notwithstanding the provisions of subdivision (2) of paragraph (c) of this Section, the Lessee shall have the right to submit to the Port Authority a statement of its Intention to Sublet. The Intention to Sublet shall be a written statement executed by an authorized officer of the Lessee setting forth the following 29 information with respect to any future subletting then contemplated by the Lessee: (1) A description of the portion or portions of the premises which the Lessee intends to sublet, including the number of rentable square feet contained therein and the proposed effective date of such subletting; (2) The amount of any finishing allowance, payments to contractors or the cost of any other work to be offered by the Lessee to prepare the sublet premises for a subtenant; (3) Rent concessions, if any; (4) Relocation contributions per rentable square foot which the Lessee intends to offer a subtenant; (5) If the Lessee intends to utilize a real estate broker in connection with any proposed subletting, then the Lessee's good faith estimate of the amount of brokerage commissions which would be payable by the Lessee in connection with any proposed subletting; (6) Legal fees, advertising and marketing expenses and interest expenses which the Lessee estimates in good faith it will incur in connection with the proposed subletting; (7) The term of the proposed subletting, it being understood that the term of any proposed subletting shall not exceed the remaining balance of the term of the letting under this Agreement less one (1) day. (h) In the event the proposed term of the subletting set forth in the Intention to Sublet is for the entire balance of the term of the letting less one (1) day, then the Port Authority may, by notice to the Lessee within twenty (20) business days after receipt of such Intention to Sublet, terminate this Agreement as to the portion of the premises which the Lessee intends to sublet as set forth in such Intention to Sublet, such termination being hereinafter referred to as the "Port Authority Termination". Such Port Authority Termination shall be effective as of the proposed effective date of the subletting as set forth in the Intention to Sublet and from and after the effective date of such termination there shall be a reduction of the annual basic rental and additional basic rental payable, such reduction to be determined as follows: the annual basic rental for each period set forth in paragraph (a) of the Section of this Agreement entitled "Rental" shall be reduced by an amount equal to the product obtained by multiplying the annual basic rental for that period by a fraction, the numerator of which shall be the aggregate number of rentable square feet contained in such portion of the premises (the letting of which has been terminated) and the denominator of which shall be 58,783 rentable square feet, and 30 rentable square feet in the premises used in calculating additional basic rental pursuant to Schedule A shall be reduced by the amount of rentable square feet in such portion of the premises (the letting of which shall have been terminated). In the event the Port Authority is entitled to exercise a right of termination with respect to a proposed subletting set forth in an Intention to Sublet pursuant to this paragraph (h), but fails to exercise such right of termination, then the provisions of subdivision (2) of paragraph (c) of this Section 19 shall not be applicable with respect to such proposed subletting set forth in such Intention to Sublet unless the actual proposed subletting is in violation of paragraph (k) below of this Section 19 in which case the provisions of said subdivision (2) of said paragraph (c) shall remain applicable. (i) In the event that the proposed term of the subletting set forth in the Intention to Sublet is for a period less than the entire balance of the term of the letting under this Agreement less one (1) day, then the Port Authority may, by notice to the Lessee within twenty (20) business days after receipt of such Intention to Sublet, sublet from the Lessee for the term set forth in the Intention to Sublet the portion of the premises which the Lessee intends to sublet as set forth in such Intention to Sublet, such subletting being hereinafter referred to as the "Port Authority Subletting". Such Port Authority Subletting shall be effective as of the proposed effective date of the subletting as set forth in the Intention to Sublet and shall expire on the expiration date set forth in such Intention to Sublet or such earlier date as this Agreement and the letting hereunder shall terminate, (such subletting to be effectuated by the Port Authority's notice without any further document or agreement required to be executed by the parties hereto) and from and after the effective date of such subletting there shall be a reduction of the annual basic rental and additional basic rental payable, such reduction to be determined as follows: the annual basic rental for each period set forth in paragraph (a) of the Section of this Agreement entitled "Rental" shall be reduced by an amount equal to the product obtained by multiplying the annual basic rental for that period by a fraction, the numerator of which shall be the aggregate number of rentable square feet contained in such sublet portion of the premises and the denominator of which shall be 58,783 rentable square feet, and rentable square feet in the premises used in calculating additional basic rental pursuant to Schedule A shall be reduced by the amount of rentable square feet in such portion of the sublet premises. In the event the Port Authority is entitled to exercise a right to sublet with respect to a proposed subletting set forth in an Intention to Sublet pursuant to this paragraph (i), but fails to exercise such right to sublet, then the provisions of subdivision (2) of paragraph (c) of this Section 19 shall not be applicable with respect to such proposed subletting set forth in such Intention to Sublet unless the actual proposed subletting is in violation of paragraph (k) below of this Section 19 in which case the provisions of said subdivision (2) of said paragraph (c) shall remain applicable. The Lessee shall have no rights whatsoever to the sublet premises during the term of any subleasing hereunder and shall be released from all lease obligations with respect to any portion of the premises sublet to the Port Authority hereunder by the Lessee during the term of such subletting but nothing herein shall be construed to relieve the Lessee from any obligations under this Agreement with respect to such sublet space which has accrued prior to the effective 31 date of such subletting. Upon the expiration date of such subletting all of the Lessee's obligations under this Agreement with respect to such sublet space shall be applicable, including the payment of basic and additional basic rental, with the same force and effect as if such subletting had never occurred. In the event that the term of the subletting hereunder is for a term of five (5) years or less the subleased space shall be made available to the Lessee at the expiration of the term of the sublease in substantially the same condition, except for reasonable wear and tear, as it was made available to the Port Authority on the commencement of the sublease to the Port Authority. In the event that the term of the subletting to the Port Authority is in excess of five (5) years, then the Lessee hereby agrees to accept such sublet space on the expiration of the sublease in its then "as is" condition except that the Port Authority will remove any structural improvements made during the term of the sublease, will remove all personalty therefrom and will remove all telecommunications wiring and cabling installed during the term of the sublease. The Port Authority during the term of any subletting hereunder shall have the exclusive right to use the sublet space and without limiting the foregoing may use the sublet space for its own benefit or may lease the same to third parties, the terms and conditions of any third party arrangement to be in the sole discretion of the Port Authority. The Lessee agrees to vacate the sublet premises and to remove all of its trade fixtures, equipment and all other personalty from the premises on or before the effective date of any subletting hereunder. The Port Authority will not be obligated to provide any utilities or services to the sublet premises during the period of the subletting hereunder and will not be obligated to pay the Lessee any basic rental or additional basic rental in connection with the portion or portions of the premises sublet to the Port Authority hereunder. (j) In the event the Port Authority exercises its Port Authority Termination option pursuant to paragraph (h) above, or in the event the Port Authority exercises its Port Authority Subletting option pursuant to paragraph (i) above, the Lessee shall pay to the Port Authority upon the effective date of such Port Authority Termination or the effective date of such Port Authority Subletting, as the case may be, the following amounts: (i) an amount equal to the then present value of the difference between (x) the amount obtained by multiplying the amount of basic rental payable by the Lessee to the Port Authority under this Agreement for the premises during the period from the effective date of the Port Authority Termination or Port Authority Subletting, as the case may be, through the balance of the term of the letting under this Agreement in the case of Port Authority Termination or through the balance of the term of the Port Authority Subletting in the event of a Port Authority Subletting, by a fraction, the numerator of which shall be the number of rentable square feet contained in the portion of the premises proposed to be subleased as set forth in the Intention to Sublet and the denominator of which shall be the total number of rentable square feet contained in the premises and (y) the "Total Sublease Basic Rental Amount"; the Total Sublease Basic Rental Amount shall be the product obtained by multiplying the number of months from the effective date of the Port Authority Termination or the effective date of the Port Authority Subletting through the balance of the term of the letting under this Agreement in the case of Port Authority Termination or through the balance of the term of the Port Authority Subletting, as the case may 32 be, by the average monthly basic rental amount payable under the proposed sublease described in the Intention to Sublet, such amount to be obtained by dividing the number of months in the proposed sublease term described in the Intention to Sublet into the total basic rental payable under the proposed sublease for the entire term of such sublease, and (ii) an amount equal to the sum of the expenses set forth in subdivisions (2), (3), (4), (5) and (6) of paragraph (g) above of this Section 19 which have been or which would have been incurred by the Lessee in connection with such subletting. In determining the present value of basic rental for purposes of this paragraph (j), an interest rate per annum equal to the prime rate established by Citibank, N.A. at the time of the determination shall be used. (k) In the event that the Port Authority shall fail to exercise its right to terminate or sublet pursuant to paragraphs (h) or (i) above of this Section 19, as the case may be, within twenty (20) business days after the Port Authority's receipt of an Intention to Sublet from the Lessee, then the Lessee, notwithstanding the provisions of subdivision (2) of paragraph (c) of this Section 19, but subject to the provisions of this paragraph (k), shall have the right to sublet the premises or the portions thereof described in said Intention to Sublet pursuant to and in accordance with said paragraph (c) provided, however, that if the Lessee thereafter requests the Port Authority to enter into a Consent to Sublease Agreement covering a proposed sublease and the number of rentable square feet proposed to be sublet is more than ten percent (10%) larger or smaller than the number of rentable square feet described in the Intention to Sublet or that the term of the subletting is six (6) months greater or shorter than the term set forth in the Intention to Sublet or that on a per rentable square foot basis the present value of the rental and all other consideration payable by the proposed subtenant over the term for the proposed subletting less the present value of any free rent period and any credits, allowances or payments payable to such proposed subtenant is less than eighty-nine percent (89%) of the present value on a per rentable square foot basis of the rental and all other consideration which would have been payable in connection with the subletting covered by the Intention to Sublet, then the provisions of subdivision (2) of said paragraph (c) shall be deemed applicable and the Port Authority without any liability on its part may refuse to enter into such Consent to Sublease Agreement with respect to such proposed subletting. In determining present value for purposes of this paragraph (k), an interest rate per annum equal to the prime rate of Citibank, N.A. in effect on the date of such determination shall be used. Notwithstanding anything herein to the contrary, if the Lessee with respect to an Intention to Sublet fails to request the Port Authority to enter into a Consent to Sublease within two hundred seventy (270) days after such Intention to Sublet was submitted to the Port Authority, then it shall be with the same force and effect as if such Intention to Sublet were never submitted to the Port Authority and the provisions of subdivision (2) of paragraph (c) of this Section 19 shall remain in full force and effect. Section 20. Termination (a) If any one or more of the following events shall occur, that is to say: 33 (1) The Lessee shall become insolvent, or shall take the benefit of any present or future insolvency statute, or shall make a general assignment for the benefit of creditors, or file a voluntary petition in bankruptcy or a petition or answer seeking an arrangement or its reorganization or the readjustment of its indebtedness under the federal bankruptcy laws or under any other law or statute of the United States or of any State thereof, or consent to the appointment of a receiver, trustee, or liquidator of all or substantially all its property; or (2) By order or decree of a court the Lessee shall be adjudged bankrupt or an order shall be made approving a petition filed by any of the creditors or, if the Lessee is a corporation, by any of the stockholders of the Lessee, seeking its reorganization or the readjustment of its indebtedness under the federal bankruptcy laws or under any law or statute of the United States or of any State thereof; or (3) A petition under any part of the federal bankruptcy laws or an action under any present or future insolvency law or statute shall be filed against the Lessee and shall not be dismissed within ninety (90) days after the filing thereof; or (4) Except as specifically permitted in the Section of this Agreement entitled "Assignment and Sublease", the letting hereunder or the interest or estate of the Lessee under this Agreement shall be transferred to, pass to or devolve upon, by operation of law or otherwise, any other person, firm or corporation; or (5) The Lessee, if a corporation, shall, without the prior consent of the Port Authority, become a possessor or merged corporation in a merger, a constituent corporation in a consolidation, or a corporation in dissolution, unless the corporation resulting from such merger or consolidation has a financial standing as of the date of the merger or consolidation at least as good as that of the Lessee, by which is meant that its ratio of current assets to current liabilities and its net worth shall each be at least as favorable as that of the Lessee; or (6) The Lessee is a partnership, and the said partnership shall be dissolved as the result of any act or omission of its partners or any of them, or by operation of law or the order or decree of any court having jurisdiction, or for any other reason whatsoever; or (7) By or pursuant to, or under authority of any legislative act, resolution or rule, or any order or decree of any court or governmental board, agency or officer, a receiver, trustee, or liquidator shall take possession or control of all or substantially all the property of the Lessee, or any execution or attachment shall be issued against the Lessee or any of its property, whereupon possession of the premises shall be taken by someone other 34 than the Lessee, and any such possession or control shall continue in effect for a period of sixty (60) days; or (8) Any lien is filed against the premises because of any act or omission of the Lessee and is not removed or bonded within forty-five (45) days after notice thereof from the Port Authority; or (9) If this Agreement shall require a guarantor of one or more of the Lessee's obligations under this Agreement and any of the events described in subparagraphs (1), (2), (3) or (7) above shall occur to or with respect to the guarantor (whether or not they shall also occur to or with respect to the Lessee); or (10) The Lessee shall fail duly and punctually to pay the rentals or to make any other payment required hereunder when due to the Port Authority and such failure shall continue for a period of ten (10) days after the Port Authority shall have given the Lessee a statement therefor; or (11) The Lessee shall fail to keep, perform and observe each and every other promise, covenant and agreement set forth in this Agreement on its part to be kept, performed, or observed, within thirty (30) days after receipt of notice of default thereunder from the Port Authority (except where fulfillment of its obligation requires activity over a period of time, and the Lessee shall have commenced to perform whatever may be required for fulfillment within thirty (30) days after receipt of notice and continues diligently such performance without interruption except for causes beyond its control); then upon the occurrence of any such event or at any time thereafter during the continuance thereof, the Port Authority may by five (5) days' notice terminate the letting, such termination to be effective upon the date specified in such notice. Such right of termination and the exercise thereof shall be and operate as a conditional limitation. (b) If any of the events enumerated in paragraph (a) of this Section shall occur prior to the Prior Entry Date, the Lessee shall not be entitled to enter into possession of the premises and the Port Authority upon the occurrence of any such event or at any time thereafter during the continuance thereof by twenty-four (24) hours' notice may cancel the interest of the Lessee under this Agreement, such cancellation to be effective upon the date specified in such notice. (c) No acceptance by the Port Authority of rentals, fees, charges or other payments in whole or in part for any period or periods after a default in any of the terms, covenants and conditions to be performed, kept or observed by the Lessee shall be deemed a waiver of any right on the part of the Port Authority to terminate the letting. (d) No waiver by the Port Authority or the Lessee of any default on the part of the other party to this Agreement in 35 performance of any of the terms, covenants or conditions hereof to be performed, kept or observed by such party shall be or be construed to be a waiver by the Port Authority or the Lessee of any other or subsequent default in performance of any of the said terms, covenants and conditions. (e) The rights of termination described above shall be in addition to any other rights of termination provided in this Agreement and in addition to any rights and remedies that the Port Authority would have at law or in equity consequent upon any breach of this Agreement by the Lessee, and the exercise by the Port Authority of any right of termination shall be without prejudice to any other such rights and remedies. (f) The Lessee hereby waives its right to trial by jury in any summary proceeding or action that may hereafter be instituted by the Port Authority against the Lessee in respect of the premises or in any action that may be brought by the Port Authority to recover rent, damages, or other sums payable hereunder. The Lessee shall not interpose any claims as counterclaims in any summary proceeding or action for non-payment of rental which may be brought by the Port Authority unless such claims would be deemed waived if not so interposed. Section 21. Right of Re-entry The Port Authority shall, as an additional remedy upon the giving of a notice of termination as provided in the Section of this Agreement entitled "Termination", have the right to re-enter the premises and every part thereof upon the effective date of termination without further notice of any kind, and may regain and resume possession either with or without the institution of summary or any other legal proceedings or otherwise. Such re-entry, or regaining or resumption of possession, however, shall not in any manner affect, alter or diminish any of the obligations of the Lessee under this Agreement, and shall in no event constitute an acceptance of surrender. Section 22. Survival of the Obligations of the Lessee (a) In the event that the letting shall have been terminated in accordance with a notice of termination as provided in the Section of this Agreement entitled "Termination", or the interest of the Lessee cancelled pursuant thereto, or in the event that the Port Authority has re-entered, regained or resumed possession of the premises in accordance with the provisions of the Section of this Agreement entitled "Right of Re-entry", all the obligations of the Lessee under this Agreement shall survive such termination or cancellation, re-entry, regaining or resumption of possession and shall remain in full force and effect for the full term of this Agreement, and the amount or amounts of damages or deficiency shall become due and payable, as more specifically stated in paragraph (b) below, to the Port Authority to the same extent, at the same time or times and in the same manner as if no termination, cancellation, re- entry, regaining or resumption of possession had taken place. (b) Immediately upon any termination or cancellation pursuant to the Section of this Agreement entitled "Termination", or 36 upon any re-entry, regaining or resumption of possession in accordance with the Section of this Agreement entitled "Right of Re-entry", there shall become due and payable by the Lessee to the Port Authority, in addition to rental accrued prior to the effective date of termination, without notice or demand and as damages, the sum of the following: (1) subject to the provisions of paragraph (c) below, an amount equal to the then present value of all basic rental provided for in this Agreement for the entire term, following the effective date of termination, as originally fixed in the Section of this Agreement entitled "Term" less the amount thereof which may have been actually paid by the Lessee; (2) the amount of all other unfulfilled monetary obligations of the Lessee under this Agreement, including without limitation thereto, all sums constituting additional rental hereunder and the cost to and expenses of the Port Authority for fulfilling all other obligations of the Lessee which would have accrued or matured during the balance of the term or on the expiration date originally fixed or within a stated time after expiration or termination; and (3) an amount equal to the cost to and the expenses of the Port Authority in connection with the termination, cancellation, regaining possession and restoring and reletting the premises (provided that as to any costs which would have been customarily incurred by the Port Authority upon the original expiration date of the letting with respect to any reletting, such as brokerage commissions, finishing allowances and rent concessions the portion of such costs to be included herein shall be equivalent to the product obtained by multiplying such costs by a fraction the numerator of which shall be the number of months in the letting hereunder subsequent to termination and up to the original expiration date and the denominator shall be the number of months in the term of any such reletting), the Port Authority's legal expenses and costs including the costs to the Port Authority of its in-house counsel, and the Port Authority's cost and expenses for the care and maintenance of the premises during any period of vacancy, and any brokerage fees and commissions in connection with any reletting. (c) The Port Authority may at any time bring an action to recover all the damages as set forth above not previously recovered in separate actions, or it may bring separate actions to recover the items of damages set forth in subparagraphs (2) and (3) of paragraph (b) above and separate actions periodically to recover from time to time only such portion of the damages set forth in subparagraph (1) of paragraph (b) above as would have accrued as rental up to the time of the action if there had been no termination or cancellation. In any such action the Lessee shall be allowed a credit against its survived damages obligations equal to the amounts which the Port Authority shall have actually received from any tenant, licensee, permittee or other occupier of the premises or a part thereof during the period for which damages are sought, and if recovery is sought for a period subsequent to the date of suit a credit equal to the market rental 37 value of the premises during such period (discounted to reflect the then present value thereof). If at the time of such action the Port Authority pursuant to an arms length transaction has relet the premises, the rental for the premises obtained through such reletting shall be deemed to be the market rental value of the premises or be deemed to be the basis for computing such market rental value if less than the entire premises were relet. In no event shall any credit allowed to the Lessee against its damages for any period exceed the then present value of the basic rental which would have been payable under this Agreement during such period if a termination or cancellation had not taken place. In determining present value of rental an interest rate of 6% per annum shall be used. Section 23. Reletting by the Port Authority The Port Authority, upon termination or cancellation pursuant to the Section of this Agreement entitled "Termination", or upon any re-entry, regaining or resumption of possession pursuant to the Section of this Agreement entitled "Right of Re-entry", may occupy the premises or may relet the premises, and shall have the right to permit any person, firm or corporation to enter upon the premises and use the same. The Port Authority may grant free rental or other concessions and such reletting may be of part only of the premises or of the premises or a part thereof together with other space, and for a period of time the same as or different from the balance of the term hereunder remaining, and on terms and conditions and for purposes the same as or different from those set forth in this Agreement. The Port Authority shall also, upon termination or cancellation pursuant to the Section of this Agreement entitled "Termination", or upon its re- entry, regaining or resumption of possession pursuant to the Section of this Agreement entitled "Right of Re-entry", have the right to repair or to make structural or other changes in the premises, including changes which alter the character of the premises and the suitability thereof for the purposes of the Lessee under this Agreement, without affecting, altering or diminishing the obligations of the Lessee hereunder. In the event either of any reletting or of any actual use and occupancy by the Port Authority or a third party whose occupancy is not pursuant to an arms-length transaction (the mere right to use and occupy not being sufficient however) there shall be credited to the account of the Lessee against its survived obligations hereunder any net amount remaining after deducting from the amount actually received from any lessee, licensee, permittee or other occupier as the rental or fee for the use of the said premises or portion thereof during the balance of the letting as the same is originally stated in this Agreement (it being understood, however, that in computing such net amount remaining to the Port Authority any rent concessions or finishing allowances granted by the Port Authority or brokerage commissions paid by the Port Authority in connection with any reletting shall be amortized on a straight-line basis over the entire term of the reletting), or from the market value of the occupancy of such portion of the premises as the Port Authority or a third party occupying not pursuant to an arms-length transaction may during such period actually use and occupy, all expenses, costs and disbursements incurred or paid by the Port Authority in connection therewith. No such reletting or such use and occupancy shall be or be construed to be an acceptance of a surrender. 38 Section 24. Waiver of Redemption The Lessee hereby waives any and all rights of redemption, granted by or under any present or future law, arising in the event it is evicted or dispossessed for any cause, or in the event the Port Authority obtains or retains possession of the premises in any lawful manner. Section 25. Remedies and Suits Against the Lessee All remedies provided in this Agreement shall be deemed cumulative and additional and not in lieu of or exclusive of each other or of any other remedy available to the Port Authority at law or in equity. In the event of a breach or threatened breach by the Lessee of any term, covenant, condition or provision of this Agreement, the Port Authority shall have the right of injunction and the right to invoke any other remedy allowed by law or in equity as if termination, re-entry, summary proceedings and any other specific remedies including without limitation thereto, indemnity and reimbursement, were not mentioned herein, and neither the mention thereof nor the pursuance or exercise or failure to pursue or exercise any right or remedy shall preclude the pursuance or exercise of any other right or remedy. Section 26. Surrender (a) The Lessee covenants and agrees to yield and deliver peaceably to the Port Authority possession of the premises on the date of the cessation of the letting, whether such cessation be by termination, expiration or otherwise, promptly and in the condition required by paragraph (a) of the Section of this Agreement entitled "Construction by the Lessee". (b) Unless the same are required for the performance by the Lessee of its obligations hereunder, the Lessee shall have the right at any time during the letting to remove from the premises, and, on or before the expiration or earlier termination of the letting, shall so remove its equipment, removable fixtures and other personal property, and all property of third persons for which it is responsible, repairing all damages caused by such removal. If the Lessee shall fail to remove such property on or before the termination or expiration of the letting, the Port Authority shall have the same rights with respect to such property as it has in the event of casualty under paragraph (d) of the Section of this Agreement entitled "Casualty". Section 27. Acceptance of Surrender of Lease No agreement of surrender or to accept a surrender shall be valid unless and until the same shall have been reduced to writing and signed by the duly authorized representatives of the Port Authority and of the Lessee. Except as expressly provided in this Section, neither the doing of, nor any omission to do, any act or thing, by any of the officers, agents or employees of the Port Authority, shall be deemed an acceptance of a surrender of the letting or of this Agreement. Without limiting the foregoing, no employee or officer of the Port Authority shall be authorized to accept the keys 39 of the premises prior to the expiration date of the letting as fixed in the Section of this Agreement entitled "Term" and no delivery of the keys by the Lessee shall constitute a termination of this Agreement or acceptance of surrender. Section 28. Brokerage The Lessee represents and warrants that it has not dealt or had any contacts or dealings with any broker in connection with the negotiation and execution of this Agreement or the letting hereunder except Edward S. Gordon Company, Inc., a New York corporation having an office and place of business at 111 Broadway, New York, New York 10006, and that there is no broker with whom the Lessee has dealt or had contacts or dealings with who is or may be entitled to be paid a commission or fee in connection with the negotiation and execution of this Agreement or the letting hereunder except Edward S. Gordon Company, Inc. The Lessee shall indemnify and save harmless the Port Authority of and from any and all claims for commission, brokerage or fees which have been or which may be made by any and all persons, firms or corporations whatsoever for services in connection with the negotiation and execution of this Agreement or the letting hereunder with whom the Lessee has dealt or had contacts or dealings with except for a claim of Edward S. Gordon Company, Inc. if the said claim is made in accordance with the terms of the agreement between the Port Authority and Edward S. Gordon Company, Inc. dated as of January 10, 1995. Section 29. Notices (a) Notices, requests, permissions, consents and approvals given or required to be given to or by either party under this Agreement, shall not be effective unless they are given in writing, and all such notices and requests shall be (i) personally delivered to the party or a duly designated officer or representative of such party; or (ii) delivered to the office of such party, officer or representative during regular business hours; or (iii) if directed to the Lessee, delivered at the premises at any time from and after the date the Lessee commences business operations in the premises; or (iv) forwarded to such party, officer or representative at the office or residence address by registered or certified mail. The Lessee shall designate an office within the Port of New York District and an officer or representative whose regular place of business is at such office. Except as may be specifically provided elsewhere in this Agreement, the Port Authority hereby designates its Executive Director, and the Lessee designates the person named as representative on the first page hereof as their respective officers or representatives upon whom notices and requests may be served. The Port Authority designates its office at One World Trade Center, New York, New York 10048 as its office where notice and requests may be served. The Lessee up until the date it commences business operations in the premises designates its office at 110 William Street, New York, New York 10038 and from and after the date it commences business operations in the premises designates its office at the address stated on the first page hereof, as its respective offices where notices and requests may be served. It is hereby understood and agreed that the Port Authority and the Lessee by prior notice to the other from time to time may designate officers and representatives and offices 40 different than those named herein for the purposes of receiving notices and requests. (b) If any notice is delivered, such notice shall be deemed to have been given or made on the date delivered and if any notice is mailed, such notice shall be deemed to have been given or made on the second day after the day the notice is so mailed. Section 30. Payments (a) All payments required of the Lessee by this Agreement shall be mailed to the Port Authority of New York and New Jersey, P. O. Box 17309, Newark, New Jersey 07194, or to such office or address as may be substituted therefor. (b) No payment by the Lessee or receipt by the Port Authority of a lesser rental amount than that which is due and payable under the provisions of this Agreement at the time of such payment shall be deemed to be other than a payment on account of the earliest rental then due, nor shall any endorsement or statement on any check or in any letter accompanying any check or payment be deemed an accord and satisfaction, and the Port Authority may accept such check or payment without prejudicing in any way its right to recover the balance of such rental or to pursue any other remedy provided in this Agreement or by law. No payment by the Port Authority or receipt by the Lessee of a lesser amount than that which is due and payable under the provisions of this Agreement at the time of such payment shall be or be deemed to be other than a payment on account, nor shall any endorsement or statement or any check or in any letter accompanying any check or payment be deemed an accord and satisfaction, and the Lessee may accept such check or payment without prejudicing in any way its right to recover the balance of any such amount or to pursue any other remedy provided in this Agreement or by law. Section 31. Late Charges; Monetary and Non-Monetary Disputes (a) If the Lessee should fail to pay any amount required under this Agreement when due to the Port Authority, including without limitation any payment of basic or other rental or any payment of utility or other charges, then, in such event, the Port Authority may impose (by statement, bill or otherwise) a late charge with respect to each such unpaid amount for each late charge period (hereinbelow described) during the entirety of which such amount remains unpaid, each such late charge not to exceed an amount equal to eight-tenths of one percent of such unpaid amount for each late charge period. There shall be twenty-four late charge periods on a calendar year basis; each late charge period shall be for a period of at least fifteen (15) calendar days except one late charge period each calendar year may be for a period of less than fifteen (but not less than thirteen) calendar days. Each late charge shall be payable immediately upon demand made at any time therefor by the Port Authority. No acceptance by the Port Authority of payment of any unpaid amount or of any unpaid late charge amount shall be deemed a waiver of the right of the Port Authority to payment of any late charge or late charges payable under the provisions of this Section with respect to such unpaid amount. Each late charge shall be and 41 become additional rent, recoverable by the Port Authority in the same manner and with like remedies as if it were originally a part of the rental as set forth in the Section of this Agreement entitled "Basic Rental". Nothing in this Section is intended to, or shall be deemed to, affect, alter, modify or diminish in any way (i) any rights of the Port Authority under this Agreement, including without limitation the Port Authority's rights set forth in the Section of this Agreement entitled "Termination" or (ii) any obligations of the Lessee under this Agreement. If the precise amount of any payment required to be made by the Lessee under this Agreement cannot be known to the Lessee, such payment shall not be deemed due to the Port Authority until ten (10) days after the Port Authority notifies the Lessee of the amount of such payment. In the event that any late charge imposed pursuant to this Section shall exceed a legal maximum applicable to such late charge, then, in such event, each such late charge payable under this Agreement shall be payable instead at such legal maximum. (b) In the event that the Lessee shall in good faith dispute the amount of any charge or other amount claimed by the Port Authority as due and payable to it by the Lessee under this Agreement, and the Lessee within fifteen (15) days after notice from the Port Authority that such amount is due and payable notifies the Port Authority of the amount it is disputing and the reason it is disputing same, then the Lessee may withhold solely the portion of such charge or amount in dispute (and shall pay the remainder of such charge or amount to the Port Authority) and for a period of thirty (30) days following such notice, the failure of the Lessee to pay such withheld amount shall not constitute a default, an event of default or ground for termination giving the Port Authority the right to terminate this Agreement and the letting hereunder pursuant to paragraph (a) of the Section of this Agreement entitled "Termination" or exercise any other rights or remedies under this Agreement, nor shall a late charge be imposed on any such withheld amount pursuant to the provisions of paragraph (a) of this Section, in each case so long as the withheld amount shall be the subject of a bona fide dispute between the Lessee and the Port Authority, provided, that nothing in this paragraph (b) shall permit or be deemed to permit the Lessee to dispute and withhold any payment of basic rental or any portion thereof or all or part of any other charge or amount, the amount of which is specified in this Agreement. The Lessee and the Port Authority will promptly meet and make good faith efforts to resolve any such dispute, and from and after the resolution of such dispute, if any amount shall be due and owing to the Port Authority, the provisions of paragraph (a) of this Section (including, without limitation, the fifteen (15) day grace period permitted to the Lessee prior to the imposition of a late charge) shall be applicable thereto. If the Lessee and the Port Authority shall be unable to resolve such dispute within thirty (30) days after the Lessee notifies the Port Authority of the reason for the dispute, the Port Authority shall have the right to terminate this Agreement and the letting hereunder or exercise any other remedy available to it under this Agreement or otherwise, whether in law or in equity. The Port Authority covenants that if the Lessee should serve an effective and timely Notice of Claim upon the Port Authority with respect to such dispute pursuant to and in accordance with the provisions of Section 7101 et. seq. of the Unconsolidated Laws of the State of New York, within ten (10) business days after the Port Authority shall have served upon the Lessee a notice terminating this Agreement and the letting hereunder, then and subject to the 42 provisions of paragraph (c) below, the effective date set forth in the Port Authority's Notice of Termination shall be deemed postponed until five (5) business days after the claim set forth in such Notice of Claim or any ensuing legal action with respect to that dispute is resolved, and if such resolution determines that the Lessee is in default of the monetary obligation disputed by the Lessee under this Agreement, the Port Authority shall not commence a "holdover" proceeding or any other proceeding to evict the Lessee on the basis of such dispute until on or after the day following such postponed effective date of termination. If such resolution should determine that the Lessee is not in default of said disputed monetary obligation under this Agreement, or if the Lessee shall have paid the disputed monetary obligation within such five (5) business day period, then in either case such Notice of Termination shall be deemed withdrawn with the same force and effect as if it had never been served. It is expressly understood that nothing contained herein shall be deemed to waive any rights of the Port Authority under the provisions of Section 7101 et. seq. of the Unconsolidated Laws of the State of New York. Any such Notice of Claim shall be served and prosecuted solely in accordance with the provisions of Section 7101 et. seq. of the Unconsolidated Laws of the State of New York, and the Lessee hereby covenants and agrees that it shall diligently prosecute the Notice of Claim and any ensuing legal action with respect to that dispute to resolution. (c) If the Lessee should serve an effective and timely Notice of Claim upon the Port Authority with respect to a monetary dispute referred to in paragraph (b) above of this Section 31, the Port Authority notwithstanding service of such Notice of Claim shall have the right to request by notice to the Lessee within thirty (30) days after service of such notice of claim that such monetary dispute be resolved in accordance with the Expedited Procedures provision (Rules 53 through 57 in the May 1, 1992 edition) of the Commercial Arbitration Rules of the American Arbitration Association and if the Port Authority does so request arbitration, then simultaneously upon receipt by the Lessee of the Port Authority's notice, the said Notice of Claim shall be deemed withdrawn by the Lessee with the same force and effect as if it had never been served by the Lessee on the Port Authority, but the effective date set forth in the Port Authority's Notice of Termination referred to in paragraph (b) above shall be deemed postponed until five (5) business days after the dispute is resolved by arbitration. If such resolution by arbitration determines that the Lessee is in default of the monetary obligation disputed by the Lessee hereunder, the Port Authority shall not commence a "holdover" proceeding or any other proceeding to evict the Lessee on the basis of such dispute until on or after the day following such postponed effective date of termination. If such resolution should determine that the Lessee is not in default of such described monetary obligation under this Agreement, or if the Lessee within such five (5) business day period shall have paid the disputed monetary obligation, then in each case such Notice of Termination shall be deemed withdrawn with the same force and effect as if it had never been served. All costs of arbitration pursuant to this paragraph (c) shall be borne by the unsuccessful party (and if both parties are partially successful, such costs shall be apportioned between the Port Authority and the Lessee in inverse proportion to the amount by which such decision is favorable to each party). 43 (d) In the event that the Port Authority shall send a notice to the Lessee claiming that it is in default of any of its non- monetary obligations under this Agreement, other than any default which (i) affects life and safety, or (ii) affects any building system which directly affects other tenants in the Building, or (iii) affects the ability of the Port Authority to provide essential services to other tenants of the Building, and the Lessee, in good faith, disputes that it is in default of such obligations, then, provided the Lessee shall notify the Port Authority of the basis for the dispute within ten (10) business days after its receipt of the notice, and, if applicable and feasible, shall comply with or perform any non-disputed portions or aspects of such disputed obligation, then, for a period of twenty-five (25) days following such notice, the failure of the Lessee to comply with or perform the disputed obligation shall not constitute a default, an event of default or ground for termination giving the Port Authority the right to terminate this Agreement and the letting hereunder pursuant to paragraph (a) of the Section of this Agreement entitled "Termination" or exercise any other rights or remedies under this Agreement. The Lessee and the Port Authority will promptly meet and make good faith efforts to resolve any such dispute, and if the Lessee and the Port Authority shall be unable to resolve such dispute within twenty-five (25) days after the Lessee notifies the Port Authority of the basis for the dispute, the Port Authority shall have the right to terminate this Agreement and the letting hereunder or exercise any other right or remedy available to it under this Agreement, or otherwise, whether in law or in equity. The Port Authority covenants that if the Lessee should serve an effective and timely Notice of Claim upon the Port Authority with respect to such dispute pursuant to and in accordance with the provisions of Section 7101 et. seq. of the Unconsolidated Laws of the State of New York, within ten (10) business days after the Port Authority shall have served upon the Lessee a notice terminating this Agreement and the letting hereunder, the effective date set forth in the Port Authority's Notice of Termination shall be deemed postponed until ten (10) business days after the claim set forth in such Notice of Claim or any ensuing legal action with respect to that dispute is resolved, and if such resolution determines that the Lessee is in default of the obligation disputed by the Lessee under this Agreement, the Port Authority shall not commence a "holdover" proceeding or any other proceeding to evict the Lessee on the basis of such dispute until on or after the day following such postponed effective date of termination, and the postponement of such effective date of termination shall continue as long as the Lessee commences to cure the default giving rise to the dispute within said ten (10) business day period and diligently prosecutes said cure to completion. If such resolution should determine that the Lessee is not in default of said disputed obligation under this Agreement, or if the Lessee shall have commenced to cure the default giving rise to the dispute within such ten (10) business day period and shall thereafter have diligently prosecuted such cure to completion, then in either case such Notice of Termination shall be deemed withdrawn with the same force and effect as if it had never been served. It is expressly understood that nothing contained herein shall be deemed to waive any rights of the Port Authority under the provisions of Section 7101 et. seq. of the Unconsolidated Laws of the State of New York, and the Lessee hereby covenants and agrees that it shall diligently prosecute the Notice of Claim and any ensuing legal action with respect to that dispute to resolution. 44 Section 32. Quiet Enjoyment The Lessee, upon paying all rentals hereunder and performing all the covenants, conditions and provisions of this Agreement on its part to be performed, shall and may peaceably and quietly have, hold and enjoy the premises free of any act or acts of the Port Authority or any successor landlord or anyone claiming superior title through the Port Authority or such successor landlord except as expressly provided in this Agreement, if at all, it being understood and agreed that the Port Authority's liability hereunder shall obtain only so long as it remains the owner of the portion of the Facility of which the premises are a part, provided the successor owner shall assume such liability. Section 33. Non-Liability of Individuals Neither the Commissioners of the Port Authority nor any of them, nor any officer, agent or employee thereof, shall be charged personally by the Lessee with any liability or held liable to it under any term or provision of this Agreement, or because of its execution or attempted execution, or because of any breach or attempted or alleged breach thereof. Section 34. Headings The section headings and the paragraph headings, if any, are inserted only as a matter of convenience and for reference and in no way define, limit or describe the scope or intent of any provision hereof. Section 35. Construction and Application of Terms (a) Wherever in this Agreement a third person singular neuter pronoun or adjective is used referring to the Lessee, the same shall be taken and understood to refer to the Lessee, regardless of the actual gender or number thereof. (b) If more than one individual or other legal entity is the Lessee under this Agreement, each and every obligation hereof shall be the joint and several obligation of each such individual or other legal entity. (c) This Agreement does not constitute the Lessee, the agent or representative of the Port Authority for any purpose whatsoever. (d) All designations of time herein contained shall refer to the time-system then officially in effect in the municipality wherein the premises are located. (e) No greater rights or privileges with respect to the use of the premises or any part thereof or with respect to the World Trade Center are granted or intended to be granted to the Lessee by this Agreement, or by any provision thereof, than the rights and privileges expressly granted hereby. Section 36. Definitions 45 The following terms, when used in this Agreement, shall have the respective meanings given below: (a) "Letting" shall mean the letting under this Agreement for the original term stated herein, and shall include any extensions thereof which may be made pursuant to the provisions of this Agreement, or otherwise. (b) "World Trade Center" shall mean the building complex constructed by the Port Authority within the area in the Borough of Manhattan, City, County and State of New York, bounded generally by the east side of Church Street on the east, the south side of Liberty Street and the south side of Liberty Street extended on the south, the Hudson River on the west, and on the north by a line beginning at the point of intersection of the Hudson River and the north side of Vesey Street extended, running along the north side of Vesey Street extended and the north side of Vesey Street to the west side of Washington Street, then along the west side of Washington Street to the north side of Barclay Street, then along the north side of Barclay Street to the east side of West Broadway, then along the east side of West Broadway to the north side of Vesey Street, then along the north side of Vesey Street to the east side of Church Street, together with such additional contiguous area as may be agreed upon from time to time between the Port Authority and the said City of New York. (c) The phrase "utility, mechanical, electrical, communication and other systems" shall mean and include (without limitation thereto) the following: machinery, engines, dynamos, boilers, elevators, escalators, incinerators and incinerator flues, systems for the supply of fuel, electricity, water, gas and steam, plumbing, heating, sewerage, drainage, ventilating, air conditioning, communications, fire-alarm, fire-protection, sprinkler, telephone, telegraph and other systems, fire hydrants, fire hoses, and their respective wires, mains, conduits, lines, tubes, pipes, equipment, motors, cables, fixtures and other equipment. (d) "Causes or conditions beyond the control of the Port Authority", shall mean and include acts of God, the elements, weather conditions, tides, earthquakes, settlements, fire, acts of governmental authority, other than the Port Authority, war, shortage of labor or materials, acts of third parties for which the Port Authority is not responsible, injunctions, strikes, boycotts, picketing, slowdowns, work stoppages, labor troubles or disputes of every kind (including all those affecting the Port Authority, its contractors, suppliers or subcontractors) or any other condition or circumstances, whether similar to or different from the foregoing (it being agreed that the foregoing enumeration shall not limit or be characteristic of such conditions or circumstances) which is beyond the control of the Port Authority or which could not be prevented or remedied by reasonable effort and at reasonable expense. (e) "Normal business hours" shall mean 8:00 o'clock A.M. to 6:00 o'clock P.M. Mondays to Fridays inclusive, legal holidays as defined in Exhibit R excepted. Section 37. Force Majeure 46 (a) The Port Authority shall not be liable for any failure, delay or interruption in performing its obligations hereunder due to causes or conditions beyond the control of the Port Authority. Further, the Port Authority shall not be liable unless the failure, delay or interruption shall result from failure on the part of the Port Authority to use reasonable care to prevent or reasonable efforts to cure such failure, delay or interruption. (b) Subject to the provisions of paragraph (c) below, no abatement, diminution or reduction of the rent or other charges payable by the Lessee, shall be claimed by or allowed to the Lessee for any inconvenience, interruption, cessation or loss of business or other loss caused, directly or indirectly, by any present or future laws, rules, requirements, orders, directions, ordinances or regulations of the United States of America, or of the state, county or city governments, or of any other municipal, governmental or lawful authority whatsoever, or by priorities, rationing or curtailment of labor or materials, or by war or any matter or thing resulting therefrom, or by any other cause or condition beyond the control of the Port Authority, nor shall this Agreement be affected by any such causes or conditions. (c) In the event that any failure to provide the Lessee with access to the premises in accordance with the Section of this Agreement entitled "Ingress and Egress", or to supply elevator service to the premises, or to supply other services which the Port Authority has agreed to supply pursuant to the Section of this Agreement entitled "Services and Utilities" or the Section of this Agreement entitled "Additional Services" (whether or not excused by this Section 37, paragraph (h) of the Section of this Agreement entitled "Services and Utilities" or other provisions hereof), renders uninhabitable one or more portions of the premises so that the Lessee's operations under the Section of this Agreement entitled "Rights of User by the Lessee" cannot reasonably be conducted therein and such failure of service is not the result of the fault of the Lessee, its officers, employees, agents or contractors, and the Lessee shall give notice to the Port Authority of such fact and shall thereafter vacate and not use the said portion of the premises for the Lessee's operations permitted by the Section of this Agreement entitled "Rights of User by the Lessee" for five (5) consecutive business days, then thereafter, while such vacant and uninhabitable condition and non use shall continue, the Lessee shall be entitled to an abatement of the basic rental and the additional basic rental hereunder (as provided for in the Section of this Agreement entitled "Abatement of Rental") solely as to the portion of the premises so rendered vacant, uninhabitable and which is unused provided that if such vacant and uninhabitable condition and non-use shall as to fifteen percent (15%) or more of the rentable square feet in the premises continue for two hundred seventy (270) consecutive days, then the Lessee shall have the right to terminate this agreement and the letting hereunder in its entirety by giving thirty (30) days' prior notice to the Port Authority provided such notice is given to the Port Authority no later than the thirtieth (30th) day from the end of such two hundred seventy (270) consecutive day period and provided further that such non-use, vacant and uninhabitable condition does not end prior to the date the Lessee gives the Port Authority such notice of termination. Termination by the Lessee pursuant to the provisions of this paragraph (c) shall be with the same force and effect as if the 47 effective date of termination stated in the Lessee's notice were the date set forth in this Agreement as the expiration date of the letting hereunder. Section 38. Premises The Lessee acknowledges that it has not relied upon any representation or statement of the Port Authority or its Commissioners, officers, employees or agents as to the suitability of the premises for the operations permitted on the premises by this Agreement. The Lessee agrees that no portion of the premises will be used initially or at any time during the letting which is in a condition unsafe or improper for the conduct of the Lessee's operations hereunder so that there is possibility of injury or damage to life or property. For all purposes of this Agreement the premises hereunder (notwithstanding any statement elsewhere in this Agreement of any rule for the measurement of the area thereof) shall be deemed to include all of the enclosing partitions, and the interior of the adjacent exterior building walls including glass therein. Section 39. Governmental Compliance In the event that all or any portion of the premises is required by the Port Authority to comply with any present or future governmental law, rule, regulation, requirement, order or direction, the Port Authority shall give the Lessee notice that all or any such portion of the premises is so required and the Lessee shall deliver all or any such portion of the premises so required on the date specified in such notice and, if the Lessee does not so deliver, the Port Authority may take the same. No such taking or delivery shall be or be construed to be an eviction of the Lessee or a breach of this Agreement. In the event that the Lessee has received a notice hereunder it shall deliver all or any such portion of the premises so required in the same condition as that required hereunder for the delivery of the premises on the cessation of the letting. In the event of the taking or delivery of all the premises, this Agreement and the letting hereunder shall on the day of such taking or delivery cease and expire as if that day were the date originally stated herein for the expiration of this Agreement; and, in the event of the taking or delivery of any portion of the premises, then, from and after such taking or delivery, such portion of the premises shall cease to be a part of the premises hereunder. There shall be an abatement of the rental in the event of any such taking or delivery of a portion of the premises as provided in the Section of this Agreement entitled "Abatement of Rental". Section 40. Services and Utilities (a) Subject to all the terms and provisions of this Agreement, the Port Authority will furnish without additional charge to the Lessee the following: (1) During normal business hours heat, ventilation and air cooling in accordance with the specifications set forth in Schedule D attached hereto, subject to the provisions of paragraph (b) of the Section of this Agreement entitled "Construction by the Lessee"; 48 (2) Cleaning services in the portion of the premises shown on Exhibit A as described in Schedule B attached hereto and hereby made a part hereof and cleaning services in the portion of the premises shown on Exhibit A-1 as described in Schedule B-1 attached hereto and hereby made a part hereof. (3) Passenger elevator service to the premises on business days during normal business hours, which service shall consist of not less than three (3) elevator cars available from the lobby of the South Tower Building to each floor of the premises and one passenger elevator car available from the lobby of the South Tower Building to each floor of the premises during all other times; one freight elevator serving the premises and the entire Building in which the premises are located on call on a "first come, first served" basis on business days during normal business hours and on a reservation "first come, first served" basis during hours other than normal business hours; (4) Access to the premises 24 hours per day, 365 days per year throughout the term of this Agreement, subject to the Lessee's compliance with the Rules and Regulations, and with such other reasonable rules, regulations and procedures which may be imposed by the Port Authority, including, without limitation, regulations and procedures establishing reasonable security checks. (b) Unless the premises contain toilet and washroom facilities, the Port Authority shall, without additional charge, furnish non-exclusive toilet and washroom facilities for the employees of the Lessee. The Port Authority agrees to furnish hot and potable cold water for sanitary purposes in the public bathrooms located in the Lessee's premises or located of multitenanted floors on which portions of the Lessee's premises are located. (c) Subject to all the terms, provisions and conditions of paragraphs (f), (g), (h) and (i) of this Section 40 and to the extent that the Lessee's consumption does not exceed the capacity of feeders, risers or wiring in the building of which the premises is a part (it being the Lessee's sole responsibility for designing and constructing distribution systems for the premises), the Port Authority will supply to the existing electric closets serving the premises on each floor of the premises for use by the Lessee 7 watts per rentable square foot of electrical capacity (exclusive of electricity required for HVAC and core facilities) as follows: 3 watts at 120/208 and 4 watts at 277/465 provided that if the Port Authority pursuant to its comprehensive plan for the World Trade Center increases the electrical capacity to 10 watts per rentable square foot in the first zone of the South Tower Building, then the Port Authority upon written request from the Lessee will provide 10 watts per rentable square foot of electrical capacity to the Lessee but nothing herein shall in any way be construed to in any way obligate the Port Authority to increase the electrical capacity in the 49 first zone of the South Tower Building or elsewhere at the World Trade Center. Electricity furnished to the Lessee shall be used solely for illumination by which is meant the energizing of fluorescent and incandescent bulbs (to be supplied, paid for and installed by the Lessee) and for the operation of such office machines and equipment (including computers) as are customarily utilized in an office of the type described in the Section of this Agreement entitled "Rights of User by the Lessee", and the Lessee shall pay for the same in accordance with the following provisions of this paragraph (c). The quantity of all electricity supplied to the Lessee shall be measured by a meter or meters to be furnished and installed by the Port Authority at its cost and expense for that purpose (it being understood that the wiring and all other electrical work in connection with such metering shall be performed by the Lessee at its cost and expense), and in the event any such meter fails to record such, the quantity of electricity so supplied during any period that a meter is out of service will be considered to be the same as the quantity supplied during a like period immediately before such interruption and if there is no like period immediately before such interruption, then it shall be a like period immediately after such disruption. The quantity of such electricity shall be paid for by the Lessee in an amount equal to 100% of the rates (including the fuel or other adjustment factor, if any) which the Lessee, under the service classification then applicable to the Lessee, would be required to pay for the same quantity of electricity to be used for the same purpose under the same conditions if the Lessee had purchased such electricity directly from the public utility company supplying the same to commercial buildings in the vicinity of the World Trade Center. The Lessee shall pay the cost of such consumption and demand for each such billing period to the Port Authority upon demand therefor (billing period hereunder to be the same as that established by the public utility company supplying electricity to commercial buildings in the vicinity of the World Trade Center), and the same shall be deemed additional rental collectible in the same manner and with like remedies as if it were a part of the basic rental reserved hereunder. Notwithstanding that the Port Authority has agreed to supply electricity to the Lessee, the Port Authority shall be under no obligation to provide or continue such service if the Port Authority is prevented by law, agreement or otherwise from submetering electricity as hereinabove set forth or elects not to so submeter the same, provided that unless prevented by law the Port Authority will not discontinue the supply of electricity to the Lessee unless it discontinues such supply to all non-governmental entities at the World Trade Center whose premises are in excess of one hundred thousand (100,000) rentable square feet. In the event the Port Authority does so discontinue the supply of electricity, the Lessee shall make all arrangements and conversions necessary to obtain electricity directly from the public utility company supplying electricity in the vicinity. Also, in such event, the Lessee shall perform the construction necessary for such conversion, and if despite such discontinuance the Port Authority was not prevented by law from submetering electricity as hereinabove set forth, then the Port Authority shall grant to the Lessee a credit against its rental payments next becoming due in an amount equal to the Lessee's reasonable cost of performing such necessary construction provided, however that if the term of the letting expires prior to full application of such credit, then the Port Authority will promptly pay the Lessee such portion of the credit as has not been applied against rental. If any lines or equipment of 50 the Port Authority are with the consent of the Port Authority used subsequent to such conversion, the Port Authority may make an appropriate charge therefor to the Lessee based on its costs and expenses for the said lines and equipment. (d) If the Lessee, in accordance with the Section of this Agreement entitled "Construction by the Lessee" or otherwise, erects any partitions or makes any improvements which stop, hinder, obstruct or interfere with the cooling of the air or the heating of the premises, or if the Lessee shall fail to close and keep closed the window coverings when the sun is shining on the windows of the premises, then no such action by the Lessee shall impose any obligations on the Port Authority to install facilities, fixtures or equipment for air-cooling or for heating additional to those existing or presently contemplated or to increase the capacity or output of initially existing facilities, equipment or fixtures and the Lessee shall not in any such event be relieved of any of its obligations hereunder because a comfortable temperature is not maintained but nothing herein shall be construed to relieve the Port Authority of its obligation to provide heating, ventilation and air cooling in accordance with the specifications set forth in Schedule D. No consent given by the Port Authority to the erection of partitions or the making of any improvements shall be or be deemed to be a representation that the work consented to will not stop, hinder, obstruct or interfere with either the cooling of the air or heating of the premises or any portion thereof. It is hereby understood further that the installation by the Lessee of any equipment which itself requires air cooling or which requires additional quantities of air cooling at the portion of the premises where such equipment is installed or the concentration in any portion of the premises of such a number of people so as to require additional quantities of air cooling, shall not impose any obligation on the Port Authority to install facilities, fixtures and equipment for air cooling additional to those initially existing, or to increase the capacity or output of initially existing facilities, equipment or fixtures and the Lessee shall not in any such event be relieved of any of its obligations hereunder. (e) The Lessee shall keep closed all entrance doors and all windows in the premises except that doors may be opened when required for ingress or egress. The Lessee shall not otherwise waste or dissipate the air cooling or heating services. (f) If any federal, state, municipal or other governmental body, authority or agency or any public utility assesses, levies, imposes, makes or increases any charge, fee or rent on the Port Authority for any service, system or utility now or in the future supplied to or available to the premises or to any occupants or users thereof or to the structure or building of which the premises form a part (including but not limited to any sewer rent or charge for the use of sewer systems), the Lessee shall, at the option of the Port Authority exercised at any time and from time to time by notice to the Lessee, pay, in accordance with said notice, such charge, fee or rent or increase thereof (or the portion thereof allocated by the Port Authority to the premises or the Lessee's operations hereunder) either directly to the governmental body, authority or agency or to the public utility or directly to the Port Authority. No charge, fee, or rent or increase shall be imposed upon the Lessee pursuant to this 51 paragraph (f) to the extent any such is included as an Operating Expense for purposes of Schedule A. (g) The Port Authority shall have the right to discontinue temporarily the supply of any of the above services when necessary or desirable in the reasonable opinion of the Port Authority in order to make any repairs, alterations, changes or improvements in the premises or elsewhere in the World Trade Center including but not limited to all systems for the supply of services. The Port Authority will give reasonable advance notice, when practicable, of the anticipated commencement, duration and notice of any such interruption. The Port Authority will proceed with reasonable diligence to eliminate the interruption. (h) Subject to the provisions of paragraph (c) of the Section of this Agreement entitled "Force Majeure", no failure, delay, interruption or reduction in any service or services shall be or shall be construed to be an eviction of the Lessee, shall be grounds for any diminution or abatement of the rentals payable hereunder, or shall constitute grounds for any claim by the Lessee for damages, consequential or otherwise, unless due to the negligent acts of the Port Authority, its employees or agents. (i) The Port Authority shall be under no obligation to supply any service or services if and to the extent and during any period that the supplying of any such service or services or the use of any component necessary therefor shall be prohibited or rationed by any federal, state or municipal law, rule, regulation, requirement, order or direction and if the Port Authority deems it in the public interest to comply therewith, even though such law, rule, regulation, requirement, order or direction may not be mandatory on the Port Authority as a public agency. (j) (i) In such kitchen facilities as may be referred to in paragraph (e) of the Section of this Agreement entitled "Responsibilities of the Lessee" and as are approved by the Port Authority for installation in the premises pursuant to the provisions of the Section of this Agreement entitled "Construction by the Lessee" and subject to the provisions of paragraphs (f), (g), (h) and (i) of this Section 41, the Port Authority will supply to the Lessee cold water, of the character furnished by the municipality or utility company supplying the same in the vicinity and hot water, at a temperature of approximately 140 F, both in reasonable quantities for use by the Lessee through such fixtures and outlets as may be installed by the Lessee pursuant to the provisions of the Section of this Agreement entitled "Construction by the Lessee". The Port Authority will measure the quantities of such cold water and hot water supplied to the Lessee by meters to be installed by the Port Authority for the purpose. The Lessee shall pay to the Port Authority for the cold and hot water as billed by the Port Authority from time to time at the following rates: (1) cold water, at the rate of Thirty-six Dollars and Sixty-eight Cents ($36.68) per thousand cubic feet and (2) hot water at the rate of Sixty-two Dollars and Seventy-one Cents ($62.71) per thousand cubic feet; the charges to be subject to increase in rates charged the Port Authority as provided in paragraph (f) of this Section 40 and with respect to the charge for metered hot water the same shall also be subject to increase as provided in subparagraph (ii) of this paragraph (j) below. Notwithstanding the 52 foregoing, the Port Authority will not impose a charge upon the Lessee for cold and hot water used in conjunction with drinking fountains, dryer units, dishwashers, kitchen sinks, kitchen ice makers and existing public restrooms located in the premises. (ii) The charge for metered hot water provided for in subparagraph (i) above of this paragraph (j) shall be subject to increase from time to time as follows: "Wage rate' as used in this paragraph shall mean the hourly straight time wage rate for Engineers as that wage rate is established from time to time by collective bargaining agreement between the Realty Advisory Board on Labor Relations, Incorporated, acting on behalf of various building owners and Local 94 of the International Union of Operating Engineers, AFL- CIO, and "basic wage rate" shall mean the wage rate in effect on January 1, 1994. From and after each wage rate established from and after the commencement date of the letting, the Lessee shall pay a charge for metered hot water in addition to the charge set forth in subparagraph (i) above, such additional charge to be an amount computed by multiplying the charge for metered hot water stated in that subparagraph by the percentage increase in the wage rate so established over the basic wage rate. If either the Realty Advisory Board on Labor Relations, Incorporated, or Local 94 of the International Union of Operating Engineers, AFL-CIO, shall cease to exist or a collective bargaining agreement shall cease to be negotiated between the Realty Advisory Board on Labor Relations, Incorporated, and Local 94 of the International Union of Operating Engineers, AFL-CIO, then the wage rate to be used for computing increases in the said charge shall be the wage rate for Engineers established under such collective bargaining agreements as the Port Authority shall select. If the job classification "Engineers" shall be renamed or abolished, then the Port Authority will select the job classification performing substantially the same labor function as Engineers and the wage rate of the job classification so selected shall be used in computing increases in the charge provided herein. (k) The Port Authority shall have no obligations or responsibility with respect to the performance of any services or providing, supplying or furnishing to the Lessee of any utilities or services whatsoever except as expressly provided in this Agreement. Section 41. Liability Insurance (a) The Lessee shall not do or permit to be done any act or thing upon the premises or at the World Trade Center which will invalidate or conflict with any insurance policies covering the premises or any part thereof, or the World Trade Center, or any part thereof, which, in the reasonable opinion of the Port Authority, may constitute an extra-hazardous condition, so as to increase the risks normally attendant upon the operations contemplated by the Section of this Agreement entitled "Rights of User by the Lessee", and the Lessee shall promptly observe, comply with and execute the provisions of any and all present and future rules and regulations, requirements, orders and directions of the National Fire Protection Association and the Insurance Services Office, Inc. and of any other board or organization exercising or which may exercise similar functions, which may pertain or apply to the operations of the Lessee on the premises, and the Lessee shall, subject to and in accordance with the provisions of the Section of this Agreement entitled "Construction by the Lessee", make 53 any and all improvements, alterations or repairs of the premises that may be required at any time hereafter by any such present or future rule, regulation, requirement, order or direction, provided such improvements, alterations or repairs are not required generally throughout the building in which the premises are located unless such general requirement results from the Lessee's particular manner of use of or its particular operations in the premises which are not common to other tenants in the building in which the premises are located, and if by reason of any failure on the part of the Lessee to comply with the provisions of this Agreement any insurance rate on the premises or any part thereof or on the World Trade Center or any part thereof, shall at any time be higher than it otherwise would be, then the Lessee shall pay to the Port Authority, as an item of additional rental, that part of all insurance premiums paid by the Port Authority which shall have been charged because of such violation or failure by the Lessee, but no such payment shall relieve the Lessee of its other obligations under this paragraph. (b) (i) The Lessee in its own name as assured shall secure and keep in full force and effect throughout the term of the letting under this Agreement, at Lessee's sole cost and expense, (a) a policy of comprehensive general liability insurance including a contractual liability endorsement for such coverage as may reasonably be stipulated from time to time by the Port Authority covering the Lessee's operations hereunder which shall be effective throughout the letting under this Agreement and shall initially be in a combined single limit of not less than $2,000,000 for liability for bodily injury, for wrongful death and for property damage arising from any one occurrence; and (b) a fire or other casualty policy insuring the full replacement value of all construction, installation and finishing work performed by the Lessee in the premises and the Lessee's furniture, trade fixtures, equipment and other personal property, such insurance to include a replacement cost endorsement, with a deductible of no more than $1,000 against loss or damage by fire and theft and such other risks or hazards as are insurable under present or future forms of "All Risk" insurance policies. (ii) The Port Authority shall be included as an additional insured in any policy of liability insurance required by this Section. The Lessee shall have the right to insure and maintain the insurance coverages set forth in this Section under blanket insurance policies covering the premises and other space occupied by Lessee, if any, so long as such blanket policies comply in all respects with the insurance provisions set forth in this Agreement; provided that upon request, Lessee shall deliver to the Port Authority a certificate of Lessee's insurer evidencing the portion of such blanket policy of insurance allocated to the premises. (iii)As to any insurance required by this Section, a certified copy of each of the policies or a certificate or certificates evidencing the existence thereof (including all required endorsements and evidence of the waivers of subrogation required by paragraph (c) of this Section), or binders, shall be delivered to the Port Authority within twenty (20) days prior to the commencement date of the letting hereunder. In the event any binder is delivered, it shall be replaced within thirty (30) days by a certificate including said endorsements and such waiver of subrogation. Within thirty (30) days after request of the Port Authority made at any time during the 54 term of the letting under this Agreement the Lessee shall deliver a certified copy of the policy to the Port Authority. Each such copy or certificate shall contain endorsements that (a) the policy may not be cancelled, terminated, changed or modified without giving at least ten (10) days written advance notice thereof to the Port Authority; (b) the insurer shall not, without obtaining express advance permission from the General Counsel of the Port Authority, raise any defense involving in any way the jurisdiction of the tribunal over the person of the Port Authority, the immunity of the Port Authority, its Commissioners, officers, agents or employees, the governmental nature of the Port Authority or the provisions of any statutes respecting suits against the Port Authority; and (c) Lessee shall be solely responsible for the payment of premiums therefor notwithstanding that the Port Authority is named as an additional insured. A renewal certificate shall be delivered to the Port Authority at least fifteen (15) days prior to the expiration date of each expiring policy, except for any policy expiring after the date of expiration of the letting, provided that within thirty (30) days after request by the Port Authority the Lessee shall deliver a certified copy of such renewal policy to the Port Authority. If at any time any of the policies shall be or become unsatisfactory to the Port Authority as to form or substance, or if any of the carriers issuing such policies shall be or become unsatisfactory to the Port Authority, the Lessee shall promptly obtain a new and satisfactory policy in replacement. A carrier shall be deemed satisfactory to the Port Authority if it has and maintains a rating by Best's Insurance Reports or any successor publication of comparable standing of "A" or better or the then equivalent of such rating. The Port Authority will not find a policy issued by a satisfactory carrier to be unsatisfactory as to form or substance unless it contains an exclusion not generally included in Comprehensive General Liability policies which landlords in the City of New York owning comparable first class office buildings at the time of such determination require to be maintained by tenants conducting operations similar to those conducted by the Lessee in the premises. (c) Each party shall include in each of its insurance policies covering loss, damage or destruction by fire or other casualty (insuring the World Trade Center and the Port Authority's property therein in the case of the Port Authority, and insuring the Lessee's property required to be insured by Lessee under paragraph (b) above in the case of the Lessee) a waiver of the insurer's right of subrogation against the other party or, if such waiver should be unobtainable or unenforceable, (i) an express agreement that such policy shall not be invalidated if the insured waives before the casualty the right of recovery against any party responsible for a casualty covered by such policies, or (ii) any other form of permission for the release of the other party. If any party hereto is unable to obtain such waiver, agreement or permission without additional charge, then such party shall be relieved from providing such waiver, agreement or permission unless the other party shall so elect and shall pay the carrier's additional charge therefor. (d) Each party hereby releases the other party with respect to any claim (including a claim for negligence) which it might otherwise have against the other party for loss, damage or destruction with respect to its property (including business interruption) occurring during the term of the letting under this Agreement and with respect and to the extent to which it is insured under a policy or 55 policies containing a waiver of subrogation or permission to release liability as provided in paragraph (c) above. (e) Nothing contained in said paragraphs (c) or (d) above of this Section shall be deemed to impose upon either party any duty to procure or maintain any of the kinds of insurance referred to therein except as otherwise required in this Section. If the Lessee shall fail to maintain insurance in effect as required in this Section, the release by the Lessee set forth in paragraph (d) above of this Section shall be in full force and effect to the same extent as if such required insurance (containing a waiver of subrogation) were in effect. Notwithstanding anything to the contrary contained in this Agreement, the carrying of insurance by the Lessee in compliance with this Section shall not modify, reduce, limit or impair the Lessee's obligations and liability under the Section of this Agreement entitled "Indemnity". (f) At the time of the execution of this Agreement, there is in effect a policy of insurance under which the Port Authority is the insured covering damage to the premises and the Facility having a deductible of One Hundred Thousand Dollars and No Cents ($100,000.00) and containing an endorsement permitting the release described in paragraph (c) above of this Section 41. The Port Authority does not represent or warrant that it will continue to maintain such insurance, provided, however, that in the event that the Port Authority shall no longer maintain insurance covering damage to the premises or the Facility, or shall maintain such insurance having a higher deductible amount, in each case so long as the release described in said paragraph (c) above shall remain available on commercially reasonable terms to owners of first-class office buildings in the City of New York with more than 1,000,000 rentable square feet, the obligation of the Lessee set forth in paragraphs (b) and (c) of the Section of this Agreement entitled "Maintenance and Repair" shall be released to the extent that such loss exceeds One Hundred Thousand Dollars and No Cents ($100,000.00), it being expressly understood and agreed that the maximum liability of the Lessee under such circumstances in the event of damage or destruction to the Facility, or any portion thereof, shall be $100,000 with respect to any single occurrence. Nothing herein shall limit or affect the Lessee's liability with respect to such $100,000 portion of such loss, and with respect to such $100,000 portion of such loss, the provisions of paragraph (b) of the Section of this Agreement entitled "Maintenance and Repair" and of this paragraph (f) shall control, and nothing in this paragraph (f) shall limit or affect the Lessee's liability which it may otherwise have under this Agreement with respect to damage not insurable under the New York standard form of fire insurance policy or the New York standard form of extended coverage endorsement. Section 42. Port Authority Work; Additional Lessee Work (a) Subject to all of the provisions of this Agreement (including but not limited to the Section of this Agreement entitled "Force Majeure"), the Port Authority, through its employees, agents, representatives, contractors and subcontractors shall perform the following work (hereinafter collectively referred to as the "Port Authority Work") in the areas indicated, which work, except as otherwise indicated below will be performed prior to the Prior Entry 56 Date, as such term is defined in paragraph (c) of the Section of this Agreement entitled "Term": (i) No later than August 15, 1995, repair and/or replace all cracked or damaged floor, wall and ceiling tiles, all broken partitions and damaged fixtures in the public bathroom areas on the 23rd floor of the Lessee's premises and on the 24th floor of the South Tower Building at the World Trade Center and perform such other work therein to put such bathrooms in compliance with the applicable provisions and implementing regulations of the Americans With Disabilities Act of 1990 (42 U.S.C. 12101 et seq.) (hereinafter, the "ADA"), all of such bathroom work being as described on Schedule E attached hereto and hereby made a part hereof and referred to in this Agreement as the "Public Bathroom Work"; (ii) Remove, collect and properly dispose of all vinyl asbestos tile from the floors in the premises and flash patch the areas where such vinyl asbestos tile was removed and where any adhesive or glue remains; (iii)Install ADA compliant elevator call buttons and indicator lights in the public elevator lobbies on the 23rd and 24th floors in the South Tower Building; such work referred to in this subdivision (iii) being referred to in this Agreement as the "Elevator Work"; the Lessee understands that such Elevator Work will be performed by the Port Authority in conjunction with its capital improvement program for the Building and that such work may not be completed prior to the date the Lessee commences public operations in the premises; (iv) No later than August 15, 1995 (1) refinish or renovate the public corridors on the 24th floor of the South Tower Building, including installation of building standard wall coverings, ceilings and floor coverings, such work to provide for multiple tenancies on such floor and perform such other work therein to put such public corridor in compliance with the applicable provisions of the ADA (including ADA compliant hardware on all core doors but excluding the Elevator Work); and (2) install ADA compliant hardware on all core doors in the public corridor areas on the Lessee's premises on the 23rd floor of the South Tower Building; all of such corridor work referred to in this subdivision (iv) being as described on Schedule F attached hereto and hereby made a part hereof and referred to in this Agreement as the "Public Corridor Work"; 57 (v) Perform such demolition work and other work in the premises, including the removal of all cabling from existing underground floor ducts in the premises, as is shown or described in the Schedule I attached hereto and hereby made a part hereof and in the Plans and Specifications dated December 15, 1994 and December 19, 1994 and identified by Port Authority Contract No. WTC- 702.182. It is understood that notwithstanding such Plans and Specifications the work shown therein shall be performed in all of Area A-1. All such work described in the preceding sentence being referred to in this Agreement as the "Demolition Work" which Demolition Work shall be completed prior to the Prior Entry Date unless indicated otherwise in Schedule I; (b) Nothing set forth above in this Section shall be construed as a submission by the Port Authority to the application to itself of the Americans with Disabilities Act except and solely to the extent specifically provided above in this Section. (c) Notwithstanding the provisions of subdivision (i) of paragraph (a) above, the Port Authority on or before January 5, 1995 will provide Contract Drawings to the Lessee for performance of the Public Bathroom Work. The Lessee no later than February 23, 1995 will submit to the Port Authority in writing a fixed price (hereinafter called the "Public Bathroom Price") for which the Lessee will agree to perform such Public Bathroom Work. The Port Authority within ten (10) business days after receipt of such price from the Lessee will advise the Lessee whether or not it accepts the Lessee's price. If the Port Authority does not accept the Lessee's price, the Port Authority will remain obligated to perform the Public Bathroom Work in accordance with subdivision (i) of paragraph (a) above. If the Port Authority accepts the Lessee's price, then the Lessee shall thereafter and in accordance with the applicable provisions of the Section of this Agreement entitled "Construction by the Lessee" diligently perform the Public Bathroom Work in accordance with the Contract Drawings previously provided by the Port Authority and the Port Authority will pay the Lessee the Public Bathroom Price as hereinafter provided in paragraph (f) below. (d) Notwithstanding the provisions of subdivision (iv) of paragraph (a) above, the Port Authority on or prior to January 5, 1995 will provide Contract Drawings to the Lessee for performance of the Public Corridor Work. The Lessee no later than February 23, 1995 will submit to the Port Authority in writing a fixed price (hereinafter called the "Public Corridor Price") for which the Lessee will agree to perform such Public Corridor Work. The Port Authority within ten (10) business days after receipt of such price will advise the Lessee whether or not it accepts the Lessee's price. If the Port Authority does not accept the Lessee's price, the Port Authority will remain obligated to perform the Public Corridor Work in accordance with the provisions of subdivision (iv) of paragraph (a) above. If the Port Authority accepts the Lessee's price, then the Lessee shall thereafter and in accordance with the applicable provisions of the Section of this Agreement entitled "Construction by the Lessee" diligently perform the Public Corridor Work in accordance with said 58 Contract Drawings previously provided by the Port Authority, and the Port Authority will pay the Lessee the Public Corridor Price as hereinafter provided in paragraph (f) below. (e) The Lessee hereby agrees to paint all convector covers in the premises. The Port Authority will pay the Lessee Five Thousand Nine Hundred Seventy-six Dollars and No Cents ($5,976.00) for the work described in this paragraph (e), such payment to be made in accordance with paragraph (f) below. (f) Upon completion of the work by the Lessee described in paragraphs (c), (d) and (e) above, the Lessee shall deliver to the Port Authority a certificate signed by an authorized officer of the Lessee and a certificate signed by the Lessee's architect or professional engineer, each certifying that the construction and installation work has been completed and in the case of the Public Bathroom Work and Public Corridor Work that it has been performed strictly in accordance with the Contract Drawings provided by the Port Authority to the Lessee covering such work. The Port Authority, within five (5) business days thereafter shall inspect the particular work as to which the certification has been given and if the same has been completed as certified by the Lessee and such architect or engineer, the Port Authority's Assistant Director, Physical Facilities, World Trade Department, shall so certify to the Port Authority and the Lessee subject to the condition that all risks thereafter with respect to the construction and installation work and any liability therefor for negligence or other reason shall be borne by Lessee. The Port Authority within thirty (30) days after such certification by such Assistant Director, Physical Facilities, will pay the Lessee the applicable price pertaining to such particular work. In addition thereto and solely in connection with the work which the Lessee is to perform pursuant to paragraphs (c) and (d) of this Section 42, in the event there are unforeseen conditions actually encountered by the Lessee in performance of such work, which conditions were unknown to the Lessee at the time of its execution of this Agreement and which could not have been reasonably anticipated by the Lessee, and such unforeseen conditions increase the cost of the performance of such work, then in addition to the fixed price the Port Authority is to pay for such work, the Port Authority will pay the Lessee the Lessee's reasonable additional cost directly resulting from such unforeseen condition. Notwithstanding anything in this paragraph (f) to the contrary, with respect to the certification set forth in this paragraph (f), the Lessee may notify the Port Authority in writing that the certification of the Lessee's architect or engineer shall also be deemed to be the certification of the Lessee with the same force and effect as if given directly by the Lessee. (g) For purposes of this Agreement the work described in subdivisions (ii) and (v) of paragraph (a) and paragraphs (e) and (i) of this Section are collectively called the "Landlord Work". It is hereby understood and agreed that except for the work which the Lessee is to perform pursuant to paragraphs (c) and (d) of this Section, the Lessee shall not be required to perform any ADA required work outside the Lessee's premises. (h) The Port Authority hereby agrees that it will not impose upon the Lessee any utility or freight elevator charges or inspection, filing, sign-off or other fees or charges in connection 59 with the Lessee's performance of the Additional Lessee Work. For purposes of this Agreement "Additional Lessee Work" shall mean that work which the Lessee is to perform pursuant to paragraphs (c), (d) and (e) of this Section 42. (i) Except for vinyl asbestos tiles and asbestos or asbestos-containing materials located within or behind the mullions on the interior of the exterior walls of the premises, the Port Authority hereby represents that to the best of its knowledge there are no asbestos and asbestos-containing materials located in the premises. "Asbestos" or "asbestos containing-materials" as used herein shall be as defined in the guidelines established by the United States Environmental Protection Agency ("USEPA") as set forth in the USEPA publication entitled "Guidance for Controlling Asbestos-Containing Materials in Building" (EPA 560/5-85-024, June 1985). Notwithstanding the foregoing, in the event that the asbestos or asbestos-containing materials are discovered in the premises prior to the Prior Entry Date, then the Port Authority will remove or cause same to be removed from the premises prior to the Prior Entry Date. In the event that asbestos or asbestos-containing materials are discovered in the premises subsequent to the Prior Entry Date, the Lessee will expeditiously notify the Port Authority of their existence and if such asbestos or asbestos-containing materials were not installed therein by the Lessee or its contractor, the Port Authority will diligently remove or cause same to be removed and will make reasonable efforts to minimize disruption to the Lessee's operations. The Lessee will not be entitled to any rental abatement during performance of such removal work occurring subsequent to the commencement date of the term of the letting hereunder unless the Lessee is unable to use such portion of the premises during performance of such work in which case the basic rental and additional basic rental for such portion of the premises shall be abated in accordance with the provisions of the Section of this Agreement entitled "Abatement of Rental" during the period of such non use due to such removal work. In the event that the Lessee prior to the commencement date of the term of the letting is unable to perform construction work in all or a substantial portion of the premises during performance of such asbestos removal work by the Port Authority, then the two hundred fourteen (214) day period in clause (i) of paragraph (a) of the Section of this Agreement entitled "Term" shall be extended by one day for each day that the Lessee is unable to perform its construction work in all or a substantial portion of the premises due to the asbestos removal work being performed by the Port Authority. The Port Authority hereby agrees to refireproof any area in the premises, including any structural steel members located in the ceiling area of the Lessee's premises necessitated by such asbestos removal work. The Port Authority upon completion of the removal of asbestos or asbestos-containing materials from the premises will furnish written certification of same to the Lessee from the Port Authority's Assistant Director, Physical Facilities, World Trade Department. In no event will the Port Authority be required to remove asbestos or any asbestos-containing materials located within or behind the mullions on the interior of the exterior walls of the premises. Section 43. Additional Space 60 (a) If the Lessee no later than September 1, 1997 shall notify the Port Authority in writing that it desires to lease a single block of additional space on the 24th floor of the South Tower Building contiguous to the Lessee's initial premises on said floor (hereinafter referred to as the "Additional Space I"), and provided that the Lessee is not then in default under any of the terms, provisions, covenants and conditions of this Agreement beyond the applicable cure period therefor and this Agreement is then in full force and effect, the Port Authority within twenty (20) days following the date of the Lessee's notice will notify the Lessee in writing of the location and configuration of the Additional Space I (such configuration to be commercially reasonable) setting forth the commencement date of the letting thereof (June 1, 1998, subject to postponement due to causes or conditions beyond the control of the Port Authority), the exact number of rentable square feet contained therein (such number of rentable square feet to be no less than 5,000 nor more than 7,000 rentable square feet as determined by the Port Authority, such determination of the number of rentable square feet to be determined by the Port Authority in the same manner as the Port Authority determined the rentable square footage for the initial premises) and the annual basic rental rate therefore. The letting of the Additional Space I shall be on an "as is" basis with no finishing allowance provided that the Port Authority prior to the commencement date of the letting of same will provide in such Additional Space I the Landlord Work, as such term is defined in the Section of this Agreement entitled "Port Authority Work; Additional Lessee Work". In addition rental for the Additional Space I shall commence on the ninetieth (90th) day from the commencement date of the letting of the Additional Space I, as such commencement date may be postponed due to causes or conditions beyond the control of the Port Authority. Thereupon, the Lessee shall have the right, by notice to the Port Authority subscribed by an authorized officer of the Lessee and delivered to the Port Authority within ten (10) days after its receipt of the Port Authority's notice: (i) to accept the Additional Space I unconditionally for the balance of the term of the letting hereunder at the basic rental rate set forth in the Port Authority's notice; or (ii) to accept the Additional Space I unconditionally for the balance of the term of the letting hereunder but advising the Port Authority that the Lessee has concluded that the annual basic rental rate specified by the Port Authority in its notice is not the fair market rental for the Additional Space I. Within thirty (30) days after the later of the date the Lessee notifies the Port Authority that it unconditionally accepts the Additional Space I in accordance with subdivision (i), above, or, in the event that the annual basic rental for the Additional Space I is determined by arbitration in accordance with the provisions of paragraph (e) of this Section, the date that the arbitrators render their determination of fair market rental, the Port Authority will prepare and tender to the Lessee for its execution an agreement supplementing this Agreement and providing for the letting of the Additional Space I. The agreement tendered by the Port Authority 61 shall contain an exhibit depicting the Additional Space I, shall set forth the annual basic rental payable for the Additional Space I and shall include the effective date of the letting of the Additional Space I. The Lessee shall execute, acknowledge and deliver the aforesaid agreement to the Port Authority within thirty (30) days after delivery of same to it. The Supplemental Agreement prepared by the Port Authority pursuant to the provisions of this paragraph (a) shall provide for the letting of the Additional Space I upon all the terms and conditions set forth in this Agreement except as modified by the provisions of this paragraph (a) and paragraph (e) below. If the Lessee shall fail to execute, acknowledge and deliver the agreement tendered to it by the Port Authority within the aforesaid time period, then the Lessee shall have no further right to or interest in the Additional Space I the letting of which is covered by the said agreement, and the Port Authority shall have the right to lease the same to a third party on terms and conditions more or less favorable than the terms and conditions which would have governed the letting to the Lessee, all as the Port Authority in its discretion shall determine. The Lessee shall have a single option only to include additional space in the premises pursuant to this paragraph (a). (b) If the Lessee not later than June 1, 2005 shall notify the Port Authority in writing that it desires to lease all of the space shown in diagonal hatching on the sketch annexed hereto, made a part hereof and marked "Exhibit A-3" (hereinafter referred to as the "Additional Space II"), and provided that the Lessee is not then in default under any of the terms, provisions, covenants and conditions of this Agreement beyond the applicable cure period therefor and this Agreement is then in full force and effect, the Port Authority within twenty (20) days following the date of the Lessee's notice will notify the Lessee in writing of the exact number of rentable square feet contained therein and the annual basic rental rate therefore. The letting of the Additional Space II shall commence on March 1, 2006, subject to postponement due to causes or conditions beyond the control of the Port Authority, and such letting shall be on an "as is" basis with no finishing allowance provided that the Port Authority prior to the commencement date of the letting of same will provide in such Additional Space II the Landlord Work, as such term is defined in the Section of this Agreement entitled "Port Authority Work; Additional Lessee Work". In addition rental for the Additional Space II will commence on the ninetieth (90th) day from the commencement date of the letting of such space, as such commencement date may be postponed due to causes or conditions beyond the control of the Port Authority. Thereupon, the Lessee shall have the right, by notice to the Port Authority subscribed by an authorized officer of the Lessee and delivered to the Port Authority within ten (10) days after its receipt of the Port Authority's notice: (i) to accept the Additional Space II unconditionally for the balance of the term of the letting at the basic rental rate set forth in the Port Authority's notice; or (ii) to accept the Additional Space II unconditionally for the balance of the term of the letting hereunder but advising the Port Authority that the Lessee has concluded that the annual basic rental rate specified by the Port Authority 62 in its notice is not the fair market rental for the Additional Space II. Within thirty (30) days after the later of the date the Lessee notifies the Port Authority that it unconditionally accepts the Additional Space II in accordance with subdivision (i), above, or, in the event that the annual basic rental for the Additional Space II is determined by arbitration in accordance with the provisions of paragraph (e) of this Section, the date that the arbitrators render their determination of fair market rental, the Port Authority will prepare and tender to the Lessee for its execution an agreement supplementing this Agreement and providing for the letting of the Additional Space II. The agreement tendered by the Port Authority shall contain Exhibit A-3 depicting the Additional Space II, shall set forth the annual basic rental payable for the Additional Space II and shall include the effective date of the letting of the Additional Space II. Any Supplemental Agreement prepared by the Port Authority pursuant to the provisions of this paragraph (b) shall provide for the letting of the Additional Space II upon all the terms and conditions set forth in this Agreement except as modified by the provisions of this paragraph (a) and paragraph (e) below. The Lessee shall execute, acknowledge and deliver the aforesaid agreement to the Port Authority within thirty (30) days after delivery of same to it. If the Lessee shall fail to execute, acknowledge and deliver the agreement tendered to it by the Port Authority within the aforesaid time period, then the Lessee shall have no further right to or interest in the Additional Space II the letting of which is covered by the said agreement, and the Port Authority shall have the right to lease the same to a third party on terms and conditions more or less favorable than the terms and conditions which would have governed the letting to the Lessee, all as the Port Authority in its discretion shall determine, but such failure to execute and acknowledge such agreement within the time period provided covering the Additional Space II shall not diminish or affect the Lessee's rights under paragraph (a) above to include Additional Space I in the premises. The Lessee shall have a single option only to include additional space in the premises pursuant to this paragraph (b). (c) If any time during the term of the letting hereunder the Lessee shall notify the Port Authority in writing that it desires to lease a single block of space contiguous to its premises on the 24th floor of the South Tower Building or located on the 22nd or 25th floors of the South Tower Building and provided that the Port Authority acting in good faith determines that such space will become available for leasing within two hundred seventy (270) days from the date of the Lessee's notice (hereinafter referred to as Additional Space III) and provided, further that the Lessee is not then in default under any of the terms, provisions, covenants and conditions of this Agreement beyond the applicable cure period therefor and this Agreement is then in full force and effect, the Port Authority within twenty (20) business days after receipt of such notice from the Lessee will notify the Lessee in writing of the availability for letting of the Additional Space III setting forth the date the Port Authority expects the Additional Space III to be ready for occupancy, the location and configuration thereof (such configuration to be commercially reasonable), the exact number of rentable square feet contained therein and the annual basic rental rate therefore. The letting of the Additional Space III shall be on an "as is" basis with 63 no finishing allowance to be provided by the Port Authority provided that the Port Authority prior to the commencement date of the letting of such space will provide in such Additional Space III the Landlord Work, as such term is defined in the Section of this Agreement entitled "Port Authority Work; Additional Lessee Work". Payment of rental for the Additional Space III will commence on the ninetieth (90th) day from the commencement date of the letting of same, as such commencement date may be postponed due to causes or conditions beyond the control of the Port Authority. Thereupon, the Lessee shall have the right, by notice to the Port Authority subscribed by an authorized officer of the Lessee and delivered to the Port Authority within ten (10) days after its receipt of the Port Authority's notice: (i) to accept the Additional Space III unconditionally for the balance of the term of the letting hereunder at the basic rental rate set forth in the Port Authority's notice; or (ii) to accept the Additional Space III unconditionally for the balance of the term of the letting hereunder but advising the Port Authority that the Lessee has concluded that the annual basic rental rate specified by the Port Authority is not the fair market rental for the Additional Space III. Within thirty (30) days after the later of the date the Lessee notifies the Port Authority that it unconditionally accepts the Additional Space III in accordance with subdivision (i), above, or, in the event that the annual basic rental for the Additional Space III is determined by arbitration in accordance with the provisions of subdivision (ii), above, and of paragraph (e) of this Section, the date that the arbitrators render their determination of fair market rental, the Port Authority will prepare and tender to the Lessee for its execution an agreement supplementing this Agreement and providing for the letting of the Additional Space III. The agreement tendered by the Port Authority shall contain an exhibit depicting the Additional Space III, shall set forth the annual basic rental payable for the Additional Space III and shall include the effective date of the letting of the Additional Space III. Any Supplemental Agreement prepared by the Port Authority pursuant to the provisions of this paragraph (c) shall provide for the letting of the Additional Space III upon all the terms and conditions set forth in this Agreement except as modified by the provisions of this paragraph (c) and paragraph (e) below. The Lessee shall execute, acknowledge and deliver the aforesaid agreement to the Port Authority within thirty (30) days after delivery of same to it. If the Lessee shall fail to execute, acknowledge and deliver the agreement tendered to it by the Port Authority within the aforesaid time period, then the Lessee shall have no further right to or interest in the Additional Space III the letting of which is covered by the said agreement, and the Port Authority shall have the right to lease the same to a third party on terms and conditions more or less favorable than the terms and conditions which would have governed the letting to the Lessee, all as the Port Authority in its discretion shall determine. The Lessee expressly understands and agrees that the Port Authority in its discretion exercised in good faith shall determine when any Additional Space III is available for leasing, and nothing contained herein shall 64 obligate or be construed to obligate the Port Authority to offer any space to the Lessee other than in its existing configuration nor to terminate the letting or otherwise end the occupancy of a tenant currently in possession of any space, including the Additional Space III, prior to the scheduled expiration date of such letting, nor shall anything herein be deemed to prevent the Port Authority, without liability of any kind to the Lessee, from renewing or extending any lease covering any space on any of the designated floors or from otherwise continuing in occupancy a tenant of any space located on any of the designated floors, nor shall anything herein be deemed to limit the Port Authority's right to freely discuss and negotiate with third parties for the leasing of any space, including the Additional Space III. The Lessee's right to notify the Port Authority that it desires to lease Additional Space III shall continue throughout the entire term of the letting hereinabove described irrespective of whether the Lessee shall have added Additional Space III to the premises or of the number of times the Lessee shall have notified the Port Authority during such period provided however that the Lessee shall not have the right to notify the Port Authority of its desire to let any Additional Space III within three hundred sixty-five (365) days subsequent to the last prior such notice sent by the Lessee with respect to any Additional Space III unless (i) the Port Authority in response to such last prior notice determined that the additional space requested by the Lessee was not available for leasing or (ii) the Lessee and the Port Authority pursuant to the last such prior notice entered into an agreement providing for the inclusion of Additional Space III in the premises and in either said case the said three hundred sixty-five (365)-day period shall be reduced to ninety (90) days. In the event that prior to exercising its right to include Additional Space II in the premises pursuant to paragraph (b), above, the Lessee includes Additional Space III in the premises pursuant to the provisions of this paragraph (c), and such Additional Space III includes all or a portion of Additional Space II, then for purposes of paragraph (b) of this Section 43 Additional Space II as defined therein shall be reduced by all or such portion thereof which may have become a part of the premises as Additional Space III pursuant to the provision of this paragraph (c). (d) The Lessee at any time during the period commencing with the Prior Entry Date and continuing for 547 days thereafter (hereinafter in this paragraph (d) called the "Option Period") shall have the right to notify the Port Authority in writing that it desires to lease all or any portion (such portion to be as designated by the Lessee but such portion to be contiguous to the Lessee's then existing premises, to be no less than 3,500 rentable square feet and the balance of the Additional Space IV not taken by the Lessee to be a marketable configuration) of the space shown in diagonal hatching on the sketch attached hereto as Exhibit A-2 (all or any portion of such space being hereinafter called Additional Space IV), provided that the Lessee at the time of such notice is not in default under any term, provision or covenant of this Agreement beyond the applicable grace period therefor and provided further that this Agreement and the letting hereunder are then in full force and effect. In the event that the Lessee during the Option Period has not notified the Port Authority pursuant to the immediately preceding sentence that it desires to lease Additional Space IV and in the further event that during the Option Period the Port Authority receives a non-binding bona fide proposal from a third party to lease all or a portion of the 65 Additional Space IV (such portion to be no less than 3,500 rentable square feet), then prior to entering into an agreement with a third party covering the letting of all or a portion of the Additional Space IV, the Port Authority shall offer the Additional Space IV to the Lessee by notice in writing (it being understood that from and after the date of such notice the Lessee shall have no further right to add Additional Space IV to the premises pursuant to the first sentence of this paragraph (d)) and the Lessee shall have the right to be exercised within thirty (30) days after the date of such notice, to advise the Port Authority whether it wishes to include the Additional Space IV in the premises. If the Lessee shall timely indicate its desire to add the Additional Space IV to the premises under this Agreement either pursuant to the first or second sentence of this paragraph (d), as the case may be, the Port Authority shall prepare and tender to the Lessee for its execution an agreement further supplementing this Agreement and providing for the letting of the Additional Space IV hereunder. The agreement shall provide for the letting of Additional Space IV on the terms and conditions set forth in this Agreement, except as provided otherwise in this paragraph (d). The Supplemental Agreement tendered by the Port Authority shall contain an exhibit depicting the Additional Space IV and a statement of the number of rentable square feet comprising the Additional Space IV, such calculation of the number of rentable square feet to be determined by the Port Authority in the same manner as the Port Authority determined the rentable square footage for the initial premises. Such Supplemental Agreement for the letting of Additional Space IV shall provide for a commencement date occurring two hundred ten (210) days from the date the premises are made available to the Lessee for construction purposes (provided that if the period, hereinafter called the "Additional Space IV period", from the date the Additional Space IV is made available for construction by the Lessee through the expiration date of the term of the letting, as determined in accordance with the provisions of the Section of this Agreement entitled "Term", contains less than one hundred ninety-six (196) whole calendar months, then the aforesaid two hundred ten (210) day amount shall be replaced by the product obtained by multiplying 210 by a fraction the numerator of which shall be the number of whole calendar months in the Additional Space IV period and the denominator of which shall be 196) or such earlier date as the Lessee commences business operations therein. The rent commencement date for the Additional Space IV will be two hundred seventy (270) days from the commencement date but if the period between the commencement date of the letting of the Additional Space IV and the expiration date of the letting of the entire premises as set forth in the Section of this Agreement entitled "Term" is less than 189 whole calendar months, then the rent commencement date for Additional Space IV shall be the following number of days from the commencement date of the letting of same, such number of days to be obtained by multiplying two hundred seventy (270) by a fraction the numerator of which shall be the number of whole calendar months in the period from the commencement date of the letting of the Additional Space IV to the aforesaid expiration date of the letting and the denominator of which shall be 189. The Port Authority will provide the Lessee a finishing allowance equivalent to the product obtained by multiplying $62.00 by the number of rentable square feet in the Additional Space IV provided that if the term of the letting of Additional Space IV is less than 189 whole calendar months, then for purposes of determining the finishing allowance the said $62.00 shall be replaced by the product obtained by multiplying 66 $62.00 by a fraction the numerator of which shall be the number of whole calendar months in the period from the commencement date of the letting of Additional Space IV to the expiration date of the letting of same and the denominator of which shall be 189. The Lessee will accept the Additional Space IV in its "as is" condition, but the Port Authority will provide prior to the date the Additional Space IV is made available to the Lessee the Landlord Work, as such term is defined in the Section of this Agreement entitled "Port Authority Work; Additional Lessee Work". The basic rental for the Additional Space shall be at the following annual per rentable square foot rates for the following periods: for the period commencing with the payment of basic rental for Additional Space IV and continuing up to and including the day preceding the fifth anniversary of the Rent Commencement Date (as such term is defined in paragraph (c) of the Section of this Agreement entitled "Basic Rental") the Lessee shall pay basic rental for the Additional Space IV at the annual rate of $31.00 per rentable square foot; for the period commencing with the fifth anniversary of the Rent Commencement Date up to and including the day preceding the tenth (10th) anniversary of the Rent Commencement Date, the Lessee shall pay basic rental for the Additional Space IV at the annual rate of $33.75 per rentable square foot; and for the period commencing with the tenth (10th) anniversary of the Rent Commencement Date through the balance of the term of the letting, the Lessee shall pay basic rental for the Additional Space IV at the annual rate of $36.50 per rentable square foot. In addition to the basic rental, the Lessee commencing with the rent commencement date shall pay additional basic rental for the Additional Space IV in accordance with the provisions of Schedule A attached hereto, the base dates and amounts set forth in said Schedule A to remain unchanged. In the event the Lessee does not so advise the Port Authority of its desire to add Additional Space IV within the time period hereinabove specified or shall fail to execute, acknowledge and deliver the agreement to the Port Authority within the time period hereinabove set forth, then the Lessee shall have no further right or interest in the Additional Space IV pursuant to this paragraph (d), and the Port Authority shall have the right to lease the same to any third party on terms and conditions more or less favorable than the terms and conditions which would have governed the letting to the Lessee, all as the Port Authority in its discretion may determine. If Additional Space IV shall become a part of the premises under this Agreement pursuant to and in accordance with the provisions of this paragraph (d), then at such time the Lessee shall have no right to add Additional Space I to the premises pursuant to paragraph (a) of this Section 43 and all rights and obligations of the Port Authority and the Lessee with respect to Additional Space I shall be null and void and of no further force or effect. (e) In the event the Lessee concludes that the annual basic rental for the Additional Space I specified by the Port Authority pursuant to paragraph (a), above, for the Additional Space II specified by the Port Authority pursuant to paragraph (b) above, or the Additional Space III pursuant to paragraph (c) above, is greater than the fair market rental for any such space, the Lessee shall so advise the Port Authority and shall request arbitration with respect thereto. Such arbitration shall be by three arbitrators, one to be appointed by the Port Authority, one to be appointed by the Lessee and the third to be appointed by the arbitrators so appointed. The arbitration shall be pursuant to the then rules of the American 67 Arbitration Association or any successor organization and the question to be answered by the arbitrators shall be: "Is the annual basic rental established by the Port Authority greater than the fair market rental for the Additional Space I or the Additional Space II or the Additional Space III (as the case may be) for the balance of the term of the letting under the Lease?" If the arbitrators' decision is in the negative (or if the Lessee does not contest the rental rate after specification thereof by the Port Authority) then from and after the first day for payment of rental for the Additional Space I or the Additional Space II, or the Additional Space III, as the case may be, the Lessee shall pay to the Port Authority such annual basic rental in advance in equal monthly installments throughout the balance of the term of the letting under this Agreement. If the decision of the arbitrators is that the annual basic rental specified by the Port Authority is greater than the fair market rental for the Additional Space I, the Additional Space II or the Additional Space III, as the case may be, the arbitrators shall thereupon determine the fair market rental for the applicable space, and in such event from and after the first day for payment of basic rental for the Additional Space I, the Additional Space II or the Additional Space III, as the case may be, the Lessee shall pay to the Port Authority in advance in equal monthly installments an annual basic rental equal to the fair market rental as determined by the arbitrators. In the event the annual basic rental for the Additional Space I, the Additional Space II or the Additional Space III, as the case may be, has not been determined as herein provided prior to the commencement date for payment thereof, the Lessee shall pay monthly installments of annual basic rental for the Additional Space I, the Additional Space II or the Additional Space III, as the case may be, at the annual per rentable square foot rate then in effect for the initial premises, and upon determination of the annual basic rental pursuant to the provisions of this Section, the Lessee shall, within thirty (30) days thereafter, pay any amount due to the Port Authority arising out of the excess (if any) of the monthly installments of annual basic rental as so determined over the monthly installments thereof actually paid by the Lessee for such period, provided however that if the sum of the monthly installments of annual basic rental actually paid by the Lessee for such period are in excess of the sum of the monthly installments determined by arbitration to be payable by the Lessee for such period, the Port Authority shall within thirty (30) days thereafter, pay such excess to the Lessee and if such excess is not so paid within thirty (30) days, then the Lessee shall be entitled to a credit for such excess to be applied against its rental obligations next becoming due for any such space. The Port Authority and the Lessee shall each bear the cost of the arbitrator appointed by them. All other costs of such arbitration, including but not limited to the cost of the third arbitrator, shall be borne equally by the Port Authority and the Lessee. (f) In addition to the payment of basic rental for any Additional Space I, Additional Space II or Additional Space III as provided herein, the Lessee shall, from and after the commencement date for payment of rental therefor and continuing for the balance of 68 the term of the letting under this Agreement, pay additional basic rental for the Additional Space I, Additional Space II and the Additional Space III, as the case may be, in accordance with the provisions of Schedule A attached hereto, the base amounts and dates set forth in said Schedule A to remain as provided therein. From and after the commencement of the term of the letting of the Additional Space I, Additional Space II and the Additional Space III, paragraph (n) of Section 1 of Schedule A shall be amended to set forth the number of rentable square feet constituting the Additional Space I, Additional Space II or the Additional Space III, as the case may be, in addition to the number of rentable square feet constituting the balance of the premises, and the "Lessee's Proportionate Share" as set forth in paragraph (j) of Section 1 of said Schedule A shall be adjusted as provided in said paragraph. (g) For purposes of this Section 43, the term "fair market rental" shall mean the rent that a willing tenant would pay and a willing landlord would accept for comparable space in the World Trade Center (or if there is no comparable space available for comparison at such time then such other comparable space in first class office buildings in the vicinity of the World Trade Center) taking into account all relevant factors in connection therewith, including, but not limited to, landlord work, if any, rent concessions, if any, and finishing allowances, if any, then being given by the Port Authority for space of comparable size, location and term in the building in which the premises are located (and if there is no comparable space in the building available at such time, then the rent concessions, if any, landlord work, if any, and finishing allowances, if any, then being given by landlords for comparable space in first class buildings in the vicinity of the World Trade Center) and the fact that the Port Authority will pay a brokerage commission in connection with the letting of such space, perform the Landlord Work in the premises, will not offer a finishing allowance but will give a ninety (90) day rent concession. Such determination of fair market rental shall also take into account the fact that for any additional space hereunder the base dates and base years set forth in Schedule A will remain unchanged as provided in paragraph (f) above. (h) Failure of the Lessee to exercise any of its options pursuant to any one of paragraphs (a), (b), (c) or (d) of this Section shall not affect the Lessee's right to add additional space to the premises pursuant to the other said paragraphs. Section 44. Lessee's Right to Extend the Letting (a) The Lessee shall have the right to extend this Agreement and the term of the letting of the premises hereunder solely in its entirety (including any Additional Space I, Additional Space II, Additional Space III and Additional Space IV) for a five (5) year period effective upon the expiration date of the term of the letting hereunder, provided that the Lessee shall give unconditional written notice to the Port Authority of its election to do so not later than three hundred sixty-five (365) days prior to the expiration date of the term of the letting, and provided further that on the date of the giving of the said notice and on the effective date thereof the Lessee is not in default in the performance or observance of any term, 69 provision or condition of this Agreement and that the Lessee has not been served with a notice of termination of this Agreement by the Port Authority and this Agreement is then in full force and effect. (b) In the event the Lessee shall give to the Port Authority the notice referred to in paragraph (a) above, the Port Authority shall, not later than thirty (30) days subsequent to its receipt of such notice from the Lessee, advise the Lessee in writing of the Port Authority's determination of the annual basic rental to be payable by the Lessee during the five (5)-year extension period which shall be equal to ninety-five percent (95%) of the fair market rental, as determined by the Port Authority, subject to the provisions of this paragraph (b). In the event the Lessee concludes that the annual basic rental so stated in the Port Authority's notice is greater than ninety-five percent (95%) of the fair market rental for the premises for the extension period, the Lessee shall, within fifteen (15) days after the date of the Port Authority's said notice, advise the Port Authority in writing that it has so concluded and request arbitration with respect thereto. Such arbitration shall be by three arbitrators, one to be appointed by the Port Authority, one to be appointed by the Lessee and the third to be appointed by the arbitrators so appointed. The arbitration shall be pursuant to the then-rules of the American Arbitration Association or by any successor organization, and the question to be answered by the arbitrators shall be: "Is the annual basic rental established by the Port Authority greater than ninety-five percent (95%) of the fair market rental for the premises for the extension period?" If the arbitrators' decision is in the negative (or if the Lessee does not contest the rental rate after specification thereof by the Port Authority) then, from and after the first day of the extended term of the letting hereunder, the Lessee shall pay to the Port Authority such annual basic rental for the premises in advance in equal monthly installments throughout the extension period. If the decision of the arbitrators is that the annual basic rental specified by the Port Authority is greater than ninety-five percent (95%) of the fair market rental for the extension period, the arbitrators shall thereupon determine the fair market rental for the extension period, and in such event, from and after the first day of the extended term of the letting the Lessee shall pay to the Port Authority in advance in equal monthly installments an annual basic rental equal to the product of the fair market rental as determined by the arbitrators multiplied by ninety-five percent (95%). In the event the annual basic rental has not been determined as herein provided prior to the commencement of the extended term of the letting hereunder, the Lessee shall continue to pay the monthly installments of basic rental at the rate theretofore in effect, and upon determination of the annual basic rental pursuant to the provisions of this Section, the Lessee shall, within thirty (30) days thereafter, pay any amounts due to the Port Authority arising out of the excess (if any) of the monthly installments of the annual basic rental as so determined over the monthly installments thereof actually paid by the Lessee for such period, provided however, that if the sum of the monthly installments of the annual basic rental actually paid by the Lessee for such period are in excess of the sum of the monthly installments as determined by arbitration to be payable by the Lessee 70 for such period, the Port Authority, within thirty (30) days thereafter, shall pay the amount of such excess to the Lessee and if the Port Authority fails to make such payment within such period the Lessee shall be entitled to a credit for such excess to be applied against its rental obligations next becoming due under this Agreement. In addition to the basic rental payable as provided in this paragraph (b), the Lessee shall, from and after the commencement of the extended term of the letting hereunder, continue to pay additional basic rental in accordance with the provisions of Schedule A attached hereto, the base amounts and dates set forth in said Schedule A to remain unchanged. The cost of the aforesaid arbitration shall be borne equally by the Port Authority and the Lessee. (c) For purposes of this Section 44, the term "fair market rental" shall mean the rent that a willing tenant would pay and a willing landlord would accept for comparable space in the World Trade Center (or if there is no comparable space available for comparison at such time, then such other comparable space in first class office buildings in the vicinity of the World Trade Center) taking into account all relevant factors in connection therewith, including, but not limited to, landlord work, if any, rent concessions, if any, and finishing allowances, if any, then being given by the Port Authority for space of comparable size, location and term in the building in which the premises are located (and if there is no comparable space in the building available at such time, then the rent concessions, if any, landlord work, if any, and finishing allowances, if any, then being given by landlords for comparable space in first class buildings in the vicinity of the World Trade Center) and the fact that the Port Authority will pay a brokerage commission in connection with such renewal but will not perform any work in the premises nor give a finishing allowance or rent concession during the renewal period, but such determination shall not take into consideration the fact that the Port Authority will not incur a period during which the premises will be vacant, such factor having been taken into consideration in specifying ninety-five percent (95%) of the fair market rental as the rental; the determination of fair market rental shall also take into account the fact that the base date and base years set forth in Schedule A will remain unchanged as provided in paragraph (b) above. Section 45. No Gifts, Gratuities, Offers of Employment, etc. (a) During the term of the letting under this Agreement, the Lessee shall not offer, give or agree to give anything of value either to a Port Authority employee, agent, job shopper, consultant, construction manager or other person or firm representing the Port Authority, or to a member of the immediate family (i.e., a spouse, child, parent, brother or sister) of any of the foregoing, in connection with the performance of duties involving transactions with the Lessee on behalf of the Port Authority by such employee, agent, job shopper, consultant, construction manager or other person or firm representing the Port Authority, whether or not such duties are related to this Agreement or any other Port Authority lease, contract 71 or matter. Any such conduct shall be deemed a material breach of this Agreement. (b) As used herein, "anything of value" shall include but not be limited to any (1) favors, such as meals, entertainment, transportation (other than that contemplated by this Agreement or any other Port Authority lease or contract), etc., which might tend to obligate the Port Authority employee to the Lessee, and (2) gift, gratuity, money, goods, equipment, services, lodging, discounts not available to the general public, offers or promises of employment, loans or the cancellation thereof, preferential treatment or business opportunity. Such term shall not include compensation contemplated by this Agreement or any other Port Authority lease or contract. (c) In addition, during the term of the letting under this Agreement, the Lessee shall not make an offer of employment or use confidential information in a manner proscribed by the Code of Ethics and Financial Disclosure dated as of July 18, 1994 (a copy of which is available upon request to the Office of the Secretary of the Port Authority). (d) The Lessee shall include the provisions of this Section in each sublease, contract or subcontract entered into under and pursuant to the provisions of this Agreement. (e) The Lessee certifies that it has not made any offers or agreements, or given, or agreed to give, anything of value (as defined in paragraph (b) of this Section) or taken any other action with respect to any Port Authority employee or former employee or immediate family member of either which would constitute a breach of ethical standards under the Code of Ethics and Financial Disclosure dated as of July 18, 1994, referred to in paragraph (c) of this Section, nor does the Lessee have any knowledge of any act on the part of a Port Authority employee or former Port Authority employee relating either directly or indirectly to the Lessee which constitutes a breach of the ethical standards set forth in said Code. Section 46. Security Deposit or Letter of Credit (a) Upon the execution of this Agreement by the Lessee and delivery thereof to the Port Authority, the Lessee shall deposit with the Port Authority (and shall keep deposited throughout the letting under this Agreement) the sum of One Hundred Fifty Thousand Dollars and No Cents ($150,000.00) either in cash, or bonds of the United States of America, or of the State of New Jersey, or of the State of New York, or of The Port Authority of New York and New Jersey, having a market value of that amount, as security for the full, faithful and prompt performance of and compliance with, on the part of the Lessee, all of the terms, provisions, covenants and conditions of this Agreement on its part to be fulfilled, kept, performed or observed. Bonds qualifying for deposit hereunder shall be in bearer form but if bonds of that issue were offered only in registered form, then the Lessee may deposit such bond or bonds in registered form, provided, however, that the Port Authority shall be under no obligation to accept such deposit of a bond in registered form unless such bond has been re-registered in the name of the Port Authority (the expense of such re-registration to be borne by the Lessee) in a manner satisfactory to the Port Authority. The Lessee 72 may request the Port Authority to accept a registered bond in the Lessee's name and if acceptable to the Port Authority the Lessee shall deposit such bond together with a bond power (and such other instru- ments or other documents as the Port Authority may require) in form and substance satisfactory to the Port Authority. In the event the deposit is returned to the Lessee any expenses incurred by the Port Authority in re-registering a bond to the name of the Lessee shall be borne by the Lessee. In addition to any and all other remedies available to it, the Port Authority shall have the right, at its option, at any time and from time to time, with or without notice, to use the deposit or any part thereof in whole or partial satisfaction of any of its claims or demands against the Lessee. There shall be no obligation on the Port Authority to exercise such right and neither the existence of such right nor the holding of the deposit itself shall cure any default or breach of this Agreement on the part of the Lessee. With respect to any bonds deposited by the Lessee, the Port Authority shall have the right, in order to satisfy any of its claims or demands against the Lessee, to sell the same in whole or in part, at any time and from time to time, with or without prior notice at public or private sale, all as determined by the Port Authority, together with the right to purchase the same at such sale free of all claims, equities or rights of redemption of the Lessee. The Lessee hereby waives all right to participate therein and all right to prior notice or demand of the amount or amounts of the claims or demands of the Port Authority against the Lessee. The proceeds of every such sale shall be applied by the Port Authority first to the costs and expenses of the sale (including but not limited to advertising or commission expenses) and then to the amounts due the Port Authority from the Lessee. Any balance remaining shall be retained in cash toward bringing the deposit to the sum specified above. In the event that the Port Authority shall at any time or times so use the deposit, or any part thereof, or if bonds shall have been deposited and the market value thereof shall have declined below the above-mentioned amount, the Lessee shall, on demand of the Port Authority and within two (2) days thereafter, deposit with the Port Authority additional cash or bonds so as to maintain the deposit at all times to the full amount stated above in this paragraph (a), and such additional deposits shall be subject to all the conditions of this Section. After the expiration or earlier termination of the letting under this Agreement as the said letting may have been extended, and upon condition that the Lessee shall then be in no wise in default under any part of this Agreement, as this Agreement may have been amended or extended (or both), and upon written request therefor by the Lessee, the Port Authority will return the deposit to the Lessee less the amount of any and all unpaid claims and demands (including estimated damages) of the Port Authority by reason of any default or breach by the Lessee of this Agreement or any part thereof. The Lessee agrees that it will not assign or encumber the deposit. The Lessee may collect or receive any interest or income earned on bonds and interest paid on cash deposited in interest-bearing bank accounts, less any part thereof or amount which the Port Authority has paid or applied against the Lessee's obligations under this Agreement or which the Port Authority is or may hereafter be entitled or authorized by law to retain or to charge, whether as or in lieu of an administrative expense, or custodial charge, or otherwise; provided, however, that the Port Authority shall not be obligated by this provision to place or to keep cash deposited hereunder in interest-bearing bank accounts. 73 (b) In lieu of the security deposit required pursuant to paragraph (a) of this Section the Lessee may deliver to the Port Authority, as security for all obligations of the Lessee under this Agreement, a clean irrevocable letter of credit issued by a banking institution satisfactory to the Port Authority and having its main office within the Port of New York District, in favor of the Port Authority in the amount of One Hundred Fifty Thousand Dollars and No Cents ($150,000.00). The form and terms of such letter of credit, as well as the institution issuing it, shall be subject to the prior and continuing approval of the Port Authority. Such letter of credit shall provide that it shall continue throughout the term of the letting under this Agreement and for a period of not less than six (6) months thereafter; such continuance may be by provision for automatic renewal or by substitution of a subsequent satisfactory letter. Upon notice of cancellation of a letter of credit the Lessee agrees that unless, by a date twenty (20) days prior to the effective date of cancellation, the letter of credit is replaced by security in the amount required in accordance with paragraph (a) of this Section or another letter of credit satisfactory to the Port Authority, the Port Authority may draw down the full amount thereof and thereafter the Port Authority will hold the same as security under paragraph (a) of this Section. Failure to provide such letter of credit at any time during the term of the letting which is valid and available to the Port Authority, including any failure of any banking institution issuing any such letter of credit previously accepted by the Port Authority to make one or more payments as may be provided in such letter of credit shall be deemed to be a breach of this Agreement on the part of the Lessee. Upon acceptance of such letter of credit by the Port Authority, and upon request by the Lessee made thereafter, the Port Authority will return any security deposit theretofore made under and in accordance with the provisions of paragraph (a) of this Section. The Lessee shall have the same rights to receive such deposit during the existence of a valid letter of credit as it would have to receive such deposit upon expiration of the letting and fulfillment of the obligations of the Lessee under this Agreement. If the Port Authority shall make any drawing under a letter of credit held by the Port Authority hereunder, the Lessee on demand of the Port Authority and within two (2) days thereafter, shall bring the letter of credit back up to its full amount. (c) No action by the Port Authority pursuant to the terms of any letter of credit, or receipt by the Port Authority of funds from any bank issuing any such letter of credit, shall be or be deemed to be a waiver of any default by the Lessee under the terms of this Agreement and all remedies under this Agreement of the Port Authority consequent upon such default shall not be affected by the existence of or a recourse to any such letter of credit. Section 47. Additional Services (a) From and after the commencement date of the term of the letting, the Port Authority will furnish to the Lessee in the premises, for operation of the equipment comprising special air cooling facilities installed by the Lessee, condenser water sufficient for a rated capacity of twenty-five tons, and the Lessee agrees to pay to the Port Authority for such condenser water an annual charge at the rate of One Thousand Ninety-one Dollars and Ninety-seven Cents ($1,091.97) per ton of the rated cooling capacity of the Lessee's 74 equipment as determined by the Port Authority. If the Lessee requires additional quantities of condenser water for use in its air cooling equipment, and provided the Port Authority has additional quantities available to furnish to the Lessee, the Port Authority will furnish the same and the Lessee shall pay to the Port Authority for such additional condenser water an annual charge at the rate of One Thousand Ninety-one Dollars and Ninety-seven Cents ($1,091.97) per ton of the rated cooling capacity of the Lessee's equipment requiring such additional condenser water as determined by the Port Authority. In the event of any changes made in the Lessee's air cooling equipment or the installation thereof, the Lessee shall supply to the Port Authority such certifications of rated capacity as the Port Authority shall reasonably request, including certifications of third parties. The annual charge for condenser water, together with the annual charge for additional condenser water, shall be payable by the Lessee in advance in equal monthly installments and shall be payable at the same time, in the same manner and shall be recoverable with like remedies as if it were a part of the basic rental reserved under this Agreement. (b) The charges for condenser water stated in paragraph (a), above, shall be subject to increase from time to time as follows: "Wage rate" as used in this paragraph shall mean the hourly straight time wage rate for Engineers as that wage rate is established from time to time by collective bargaining agreement between the Realty Advisory Board on Labor Relations, Incorporated, acting on behalf of various building owners and Local 94 of the International Union of Operating Engineers, AFL-CIO, and "basic wage rate" shall mean the wage rate in effect on January 1, 1994. From and after each wage rate established from and after January 1, 1994, the Lessee shall pay annual charges in addition to the charges for condenser water and additional condenser water stated in paragraph (a), above, such additional charges for condenser water and additional condenser water to be at an annual rate per ton equal to Two Dollars and Fifty Cents ($2.50) for each one percent (1%), or major fraction thereof, that the wage rate so established exceeds the basic wage rate. If either the Realty Advisory Board on Labor Relations, Incorporated, or Local 94 of the International Union of Operating Engineers, AFL-CIO, shall cease to exist or a collective bargaining agreement shall cease to be negotiated between the Realty Advisory Board on Labor Relations, Incorporated and Local 94 of the International Union of Operating Engineers, AFL-CIO, then the wage rate to be used for computing increases in the said charges shall be the wage rate for Engineers established under such collective bargaining agreements as the Port Authority shall select. If the job classification "Engineers" shall be renamed or abolished, then the Port Authority will select the job classification performing substantially the same labor functions as Engineers and the wage rate of the job classification so selected shall be used in computing increases in the charges provided for herein. (c) The furnishing of condenser water and additional condenser water by the Port Authority as provided for herein shall be subject to all of the terms, provisions and conditions of the Section of this Agreement entitled "Services and Utilities". The Port Authority's sole obligation under this Section 47 is to provide condenser water at a temperature not exceeding eighty-five (85) degrees Fahrenheit at a rate flow of approximately three (3) gallons 75 per minute for each ton of the actual rated capacity of the Lessee's air-cooling equipment. Notwithstanding that the Port Authority is obligated to furnish condenser water as provided in paragraph (a) hereof, the Port Authority shall have no responsibility whatsoever for conditioning or cooling the air in that area of the premises served by the air cooling equipment installed by the Lessee nor for the maintenance therein of any specified temperature or comfort level. The Lessee shall and does hereby release the Port Authority from any and all liability to the Lessee arising out of the Port Authority's failure to provide condenser water which meets the aforesaid specifications except that the Port Authority shall remain fully liable for all damage to equipment and other property owned or leased by the Lessee, or any subtenants or desk-space users of the premises (excluding, however, loss of data and any loss of business or business interruption losses resulting from such equipment or property damage or data loss) and all personal injury arising as a result of the condenser water which the Port Authority provides to the point of connection to the Lessee's equipment being contaminated. The Lessee shall indemnify the Port Authority against any and all claims and demands, losses or damages made by third parties for loss of data, loss of business and business interruption losses resulting from any failure to provide condenser water meeting the aforesaid specifications. Nothing herein shall be construed to relieve the Port Authority from supplying heat, ventilation and air cooling in accordance with the provisions of the Section of this Agreement entitled "Services and Utilities" and the specifications set forth in Schedule D. Section 48. Entire Agreement This Agreement consists of the following: pages 1 through 75, inclusive, plus Exhibits A, A-1, A-2, A-3, R, TAA, X and Y and Schedules A, B, B-1, D, E, F and I. It constitutes the entire agreement of the parties on the subject matter hereof and may not be changed, modified, discharged or extended except by written instrument duly executed by the Port Authority and the Lessee. The Lessee agrees that no representations or warranties shall be binding upon the Port Authority unless expressed in writing in this Agreement. IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. T H E PORT AUTHORITY OF NEW YORK AND NEW JERSEY ATTEST: ------------- By ------------------------ (SEAL) SCOR U.S. CORPORATION 76 ATTEST: ------------- By ------------------------- Secretary (Title) President (CORPORATE SEAL) EXHIBIT A DRAWING NO. WT-3091-823 FLOOR PLAN FOR SOUTH TOWER BUILDING, FLOOR 23 Dated September 21, 1994 This drawing highlights the following six (6) areas: 1.Office Area 2.Passenger Elevator Lobby 1 3.Freight Elevator Lobby 4.Corridor Area 5.Toilet Area 6.Janitor Closets EXHIBIT A EXHIBIT A-1 DRAWING NO. W.T. 3091-B23 DATE: Jan. 26, 1995 This floor plan indicates the approximate dimensions for the office space. Floor 24 Approximate square footage: 60'1" x 100' 1"; 100' 1" x 36' 6" EXHIBIT A-1 EXHIBIT A-2 DRAWING NO. W.T. 3091-B23 DATE: Jan. 26, 1995 This floor plan indicates the approximate dimensions for the office space. 24th Floor 70' 1" x 46' 9"; 16' 8" x 60' 1" EXHIBIT A-2 EXHIBIT A-3 DRAWING NO. W.T.-3091-B24 DATE: Dec. 5, 1994 This floor plan indicates the square footage for the office space: Floor 24 60' 1" x 106' 9" 15' 8" x 36' 6" 31' 0" x 52' 4" EXHIBIT A-3 SCHEDULE A 1. For the purposes of this Schedule, the following terms shall have the respective meanings provided below: (a) The "annual per rentable square foot factor" referred to in this Schedule was initially fixed at $1.25 in the City Agreement (as hereinafter defined) and provision was made in paragraph 7(3) of the City Agreement for changes therein from time to time to reflect changes in the tax rate and changes in assessed valuations. (b) "Amortized Expenses" shall mean the annual amortization of expenditures incurred by the Port Authority during the term of the letting under the Lease (as hereinafter defined) on a straight-line basis over a depreciable life in accordance with generally accepted accounting principles, consistently applied by the Port Authority, (with interest calculated at an annual rate (the "Applicable Rate") equal to two (2) percentage points above the last twelve (12) month average of the twenty-five (25) bond Revenue Bond Index as published each Friday in the "Bond Buyer" at the time the Port Authority makes such expenditure) for any equipment, device or capital improvement (i) which may be required by the insurance carriers providing insurance coverage on the Facility (as hereinafter defined) or on any part thereof, (ii) the use or presence of which equipment, device or capital improvement at the Facility will reduce the premiums charged by the insurance carriers providing such insurance coverage, (iii) which is required by law which first takes effect after the execution of the Lease by the parties thereto or (iv) which is reasonably designed as a cost-saving measure (and the annual amortization in respect of which bears a reasonable relationship to the amount of actual savings) in the operation or maintenance of the Facility. Notwithstanding the foregoing, Amortized Expenses shall exclude expenditures for any equipment, device or capital improvement made as part of the planned capital upgrade program for the electrical, HVAC and elevator systems in the Facility. (c) "Base Operating Year" shall mean the calendar year 1995. (d) "City Agreement" shall mean that certain agreement between the Port Authority and the City of New York dated 1967, as it may have been or may hereafter be supplemented or amended. (e) "Escalation Year" shall mean each calendar year subsequent to the Base Operating Year which shall include any part of the term of the letting under the Lease. (f) "Estimate Statement" shall mean, with respect to any Escalation Year, a written statement setting forth in reasonable detail the Port Authority's estimates of Operating Expenses (as hereinafter defined) and additional basic rental under Paragraph 3 of this Schedule for such Escalation Year. Page 1 of Schedule A (g) "Facility" for the purposes of this Schedule only, shall have the meaning set forth in paragraph (b) of Section 36 of the Lease, except that there shall be excluded therefrom the following buildings commonly known as Three World Trade Center (Vista Hotel International), Six World Trade Center (U.S. Customs House) and Seven World Trade Center. (h) "Lease" shall mean the agreement of lease to which this Schedule is attached. (i) "Lessee's Proportionate Share" shall mean that fraction, the numerator of which is the number of Rentable Square Feet in the Premises and the denominator of which is the number of rentable square feet in the Facility, exclusive of the subgrade space and all retail space, which fraction may be expressed as a percentage. The Lessee and the Port Authority agree that the number of rentable square feet in the Facility, exclusive of the subgrade space and all retail space, is 10,173,368 rentable square feet. Accordingly, as of the date hereof, the Lessee's Proportionate Share is Five Hundred Seventy- seven Thousandths of One percent (.577%), which Share consists of Four Hundred Forty-two Thousandths of One percent (.442%) for the portion of the premises shown on Exhibit "A", and One Hundred Thirty-five Thousandths of One percent (.135%) for the portion of the premises shown in diagonal hatching on Exhibit "A-1". The Port Authority and the Lessee hereby expressly acknowledge and agree that the Lessee's Proportionate Share as set forth above is the percentage as agreed by the Port Authority and the Lessee and shall not be subject to change, redetermination or remeasurement whatsoever for any reason, except that such percentage shall be subject to change by reason of an alteration or improvement made to the Facility which physically increases or decreases the total number of rentable square feet in the Facility, exclusive of the subgrade space and all retail space. If the number of Rentable Square Feet in the Premises shall be increased or decreased, the Lessee's Proportionate Share shall be increased or decreased to take into account such change in the number of Rentable Square Feet in the Premises, measured on a consistent basis with the manner in which the number of Rentable Square Feet in the Premises have been measured as of the date hereof. In no event shall the Lessee's Proportionate Share be increased by reason of the leasing by the Lessee of any subgrade space in the Facility. (j) "Operating Expenses" shall mean the total of Amortized Expenses and all other costs and expenses (and taxes thereon, if any), without duplication, paid or incurred by or on behalf of the Port Authority with respect to the operation, maintenance, repair, marketing, promoting, servicing, cleaning and policing of the entire Facility, including but not limited to all buildings and structures, equipment, systems, elevators, escalators, bridges, truck docks, generators, fuel tanks, common areas, public areas, passageways, lobbies and mezzanines, sidewalks, curbs, plazas, concourses and other areas adjacent to the Facility, and with respect to the utilities and services provided Tenants (as hereinafter defined), sewer and water rents, rates and charges and annual management fees equal to three percent (3%) of the total of basic rental, additional basic rental and other charges paid to the Port Authority by Tenants of the Facility, computed in Page 2 of Schedule A accordance with Port Authority accounting principles consistently applied, provided, however, that Operating Expenses shall exclude: (1) the compensation to executives above the grade of building manager (including labor costs and fringe benefits); (2) expenditures for capital improvements or capital equipment, other than those included in Amortized Expenses; (3) amounts received by or reimbursed to the Port Authority through insurance proceeds, warranties or service contracts or from any other third parties, including Tenants, to the extent such amounts are compensation for sums previously included in Operating Expenses hereunder; (4) depreciation, except as the same may be included in Amortized Expenses; (5) taxes or payments in lieu of taxes, as defined in and payable in accordance with this Schedule; (6) the cost of electricity or condenser water furnished to the premises or to any other space leased to Tenants and the cost of services furnished to space leased to other Tenants but not furnished to the Lessee; (7) interest on and amortization of mortgages, and any finance charges, points and closing costs incurred by the Port Authority in connection with any mortgages which may hereafter be placed on the Facility; (8) the cost of alterations, additions, changes or decorations (including leasehold improvements) made for any Tenant of the Facility at such Tenant's cost or made in order to prepare space in the Facility for occupancy by a new Tenant; (9) financing costs, except as the same may be included in Amortized Expenses; (10) the cost of repairs in or to a Tenant's premises incurred by reason of breach by a Tenant of its lease for space in the Facility except that such costs shall be included in Operating Expenses if the repairs for which such costs are incurred generally benefit Tenants at the Facility or affect fire safety or are intended to remedy or correct any conditions which are or may be of a life-threatening nature to occupants of the Facility (other than solely the defaulting Tenant); (11) the cost of any work or services performed or other expenses incurred in connection with installing, operating and maintaining any specialty service or facility, such as an observation deck or broadcasting facility or any Page 3 of Schedule A luncheon, athletic or recreational club, provided, however, that the cost of any work or services performed in any public or common area of the Facility shall not be excluded from Operating Expenses; (12) payments for rented equipment the cost of which would constitute a capital expenditure if the equipment were purchased, except to the extent same would be included in Amortized Expenses; (13) any cost or expense of furnishing heating, ventilating, air cooling, cleaning or other services to retail space located in the Facility; and (14) the portion of the cost of any work or service performed for the Port Authority which is performed for any Port Authority facility other than the Facility. If, during all or part of the Base Operating Year or any Escalation Year, the Port Authority shall not furnish any particular items of work or services (the cost of which would otherwise constitute an Operating Expense hereunder) to portions of the Facility due to the fact that: (X) such portions are not occupied or leased, (Y) such item of work or service is not required or desired by the Tenant of such portion or (Z) such Tenant is itself obtaining and providing such item of work or service without cost to the Port Authority, then, for the purposes of computing Operating Expenses, the additional costs and expenses for such items of work or services which would reasonably have been incurred during such Base Operating Year or Escalation Year, as the case may be, by the Port Authority, calculated on a reasonable basis by the Port Authority, shall be included as Operating Expenses as if the Port Authority had at its own expense furnished such items of work or services to such portion of the Facility or to such Tenant. In the event the Port Authority "grosses up" any item as provided in the preceding sentence, the Estimated Statement and Port Authority Statement (as hereinafter defined) shall include the "grossed-up" figures. (k) "Payments in lieu of taxes" shall mean such payments as the Port Authority has agreed to pay The City of New York under the City Agreement. (l) "Port Authority Statement" shall mean an instrument containing a computation of additional basic rental due pursuant to the provisions of Paragraph 3 of this Schedule furnished by the Port Authority to the Lessee, certified by the Manager, Finance and Business Planning, World Trade Department, and accompanied by a statement of Operating Expenses for the Facility from which the Port Authority shall make the computations of Operating Expenses and additional basic rental set forth in such Port Authority Statement. (m) "Rentable Square Feet in the Premises" shall be d e e m e d t o m e a n 58,783 square feet, and shall be deemed to consist of 44,973 square feet as shown on Exhibit A and 13,810 square feet as shown on Exhibit A-1. Page 4 of Schedule A (n) "Tax Base" shall mean the annual per rentable square foot factor finally established to be the annual per rentable square foot factor to be used in computing payments in lieu of taxes for the tax year beginning July 1, 1994, provided that "tax base" shall initially mean $3.76, as same may be adjusted pursuant to the City Agreement. (o) "Tax Year" shall mean the twelve-month period established by The City of New York as a tax year for real estate tax purposes. (p) "Tax Statement" shall mean a statement furnished by the Port Authority to the Lessee and prepared in accordance with the applicable provisions of this Schedule A containing a computation of additional basic rental due pursuant to Paragraph 2 of this Schedule for the applicable tax year. (q) "Taxes" shall mean real estate taxes and assessments which may be imposed from time to time by the United States of America, the State of New York or any municipality or other governmental authority upon the Port Authority with respect to the buildings, structures, facilities or land at the World Trade Center or with respect to the rentals or income therefrom in lieu of or in addition to any tax or assessment which would otherwise be a real estate tax or assessment, and "Taxes" shall include any payments in lieu of real estate taxes or assessments which may be agreed upon between the Port Authority and any of the foregoing governmental authorities, other than payments in lieu of taxes described in subparagraph (k) of this paragraph. The Port Authority hereby represents that as of the date of the Lease there are no real estate taxes imposed on the World Trade Center. (r) "Tenants" shall mean all lessees, permittees, licensees and all other Port Authority-approved users and occupiers of space in the Facility. 2. From and after each July 1 following the commencement date of the letting under the Lease, the Lessee shall pay an additional basic rental under the Lease at the annual rate computed by multiplying the rentable square feet in the premises by the excess over the Tax Base of the total of: (a) the annual per rentable square foot amount of Taxes for the Tax Year beginning on that July 1; and (b) the annual per rentable square foot factor used in computing payments in lieu of taxes for the Tax Year beginning on that July 1. If Taxes become payable on a basis other than an annual amount per rentable square foot, the Port Authority shall equitably allocate those Taxes to the rentable square feet of space in the World Trade Center and will notify the Lessee of the amount of such allocation. 3. (a) In addition to the additional basic rental payable by the Lessee under Paragraph 2 of this Schedule, for each Escalation Page 5 of Schedule A Year following the commencement date of the letting under the Lease, the Lessee shall pay to the Port Authority additional basic rental which shall be equal to the Lessee's Proportionate Share of the amount, if any, by which Operating Expenses for that Escalation Year exceed the Operating Expenses for the Base Operating Year. (b) The Port Authority shall furnish to the Lessee: (1) a statement certified by the Manager, Finance and Business Planning, World Trade Department, setting forth in detail all Operating Expenses for the Base Operating Year (separately stating any "grossed-up" figures included therein) not later than June 30 following the end of the Base Operating Year, (2) with respect to each Escalation Year following the Base Operating Year, an Estimate Statement for such Escalation Year and (3) within 180 days after the end of each Escalation Year, a Port Authority Statement for such Escalation Year. (c) The Port Authority's failure to render a Tax Statement with respect to any Tax Year or an Estimate Statement or a Port Authority Statement with respect to any Escalation Year shall not prejudice the Port Authority's right thereafter to render a Tax Statement, an Estimate Statement or a Port Authority Statement, as the case may be, with respect thereto or with respect to any subsequent Tax Year or Escalation Year, nor shall the rendering of a Tax Statement for any Tax Year or a Port Authority Statement for any Escalation Year prejudice the Port Authority's right thereafter to render a corrected Tax Statement or Port Authority Statement for that Escalation Year. Notwithstanding the foregoing, except as provided in the immediately succeeding sentence, the Port Authority shall not have the right to deliver a Tax Statement with respect to any Tax Year or an Estimate Statement or a Port Authority Statement with respect to any Escalation Year, or to make any corrections to a previously delivered Tax Statement, Estimate Statement or Port Authority Statement, which, in any event, shall increase the amount of additional basic rental which is payable by the Lessee pursuant to Paragraph 2 or 3 hereof, after the date which is the second (2nd) anniversary of the expiration of the Tax Year or Escalation Year in question. In the event that any Tax Statement shall be incorrect based upon an error or omission made by the taxing authority, which error or omission is subsequently corrected or discovered (e.g., an underbilling by the taxing authority which is subsequently corrected) or based on a change in the facts used to calculate Taxes or the annual per rentable square foot factor (such as a change in the assessment of the Facility or of the other buildings used to determine the annual per rentable square foot factor), the Port Authority may deliver a revised or corrected Tax Statement beyond the expiration of such two (2) year period. Except as set forth in the immediately preceding sentence, if the Port Authority shall deliver any Tax Statement, Estimate Statement or Port Authority Statement or any correction to a Tax Statement, Estimate Statement or Port Authority Statement after the expiration of such two (2) year period, the Lessee shall have no obligation to pay any increased amount which would otherwise be due in accordance with such Statement and the Port Authority shall have no obligation to refund any amount which the Lessee Page 6 of Schedule A may have paid in excess of that which would otherwise be due in accordance with such Statement. Nothing herein contained shall restrict the Port Authority from issuing a revised Estimate Statement from time to time and at any time there is an increase in Operating Expenses during any Escalation Year (each such revised Estimate Statement to identify the same categories of Operating Expenses as the initial Estimate Statement for that Escalation Year). 4. If the imposition or allocation of Taxes or the establishment of an annual per rentable square foot factor to be used in computing payments in lieu of taxes for any Tax Year or the delivery to the Lessee of an Estimate Statement for any Escalation Year is delayed for any reason whatsoever, the Lessee shall nevertheless continue to pay the additional basic rental at the annual rate then in effect subject to retroactive adjustments at such time as the Taxes are imposed or allocated, the said per rentable square foot factor shall have been established or such Estimate Statement shall have been delivered, provided, that in the event that no Estimate Statement for an Escalation Year is delivered prior to the delivery of the Port Authority Statement for the prior Escalation Year, the Lessee shall pay additional basic rental under Paragraph 3 of this Schedule at the annual rate determined in accordance with the Port Authority Statement for such prior Escalation Year subject to retroactive adjustment at the time the earliest of the Estimate Statement or Port Authority Statement for such Escalation Year shall be delivered subject to the provisions of Paragraph 3 above. If the sum of the payments made by the Lessee pursuant to an Estimate Statement or the Port Authority Statement for the prior Escalation Year shall have exceeded the amount which is ultimately determined to be payable based upon the Port Authority Statement for the Escalation Year in question, the Port Authority shall refund such excess amount to the Lessee and if such excess amount to be refunded is greater than ten percent (10%) of the amount which is ultimately determined to be payable pursuant to this Schedule A for the Escalation Year in question, then the Port Authority within twenty (20) days after such excess amount is determined shall refund such excess amount together with interest thereon at the Applicable Rate, calculated from the date each payment was made by the Lessee until the date such amount is actually paid by the Port Authority or credited, as the case may be. If the Port Authority shall fail to make such payment to the Lessee within twenty (20) days after such amount shall have been determined to be due hereunder, the Lessee shall be entitled to receive a credit against its ensuing installments of basic rental and additional basic rental equal to such unpaid amount. 5. After imposition and allocation of Taxes for any Tax Year and the establishment for each Tax Year of the annual per rentable square foot factor used in computing payments in lieu of taxes and at the time of the delivery to the Lessee of the Estimate Statement or Port Authority Statement, as the case may be, for any Escalation Year, the Port Authority will set forth the annual rate or rates of additional basic rental payable by the Lessee under Paragraph 2 or 3, above, and will notify the Lessee of the amounts thereof in the Estimate Statement Page 7 of Schedule A or Port Authority Statement, as the case may be. Additional basic rental accruing under Paragraphs 2 and 3, above, shall be computed separately and shall be payable by the Lessee to the Port Authority in advance in monthly installments, each installment being equal to 1/12 of the annual rate set forth in the Estimate Statement, or Port Authority Statement, as the case may be, except that if at the time the Port Authority gives notice to the Lessee under this Paragraph, additional basic rental shall have accrued for a period prior to the notice, the Lessee shall pay such additional basic rental in full for such period, within ten days after such notice. If the additional basic rental ultimately determined to be payable pursuant to Paragraphs 2 and 3 of this Schedule and set forth in the Port Authority Statement for any Escalation Year shall exceed the additional basic rental actually paid pursuant to this Paragraph 5 for that Escalation Year, then the Lessee shall pay such excess within ten days after delivery of such Port Authority Statement, and if the amounts of such additional basic rental actually paid by the Lessee during such Escalation Year exceed the annual amounts set forth in such Port Authority Statement as payable pursuant to Paragraphs 2 and 3 of this Schedule, the Port Authority will pay the Lessee such excess amount within twenty (20) days after delivery of such Port Authority Statement and if such amount is not paid within such twenty (20) day period the Lessee shall be entitled to a credit in such amount against its rental obligations next falling due under the Lease and this Schedule A. 6. If after an amount of additional basic rental shall have been fixed under Paragraphs 2 or 3, above, for any period, Taxes are imposed or the amount of Taxes or the annual per rentable square foot factor in regard to payments in lieu of taxes used for computing such additional basic rental or the Operating Expenses set forth in the Port Authority Statement for that period shall be changed or adjusted, then the additional basic rental payable for that period shall be recomputed and from and after notification of the imposition, change or adjustment, the Lessee shall make payments based upon the recomputed additional basic rental and upon demand the Lessee shall pay any excess in additional basic rental as recomputed over amounts of additional basic rental theretofore actually paid. If such change or adjustment results in a reduction in the amount of additional basic rental for any period prior to notification, the Port Authority will within twenty (20) days of determination of such reduction pay the Lessee the excess of the amounts of additional basic rental theretofore actually paid over the additional basic rental as recomputed for that period and if such amount is not paid to the Lessee within such period the Lessee shall be entitled to a credit in such amount to be applied against its rental obligations next falling due under the Lease and this Schedule A. 7. If any Escalation Year begins prior to the commencement of, or ends after the expiration or earlier termination of, the term of the letting under the Lease, the additional basic rental under Paragraph 3 of this Schedule with respect to such Escalation Year shall be apportioned by multiplying the additional basic rental determined under said Paragraph 3 for the entire Escalation Year by a fraction the Page 8 of Schedule A numerator of which shall be the number of days in the term of the letting which fall within such Escalation Year and the denominator of which shall be the total number of days in such Escalation Year. In the event of a termination of the Lease and the term of the letting thereunder, if the additional basic rental set forth in the Port Authority Statement for the Escalation Year in which such termination shall be effective, as so apportioned, shall exceed the additional basic rental theretofore actually paid by the Lessee pursuant to Paragraph 3 of this Schedule for that Escalation Year, then the Lessee shall pay such excess within ten days after delivery of such Port Authority Statement and if the amounts of such additional basic rental actually paid by the Lessee during such Escalation Year exceed the annual amount set forth in such Port Authority Statement, as so apportioned, the Port Authority shall pay such excess to the Lessee with ten days after the delivery of such Port Authority Statement, provided that such excess shall be reduced by any other amount owed to the Port Authority by the Lessee. Notwithstanding the foregoing, in the event that letting under the Lease shall have been terminated as provided in the Section of the Lease entitled "Termination" or the interest of the Lessee cancelled pursuant thereto, or in the event that the Port Authority has re-entered, regained or resumed possession of the premises in accordance with the provisions of the Section of the Lease entitled "Right of Re-entry", the rights and obligations of the Port Authority and the Lessee under the provisions of this Schedule with respect to additional basic rental shall survive the termination of the Lease in accordance with the terms and provisions of the Section of the Lease entitled "Survival of the Obligations of the Lessee" except that for the purpose of calculating damages under such Section the additional basic rental under Paragraph 3 of this Schedule for the balance of the term of the letting under the Lease shall be deemed to be payable at the annual rate at which such additional basic rental was payable during the Escalation Year during which such termination, cancellation, re-entry, regaining or resumption of possession occurred. 8. Any Port Authority Statement sent to the Lessee shall be conclusively binding upon the Lessee unless, within twenty-four (24) months after such Statement is sent, the Lessee shall send a written notice to the Port Authority objecting to such Statement. If the Lessee within said twenty-four (24) month period does not object to such Statement but requests additional information with respect to such Statement, the Port Authority will make reasonable efforts to furnish such information and the Lessee will pay the reasonable costs of the Port Authority in furnishing such information to the Lessee. If such notice objecting to an item or items in the Port Authority Statement is sent within such twenty-four (24) month period, the Lessee (together with its accountants), may examine the Port Authority's books and records relating to the costs of operating, maintaining, repairing, servicing, cleaning and policing of the Facility to determine the accuracy of the Port Authority Statement. The Lessee recognizes the confidential nature of such books and records and agrees to use good faith efforts to maintain the information obtained from such examination in strict confidence. If after such examination, the Lessee still Page 9 of Schedule A disputes such Port Authority Statement, either party may refer the decision of the issues raised to a reputable firm of certified public accountants which shall have no business relationship with either the Port Authority or the Lessee, selected by the Port Authority and acceptable to the Lessee, and the decision of the accountants shall be conclusively binding upon the parties. The fees and expenses involved in such decision shall be borne by the unsuccessful party (and if both parties are partially successful, such fees and expenses shall be apportioned between the Port Authority and the Lessee in inverse proportion to the amount by which such decision is favorable to each party). For the Port Authority For the Lessee Page 10 of Schedule A SCHEDULE B Routine Cleaning in Office Areas shown on Exhibit A Daily (Five Days each week except Saturdays, Sundays, and Holidays) 1. Empty and damp wipe ash trays, empty waste baskets. Transport collected waste to trash handling areas and removal of building. Collection and removal of waste different from or in excess of that from normal daily office operations is not included and shall be deemed additional cleaning services and requested by the Lessee in advance in accordance with the provisions of this Schedule. 2. Dust horizontal surfaces of office furniture, equipment, ledges, and sills. 3. Dust sweep vinyl asbestos floor and/or spot vacuum carpeted surfaces. 4. Clean and sanitize water fountains. 5. Damp wipe fingerprints, smears, smudges, etc., on door, wall and partition surfaces. Weekly (Once a week) 6. Dust vertical surfaces of office furniture and equipment. 7. Vacuum entire carpeted floor surfaces. Quarterly (Once every three months) 8. Wash interior surfaces of window glass. 9. Dust all pictures, frames, charts, graphs, and similar wall hangings, plus partitions, doors, and door frame surfaces. Routine Cleaning in Corridor Areas as shown on Exhibit A Daily (Five days a week except Saturdays, Sundays, and Holidays) 1. Dust sweep corridor floor surfaces once each day. 2. Damp wipe fingerprints, smudges, smears, etc., on corridor door and wall surfaces. Page 1 of Schedule B Once each year 6. Shampoo carpet surfaces. 7. Clean and polish wood panel wall surfaces. Routine Cleaning in Freight Elevator Lobbies shown on Exhibit A Daily (Five days each week except Saturdays, Sundays, and Holidays) 1. Dust sweep vinyl asbestos floors. 2. Damp wipe fingerprints, smears, smudges, etc., on door and wall surfaces. Once each week 3. Mop and rinse floor surfaces. Once each month 4. Machine scrub and refinish floor surfaces. Once each year 5. Wash door and wall surfaces. Routine Cleaning in Janitor closets shown on Exhibit A 1. Maintain in a clean and orderly condition and appearance. For the Port Authority Initialled: For the Lessee Page 2 of Schedule B SCHEDULE B-1 Routine Office Cleaning Daily (Five days each week except Saturdays, Sundays, and Holidays 1. Empty and damp wipe ash trays, empty waste baskets. Transport collected waste from normal daily office operations only to trash handling areas and removal from the building. Collection and removal of waste different from or in excess of that from normal daily office operations is not included and shall be deemed additional cleaning services and requested in accordance with the provisions of this Schedule. 2. Dust horizontal surfaces of office furniture, equipment, ledges,and sills. 3. Dust sweep vinyl asbestos floor and/or spot vacuum carpeted surfaces, if any. 4. Clean and sanitize water fountains. 5. Damp wipe fingerprints, smears, smudges, etc., on door, wall and partition surfaces. Weekly (Once a week) 6. Dust vertical surfaces of office furniture and equipment. 7. Vacuum entire carpeted floor surfaces. 8. Wash interior surfaces of exterior window glass. 9. Dust all pictures, frames, charts, graphs, and similar wall hangings, plus partitions, doors, and door frame surfaces. For the Port Authority Initialled: For the Lessee Schedule B-1 SCHEDULE D HEATING VENTILATION AND AIR CONDITIONING SYSTEM This HVAC system is a dual system design incorporating a peripheral induction unit system which supplies air within fifteen feet (15) distance measured inboard from the exterior glass, and an interior system which conditions the balance of the floor area. Each of the systems is designed to deliver the following quantities to a 10% variance. HVAC AIR SUPPLY QUANTITIES - PERIPHERAL SYSTEM FLOOR B-23 SOUTH WEST UNIT TYPE #4 #5 UNIT TYPE #1 #2 NO. OF UNITS 28 2 NO. OF UNITS 28 2 CFM 60 40 CFM 50 35 NORTH EAST UNIT TYPE #3 #2 UNIT TYPE #4 #5 NO. OF UNITS 28 2 NO. OF UNITS 28 2 CFM 50 35 CFM 60 40 Induction units are spaced at the rate of one (1) unit per two (2) windows average, subject to verification of actual conditions. Each unit delivers air of approximately 60 deg. F. utilizing water which in winter ranges between 80 deg. F. to 130 deg. F. as needed, and in summer at 69 deg. F. avearge. Supply air to induction units is a constant with variable water temperature and rate of flow. HVAC AIR SUPPLY QUANTITIES - INTERIOR SYSTEM AVERAGE SUPPLY AIR TEMP QUADRANT N.E. N.W. S.E. S.W. SUMMER-WINTER CFM CFM CFM CFM 60 deg. F. 4375 4145 4050 4050 Interior supply air is .84 CFM per square foot. Air temperature is controlled by zone thermostat at central air handling unit. Design is based on one (1) person per 100 square foot and six watts per square foot. Floor load design criteria is 100 lbs. per square foot. FOR THE PORT AUTHORITY FOR THE LESSEE Page 1 of Schedule D SCHEDULE D HEATING VENTILATION AND AIR CONDITIONING SYSTEM This HVAC system is a dual system design incorporating a peripheral induction unit system which supplies air within fifteen feet (15) distance measured inboard from the exterior glass, and an interior system which conditions the balance of the floor area. Each of the systems is designed to deliver the following quantities to a 10% variance. HVAC AIR SUPPLY QUANTITIES - PERIPHERAL SYSTEM FLOOR B-24 SOUTH WEST UNIT TYPE UNIT TYPE #1 #2 NO. OF UNITS NO. OF UNITS 20 1 CFM CFM 50 35 NORTH EAST UNIT TYPE #3 #2 UNIT TYPE NO. OF UNITS 17 1 NO. OF UNITS CFM 50 35 CFM Induction units are spaced at the rate of one (1) unit per two (2) windows average, subject to verification of actual conditions. Each unit delivers air of approximately 60 deg. F. utilizing water which in winter ranges between 80 deg. F. to 130 deg. F. as needed, and in summer at 69 deg. F. avearge. Supply air to induction units is a constant with variable water temperature and rate of flow. HVAC AIR SUPPLY QUANTITIES - INTERIOR SYSTEM AVERAGE SUPPLY AIR TEMP QUADRANT N.E. N.W. S.E. S.W. SUMMER-WINTER CFM CFM CFM CFM 60 deg. F. 4375 4145 4050 4050 Interior supply air is .84 CFM per square foot. Air temperature is controlled by zone thermostat at central air handling unit. Design is based on one (1) person per 100 square foot and six watts per square foot. Floor load design criteria is 100 lbs. per square foot. FOR THE PORT AUTHORITY FOR THE LESSEE Page 2 of Schedule D SCHEDULE E Drawing Title Date Drawing No. Revisions Title Sheet 12/30/94 T-1 2/15/95 Toilet Room Floor Plans 12/30/94 A-1 2/16/95 Toilet Elevations 12/30/94 A-2 2/15/95 Plumbing Specifications 10/05/94 P-1 2/15/95 and Notes Plumbing Floor Plans 10/5/94 P-2 2/15/95 Plumbing Riser Diagrams 10/5/94 P-3 2/15/95 For the Port Authority Initialled: For the Lessee Schedule E SCHEDULE F 24th Floor Public Corridor Port Authority Job # W2-702.214 Drawing Title Date Drawing No. Revisions Title Sheet 12/30/94 T-1 2/15/95 Floor Plan, Schedules and Notes 12/30/94 A-1 2/15/95 Reflected Ceiling Plan 12/30/94 A-2 2/15/95 Details 12/30/94 A-3 2/15/95 Electrical Specifications 1/3/95 E-24-1 2/15/95 & Symbol List 24th Fl. Lighting and Power Plan 1/3/95 E-24-2 2/15/95 HVAC Specifications, Schedules 1/3/95 H-24-1 - & Notes 24th Floor HVAC Par. Plan 1/3/95 H-24-2 - & Details Fire Protection Specifications, 1/3/95 FP-24-1 2/15/95 Symbol List & Notes Fire Protection Plan and Details 1/3/95 FP-24-2 - For the Port Authority Initialled: For the Lessee Schedule F SCHEDULE I 1) Demolition shall include: interior partitions, suspended ceilings and support systems, lighting fixtures, floor tile, carpeting and padding, unused conduits, cables, plumbing lines, miscellaneous steel and duct work on the Tenant's floors. Space shall be delivered in broom clean condition. (Demolition shall not include, except as required for Landlord's work, bathrooms, sprinkler loop and branches). 2) Pull all cabling from any existing underfloor duct systems. 3) By no later than August 15, 1995, all Public area bease building fire and safety systems, including alarms, speakers, communications, etc. required by code, will be in full service and available on all Tenant's floors. 4) Submeters, electric panels, disconnect switches and transformers will be left in place in good condition on all Tenant's floors. The induction units will be cleaned and vacuumed and delivered in good working order, including all piping, valves and thermostats. 5) Refurbished (or new if substantially damaged) radiator covers and grilles will be provided on all Tenant floors. The induction units will be cleaned and vacuumed and delivered in good working order, including all piping, valves and thermostats. 6) All core area walls and columns throughout the floors will be laminated with sheetrock and will be ready for wall covering. Core demising walls will be 2-hour fire-rated with all associated code complaint fire dampers for a multi-tenanted floor. 7) All required base building firestopping/fireproofing on walls, floors, ceilings and structural steel wll be provided. 8) All exposed base building piping will be enclosed and insulated to meet World Trade Center specifications, including all sprinkler lines and all existing 17" x 8" duct work. 9) All interior window mullions will be repaired to a "like-new" condition. 10) All windows will be made weathertight with all broken and chipped glass replaced. 11) Landlord shall supply .1 gpm per square foot of sprinkler capacity and reserve to the premises. 12) All exit stairs will be enclosed with 2-hour fire-rated material. EXHIBIT TAA TENANT CONSTRUCTION OR ALTERATION APPLICATION RIDER "A" TENANT CONSTRUCTION OR ALTERATION APPLICATION Additional Terms and Conditions RIDER "B" CLAIMS OF THIRD PERSONS RIDER "C" TENANT ALTERATION APPLICATION General requirements RIDER "F" GENERAL REQUIREMENTS EXHIBIT X CONSENT TO SUBLEASE AGREEMENT EXHIBIT Y ASSIGNMENT OF LEASE WITH ASSUMPTION AND CONSENT AGREEMENT EXHIBIT R RULES AND REGULATIONS FOR THE WORLD TRADE CENTER FORM XLD - LEGAL FORM Affidavit by Port Authority of New Yorkk and New Jersey. Individual is attesting to position in corporation, residence, and acknowledgment of corporate seal. Affidavit by SCOR U.S. Corporation. Individual is attesting to position in corporation, residence and acknowledgment of corporate seal. EX-11 10
EXHIBIT 11 SCOR U.S. CORPORATION COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share data) Year Ended December 31, 1994 1993 1992 PRIMARY: Net income (loss) applicable to common stock $(7,841) $25,328 $ 7,249 ======= ======= ====== Average number of common shares outstanding 18,166 18,184 17,960 Add: Assumed exercise of stock options -0- 211 296 ------- ------- ------- Common and common equivalent shares outstanding 18,166 18,395 18,256 ======= ======= ======= Net income (loss) per share assuming exercise of common stock equivalents $ (0.43) $ 1.38 $ 0.40 ======= ======= ======= FULLY DILUTED: Net income (loss) applicable to common stock $(7,841) $27,718 $7,249 ======= ======= ======= Average number of common shares outstanding 18,166 18,121 17,960 Add: Assumed exercise of stock options -0- 209 296 Assumed exercise of convertible bonds -0- 2,586 -0- ------- ------- ------- Common and common equivalent shares outstanding assuming full dilution 18,166 20,916 18,256 ======= ======= ======= Net income (loss) per share assuming full dilution $ (0.43) $ 1.33 $ 0.40 ======= ======= =======
EX-12 11
EXHIBIT 12 SCOR U.S. CORPORATION COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES (in thousands, except ratios) 1994 1993 1992 1991 1990 Earnings: Income (loss) from continuing operations before taxes and cumulative effect of accounting changes ($19,454) $34,911 $630 $38,000 $31,306 Adjustments: Equity (income) loss in unconsolidated subsidiaries (743) (678) 110 -0- (468) Fixed charges 9,716 8,810 5,268 4,459 4,139 ----- ------ ----- ------ ------ Adjusted earnings (10,481) 43,043 6,008 42,459 34,977 ------- ------ ----- ------ ------ Fixed charges: Interest expense 8,920 8,005 4,579 3,833 3,500 Appropriate portion (1/3) of rentals 796 805 689 626 639 ----- ----- ----- ----- ----- Total fixed charges 9,716 8,810 5,268 4,459 4,139 Ratio of earnings to fixed charges --- (1) 4.89 1.14 9.52 8.45 (1) Earnings were inadequate to cover fixed charges by $20,197,000 for the year ended December 31, 1994.
EX-21 12 EXHIBIT 21 SUBSIDIARIES OF SCOR U.S. CORPORATION SCOR U.S. Corporation SCOR Reinsurance Company (New York) General Security Indemnity Company (New York) General Security Insurance Company (Maryland) SCOR Services International, Ltd. (Hong Kong)1 The Unity Fire and General Insurance Company (New York) NARG, Inc. (New York) SCOR Services, Inc. (Delaware) BIND, Inc. (Texas) Morgard, Inc. (Pennsylvania) California Reinsurance Management Corporation (California)2 Commercial Risk Partners Limited (Bermuda)3 1 20% Ownership 2 92% Ownership 3 12.87% Ownership (as of January 10, 1995) EX-24 13 EXHIBIT 24 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors SCOR U.S. Corporation: We hereby consent to the incorporation by reference in Registration Statements (Nos. 33-12604, 33-44577 and 33-46753) on Form S-8 of SCOR U.S. Corporation of our report dated February 2, 1995, relating to the consolidated financial statements of SCOR U.S. Corporation and the related financial statement schedules as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994, which report is included in the December 31, 1994 Annual Report on Form 10-K of SCOR U.S. Corporation. Our report refers to the adoption of the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," and the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and also the adoption of the consensus opinion regarding the Financial Accounting Standards Board's Emerging Issues Task Force regarding Issue No. 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises" in 1993. In 1992, the Company adopted the provisions of SFAS No. 109, "Accounting for Income Taxes", and changed its method of accounting for deferred policy acquisition costs. KPMG Peat Marwick LLP New York, New York March 28, 1995 EX-25 14 EXHIBIT 25 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and/or Directors of SCOR U.S. Corporation constitutes and appoints Jacques P. Blondeau, John T. Andrews, Jr. and Howard B. Fischer and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign the 10-K for the calendar year ending December 31, 1994, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes and he might or could in person, hereby ratifying and confirming that all said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 24th day of March, 1995. Jacques P. Blondeau Jean P. Masse Serge M.P. Osouf Richard M. Murray John R. Cox Patrick Peugeot Raymond H. Deck John W. Popp Michel J. Gudefin Francois Reach Jerome Karter David J. Sherwood EX-27 15
7 0000798363 SCOR U.S. CORPORATION 1,000 YEAR DEC-31-1994 DEC-31-1994 0 22,871 563,656 1,738 0 0 672,793 4,763 23,755 22,844 1,143,715 382,115 90,775 43,685 20,758 113,660 5,507 0 0 233,888 1,143,715 228,244 40,990 984 0 191,270 59,434 30,048 (19,454) (11,262) (8,192) 0 351 0 (7,841) (0.43) (0.43) 340,366 193,587 (2,317) 55,155 94,366 382,115 (2,317) Reserve for losses and loss expenses at December 31, 1994 is presented net of reinsurance recoverable on unpaid losses of $222,672. Unearned premiums at December 31, 1994 is presented net of ceded unearned premiums of $19,307. Reserve for losses and loss expenses at December 31, 1993 is presented net of reinsurance recoverable on unpaid losses of $221,843.