-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DHbmtKCx0xe6ZAkcDOU1YMhuwJWWRd7DuO/i92ggCTE82DUGaI6YYZLvOtDogxC+ f+RSfBfoj8NJ8k6bJ/iwpQ== 0000950109-02-001882.txt : 20020415 0000950109-02-001882.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950109-02-001882 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MUTUAL RISK MANAGEMENT LTD CENTRAL INDEX KEY: 0000826918 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 000000000 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10760 FILM NUMBER: 02598950 BUSINESS ADDRESS: STREET 1: 44 CHURCH ST STREET 2: BERMUDA CITY: HAMILTON HM 12 BERMU STATE: D0 BUSINESS PHONE: 4412955688 MAIL ADDRESS: STREET 1: PO BOX 2064 STREET 2: BERMUDA CITY: HAMILTON HM HX STATE: D0 ZIP: 1000000000 10-K 1 d10k.txt MUTUAL RISK MANAGEMENT FORM 10-K DRAFT 3/25/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-10760 MUTUAL RISK MANAGEMENT LTD. (Exact name of registrant as specified in its charter) Bermuda (Jurisdiction of Incorporation) Not Applicable (I.R.S. Employer Identification No.) 44 Church Street Hamilton HM 12 Bermuda (441) 295-5688 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices). Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on ------------------- ------------------------ Which Registered ---------------- Common Shares, New York Stock Exchange $.01 par value. 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 the registrant's knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K. |_| At March 28, 2002, the registrant had outstanding [41,633,175] Common Shares, the only class of the registrant's common stock outstanding, and the aggregate market value of the common stock held by non-affiliates at such date was $[ ] (based on the closing price of such Common Shares of $[ ] on March 2, 2002, as reported on the New York Stock Exchange, Inc., composite listings). -1- DOCUMENTS INCORPORATED BY REFERENCE Pursuant to Rule 12b-25, this Form 10-K does not include disclosures for Items 6, 7, 8 and 14. (selected consolidated financial data, management's discussion and analysis of financial condition and results of operations, financial statements and supplementary data and financial statements schedules, independent auditor's consent), pending completion of the Company's analysis of recent developments discussed in the Recent Developments section on the Company's financial statements and MD&A. Certain portions of registrant's Proxy Statement Circular relating to its Annual General Meeting of Shareholders scheduled to be held on May 16, 2002, are incorporated by reference into Part III of this report. -2- MUTUAL RISK MANAGEMENT LTD TABLE OF CONTENTS
Item Page - ---- ---- PART I 1. Business ............................................................................ 4 2. Properties .......................................................................... 24 3. Legal Proceedings ................................................................... 24 4. Submission of Matters to a Vote of Security Holders ................................. 25 PART II 5. Market for Common Shares and Related Stockholder Matters ............................ 27 6. Selected Consolidated Financial Data ................................................ 28 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................................................... 29 7A. Quantitative and Qualitative Disclosures about Market Risk .......................... 30 8. Financial Statements and Supplementary Data ......................................... 30 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................................................ 30 PART III 10. Directors and Executive Officers .................................................... 31 11. Executive Compensation .............................................................. 31 12. Security Ownership of Certain Beneficial Owners and Management ...................... 31 13. Certain Relationships and Related Transactions ...................................... 31 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................... 31
-3- PART I ITEM 1. BUSINESS Recent Developments On February 19, 2002, the Company announced a significant loss for the fourth quarter of 2001. Since the date of that release, the net loss for 2001 has increased by $13.0 million to $99.2 million from the previously announced $86.2 million. This increase in the net loss is the result of additional provisions established by the IPC Companies to reflect increased problems in collecting indemnity payments due to these companies from their clients. The results for the fourth quarter included: . The Company established a valuation allowance against its U.S. net deferred tax asset on its Consolidated Balance Sheet at December 31, 2001 of $63.0 million, or $1.50 per diluted share. . an addition to the Company's reserves for losses and loss expenses of $74.5 million; . a gain on the sale of the Company's interest in Tremont Advisors Inc. and Tremont MRM Services Ltd., of $20.8 million; and . a loss on the expected disposal of the Company's CompFirst underwriting management subsidiary of $5.4 million and reductions in the carrying value of a number of the Company's investments, including certain Collateralized Bond Obligations, of $10.4 million. As a result, the Company will be reporting a net loss of $99.2 million, or $2.38 per diluted share, for the full 2001 year, as compared to a net loss in 2000 of $5.6 million, or $0.13 per diluted share. The loss for 2001 has had a number of significant adverse consequences for the Company: . On February 19, 2002, A. M. Best Company lowered the rating of the Company's U.S. insurance company subsidiaries, the Legion Companies, from "A- (Excellent)" to "B (Fair)" with a negative outlook. The reduced rating will adversely affect the ability of the Legion Companies to continue to write the types of insurance business that they have written in the past. A number of other rating agencies also lowered their ratings of the Company and its insurance subsidiaries. As a result of the rehabilitation orders discussed below, we expect that the Company's U.S. insurance subsidiaries will no longer be rated. . The Company is in default under the terms of its 9 3/8% Convertible, Exchangeable Debentures, its bank credit facility and its letter of credit facility. The Company's 2001 audited financial statements will include a going concern note due to these events of default. If the Company cannot restructure its debt, or reach some accommodation it may be forced to liquidate through proceedings in Bermuda and/or other jurisdictions including the United States. . On March 28, 2002, the Commonwealth Court of Pennsylvania entered an order of rehabilitation placing Legion Insurance Company and Villanova Insurance Company in rehabilitation, effective April 1, 2002. As of April 1, 2002, the Insurance Commissioner of Pennsylvania has taken control over Legion Insurance and Villanova through a special deputy. Legion Insurance and Villanova consented to the entry of the Orders of Rehabilitation and waived any rights to a hearing before the Insurance Commissioner or the Commonwealth Court. We expect that the Illinois Court will enter an order of conservation placing Legion Indemnity in conservation, to which conservation Legion Indemnity would consent and waive any right to a hearing before the Director of Insurance or the Illinois Court. While not as onerous as rehabilitation, this would give the Director of Insurance of Illinois reasonably broad powers to control Legion Indemnity's operations and evaluate whether there is a need to place Legion Indemnity in rehabilitation. . The Company has entered into an agreement with the Bermuda Monetary Authority under which the authority has appointed a Review Team to monitor the Company's business on an ongoing basis. . Our common shares have recently traded for less than $1.00. If the shares continue to trade at these levels for any significant period of time it is likely that the New York Stock Exchange will commence the process to delist the shares for failure to meet the New York Stock Exchange's minimum listing requirements. As discussed in more detail below, the Company is in the process of negotiating a restructuring plan with our lenders. It is possible that we may need to seek buyers for a number of our fee based subsidiaries in -4- order to satisfy our creditors. It is not clear at this point that the sale of these assets would yield sufficient proceeds to satisfy all of the indebtedness and, if the creditors choose this route, the Company may file for voluntary liquidation in Bermuda. If the Company did file for voluntary liquidation, administrative expenses, policyholder claims and general creditors, among others, are paid before shareholders receive anything. It is unlikely that any proceeds of the liquidation would remain after the claims of the general creditors were satisfied. The Company has retained Greenhill & Co. LLC, a financial adviser, to assist it in evaluating its strategic options and restructuring its obligations to its banks and debenture holders. Under the terms of our 9 3/8% debentures, we may not pay a dividend of more than $0.07 per share per quarter without the approval of the holders of a majority in principal amount of the 9 3/8% debentures. While the Company remains in default of covenants in the agreements governing its 9 3/8% debentures, it may not pay dividends. On March 21, 2002, the Company completed the sale of its fund administration business, principally Hemisphere Management Ltd. The proceeds of the sale, which amounted to approximately $110 million with a gain on sale of approximately $100 million after taxes and expenses, are being used to repay indebtedness. This business had revenues of $35.3 million and net income of $7.9 million in 2001. On March 25, 2002, Mr. Angus H. Ayliffe, the Company's Controller, was appointed to be the Company's Chief Financial Officer, replacing Mr. James Kelly who was previously acting in that capacity on an interim basis. As recently disclosed Mr. A. Welford Tabor, Mr. Michael Esposito, Ms. Fiona Luck and Mr. K. Bruce Connell, directors of the Company designated by holders of 9 3/8% debentures, have resigned as directors. An additional director, Mr. William Galtney, also resigned. At this time, our board of directors consists of ten members, four of whom are employees of the Company. The Company Mutual Risk Management Ltd., incorporated in 1977 and headquartered in Bermuda, provides insurance and financial services to buyers of commercial insurance. Our principal focus has been on the alternative market. The alternative market is an alternative to traditional commercial insurance that allows companies to self-insure a significant amount of their loss exposure, transferring only the unpredictable excess risk to insurers. Services we have historically provided include designing and implementing risk financing programs, issuing insurance policies, managing a client's captive insurance company or providing access to one of our "rent-a-captive" entities, arranging reinsurance coverage and providing or coordinating the purchase of loss prevention and claims administration services. As a result of the rehabilitation proceedings relating to the Legion Companies we are seeking one or more replacement insurance companies to provide the policy issuing services related to our alternative market business. Until the recent sale of our fund administration business, principally Hemisphere Management Ltd., we were also a provider of services to offshore mutual funds and other companies. Historically, the majority of our business was not intended to involve the assumption of significant underwriting risk, and a substantial amount of our revenues was derived from fee-based income. However, during 2001 we changed our strategic direction in one of our four primary business lines, Program Business, and we began to transition that line to a business segment that focused on underwriting specialty commercial insurance. For the year ended December 31, 2001, fee income totaled $137.7 million or 28.2% of total revenues. In 2001, our business consisted of four distinct business segments. Three of these segments generated revenues through fee income. The fourth segment, Specialty Insurance, sought to earn a profit from successfully underwriting risk. As a result of the rehabilitation orders relating to the Legion Companies, this segment will cease writing new business as of April 1, 2002. As referred to above, the recent sale of our fund administration business, including Hemisphere Management Ltd., will also significantly reduce the size and scale of our Financial Services segment. Corporate Risk Management. We are a provider of services for the alternative market through our Corporate Risk Management segment. Corporate Risk Management, our original business line from our formation in 1977, involves providing services to businesses and associations seeking to insure a portion of their risk in an alternative market structure. The benefits of alternative market techniques may include lower and more stable costs, greater control over the client's risk management program and an increased emphasis by the client on loss prevention and loss control. We earn our fees by designing and implementing risk financing and loss control programs for medium and large-sized companies that seek to self-insure a portion of their insurable risk and by providing consulting, accounting, administrative, investment management and regulatory services. Typically, one of our insurance companies issues an insurance policy to the customer, and we then reinsure the portion of the risk that the client wishes to self-insure to either the client's captive insurance company or a "rent-a-captive" company in which the underwriting results are for the client's account. Due to the rehabilitation of the Legion Companies, we are seeking one or more replacement insurance companies to issue policies in connection with our Corporate Risk Management -5- business. Traditionally, the excess risk has been reinsured to a third-party reinsurer. During the past year, the Company has assumed an increased amount of risk in excess layers. The amount of premium retained to fund the Company's risk in these layers in 2001 was $5.2 million. Our Corporate Risk management segment also includes our captive management operations and Captive Resources Inc. Captive Resources provides management services to group captive insurance companies, neither the captive management operations or Captive Resources significantly utilize any of the Legion companies. The Corporate Risk Management segment accounted for 42% of fee income for the year ended December 31, 2001. Financial Services. We established our Financial Services segment in 1996 with the acquisition of The Hemisphere Group Limited. The Financial Services segment historically provided administrative services to offshore mutual funds and other companies and trusts. We also offered a proprietary family of mutual funds as well as asset accumulation life insurance products for the high net worth market. This segment accounted for 39% of fee income for the year ended December 31, 2001. On March 21, 2002, the Company completed the sale of its fund administration business, principally Hemisphere Management Ltd., to The BISYS Group, Inc. Cash proceeds to the Company were approximately $110 million with a gain on sale of approximately $100 million after tax and expenses. The proceeds of the sale are being used to repay indebtedness. As a result of this sale, our Financial Services segment principally consists of providing administrative services to companies and trusts. The portion of the Financial Services segment that was retained by the Company subsequent to the BISYS transaction accounted for 14% of the Company's fee income. The Company is presently considering its options with respect to the trust and corporate services business. It is possible that the Company may pursue further asset sales in this segment, but we cannot assure you that these will occur. Specialty Brokerage. From the original operating unit formed in London in 1991, now known as MRM Intermediaries Ltd, a Lloyd's Broker, the specialty brokerage has grown both organically and by acquisition to its present level. In 1999 the decision was made to combine all our broking operations into one unit to better coordinate activities and improve customer service. Headquartered in Bermuda, specialty brokerage provides insurance and reinsurance broking services from offices in London, New York, Philadelphia, Chicago and San Francisco. The group provides access to markets on a global basis with specific emphasis on US Property & Casualty, Directors & Officers, Utility Industry, Accident and Health, Marine and Energy Reinsurance, Captive Reinsurance and Financial Reinsurance. Specialty Brokerage fees of $3.7 million related to transactions involving the Legion companies. The rehabilitation of Legion Insurance and Villanova and the likely conservation of Legion Indemnity will adversely affect fee income for this segment. Specialty Insurance. Our Specialty Insurance segment replaced our former Program Business segment, in which we insured specialty books of commercial insurance but ceded the majority of the risk to third-party reinsurers, in essence acting as a conduit between producers of the business and reinsurers wanting to write the business. In response to problems we encountered in our Program Business model and changes in market conditions and the pricing environment, in 2001 we began to increase the risk we retained, focusing on those programs which have historically shown significant profitability and running off the less profitable programs. This segment accounted for 5.5% of fee income for the year ended December 31, 2001. As a result of the rehabilitation of the Legion Companies, we will, effective April 1, 2002, cease writing new business in this segment. For the year ended December 31, 2001, our total revenues were $487.5 million, as adjusted to reflect the new accounting presentation discussed in the notes to the Financial Statements. As of December 31, 2001, we had shareholders' equity of $259.8 million and total assets of $5,363.7 million, $642.2 million of which was in our investment portfolio. The Company's shareholders' equity and total assets may be materially adversely impacted in the first quarter of 2002 as a consequence of the rehabilitation of the Legion Companies. Our principal executive offices are located at 44 Church Street, Hamilton HM 12 Bermuda, and our telephone number is (441) 295-5688. Insurance Services The structure of our programs historically placed most of the underwriting risk with our clients or reinsurers. For regulatory and other reasons, however, we were required to assume a limited amount of risk. Historically, we sought to limit this risk to the minimum level feasible until we made the transition to a Specialty Insurance Model in 2001. This approach to risk distinguished us from typical property/casualty insurance companies, which assume significant levels of underwriting risk as part of their business. We sought to earn a profit from fees for services provided rather than from underwriting risk. Commencing in 2001, we began to increase the amount of underwriting risk we retained with the transition to a Specialty Insurance Company Model. This change in our approach reflected improved pricing in the property/casualty insurance market and a desire to reduce the amount of our dependence on reinsurance, the amount of our reinsurance recoverables and to improve cash flow. We marketed our services exclusively to retail insurance brokers and consultants representing clients. The services offered to clients in connection with our products typically include the following: -6- . design and implementation of a risk financing program; . issuance of an insurance policy prior to the rehabilitation orders by one of our Legion Companies, which include Legion Insurance, Legion Indemnity and Villanova and, in the future, by unaffiliated insurance companies; . use of our IPC program, as the vehicle within which to fund a chosen portion of the client's risk or, alternatively, the management by us of the client's captive insurance company; . brokering to unaffiliated reinsurers the excess risk which the client chooses not to fund; and . coordinating the purchase, on behalf of the client, of loss prevention, loss control and claims administration services from unaffiliated providers. One of our major products is the IPC program. This program allows the client to retain a significant portion of its own loss exposure without the administrative costs and capital commitment necessary to establish and operate its own captive insurance company. The actual amount of underwriting profit and investment income produced by the client's IPC program is returned to the client, creating a direct incentive for it to engage in loss prevention and loss control in order to reduce the overall cost of financing its loss exposures. Lines of Business Our programs can be utilized by clients for many lines of insurance. In 2001, approximately 50% of our gross written premium was derived from workers' compensation insurance. During the 1980's and through 1993, workers' compensation presented many employers with substantial problems due to cost increases and the limited availability of commercial coverage in some states. Workers' compensation costs accelerated rapidly because of: . the general level of medical cost inflation, as medical costs generally amount to 40% or more of all workers' compensation costs; . an increase in the number of workers' compensation claims which resulted in litigation; . a broadening of injuries which are considered to be work-related; and . an increase in state mandated benefit levels. From 1993 to 2000, workers' compensation reforms occurred in a number of states, most notably in California, which addressed many of these issues. A number of markets have seen a significant decline in premium rates due to new capacity entering the market subsequent to these reforms. These lower premium rates reduced the fees we earn on our programs as fees are based on premiums. Notwithstanding these adverse changes in the market, workers' compensation continued to be suitable for the alternative market because many states set rates or enforce minimum rate laws which prohibit the commercial insurance market from offering premium discounts to insureds with favorable loss experience. This caused these clients to seek an alternative method of funding their workers' compensation exposure, which rewards their status as a preferred risk. In addition, workers' compensation involves relatively frequent, predictable levels of loss, which are the type favored by clients for alternative market insurance programs. Workers' compensation rates began to increase in 2000 as a result of adverse results reported by many companies due to the low rates prevailing in earlier years. The tragic events of September 11, 2001 caused a significant further increase in workers compensation rates. In addition to workers' compensation, our programs are utilized for accident and health insurance and other casualty insurance lines such as medical malpractice, general liability and commercial auto liability. At December 31, 2001, we had a total of 1,636 employees. Largely as a result of the sale of our fund administration business, we expect the number of employees to fall to approximately 1,200 as at April 1, 2002. -7- Marketing -- CRS Services Inc. Our wholly owned subsidiary, CRS Services Inc, also referred to as CRS, markets our services in the United States, Canada and Europe to insurance brokers and consultants representing clients. CRS also designs risk financing programs for potential clients in conjunction with their insurance brokers and consultants. Through offices in Philadelphia and California, CRS markets these services using direct mail, advertising, seminars and trade and industry conventions. CRS seeks to become actively involved with the insurance broker in the presentation of our services to potential clients and maintains a direct relationship with the client after the sale. CRS assists brokers in the design and implementation of risk financing programs, although the extent of this involvement depends on the size, experience and resources of the particular broker. Members of the CRS staff frequently provide supporting promotional materials and assist in the preparation of financial analyses, comparing the net present value, after-tax cost of an IPC program with alternative approaches. Representatives of CRS seek to be present at meetings with potential clients to explain how the IPC program works, including how the reinsurance is handled, how funds are invested and how underwriting profits and investment income are returned. The Insurance Profit Center Program In 1980, we developed a program which provides clients with a facility for managing their insurance exposures. This type of structure is frequently referred to as a rent-a-captive, although the facility has many significant differences from a captive insurance company. The facility was designed to provide some of the benefits available through captive insurance companies without the administrative cost and capital commitment necessary to establish and operate a captive insurance company. Since the IPC program involves a retention of risk by the client, it encourages the implementation of risk management and risk reduction programs to lower the losses incurred. The IPC program is appropriate for corporations and associations which generate $750,000 or more in annual premiums. Typically, clients which use an IPC program are profitable and have adequate working capital, but generate insufficient premium to consider, or are otherwise unsuitable for, a wholly owned captive. Return on the IPC program is a function of the loss experience of the insured. The principal benefits of the IPC program to the client are: . a reduction of the net present value, after-tax cost of financing the client's risks; . a lower commitment of funds than would be necessary to capitalize and maintain a captive insurance company; . access to commercial reinsurance markets for the client's excess risk; and . program structure that is customized, flexible and relatively easy to implement. We operate the IPC program from offices in Bermuda. The Bermuda office is involved in designing, negotiating and administering IPC programs and reviews each prospective client, negotiates the shareholder's agreement with the client and the reinsurance agreement with a policy-issuing company. One of the Company's non-U.S. insurance companies, also referred to collectively as the IPC Companies, receives and invests premiums, administers policy claims, establishes reserves, provides quarterly financial reports to clients and, ultimately, if appropriate, returns the underwriting profit and investment income to the client as preferred share dividends. The funds of each IPC program are invested by our subsidiary, Mutual Finance Ltd., using the services of professional investment advisors. In connection with the IPC programs, neither the policy issuing insurance company nor the IPC Companies underwrite risk in the traditional sense. Rather, their function is to ensure that substantially all of the underwriting risk of the client is either retained by the client in the IPC program or its captive insurance company, as the case may -8- be, or transferred to unaffiliated reinsurers. In the event that the IPC Company sustains an underwriting loss on a program which exceeds that program's investment income, the IPC Company recovers this loss from the client. Since the client has generally collateralized the IPC Company for at least the difference between the funds available in that client's IPC program and the level of currently expected losses by cash or a letter of credit, the IPC Company should not be affected by the bankruptcy of a client. In the event, however, that the IPC Company is unable to recover the full amount of its loss from the cash collateral or the letter of credit, the IPC Company would seek to recover from the client pursuant to the indemnity provisions of the shareholder's agreement. As of December 31, 2001, we maintained a provision of $21.8 million against losses that may occur on those programs where we may be forced to rely solely on the client's indemnity. In addition to programs for corporate clients, we also offer an association IPC program, which allows smaller insureds to collectively take advantage of the financial benefits available to larger corporate insureds individually. The inability to use the Legion Companies to provide policy issuing services will adversely effect our ability to market the IPC program, which may adversely affect our fee income. On February 19, 2002, A.M. Best Company lowered the rating of these IPC Companies from "A- (Excellent)" to "B+ (Very Good)" with a negative outlook. This may further adversely affect our fee income. Specialty Insurance Our Specialty Insurance segment replaced our former Program Business segment, in which we insured specialty books of commercial insurance but ceded the majority of the risk to reinsurers, in essence acting as a conduit between producers of the business and reinsurers wanting to write the business. In response to problems we encountered in our Program Business model and changes in market conditions and the pricing environment, in 2001 we began to increase the risk we retain, focusing on those programs that have historically shown significant profitability while running off the less profitable programs. In 2001, we hired a senior executive to be the chief underwriting officer of the Legion Companies with responsibility for implementing this change in strategy. The rehabilitation of the Legion Companies means that we will no longer be able to pursue this strategy. Specialty Brokerage From the original operating unit formed in London in 1991, now known as MRM Intermediaires Ltd, a Lloyd's Broker, the Specialty Brokerage segment has grown both organically and by acquisition to its present level. In 1999 the decision was made to combine all our broking operations into one unit to better coordinate activities and improve customer service. Headquartered in Bermuda, Specialty Brokerage provides insurance and reinsurance broking services from offices in London, New York, Philadelphia, Chicago and San Francisco. The group provides access to markets on a global basis with specific emphasis on US Property & Casualty, Directors & Officers, Utility Industry, Accident and Health, Marine and Energy Reinsurance, Captive Reinsurance and Financial Reinsurance. Specialty Brokerage fees of $3.7 million related to transactions involving the Legion companies. The rehabilitation of Legion Insurance and Villanova and the likely conservation of Legion Indemnity will adversely affect fee income for this segment. Financial Services In 1996, we acquired The Hemisphere Group Limited, a Bermuda financial services company. Hemisphere, which had been in business since 1980, has three active subsidiary operations in Bermuda providing company management, corporate secretarial, fund administration and trust management services. With a total staff of 290 Hemisphere had 420 mutual fund clients as of December 31, 2001. In addition, Hemisphere administers investment holding companies, trading companies and trusts. In 1998, Hemisphere expanded its operations to Dublin, Ireland and Boston, Massachusetts in order to service the European and U.S. hedge fund industries, respectively. -9- During 1997, Hemisphere expanded its trust operations by acquiring Hugo Trust Company based in Jersey in the Channel Islands. Hemisphere Trust (Jersey) Limited, which is comprised of Hugo Trust Company and Augres Trust Company, provides a base to develop European-based trust business and had revenues of $2.5 million in 2000. In January 2001, we acquired Valmet and have combined our trust businesses under a new Bermuda company, Mutual Trust Management Ltd. On March 21, 2002, we completed the sale of our fund administration business, including the sale of Hemisphere Management Ltd., to The BISYS Group, Inc. Cash proceeds to the Company were approximately $110 million with a gain on sale of approximately $100 million after tax and expenses. The proceeds of the sale are being used to repay indebtedness. As a result of this sale, our Financial Services segment currently consists of providing administrative services to companies and trusts. The Company is presently considering its options with respect to the trust business. It is possible that the Company may pursue further asset sales, but we cannot assure you that this will occur. In January 1997, we incorporated MRM Life Ltd. in Bermuda to provide life insurance and related products, including annuities and variable annuities. We began marketing these products in the fourth quarter of 1997. All of the Company's life products are variable and accordingly we do not bear interest rate risk. Virtually all of the mortality exposure is reinsured by the Company to life reinsurers. Competition Our insurance services compete with self-insurance plans, captive insurance companies managed by others and a variety of risk financing insurance policies. We believe that the IPC program is the largest independent alternative market facility that is not affiliated with either a major retail insurance broker or a major insurance company. We face significant competition in marketing the IPC program from other risk management programs offered by U.S. insurance companies, from captive insurance companies for large insureds and from rent-a-captives organized by large insurance companies and brokers. The inability to use the Legion Companies to provide policy issuing services will adversely effect our ability to market the IPC program, which may adversely affect our fee income. The primary basis for competition among these alternative risk management vehicles varies with the financial and insurance needs and resources of each potential insurance buyer. The principal factors that are considered include an analysis of the net present value, after-tax cost of financing the client's expected level of losses, the amount of premium and collateral required, the attachment point of excess coverage provided in the event losses exceed expected levels, as well as cash flow and tax planning considerations and the expected quality and consistency of the services to be provided. Some insureds may also consider financial strength ratings. As a result of the Pennsylvania rehabilitation orders discussed above, we expect that our U.S. insurance subsidiaries will no longer be rated by either A.M. Best Company or Standard & Poor's Ratings Services. The Legion Companies Legion Insurance is domiciled in Pennsylvania and is admitted to write primary insurance, often called being admitted or writing insurance on an admitted basis, in all 50 states of the United States, the District of Columbia and Puerto Rico. Legion Indemnity is domiciled in Illinois, is an admitted insurer in Illinois and is an authorized surplus lines insurer in 42 states, the District of Columbia, Guam and the Virgin Islands. An authorized surplus lines insurer writes specialty property and liability coverage when the specific specialty coverage is unavailable from admitted insurers. Villanova is domiciled in Pennsylvania and admitted to write primary insurance in 43 states. The boards of directors of the Company, Legion Insurance and Villanova have consented to Legion Insurance and Villanova being placed under voluntary rehabilitation by the Pennsylvania Insurance Department. The Insurance Commissioner of Pennsylvania has petitioned the Commonwealth Court of Pennsylvania for Orders of Rehabilitation for Legion Insurance and Villanova, which were granted on March 28, 2002, and entered into effect on April 1, 2002. We will refer to these Orders of Rehabilitation as the Pennsylvania Orders. The Insurance Commissioner of Pennsylvania will appoint deputy receivers, also known as rehabilitators, who will take possession of all the assets of Legion Insurance and Villanova and assume all of the powers of their directors, officers and managers. The Pennsylvania Orders empower the rehabilitators to take any action they deem necessary to correct the conditions that led to Legion Insurance and Villanova being placed in rehabilitation. For example, the rehabilitators may direct and manage Legion Insurance and Villanova, deal with their property and business, hire and discharge their employees and pursue legal remedies on their behalf. The rehabilitators may prepare a plan for the reorganization, consolidation, conversion, reinsurance, merger or other transformation of Legion Insurance and Villanova, which would need to be approved by the appropriate court. The rehabilitators may also cause Legion Insurance and Villanova to cease writing one or more lines of business, or alternatively allow Legion Insurance and Villanova to continue writing one or more lines of business. The Pennsylvania Orders also provide that legal proceedings against Legion Insurance and Villanova are stayed and that instituting legal proceedings against the companies is prohibited. The purpose of rehabilitation is to restore Legion Insurance and Villanova to independent operations as viable and solvent insurers, at which point Legion Insurance or Villanova may emerge from rehabilitation and we may regain control over them. If this is not possible, the Insurance Commissioner of Pennsylvania may petition the appropriate court to issue orders to liquidate Legion Insurance or Villanova. In addition, other states in which Legion Insurance and Villanova are licensed may commence proceedings to secure the assets of Legion Insurance and Villanova located in these states. We are not aware of any such proceedings being brought. Because we will not control Legion Insurance or Villanova while they are under rehabilitation, we cannot use them to facilitate our Corporate Risk Management business segment or our Specialty Insurance business segment. We expect that the Illinois Court will enter an order of conservation placing Legion Indemnity in conservation, to which conservation Legion Indemnity would consent and waive any right to a hearing before the Director of Insurance or the Illinois Court. While not as onerous as rehabilitation, this would give the Director of Insurance of Illinois reasonably broad powers to control Legion Indemnity's operations and evaluate whether there is a need to place Legion Indemnity in rehabilitation. -10- Because the Legion Companies are licensed in California, the Insurance Commissioner of California may also bring "ancillary proceedings" against the Legion Companies, which are a type of insolvency proceeding. We are not yet aware of any such "ancillary proceedings" being brought in California. Historically, the Legion Companies, in our Program Business model, replaced traditional insurers as the conduit between producers of specialty books of business and reinsurers wishing to write that business. Beginning in 2001, Legion significantly increased its risk retention on selected programs where it believed it could earn an underwriting profit. However, as a result of the rehabilitation of the Legion Companies, we will, effective April 1, 2002, cease writing new business in this segment. For the Corporate Risk Management business, the Legion Companies have established a reinsurance treaty with unaffiliated reinsurers to transfer the specific and aggregate excess risk above the client's retention. The client's retention is negotiated separately for each program and reflects the amount of risk the client wishes to retain for its program on both a specific and aggregate basis. Historically, in our Program Business Model, the Legion Companies typically purchased a separate reinsurance treaty, both on a quota share and a specific and aggregate excess of loss basis, in respect of each program. It has been the Legion Companies' policy to place substantially all reinsurance with unaffiliated commercial reinsurers whose ratings from A.M. Best Company are A- or higher at the time of placement. At December 31, 2001, the largest reinsurance recoverable from unaffiliated commercial reinsurers was $337.2 million from Lloyd's of London, $240.0 million from Transatlantic Reinsurance Company, a participant on several layers of specific and aggregate reinsurance with respect to various of our Program and Corporate Risk Management business; $291.6 million from GE Reinsurance Corp., which is a reinsurer on several current treaties; $125.3 million from Hannover Ruckversicherungs AG and $115.7 million from American Re-Insurance Company, which are both reinsurers on several current treaties. As of March 7, 2002, Transatlantic is rated A++, GE Reinsurance Corporation is rated A++, Hannover Ruckversicherungs AG is rated A+u (under review with developing implications) and American Re-Insurance is rated A++ by A.M. Best Company. In order to take regulatory credit for reinsurance ceded to one of the IPC Companies or to a captive insurance company, the Legion Company must receive a letter of credit for the amount of the insurance reserves ceded since -11- the companies to which the reinsurance is ceded are not licensed reinsurers in any state of the United States. The letter of credit must be issued or confirmed by a bank which is a member of the U.S. Federal Reserve System. At December 31, 2001, the Legion Companies had $404.9 million of letters of credit, of which $255.3 million was supplied by the IPC Companies. The Legion Companies wrote gross statutory premiums of $1.6 billion during 2001 and had statutory capital of $361.2 million as of December 31, 2001. Regulatory Considerations The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity (Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under the Bermuda Companies Act of 1981 and as insurers under the Bermuda Insurance Act of 1978, as amended by the Insurance Amendment Act 1995, and the regulations promulgated thereunder. They are required, among other things, to meet and maintain certain standards of solvency, to file periodic reports in accordance with Bermuda statutory accounting rules, to produce annual audited financial statements and to maintain a minimum level of statutory capital and surplus. In general, the regulation of insurers in Bermuda relies heavily upon the auditors, directors and managers of the Bermuda insurer, each of which must certify that the insurer meets the solvency and capital requirements of the Bermuda Insurance Act of 1978. Mutual Indemnity (Barbados) Ltd. and Mutual Indemnity (Dublin) Ltd. are subject to similar regulation in Barbados and Ireland, respectively. The Company has entered into an agreement with the Bermuda Monetary Authority under which the authority has appointed a Review Team to monitor the Company's business on an ongoing basis. The Legion Companies are subject to regulation and supervision by the insurance regulatory authorities of the various states of the United States in which they conduct business. This regulation is intended primarily for the benefit of policyholders. State insurance departments have broad regulatory, supervisory and administrative powers. These powers relate primarily to the standards of solvency which must be met and maintained, the licensing of insurers and their agents, the approval of rates and forms and policies used, the nature of, and limitations on, insurers' investments, the form and content of periodic and other reports required to be filed, and the establishment of reserves required to be maintained for unearned premiums, losses and loss expenses, or other purposes. As discussed above, Legion Insurance and Villanova have agreed to be placed into rehabilitation by the Pennsylvania Insurance Department and, we expect, Legion Indemnity to be placed into conservation by the Director of Insurance of Illinois. The Legion Companies are also subject to state laws regulating insurance holding companies. Under these laws, state insurance departments may examine the Legion Companies at any time, require disclosure of material transactions by the holding company and require prior approval of certain "extraordinary" transactions, such as dividends from the insurance subsidiary to the holding company and purchases of certain amounts of the insurance subsidiary's capital stock. These laws also generally require approval of changes of control, which are usually triggered by the direct or indirect acquisition of 10% or more of the insurer. Most states require all admitted insurance companies to participate in their respective guaranty funds, which cover certain claims against insolvent insurers. Solvent insurers licensed in these states are required to cover the losses paid on behalf of insolvent insurers by the guaranty funds and are generally subject to annual assessments in the state by its guaranty fund to cover these losses. Some states also require licensed insurance companies to participate in assigned risk plans which provide coverage for workers' compensation, automobile insurance and other lines for insureds that, for various reasons, cannot otherwise obtain insurance in the open market. This participation may take the form of reinsuring a portion of a pool of policies or the direct issuance of policies to insureds. Historically, the Legion Companies participated as a pool reinsurer or assigned to other companies the direct policy issuance obligations. The calculation of an insurer's participation in these plans is usually based on the amount of premium for that type of coverage that was written by the insurer on a voluntary basis in a prior year. Assigned risk pools tend to produce losses which result in assessments to insurers writing the same lines on a voluntary basis. The Legion Companies also paid a fee to carriers assuming their direct policy issuance obligations. For each program a Legion Company wrote, it estimated the amount of assigned risk and guaranty fund assessments that it would incur as a result of having written that program. If that estimate proved to be inadequate, the Legion Company was entitled under its reinsurance agreements with the IPC Companies to recover from the reinsurer the amount of any assessments in excess of the estimate. The IPC Companies were then entitled under the terms of each -12- shareholder's agreement to recover this excess from the client. However, the IPC Companies were generally only able to collateralize this obligation up to the amount of the estimated assessments. The National Association of Insurance Commissioners, also known as the NAIC, has established the Insurance Regulatory Information System, also known as IRIS, to assist state insurance departments in their regulation and oversight of insurance companies domiciled or operating in their respective states. IRIS has established a set of twelve financial ratios with specified "unusual values" for each ratio. Companies reporting four or more unusual values on the IRIS ratios may expect inquiries from individual state insurance departments concerning specific aspects of the insurer's financial position. As of December 31, 2001, Legion Insurance, Villanova and Legion Indemnity, had seven, eight and five unusual values, respectively. Two of Legion Insurance's ratios: Surplus Aid to Surplus and Agent's Balance to Surplus are directly related to Legion non-admitting the entire $42.0 million of deferred tax asset. Three other ratios, Two-year Overall Operating, One-year Reserve Development and Two-year Reserve Development were impacted by the write-off of reinsurance recoverable from Reliance Insurance Company and adverse loss development of some discontinued program business. Change in Net Writings is directly related to the strategic transition to become a Specialty Insurance Company, retaining more risk. Liabilities to Liquid Assets was unusual due to a loss reserve increase for the write-off of Reliance Insurance Company reinsurance recoverable as well as an increase in other recoverable balances. Villanova had two unusual values related to premium growth, Gross Premiums written to Surplus and Change in Net Writings. Gross Premiums written to Surplus and Change in Net writings were directly affected by the increase in the inter-company pooling percentage for Villanova. The Change in Net Writings was also affected by the strategic transition to become a Specialty Insurance Company, retaining more risk. The write-off of reinsurance recoverable balances from Reliance Insurance Company affected three ratios, Two-year Overall Operating, Liabilities to Liquid Assets and One-year Reserve Development. The adverse loss development on discontinued business affected four ratios, Two-year Overall Operating, Change in Surplus, Agents Balances to Surplus and One-year Reserve Development. The Change in Surplus ratio was also affected by the increase in inter-company pooling percentage for Villanova. Non-admitting the entire $8.6 million of the deferred tax asset directly affected the Change in Surplus and the Agents Balance to Surplus ratios. The Investment Yield ratio was affected by Villanova taking ownership of MGA premium trust and TPA claims accounts. As a result, Villanova had a higher percentage of its assets invested in cash. Legion Indemnity had one unusual value related to premium growth, Change in Net Writings, which like Villanova and Legion Insurance, is directly related to the strategic transition to become a Specialty Insurance Company. Surplus Aid to Surplus was directly related to Legion Indemnity non-admitting the entire $6.0 million of deferred tax asset. The Two-year Overall Operating and One-year Reserve Development ratios were impacted by the write-off of reinsurance recoverable from Reliance Insurance Company and adverse loss development of some discontinued program business. The Liabilities to Liquid Assets was unusual due to a loss reserve increase for the write-off of Reliance Insurance Company reinsurance recoverable as well as an increase in other recoverable balances. The NAIC has also adopted a Risk Based Capital for Insurers Model Act. The Risk Based Capital Model Act sets forth a risk based capital formula for property and casualty insurers. The formula measures minimum capital and surplus needs based on the risk characteristics of a company's products and investment portfolio. The formula is part of each company's annual financial statement filings and is to be used as a tool to identify weakly capitalized companies. In those states having enacted the Risk Based Capital Model Act, companies having capital and surplus greater than the minimum required by the formula but less than a specified multiple of the minimum may be subject to additional regulatory scrutiny from domiciliary state insurance departments. To date, nearly all states have adopted the Risk Based Capital Model Act. At December 31, 2001, the Legion Companies combined risk-based capital was $358.3 million. Under the risk-based capital tests, the threshold that constitutes the authorized control level which authorizes the commissioner to take whatever regulatory action considered necessary to protect the best interest of the policyholders and creditors of the Legion Companies, was $176.4 million. Therefore, the Legion Companies' capital exceeds all requirements of the Risk Based Capital Model Act. The Legion Companies are permitted to pay dividends only from statutory earned surplus. Subject to this limitation, the maximum amount of dividends that they are able to pay in any twelve-month period will be the greater of statutory net income in the preceding year or 10% of statutory surplus. Based on 2001 results, the -13- maximum dividend the Legion Companies would have been permitted to pay in 2002 is $36.1 million. Due to the Legion Companies being placed in rehabilitation, dividends will not be allowed for the foreseeable future. Losses and Loss Reserves We establish reserves for losses and loss adjustment expenses related to claims which have been reported on the basis of the evaluations of independent claims adjusters under the supervision of each of the Legion Companies' claims staff. In addition, reserves are established for losses which have occurred but have not yet been reported and for adverse development of reserves on reported losses by us on a quarterly basis. The estimate of claims arising for accidents which have not yet been reported is based upon our and the insurance industry's experiences together with statistical information with respect to the probable number and nature of these claims. Gross loss reserves of $150.1 million and $169.6 million at December 31, 2001 and 2000, respectively, have been discounted by $14.7 million and $58.1 million, respectively, assuming interest rates of approximately 4% for medical malpractice reserves and excess workers' compensation reserves based on the recommended rate under Pennsylvania law. These reserves are also discounted in our regulatory filings. In 1993, we adopted SFAS 113 and reclassified substantially all of our net retained medical malpractice reserves as claims deposit liabilities. On a net basis, therefore, the only discounted reserves are those relating to the Company's share of the excess reinsurance coverage provided in connection with each program. After reinsurance, the net effect of this discounting was to increase net income after tax by $2.3 million in 2001 and to increase net income after tax by $0.2 million in 2000. This discounting reduced net loss reserves on our consolidated balance sheets by $6.6 million and $4.0 million at December 31, 2001 and 2000, respectively. Prior to 1995, loss development had been generally favorable. The adverse development in recent years has principally been a result of losses on terminated programs and the adverse impact of the insolvency of certain reinsurers, the commutation of reinsurance and the increasing of provisions relating to reinsurance recoverables (see below). The following table sets forth a reconciliation of beginning and ending reserves for losses and loss expenses in accordance with accounting principles generally accepted in the United States, also referred to as GAAP:
Year ended December 31, -------------------------------------------------- 2001 2000 1999 -------------------------------------------------- (In thousands) Gross reserves for losses and loss expenses, beginning of year ..... $2,529,183 $1,860,120 $1,190,426 Recoverable from reinsurers ........................................ 2,307,466 1,729,936 1,079,562 -------------------------------------------------- Net reserves for losses and loss expenses, beginning of year ....... 221,717 130,184 110,864 Less: Other net reserves(1) ........................................ (5,015) (8,058) (10,184) -------------------------------------------------- 216,702 122,126 100,680 Provision for losses and loss expenses for claims occurring in: Current year .................................................. 192,994 157,813 140,574 Prior years(2) ................................................ 128,090 69,292 7,131 -------------------------------------------------- Total losses and loss expenses incurred ............................ 321,084 227,105 147,705 -------------------------------------------------- Payments for losses and loss expenses for claims occurring in: Current year .................................................. (64,128) (29,205) (61,697) Prior years ................................................... (104,153) (103,324) (64,562) -------------------------------------------------- Total payments ..................................................... (168,281) (132,529) (126,259 -------------------------------------------------- Net reserves for losses and loss expenses, end of year ............. 369,506 216,702 122,126 Other net reserves(1) .............................................. 4,276 5,015 8,058 -------------------------------------------------- 373,782 221,717 130,184 -------------------------------------------------- Recoverable from reinsurers ........................................ 2,560,602 2,307,466 1,729,936 -------------------------------------------------- Gross reserves for losses and loss expenses, end of year ........... $2,934,384 $2,529,183 $1,860,120 ==================================================
-14- (1) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves for other run-off business. (2) During 2001, 2000 and 1999, the Company reported incurred losses and loss expenses relating to prior years (change in the previously estimated liability for losses and loss expenses) of $128.1 million, $69.3 million and $7.1 million. Management's assessment of the significant conditions and events, which resulted in these changes in estimates, is as follows: During 2001, the increase in incurred losses and loss expenses relating to prior years resulted from: . Insolvency of the Company's reinsurers of approximately $31.1 million, with predominately $26.9 million relating to the insolvency of Reliance Insurance Company; . Additional net losses of $18.8 million incurred resulting from commutations with other reinsurers; . Strengthening of provisions of $12.4 million relating to reinsurance recoveries; . An additional provision of $3.5 million for the costs of running off the business underwritten by the Company's underwriting management company, CompFirst; and . General reserve strengthening of the Company's loss reserves of $61.3 million following actuarial analysis completed during the fourth quarter of 2001. This primarily relates to a few discontinued programs written by the Company where the incurred losses have been much greater than anticipated at the time that they were underwritten. Due to the severity of losses under these programs, the reinsurance that the Company purchased in order to limit these losses have been exhausted and as such the Company is responsible for the losses in excess of the reinsurance coverage. The 2000 year increase in the provision for losses and loss expenses for claims occurring in prior years relates to a $69.0 million charge taken primarily to increase the Company's provision for reinsurance recoverables. The following table reconciles the difference between the Legion Companies' portion of the GAAP reserves and those contained in regulatory filings made by the Legion Companies in accordance with statutory accounting practices, also referred to as SAP. Reconciliation of SAP and GAAP Reserves
2001 2000 1999 -------------------------------------------------- (in thousands) Reserves for Legion losses and loss expenses, end of year SAP ......... $ 343,337 $ 186,809 $ 141,709 Gross-up for ceded reinsurance reserves ............................... 2,497,445 2,235,255 1,728,988 Provision for reinsurance uncollectible on a GAAP basis reported as a provision for unauthorized reinsurance on a SAP basis ........ 18,775 38,810 -- Reclassification of loss reserves to claims deposit liabilities ....... (11,564) (9,697) (13,853) Reclassification of retroactive reinsurance reserve to receivable from affiliate ..................................................... (137) 1,047 2,777 Elimination of statutory increase in assigned risk reserves ........... (15,000) (15,000) (15,000) Reserves for audit premium estimates not included on SAP basis ........ 1,265 (639) (4,260) -------------------------------------------------- Reserves for Legion losses and loss expenses, end of year GAAP ........ 2,834,121 2,436,585 1,840,361 Other non-US Reserves ................................................. 95,187 85,161 11,567 -------------------------------------------------- Liabilities for unpaid losses and loss expenses ....................... 2,930,108 2,521,746 1,851,928 Reserves on run-off business .......................................... 4,276 7,437 8,192 -------------------------------------------------- Total Reserves for Losses and Loss expenses, end of year GAAP ......... $2,934,384 $2,529,183 $1,860,120 ===================================================
-15- The following table presents the development of the Company's ongoing net reserves for 1991 through 2001. The top line of the table shows the estimated reserve for unpaid losses and loss adjustment expenses recorded at the balance sheet date for each of the indicated years. This amount represents the estimated amount of losses and loss adjustment expenses for claims that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to the Company. The table also shows the re-estimated amount of the previously recorded reserve based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. It should be noted that the following table presents a "run-off" of balance sheet reserves, rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT (Net of Reinsurance Recoverable)
Year ended December 31, ------------------------------------------------------------------------------------------ 1991 1992 1993 1994 1995 1996 1997 ------------------------------------------------------------------------------------------ (In thousands) Gross reserve for losses and loss adjustment expenses (1) ........... $142,605 $ 191,775 $ 205,272 $ 242,189 $ 315,689 $ 419,737 $ 716,461 Reinsurance reserves .............. (89,295) (113,075) (148,637 (178,002) (256,678) (350,318) (630,697) ------------------------------------------------------------------------------------------ Net reserve for losses and loss adjustment expenses ............... 53,310 78,700 56,635 64,187 59,011 69,419 85,764 Other reserves (3) ................ (1,464) (1,531) (1,118) (1,006) (1,008) (1,008) (3,542) ------------------------------------------------------------------------------------------ 51,846 77,169 55,517 63,181 58,003 68,411 82,222 Reclassification of reserves to claim deposit liabilities (2) ..... (28,322) (36,078) -- -- -- -- -- ------------------------------------------------------------------------------------------ Reserve for losses and loss adjustment expenses restated for the effects of SFAS 113: .......... 23,524 41,091 55,517 63,181 58,003 68,411 82,222 Reserve re-estimated as of: One year later .................... 53,193 40,443 55,131 60,917 54,982 67,966 86,002 Two years later ................... 24,269 41,433 52,381 56,767 54,328 70,502 87,721 Three years later ................. 23,298 39,351 47,657 56,291 56,576 70,669 115,602 Four years later .................. 22,010 36,330 47,740 57,760 55,573 82,809 143,367 Five years later .................. 20,390 36,424 48,162 57,137 60,932 100,014 Six years later ................... 20,500 36,652 47,907 60,443 74,105 Seven years later ................. 20,689 36,105 50,082 71,731 Eight years later ................. 22,062 37,235 55,538 Nine years later .................. 23,104 39,933 Ten years later ................... 29,758 Cumulative Redundancy (Deficiency) ...................... (6,234) 1,158 (21) (8,550) (16,102) (31,603) (61,145) Percentage ........................ -27% 3% - -14% -28% -46% -74% Reserve for Losses and Loss Adjustment Expenses without the effect of Discounting: Discounted reserve ................ $ 51,846 $ 77,169 $ 55,517 $ 63,181 $ 58,003 $ 68,411 $ 82,222 Total Discount .................... 8,345 10,785 1,387 2,905 3,291 3,547 3,671 ------------------------------------------------------------------------------------------ Ultimate Reserve Liability ........ 60,191 87,954 56,904 66,086 61,294 71,958 85,893 Reclassification of reserves to claim deposit liabilities (2) ..... (36,667) (46,862) -- -- -- -- -- ------------------------------------------------------------------------------------------ Ultimate reserve liability restated for the effects of SFAS 113 ....... 23,524 41,092 56,904 66,086 61,294 71,958 85,893 Reserve re-estimated as of: One year later .................... 60,820 40,443 56,272 63,480 57,866 71,008 89,347 Two years later ................... 24,269 41,433 53,410 59,186 57,097 73,790 91,496 Three years later ................. 23,298 39,351 48,499 58,558 59,456 73,865 118,712 Four years later .................. 22,010 36,330 48,400 60,096 58,318 85,906 146,707 Five years later .................. 20,390 36,424 48,854 59,294 63,887 103,354 Six years later ................... 20,500 36,652 48,406 63,153 77,282 Seven years later ................. 20,689 36,105 52,721 74,636 Eight years later ................. 22,062 37,060 56,925 Nine years later .................. 23,104 39,933 Ten years later ................... 29,758 Cumulative Redundancy (Deficiency) without discount effect ........... (6,234) 1,159 (21) (8,550) (15,988) (31,396) (60,814) Percentage ........................ -27% 3% - -13% -26% -44% -71% Cumulative Amount of Reserve Paid through: One year later .................... $ 9,647 $ 15,972 $ 17,909 $ 19,720 $ 10,955 $ 25,196 $ 44,761 Two years later ................... 13,158 21,121 25,306 21,054 22,422 43,068 62,781 Three years later ................. 15,104 24,991 27,134 28,547 31,925 49,571 71,808 Four years later .................. 16,897 25,510 31,972 34,398 41,684 51,343 82,339 Five years later .................. 17,311 28,110 35,967 45,706 40,161 58,445 Six years later ................... 17,943 30,793 41,392 43,215 40,292 Seven years later ................. 19,494 33,432 39,531 37,466 Eight years later ................. 20,920 31,494 33,709 Nine years later .................. 20,114 25,106 Ten years later ................... 20,356
Year ended December 31, --------------------------------------------------- 1998 1999 2000 2001 --------------------------------------------------- In thousands) Gross reserve for losses and loss adjustment expenses (1) ........... $ 1,190,426 $ 1,860,124 $ 2,529,183 $ 2,934,383 Reinsurance reserves .............. (1,079,562) (1,729,935) (2,307,466) (2,560,602) --------------------------------------------------- Net reserve for losses and loss adjustment expenses ............... 110,864 130,189 221,717 373,781 Other reserves (3) ................ (10,184) (8,058) (5,015) (4,275) --------------------------------------------------- 100,680 122,131 216,702 369,506 Reclassification of reserves to claim deposit liabilities (2) ..... -- -- -- -- --------------------------------------------------- Reserve for losses and loss adjustment expenses restated for the effects of SFAS 113: .......... 100,680 122,131 216,702 369,506 Reserve re-estimated as of: One year later .................... 103,346 190,570 344,792 Two years later ................... 156,532 247,655 Three years later ................. 194,322 Four years later .................. Five years later .................. Six years later ................... Seven years later ................. Eight years later ................. Nine years later .................. Ten years later ................... Cumulative Redundancy (Deficiency) ...................... (93,642) (125,524) (128,090) Percentage ........................ -93% -103% -59% Reserve for Losses and Loss Adjustment Expenses without the effect of Discounting: Discounted reserve ................ $ 100,680 $ 22,132 $ 216,703 $ 369,506 Total Discount .................... 4,667 3,752 3,990 6,599 --------------------------------------------------- Ultimate Reserve Liability ........ 105,347 125,883 220,693 376,105 Reclassification of reserves to claim deposit liabilities (2) ..... -- -- -- -- --------------------------------------------------- Ultimate reserve liability restated for the effects of SFAS 113 ....... 105,347 125,883 220,693 376,105 Reserve re-estimated as of: One year later .................... 107,507 193,341 347,714 Two years later ................... 160,518 250,559 Three years later ................. 198,514 Four years later .................. Five years later .................. Six years later ................... Seven years later ................. Eight years later ................. Nine years later .................. Ten years later ................... Cumulative Redundancy (Deficiency) without discount effect ........... (93,167) (124,676) (127,021) Percentage ........................ -88% -99% -58% Cumulative Amount of Reserve Paid through: One year later .................... $ 5,931 $ 103,325 100,004 Two years later ................... 111,768 134,847 Three years later ................. 133,316 Four years later .................. Five years later .................. Six years later ................... Seven years later ................. Eight years later ................. Nine years later .................. Ten years later ...................
(1) Medical malpractice reserves have been discounted at 6% in 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999 and 2000 and 4% in 2001. (2) The re-classification of reserves to claims deposit liabilities is a result of the adoption of SFAS 113. (3) Other reserves represent reinsurance contracts which are being run-off and which were written in subsidiaries other than Legion, plus reserves on other run-off business. -16- Investments and Investment Results For a complete description of our investments and investment results, see note 5 to the Consolidated Financial Statements. RISK FACTORS You should carefully consider the risks described below regarding us and our common shares. The risks and uncertainties described below are not the only ones we face. There may be additional risks and uncertainties. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected and the trading price of our common shares could decline significantly. Legion Insurance and Villanova are in rehabilitation and may be liquidated Legion Insurance and Villanova have been placed in rehabilitation by the Pennsylvania court. The Insurance Commissioner of Pennsylvania will appoint deputy receivers, also known as rehabilitators, who will take possession of all the assets of Legion Insurance and Villanova and assume all of the powers of their directors, officers and managers. Because we will not control Legion Insurance and Villanova while they are in rehabilitation, we cannot use them to facilitate our Corporate Risk Management business segment or our Specialty Insurance business segment. While Legion Insurance and Villanova are in rehabilitation, they will not pay us any dividends. Consequently, our net income may be reduced and we may incur a significant loss. During rehabilitation, the rehabilitators will determine if Legion Insurance and Villanova can be restored to independent operations. If this is not possible, the Insurance Commissioner of Pennsylvania may petition the appropriate court to issue orders to liquidate either Legion Insurance, Villanova or both. If Legion Insurance and Villanova are placed in liquidation, administrative expenses, policyholder claims and general creditors, among others, are paid before shareholders receive anything. It is unlikely that any proceeds of the liquidation would remain after the claims of Legion Insurance's and Villnova's general creditors were satisfied, which would cause us to lose our investments in Legion Insurance and Villanova, and would reduce our net income and cause us to incur a significant loss. Similarly, we expect the Director of Insurance of Illinois to take control over Legion Indemnity for the same purposes. Experience indicates that companies placed in rehabilitation and conservation generally do not perform well and liquidation can follow. Insurance regulatory authorities may seek to hold us and our directors directly responsible for the obligations of the Legion companies Insurance regulatory authorities may seek direct recovery against us for the obligations of the Legion Companies through a process known as "piercing the corporate veil." A court may hold us responsible for the obligations of the Legion Companies if it determines that the Legion Companies did not function as a distinct entity from us. If we were directly required to satisfy the obligations of the Legion Companies, we could incur a significant loss. Insurance regulatory authorities may also seek to hold our directors and the directors of the Legion Companies responsible for the obligations of the Legion Companies. Courts have imposed such liabilities on parent company directors when they have improperly diverted the funds of a subsidiary, misrepresented or concealed a subsidiary's financial condition, or violated their duties under the insurance holding company statutes. The directors of the Legion Companies could face claims under Pennsylvania or Illinois common law relating to liability for their actions as directors of these companies. If a plaintiff were to succeed in winning a claim against one of our or the Legion Companies' directors, we may be required to indemnify such person, and to the extent that the directors and officers insurance was not sufficient to cover such claim, we could incur a significant loss. Further, defending against such actions may distract our directors and management from their duties, which may negatively affect our operations. We are in default under our debt agreements. The covenants in these agreements limit our financial and operational flexibility which could have an adverse effect on our financial condition. At December 31, 2001, we had $180.0 million of bank loans outstanding. In addition, we also have $156.9 million of outstanding debentures, which includes $142.5 million of outstanding 9 3/8% debentures. -17- The agreements covering our indebtedness contain numerous covenants that limit our ability, among other things, to borrow money, make particular types of investments or other restricted payments, including any dividend payment greater than $0.07 per share per quarter, sell assets, merge or consolidate. These agreements also require us to maintain specified financial ratios. As of December 31, 2001, we were not in compliance with covenants regarding required minimum shareholders' equity and the minimum statutory combined ratio. As a result of the downgrade in our rating by A. M. Best, we are also in default of the covenant relating to the minimum rating of the Legion Companies. As at March 31, 2002, we are still in default of these covenants. We are in negotiations with our creditors to restructure our bank debt and our 9 3/8% debentures but there is no assurance that a satisfactory resolution can be achieved. Since we are in default under our indebtedness, we are restricted in our ability to: . declare or pay any dividends on our capital shares; . redeem, purchase or acquire any capital shares; . sell significant assets; or . make a liquidation payment with respect to our capital shares. We are currently in default under the agreements governing our debt facilities and our 9 3/8% debentures and the Company does not have sufficient available liquidity to pay the interest and principal if the holders of the 9 3/8% debentures or of the bank debt declare the amounts to be immediately due and payable. Therefore, if these defaults are not waived or if our debt is not restructured, there is substantial doubt as to the Company's ability to continue as a going concern. If we cannot restructure our debt or reach some accommodation we may be forced to liquidate the Company through proceedings in Bermuda and/or other jurisdictions including the United States. Our ability to generate the cash needed to make payments on our bank debt and securities depends on many factors, some of which are beyond our control. Our ability to make payments on our bank debt and securities will depend on our ability to generate cash and to secure financing in the future. This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. If our business does not generate sufficient cash flow from operations, and sufficient future borrowings are not available to us, we may not be able to make payments on our bank debt and securities. The terms of our bank debt and senior securities contain covenants relating to minimum levels of shareholders' equity, debt to total capitalization and various other matters. Our reinsurers may not satisfy their obligations to the Legion Companies. Our business model relied to a large extent on reinsurance to reduce our underwriting risk. As of December 31, 2001, our reinsurance recoverable balance was $2.6 billion. Virtually all of this liability is related to reinsurance recoverables of the Legion Companies. The Legion Companies are subject to credit risk with respect to their reinsurers because the transfer of risk to a reinsurer does not relieve the Legion Companies of their liability to the insured. In addition, reinsurers may be unwilling to pay the Legion Companies even though they are able to do so. The Legion Companies are currently engaged in disputes with a number of reinsurers that have failed to honor their commitments under their reinsurance arrangements. The Legion Companies established a reserve for these disputes in accordance with GAAP in the fourth quarter of 2000 and increased such reserve in 2001, but losses from these disputes may exceed the reserve. Unfavorable arbitration decisions or the failure of one or more of the Legion Companies' reinsurers to honor their obligations or make timely payments would impact the Legion Companies' cash flow and could cause the Company to incur a significant loss. As a result of the rehabilitation of the Legion Companies, we may not be able to influence the outcome of these decisions as they will be the responsibility of the rehabilitator. -18- The tragic events of September 11, 2001 may prevent or delay some reinsurers from satisfying their obligations to us. The tragic events of September 11, 2001 have resulted in the largest insured loss in history. Much of this loss will be borne by reinsurers. The tremendous burden placed on reinsurers could impair or delay their ability to pay their reinsurance obligations to the Legion Companies. The failure of one or more of reinsurers to honor their obligations to the Legion Companies or make timely payments would adversely impact the Legion Companies' cash flow and could cause us to incur a significant loss. The lack of ratings of the Legion Companies will impair our future prospects for growth and our profitability will be significantly and adversely affected. Ratings have become an increasingly important factor in establishing the competitive position of insurance companies. As a result of the Pennsylvania rehabilitation order, we expect that the Legion Companies will no longer be rated by A.M. Best Company or Standard & Poor's Ratings Services. A.M. Best and Standard & Poor's ratings reflect their opinions of an insurance company's financial strength, operating performance, strategic position and ability to meet its obligations to policyholders. A lack of rating of the Legion Companies will adversely affect our ability to market our insurance products and will have a significant and adverse effect on our future prospects for growth and profitability. Our common shares may be de-listed from the New York Stock Exchange. Our common shares have recently traded for less than $1.00. If the shares continue to trade at these levels for any significant period of time it is likely that the New York Stock Exchange will commence the process to delist the shares for failure to meet the New York Stock Exchange's minimum listing requirements. If we are unable to purchase reinsurance and transfer risk to reinsurers we could incur additional losses. A significant feature of our Corporate Risk Management segment is our utilization of third-party reinsurance to transfer a significant portion of risk not retained by the insured. The availability and cost of reinsurance is subject to market conditions, which are outside of our control. As a result, we may not be able to successfully purchase reinsurance and transfer risk through reinsurance arrangements. The tragic events of September 11, 2001 have created uncertainty in the reinsurance market and have made some types of reinsurance more difficult or costly to obtain. A lack of available reinsurance at rates acceptable to us would adversely affect the marketing of our programs and/or force us to retain all or a part of the risk that cannot be reinsured. If we were required to retain these risks and ultimately pay claims with respect to these risks, we could incur a loss. In addition, if reinsurers are able to and do exclude coverage for terrorist acts or price such coverage at a rate at which it is not practical for primary insurers to obtain such coverage, primary insurers are likely to bear the risks of this coverage, as they might not be able to likewise exclude terrorist acts because of regulatory constraints. If this happens, we, in our capacity as a primary insurer, would have a significant gap in our reinsurance protection and would be exposed to potential losses as a result of any terrorist acts. If the issuers of letters of credit and clients fail to honor their obligations we could incur additional losses. Each of our clients in our Corporate Risk Management segment chooses a level of risk retention, which is reinsured either by one of our foreign "rent-a-captive" reinsurance subsidiaries or by the client's captive insurance company. This retention is funded by the client's premium but is generally also supported by a client indemnification backed up by letters of credit. The inability of a client to honor its uncollateralized reimbursement obligation or the failure of a bank to honor its letter of credit could cause us to incur additional losses. If our loss reserves are inadequate to meet our actual losses we could incur additional losses. Our insurance company subsidiaries are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses for both reported and unreported claims incurred. These reserves are only -19- estimates of what we think the settlement and administration of claims will cost based on facts and circumstances known to us. Because of the uncertainties that surround estimating loss reserves and loss adjustment expenses, we cannot be certain that ultimate losses will not exceed these estimates of losses and loss adjustment reserves. If our reserves are insufficient to cover our actual losses and loss adjustment expenses, we would have to increase our reserves and we could incur additional losses. If tax laws prevent our IPC program participants from deducting premiums paid to us, we would be unable to competitively market this program. One of our major products is the Insurance Profit Center program, referred to in this prospectus as the IPC program. The IPC program, frequently referred to as a "rent-a-captive," was designed to provide clients some of the benefits available through captive insurance companies without the administrative cost and capital commitment necessary to establish and operate a captive insurance company. The tax treatment of this program is not clear and varies significantly with the circumstances of each IPC program participant. However, some participants deduct the premiums paid to us for federal income tax purposes. A determination that a significant portion of the IPC program participants are not entitled to deduct the premiums paid to us without a similar determination as to competing products would adversely affect the marketability of the IPC program. Our results may fluctuate as a result of factors generally affecting the insurance and reinsurance industry. The results of companies in the insurance and reinsurance industry historically have been subject to significant fluctuations and uncertainties. Factors that affect the industry in general could also cause our results to fluctuate. The industry's profitability can be affected significantly by: . fluctuations in interest rates, inflationary pressures and other changes in the investment environment, all of which affect returns on invested assets and may impact the ultimate payout of loss amounts; . rising levels of actual costs that are not known by companies at the time they price their products; . volatile and unpredictable developments, including weather-related and other natural and man-made catastrophes; . events like the September 11, 2001 tragedy, which affect the insurance and reinsurance markets generally; . the regulatory environment and changes in applicable laws and regulations; . changes in reserves resulting from different types of claims that may arise and the development of judicial interpretations relating to the scope of insurers' liability; and . the overall level of economic activity and the competitive environment in the industry. Holders of some of our securities have the ability to wield extensive influence over the Company. In May 2001, in order to raise capital, we issued $142,500,000 aggregate principal amount of 9 3/8% debentures convertible into common shares, with an initial conversion price of $7 per common share, and warrants to purchase common shares at an initial exercise price of $7 per share. We also issued voting preferred shares as a unit with the 9 3/8% debentures, which enable these debenture holders to vote as if they had converted their 9 3/8% debentures into common shares, which voting preferred shares will be cancelled upon conversion of the 9 3/8% debentures. The 9 3/8% debentures holders and holders of the warrants, if exercised, collectively have approximately 35% of the total voting power of the Company before taking into account the sale of any common shares offered pursuant to this prospectus. XL Insurance (Bermuda) Ltd. and XL Capital Principal Partners I, LLC. currently own $38,125,581 principal amount of our 9 3/8% debentures and warrants to acquire 1,632,043 common shares. XL also obtained the right to nominate two persons for election to MRM's board of directors, and High Ridge Capital and First Union, in consultation with Century Capital II, obtained the right jointly to nominate one person for election and one observer to our board of directors. In addition, -20- XL and other holders of the 9 3/8% debentures and warrants benefit from covenants with which the Company must comply. As a result of these factors, these holders have the ability to control many fundamental matters affecting the Company. The holders of the 9 3/8% debentures also have the right to acquire, instead of our common shares, similar debentures or common shares of MRM Services Ltd., an intermediate holding company through which we conduct our Corporate Risk Management, Specialty Brokerage and Financial Services businesses. If these holders elected to convert their 9 3/8% debentures into common shares of MRM Services Ltd. instead of our common shares, they would own approximately 42.4% of MRM Services Ltd. Failure to comply with insurance laws and regulations could have a material adverse effect on our business. We cannot assure you that we have or can maintain all required licenses and approvals or that our business fully complies with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations. In addition, some regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. We are contractually restricted in our ability to pay dividends on our common shares. Under the terms of our 9 3/8% debentures, we may not pay a dividend of more than $0.07 per share per quarter without the approval of the holders of a majority in principal amount of the 9 3/8% debentures. While the Company remains in default of covenants in the agreements governing its 9 3/8% debentures, it may not pay dividends. Our holding company structure and restrictions in the agreements governing our 9 3/8% debentures could prevent us from making payments on our securities. Mutual Risk Management Ltd. is a holding company with no material assets other than the stock of its operating subsidiaries. Our ability to meet our obligations on our securities will be dependent on the earnings and cash flows of our subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us. Payment of dividends and advances and repayments from some of our operating subsidiaries are regulated by state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds. In addition, the terms of our 9 3/8% debentures require us to maintain specified minimum levels of capital and surplus and risk-based capital at our U.S. insurance subsidiaries, which could restrict their ability to pay us dividends, even if the dividends were permitted by relevant insurance laws and regulations. Accordingly, our operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from making payments on our securities. A significant amount of our investment portfolio is invested in fixed income securities and is subject to market fluctuations. A significant amount of our investment portfolio consists of fixed income securities. The fair market value of, and the investment income from, these assets fluctuate depending on general economic and market conditions. The fair market value of our fixed income securities generally increases or decreases in an inverse relationship with fluctuations in interest rates, while net investment income realized by us from future investments in fixed income securities will generally increase or decrease with interest rates. In addition, net investment income from investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, may differ from what we anticipated at the time of investment as a result of interest rate fluctuations. Because substantially all of our fixed income securities are classified as available for sale, changes in the market value of our securities are reflected in our financial statements. As a result, interest rate fluctuations could reduce our net income or cause us to incur additional losses. -21- Our industry is highly competitive and we may not be able to compete successfully in the future. Our industry is highly competitive and has experienced severe price competition over the last several years. We compete in the United States and international markets with domestic and international insurance companies. Some of these competitors have greater financial resources than we do, have been operating for longer than we and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, we expect to face further competition in the future and we may not be able to compete successfully. Potential regulatory and legislative changes may increase competition. A number of new, proposed or potential legislative or industry developments could further increase competition in our industry. These developments include: . the implementation of commercial lines deregulation in several states, which could increase competition from standard carriers for our excess and surplus lines of insurance business; and . programs in which state-sponsored entities provide property insurance in catastrophe prone areas or other alternative markets types of coverage. New competition from these developments could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our products at attractive rates and thereby adversely affect our underwriting results. The September 11, 2001 terrorist attack may result in government intervention impacting the insurance and reinsurance markets. In response to the tightening of supply in some insurance markets resulting from, among other things, the terrorist attacks of September 11, 2001, it is possible that the U.S. government and other governments may intervene in the insurance and reinsurance markets. Following the September 11, 2001 terrorist attacks, legislation has been introduced in the U.S. Congress designed to provide, among other things, federal government loans over a short-term period to commercial insurers for funding losses arising from terrorist attacks, which loans would be repaid through industry assessments and, if losses exceed a threshold, policyholder assessments, but this legislation has not been enacted. While we cannot predict whether intervention will occur, or what form it may take, potential investors should note that intervention such as direct government assistance to commercial insurers could materially adversely affect us by, among other things: . providing insurance and reinsurance capacity in the markets and to the customers we target; or . regulating the terms of insurance and reinsurance capacity and reinsurance policies in a manner which could materially adversely affect us, directly or indirectly, by benefiting our competitors or reducing the demand for our products. We are dependent on our key personnel. Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executive officers or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. The Company's financial situation and the rehabilitation of the Legion Companies has made and likely will continue to make it harder to retain key employees. Andrew Cook, who had been our Chief Financial Officer since January 1, 2001, resigned effective December 31, 2001, to devote himself full time as the Chief Financial Officer of AXIS Specialty Limited. James Kelly, who served as our Chief Financial Officer until the end of 2000, was appointed interim Chief Financial Officer from January 7, 2002 to March 19, -22- 2002. Angus H. Ayliffe, our Controller, was designated as principal accounting officer in January 2002 and has been appointed Chief Financial Officer effective March 25, 2002. If U.S. tax law changes we could incur additional losses. Some members of Congress have recently expressed concern over a competitive advantage that foreign-controlled insurers and reinsurers may have over U.S.-controlled insurers and reinsurers due to the purchase of reinsurance by U.S. insurers from affiliates operating in some foreign jurisdictions, including Bermuda. In the past few years, and as recently as May 8, 2001 (H.R. 1755, The Reinsurance Tax Equity Act of 2001), legislation has been introduced in Congress that would increase the U.S. tax burden on some of these transactions involving foreign-controlled insurers and reinsurers. We do not know whether this or any similar legislation will ever be enacted into law. If it were enacted, the U.S. tax burden on some business ceded from our licensed U.S. insurance subsidiaries, including Legion Insurance, Legion Indemnity and Villanova, to some offshore reinsurers could be increased. This could cause us to incur additional losses. We may be subject to U.S. corporate income tax, which would increase our losses. The income from our non-U.S. subsidiaries is a significant portion of our worldwide income from operations. We believe that none of our non-U.S. subsidiaries should properly be treated as engaged in the conduct of a trade or business in the United States. However, if the IRS successfully contended that one or more of our non-U.S. subsidiaries were engaged in the conduct of a trade or business in the United States, such subsidiary or subsidiaries would be required to pay U.S. corporate income tax on any income that is deemed to be effectively connected with the conduct of such trades or businesses in the United States, and possibly the U.S. branch profits tax as well. We cannot offer assurance that any of our non-U.S. subsidiaries which are treated as being engaged in the conduct of a trade or business in the United States would be able to claim the benefits of an income tax treaty between the United States and the country of the subsidiary's domicile in order to reduce the amount of income that is subject to the taxing jurisdiction of the United States. If we are classified as a passive foreign investment company or a controlled foreign corporation, your taxes would increase. In the event that we were deemed to be a passive foreign investment company, also referred to in this prospectus as a PFIC, the U.S. income tax due in the year a United States person that owns any common shares receives certain distributions with respect to, or disposes of, common shares will be increased by an interest charge unless such United States person makes specified elections. We do not believe that we are a PFIC now, but we cannot guarantee that we will not become one in the future. Additionally, if we are classified or become classified as a controlled foreign corporation, also referred to in this prospectus as a CFC, a United States person that owns directly or indirectly 10% or more of our voting shares will be required to include in his gross income a pro rata share of certain income of ours, whether or not this income is actually distributed to the United States shareholder. The Organization for Economic Cooperation and Development and the European Union are considering measures that might increase our taxes and therefore our losses. A number of multinational organizations, including the European Union, the Organization for Economic Cooperation and Development, also referred to in this prospectus as OECD, the Financial Action Task Force and the Financial Stability Forum, also referred to in this prospectus as FSF, have all recently identified some countries as not participating in adequate information exchange, engaging in harmful tax practices or not maintaining adequate controls to prevent corruption, such as money laundering activities. Recommendations to limit such harmful practices are under consideration by these organizations, and a recent report published on November 27, 2001 by the OECD at the behest of FSF titled "Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes," contains an extensive discussion of specific recommendations. The OECD has threatened non-member jurisdictions that do not agree to cooperate with the OECD with punitive sanctions by OECD member countries, though specific sanctions have yet to be adopted by OECD member countries. It is as yet unclear what these sanctions will be, who -23- will adopt them and when or if they will be imposed. Bermuda has implemented new procedures in its exchange of information provisions under the U.S.--Bermuda Tax Treaty and is committed to a course of action to enable compliance with the requirements of the above named multinational organizations. We cannot assure you, however, that the action taken by Bermuda would be sufficient to preclude all effects of the measures or sanctions described above, which, if ultimately adopted, could adversely affect Bermuda companies such as us. Some aspects of our corporate structure may discourage third party takeovers and other transactions. Some provisions of our Memorandum of Association and our Bye-Laws have the effect of making more difficult or discouraging unsolicited takeover bids from third parties. To the extent these provisions discourage takeover attempts, they could deprive shareholders of opportunities to realize takeover premiums for their shares or could depress the market price of the shares. We indirectly own U.S. companies. Our ownership of U.S. insurance companies such as these can, under applicable state insurance company laws and regulations, delay or impede a change of control of Mutual Risk Management, Ltd. Under applicable insurance regulations, any proposed purchase of 10% or more of our voting securities would require the prior approval of the relevant insurance regulatory authorities. The number of shares eligible for future sale or registration could have an adverse effect on the market price of our common shares. Public or private sales of substantial amounts of our common shares, or the perception that these sales could occur, could adversely affect the market price of the common shares, as well as our ability to raise additional capital in the public equity markets at a desirable time and price. In addition, the holders of our 9 3/8% debentures have the right to convert their 9 3/8% debentures into common shares at an initial conversion price of $7 per share, and some of those holders have warrants to acquire common shares at an initial exercise price of $7 per share. The 9 3/8% debentures and warrants may be converted into or exercised for an aggregate of 22,509,085 of our common shares. Conversion or exercise of the 9 3/8% debentures and warrants, and subsequent sale of the common shares issued upon conversion or exercise, could depress the price of our common shares. Additionally, these investors have the right to require us to register, or piggyback on any of our registration statements, their 9 3/8% debentures, warrants and/or any common shares held by them under the Securities Act. We may also provide for the registration of shares currently held or acquired in the future by employees under compensation arrangements, which will permit these shares to be sold in the public market from time to time. You may not be able to recover damages from the Company and some of its directors and officers if you sue them. The Company is organized under the laws of Bermuda. Some of its directors and officers may reside outside the United States. A substantial portion of the assets of the Company and its directors and officers are or may be located in jurisdictions outside the United States. You may not be able to effect service of process within the United States on directors and officers of the Company who reside outside the United States. You also may not be able to recover against them or the Company on judgments of U.S. courts or to obtain original judgments against them or the Company in Bermuda courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. ITEM 2. PROPERTIES We and our subsidiaries operate out of leased premises, the most significant of which are located in Bermuda, Milwaukee and Philadelphia. ITEM 3. LEGAL PROCEEDINGS The Company has generally retained only a small portion of the insurance risk that it assumes. Accordingly, the Company has relied heavily on reinsurance and carries a significant recoverable from reinsurers, which amounted to -24- $2.6 billion at December 31, 2001. On a gross basis, some of the Company's business has been unprofitable to reinsurers and certain of these reinsurers have chosen to dispute their obligation to pay the Company. The boards of directors of the Company and Legion Insurance and Villanova have consented to Legion Insurance and Villanova being placed under voluntary rehabilitation by the Pennsylvania Insurance Department. The Insurance Commissioner of Pennsylvania has petitioned the Commonwealth Court of Pennsylvania for Orders of Rehabilitation for Legion Insurance and Villanova, which were granted on March 28, 2002, and entered into effect on April 1, 2002. We expect similar proceedings to be initiated in Illinois in relation to Legion Indemnity. The Insurance Commissioner of Pennsylvania and, we expect, the Director of Insurance of Illinois, will appoint deputy receivers, also known as rehabilitators, who will take possession of all the assets of the Legion Companies and assume all of the powers of their directors, officers and managers. The Orders empower the rehabilitators to take any action they deem necessary to correct the conditions that led to the Legion Companies being placed in rehabilitation. For example, the rehabilitators may direct and manage the Legion Companies, deal with their property and business, hire and discharge their employees, pursue legal remedies on their behalf and avoid fraudulent transfers made by them or on their behalf. The rehabilitators may prepare a plan for the reorganization, consolidation, conversion, reinsurance, merger or other transformation of the Legion Companies, which would need to be approved by the appropriate court. The rehabilitators may also cause the Legion Companies to cease writing one or more lines of business, or alternatively allow the Legion Companies to continue writing one or more lines of business. The Orders also provide that legal proceedings against the Legion Companies are stayed and that instituting legal proceedings against the Legion Companies is prohibited. The purpose of rehabilitation is to restore the Legion Companies to independent operations as viable and solvent insurers, at which point one or more of the Legion Companies may emerge from rehabilitation and we will regain control over them. If this is not possible, the Insurance Commissioner of Pennsylvania and, we expect, the Director of Insurance of Illinois, may respectively petition an appropriate court to issue orders to liquidate one or more of the Legion Companies. In addition, other states in which the Legion Companies are licensed may commence proceedings to secure the assets of the Legion Companies located in these states. We are not aware of any such proceedings being brought. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -25- EXECUTIVE OFFICERS OF THE REGISTRANT
Officer Name Age Since Principal Occupation & Business Experience - ---------------------------------------------------------------------------------------------------------------------- Robert A. Mulderig ..... 48 1982 Chief Executive Officer of the Company since 1982; Chairman of Legion Insurance Co.; and Director of The Bank of N.T. Butterfield & Sons Ltd. Also serves as a director or officer of a number of unaffiliated captive insurance companies to which we provide management services. John Kessock, Jr ....... 52 1979 President of the Company and Mutual Group Ltd. primarily responsible for marketing the Company's programs since 1979; Chairman of CRS and the IPC Companies. Director of Ward North America, Inc. Richard G. Turner ...... 50 1984 Executive Vice President of the Company; President of CRS since 1984; Vice President of Marketpac International, a subsidiary of American International Group, from 1979 to 1984. Director of Colonial Penn Insurance Company; Director of Ward North America, Inc. Glenn R. Partridge ..... 47 1983 Executive Vice President of the Company; Senior Vice President of Legion Insurance; primarily responsible for Legion Insurance's underwriting function since 1987; Vice President of CRS from 1983 to 1987. Douglas Boyce .......... 51 2001 Senior Vice President of the Company since September 2001; Executive Vice President and Chief Underwriting Officer of Legion Companies; Prior to joining the Company, Division Executive at Lexington Insurance Company, a subsidiary of American International Group, Inc. Angus H. Ayliffe ....... 33 2002 Chief Financial Officer of the Company since March 2002, designated Principal Accounting Officer since January 2002 and Controller of the Company since 2000. Prior to that, he was Director, Secretary and Vice President Administrative and Finance of Terra Nova (Bermuda) Insurance Company from 1998 to 2000 and Project Accountant for Terra Nova Insurance Company Ltd. from 1996 to 1998. Paul D. Watson ......... 42 1986 Senior Vice President and Chief Operating Officer of the Company; Vice President of the Company since March 1991; President of the IPC Companies from July 1992 until December 1998; held various management and accounting positions since joining the Company in 1986. Richard E. O'Brien ..... 44 1995 Senior Vice President and General Counsel of the Company since 1995; Partner in the law firm of Dunnington, Bartholow & Miller, New York, from 1989 to 1995.
All Executive Officers are appointed by the Company's Board of Directors and serve until the next annual general meeting of the shareholders or until their successors are appointed. -26- PART II ITEM 5. MARKET FOR COMMON SHARES AND RELATED STOCKHOLDER MATTERS Our common shares have been listed on the New York Stock Exchange under the symbol MM since June 25, 1991. Our common shares were listed in connection with our initial public offering completed in July 1991. There were 357 holders of record of our common shares as of March 28, 2002. The following table sets forth the high and low closing sale prices for the shares during 2000 and 2001 for the calendar quarters indicated as reported by the New York Stock Exchange Composite Tape. High Low ------------------ Year ended December 31, 2000 First Quarter .................................... 20 12 5/8 Second Quarter ................................... 19 5/8 13 3/16 Third Quarter .................................... 22 3/16 15 1/16 Fourth Quarter ................................... 23 9/16 12 5/16 Year ended December 31, 2001 First Quarter .................................... 16.36 6.20 Second Quarter ................................... 9.70 3.97 Third Quarter .................................... 12.15 5.57 Fourth Quarter ................................... 9.84 5.50 Year ended December 31, 2002 First Quarter .................................... 7.24 0.49 During 2001 and 2000, we paid total dividends of $0.04 and $0.28 per common share, respectively. Dividends are paid quarterly. We do not expect to pay dividends in 2002. Our ability to pay dividends is restricted due to certain insurance regulations. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and Note 11 to the Consolidated Financial Statements -27- ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Information required for this item is the subject of a Form 12b-25 filed with the Securities and Exchange Commission on April 1, 2002 and such information will be filed at a later date pursuant to an amendment to this Form 10-K. -28- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information required for this item is the subject of a Form 12b-25 filed with the Securities and Exchange Commission on April 1, 2002 and such information will be filed at a later date pursuant to an amendment to this Form 10-K. -29- ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information required for this item is the subject of a Form 12b-25 filed with the Securities and Exchange Commission on April 1, 2002 and such information will be filed at a later date pursuant to an amendment to this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -30- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS Reference is made to the information under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the 2002 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Reference is made to the information under the heading "Executive Compensation" in the Company's Proxy Statement for the 2002 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year, which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is made to the information under the heading "Principal Shareholders" in the Company's Proxy Statement for the 2002 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is made to the information under the heading "Certain Transactions" in the Company's Proxy Statement for the 2002 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year, which information is incorporated herein by reference. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K [CONFIRM THAT ALL MATERIAL CONTRACTS ARE LISTED] A. Exhibits Exhibit No. Description - -------------------------------------------------------------------------------- 3.1 Memorandum of Association.(1) 3.2 Bye-Laws of Registrant.(2) 3.3 Bye-Laws of IPC Mutual Holdings Ltd.(1) 3.4 Certificate of Designations of the Registrant's Series A Preferred Shares.(3) 4.1 Form of Stock Certificate.(1) 4.2 Indenture dated as of October 30, 1995 relating to the Company's Zero Coupon Convertible Exchangeable Subordinated Debentures due 2015.(4) -31- Exhibit No. Description - -------------------------------------------------------------------------------- 4.3 Form of the Registrant's 9 3/8% Convertible Exchangeable Debenture Due 2006.(5) 4.4 Form of Voting Preferred Shares issued together as a unit with the 9 3/8% Debentures.(5) 4.5 Form of Warrant for Common Stock of the Registrant.(5) 4.6 Form of Newco Convertible Exchangeable Debenture Due 2006.(5) 4.7 Amendment No. 1 to Amended and Restated Trust Agreement, dated May 8, 2001, by and among the Administrative Trustees of MRM Capital Trust I (as defined therein), Mutual Group, Ltd. and Intrepid.(5) 4.8 Second Supplemental Indenture, dated May 8, 2001, by and among Mutual Group, Ltd., the Registrant and The Chase Manhattan Bank, as Trustee.(5) 10.1 1991 Long Term Incentive Plan.(6)(7) 10.2 Form of Director's Stock Option Grant Agreement.(6)(7) 10.3 Form of Non-Qualified Stock Option Grant Agreement.(6)(7) 10.4 Form of Shareholders Agreement relating to the IPC Program.(1) 10.5 Agreement between Mutual Risk Management (Bermuda) Ltd. and Robert A. Mulderig relating to Hemisphere Trust Company Limited. (8) 10.6 Directors Deferred Cash Compensation Plan.(7)(4) 10.7 Directors Restricted Stock Plan.(7)(4) 10.8 Deferred Compensation Plan.(9) 10.9 1998 Long Term Incentive Plan.(9) 10.10 Credit Agreement Dated as of September 21, 2000 among Mutual Risk Management Ltd., Mutual Group Ltd. and Lenders party thereto and Bank of America, N.A. as agent.(10) -32- Exhbit No. Description - -------------------------------------------------------------------------------- 10.11 Securities Purchase Agreement for Debentures, dated May 8, 2001, between the Registrant, Mutual Group, Ltd., the additional Guarantors named therein, XL, First Union, High Ridge, Century Capital II, Robert A. Mulderig, Taracay and Intrepid.(5) 10.12 Debenture Registration Rights Agreement, dated as of May 17, 2001, by and among the Registrant, XL, First Union, High Ridge, Century Capital II, Robert A. Mulderig, Taracay and Intrepid.(5) 10.13 Warrant Registration Rights Agreement, dated as of May 17, 2001, by and among the Registrant, XL, First Union, High Ridge, Century Capital II and Taracay.(5) 10.14 Subordination Agreement, dated May 17, 2001, by and among the Bank Lenders (as defined therein), Intrepid, MRM Capital Trust I, The Chase Manhattan Bank, the Registrant, Mutual Group, Ltd., the Guarantors named therein, XL, First Union, High Ridge, Century Capital II, Robert A. Mulderig and Taracay.(5) 10.15 Collateral Agreement, dated as of May 17, 2001, by and between First Union National Bank, as Collateral Agent, and the Registrant.(5) 10.16 Amendment No. 1 to Remarketing and Contingent Purchase Agreement, dated May 8, 2001, by and among Mutual Group, Ltd., the Registrant, MRM Capital Trust I and Banc of America Securities LLC, as Remarketing Agent.(5) 10.17 First Amendment to Credit Agreement, Consent and Waiver, dated May 17, 2001, among the Registrant, Mutual Group, Ltd., the Lenders (as defined therein) and Bank of America, N.A., as Administrative Agent for the Lenders ("First Amendment to Credit Agreement").(5) 10.18 Assignment of Account, dated May 17, 2001, from the Registrant, as Assignor, for the benefit of the holders of the Debentures (first priority security interest) and the RHINOS Holders (as defined therein) and Bank of America, N.A., as Administrative Agent for the Lenders under the First Amendment to Credit Agreement (second priority security interest).(5) 10.19 Deposit Account Control Agreement, dated May 17, 2001, among the Registrant, as Pledgor, XL, as Representative, Bank of America, N.A., as Administrative Agent, and Intrepid, as RHINOS Holder, with Fleet National Bank, as Depository Bank.(5) 10.20 Waiver and Amendment, dated as of January 11, 2002, to Registrant's Convertible Exchangeable Debenture Due 2006, among the Registrant, Mutual Group, Ltd., MGL Investments Ltd., Legion Financial Corporation, Mutual Risk Management (Holdings) Ltd., MRM Securities Ltd., Mutual Finance Ltd. and XL Insurance (Bermuda) Ltd.(3) -33- Exhibit No. Description - -------------------------------------------------------------------------------- 10.21 Waiver and Amendment to Credit Agreement, dated as of January 14, 2002, among the Registrant, Mutual Group, Ltd., MGL Investments Ltd., Legion Financial Corporation, Mutual Risk Management (Holdings) Ltd., MRM Securities Ltd., Mutual Finance Ltd., MRM Services Ltd., MSL (US) Ltd., MRM Services (Barbados) Ltd., the Lenders under its $180 million bank facility and Bank of America, N.A., as Administrative Agent for the Lenders.(3) 10.22 Waiver, dated as of January 14, 2002, among the Registrant, Mutual Finance Ltd., Mutual Indemnity Ltd., Mutual Indemnity (US) Ltd., Mutual Indemnity (Bermuda) Ltd., Mutual Indemnity (Dublin) Ltd., Mutual Indemnity (Barbados) Ltd., MRM Services Ltd., MSL (US) Ltd., MRM Services (Barbados) Ltd., the Lenders under its Letter of Credit and Reimbursement Agreement and Bank of America, N.A., as the Administrative Agent for the Lenders.(3) 10.23 Stock Purchase Agreement by and among MGL Investments, LLC, MRM Financial Services Ltd., Other Stockholders of Hemisphere Management Limited, and The BISYS Group, Inc., dated March 7, 2002, relating to the Hemisphere group of companies. 10.24 Consent Under Credit Agreement, dated March 7, 2002, among the Registrant, Mutual Group, Ltd., MGL Investments LLC, Legion Financial Corporation, Mutual Risk Management (Holdings Ltd., MRM Securities Ltd., Mutual Finance Ltd., MRM Services Ltd., MSL (US) Ltd. and MRM Services (Barbados) Ltd., as Guarantors, the Lenders (as defined therein) and Bank of America, N.A. as Administrative Agent. 10.25 Consent and Amendment to Debentures, dated March 7, 2002, among the Registrant, Mutual Group, Ltd., MGL Investments LLC, Legion Financial Corporation, Mutual Risk Management (Holdings Ltd., MRM Securities Ltd., Mutual Finance Ltd., MRM Services Ltd., MSL (US) Ltd. and MRM Services (Barbados) Ltd., as Guarantors, and XL Insurance (Bermuda) Ltd. 10.26 Consent Under Letter of Credit and Reimbursement Agreement, dated March 7, 2002, among Mutual Finance Ltd., as Applicant, Mutual Indemnity Ltd., Mutual Indemnity (U.S.) Ltd., Mutual Indemnity (Bermuda) Ltd., Mutual Indemnity (Dublin) Limited, and Mutual Indemnity (Barbados) Ltd., as Co-Obligors, the Registrant, MRM Services Ltd., MSL (US) Ltd. and MRM Services (Barbados) Ltd., as Guarantors, the Lenders (as defined therein) and Bank of America, N.A. as Administrative Agent. 10.27 Pennsylvania Rehabilitation Orders.* 10.28 Letter, dated March 12, 2002, to the Registrant from the Bermuda Monetary Authority, Supervisor of Insurance. 10.29 Employment Agreement, dated October 2001, between Legion Insurance Company and Doug Boyce.* 12.1 Computation of Ratio of Earnings to Fixed Charges.* 21.1 List of subsidiaries. 23.1 Consent and Reports of Ernst & Young.* -34- Exhibit No. Description - -------------------------------------------------------------------------------- 24 Powers of Attorney. (1) Incorporated by reference to Form S-1 Registration Statement (No. 33-40152) of Mutual Risk Management Ltd. declared effective June 25, 1991. (2) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for the period ended June 30, 1996. (3) Incorporated by reference to Form 8-K of Mutual Risk Management Ltd. filed on January 17, 2002. (4) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual Risk Management Ltd. (5) Incorporated by reference to Form 8-K of Mutual Risk Management Ltd. filed on May 25, 2001. (6) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual Risk Management Ltd. (7) This exhibit is a management contract or compensatory plan or arrangement. (8) Incorporated by reference to 1996 Annual Report on Form 10-K of Mutual Risk Management Ltd. (9) Incorporated by reference to 1998 Annual Report on Form 10-K of Mutual Risk Management Ltd. (10) Incorporated by reference to 2000 Annual Report on Form 10-K of Mutual Risk Management Ltd. * In accordance with Rule 12b-25, these exhibits will be filed with Amendment No. 1 to this Form 10-K. -35- B. Financial Statements and Financial Statement Schedules Information required for this item is the subject of a Form 12b-25 filed with the Securities and Exchange Commission on April 1, 2002 and such information will be filed at a later date pursuant to an amendment to this Form 10-K. C. Reports on Form 8-K The registrant filed a report the following reports on Form 8-K: [UPDATE if any additional 8-Ks are filed] 1. On November 29, 2001 announcing (i) the receipt of a waiver from the holders of its 9 3/8% debentures and (ii) its expectation of receiving a waiver from the lenders under its $180 million bank facility, each relating to breaches by the Company of certain covenants under the respective governing agreements; 2. On December 12, 2001 announcing (i) an addition to its reserves and (ii) its intention to promptly file a shelf registration statement; 3. On January 17, 2002 (i) attaching waivers of the Company's breach of certain covenants under its 9 3/8% debentures, bank facility and credit and reimbursement agreement; (ii) announcing the appointment of James C. Kelly as interim Chief Financial Officer and (iii) announcing the designation of Angus H. Ayliffe as principal accounting officer; and 4. On March 8, 2002, announcing (i) the signing of a definitive agreement to sell Hemisphere Management to The BISYS Group Inc., (ii) the resignation of Messers A. Wellford Tabor, K. Bruce Connell and Mr. Michael P. Esposito. and Ms. Fiona E. Luck, directors appointed by its 9 3/8% debenture holders, as directors, and the resignation of Mr. William Galtney, Jr. as director; and (iii) the retention of Greenhill & Co., LLC to assist in developing a restructuring of its balance sheet. -36- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto, duly authorized, in Hamilton, Bermuda, on April 1, 2002. MUTUAL RISK MANAGEMENT, LTD. By: /s/ Robert A. Mulderig ------------------------------------ Robert A. Mulderig Chairman and Chief Executive Officer 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 --------- ----- ---- /s/ Robert A. Mulderig Chairman and Chief Executive Officer April 1, 2002 - ---------------------- (Principal Executive Officer) Robert A. Mulderig /s/ John Kessock Jr. President and Director April 1, 2002 - ---------------------- (Authorized U.S. Representative) John Kessock Jr. /s/ Richard G. Turner Executive Vice President and Director April 1, 2002 - ---------------------- Richard G. Turner /s/ Glenn R. Partridge Executive Vice President and Director April 1, 2002 - ---------------------- Glenn R. Partridge /s/ Angus H. Ayliffe Chief Financial Officer and Controller April 1, 2002 - ---------------------- (Principal Accounting and Financial Angus H. Ayliffe Officer) /s/ Roger E. Dailey Director April 1, 2002 - ---------------------- Roger E. Dailey /s/ David J. Doyle Director April 1, 2002 - ---------------------- David J. Doyle /s/ Arthur E. Engel Director April 1, 2002 - ---------------------- Arthur E. Engel -37- Signature Title Date --------- ----- ---- /s/ Jerry S. Rosenbloom Director April 1, 2002 - ----------------------- Jerry S. Rosenbloom /s/ Norman L. Rosenthal Director April 1, 2002 - ----------------------- Norman L. Rosenthal /s/ Joseph D. Sargent Director April 1, 2002 - ----------------------- Joseph D. Sargent -38- EX-10.23 3 dex1023.txt STOCK PURCHASE AGREEMENT Exhibit 10.23 EXECUTION COPY ================================================================================ STOCK PURCHASE AGREEMENT By and Among MGL INVESTMENTS, LLC, MRM FINANCIAL SERVICES LTD., OTHER STOCKHOLDERS OF HEMISPHERE MANAGEMENT LIMITED, and THE BISYS GROUP, INC. Dated as of March 7, 2002 Relating to the Hemisphere Group of Companies ================================================================================ TABLE OF CONTENTS -----------------
PAGE ARTICLE I DEFINITIONS...............................................................................2 1.1 Definitions...................................................................................2 1.2 Interpretation................................................................................9 ARTICLE II SALE AND PURCHASE OF SHARES..............................................................10 2.1 Sale and Purchase............................................................................10 2.2 Payment for the Initial Shares...............................................................10 2.3 Allocation of Purchase Price.................................................................11 2.4 Allocation of Expenses.......................................................................11 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS................................................12 3.1 Due Incorporation; Subsidiaries..............................................................12 3.2 Due Authorization............................................................................12 3.3 Consents and Approvals; No Conflict; Releases................................................13 3.4 Capitalization...............................................................................14 3.5 Financial Statements; Undisclosed Liabilities................................................14 3.6 No Adverse Effects or Changes................................................................15 3.7 Title to and Sufficiency of Assets...........................................................16 3.8 Condition of Assets..........................................................................17 3.9 Real Property................................................................................17 3.10 Accounts Receivable; Advances................................................................17 3.11 Intellectual Property........................................................................17 3.12 Contracts....................................................................................19 3.13 Permits......................................................................................20 3.14 Employee Benefit Plans and Employment Agreements.............................................20 3.15 Employment and Labor Matters.................................................................22 3.16 Taxes........................................................................................23 3.17 Compliance with Law..........................................................................25 3.18 Money Laundering.............................................................................25 3.19 Litigation...................................................................................26 3.20 Bank Accounts................................................................................26
-i- TABLE OF CONTENTS ----------------- (continued)
PAGE 3.21 Customers....................................................................................26 3.22 Insurance....................................................................................27 3.23 Fairness Opinion.............................................................................27 3.24 Net Asset Value Calculations.................................................................27 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER..............................................27 4.1 Due Incorporation............................................................................27 4.2 Due Authorization............................................................................27 4.3 Consents and Approvals; No Conflict..........................................................28 4.4 Litigation...................................................................................28 4.5 Financing....................................................................................28 4.6 Purchase for Investment......................................................................29 ARTICLE V COVENANTS................................................................................29 5.1 Implementing Agreement.......................................................................29 5.2 Access to Information and Facilities.........................................................29 5.3 Preservation of Business.....................................................................29 5.4 Consents and Approvals.......................................................................31 5.5 Resignation of Officers and Directors........................................................32 5.6 Trademarks...................................................................................32 5.7 Intercompany Payables and Receivables........................................................33 5.8 Brokers......................................................................................33 5.9 Preservation of Books and Records; Access....................................................33 5.10 Employees; Employee Benefit Plans............................................................34 5.11 MRM Guaranties...............................................................................35 5.12 Old Irish Lease..............................................................................36 5.13 Interim Financial Statements.................................................................36 5.14 Non-Competition..............................................................................36 5.15 Use of Hemisphere Name.......................................................................37 5.16 Negotiation With Others......................................................................37 5.17 Indemnity Agreement..........................................................................38
-ii- TABLE OF CONTENTS ----------------- (continued)
PAGE 5.18 Remaining Shares.............................................................................38 5.19 Acceleration of Vesting of Remaining Shares; Forfeiture of Remaining Shares..................38 5.20 Certain Releases of Remaining Shares to Purchaser Under Stock Escrow Agreement...............39 ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER.........................................39 6.1 Warranties True as of Both Present Date and Closing Date.....................................39 6.2 Compliance with Agreements and Covenants.....................................................39 6.3 Certificate of Compliance....................................................................39 6.4 Consents and Approvals.......................................................................39 6.5 Actions or Proceedings.......................................................................40 6.6 Opinion of Counsel...........................................................................40 6.7 Material Adverse Effect......................................................................40 6.8 Insolvency...................................................................................40 6.9 MRM Escrow Agreement.........................................................................40 ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS...........................................40 7.1 Warranties True as of Both Present Date and Closing Date.....................................40 7.2 Compliance with Agreements and Covenants.....................................................41 7.3 Certificate of Compliance....................................................................41 7.4 Consents and Approvals.......................................................................41 7.5 Actions or Proceedings.......................................................................41 7.6 Opinion of Counsel...........................................................................41 7.7 MRM Escrow Agreement.........................................................................41 ARTICLE VIII CLOSINGS.................................................................................41 8.1 Closing......................................................................................41 8.2 Certain Deliveries by Sellers................................................................41 8.3 Certain Deliveries by Purchaser..............................................................43 8.4 Second Closing...............................................................................43 8.5 No Second Closing............................................................................46
-iii- TABLE OF CONTENTS ----------------- (continued)
PAGE ARTICLE IX TERMINATION..............................................................................47 9.1 Termination..................................................................................47 9.2 Effect of Termination........................................................................48 ARTICLE X INDEMNIFICATION..........................................................................48 10.1 Survival.....................................................................................48 10.2 Indemnification by Seller....................................................................48 10.3 Indemnification by Purchaser.................................................................49 10.4 Limitations on Liability of Sellers..........................................................49 10.5 Claims.......................................................................................51 10.6 Notice of Third Party Claims; Assumption of Defense..........................................51 10.7 Settlement or Compromise.....................................................................52 10.8 Time Limits..................................................................................52 10.9 Net Losses and Subrogation...................................................................52 10.10 Purchase Price Adjustments...................................................................53 10.11 Role of Seller Representative................................................................53 ARTICLE XI MISCELLANEOUS............................................................................53 11.1 Expenses.....................................................................................53 11.2 Amendment....................................................................................53 11.3 Notices......................................................................................53 11.4 Disbursements and Payments in Dollars........................................................55 11.5 Waivers......................................................................................55 11.6 Assignment...................................................................................55 11.7 No Third Party Beneficiaries.................................................................56 11.8 Publicity....................................................................................56 11.9 Further Assurances...........................................................................56 11.10 Severability.................................................................................56 11.11 Entire Understanding.........................................................................56 11.12 Language.....................................................................................57 11.13 Applicable Law...............................................................................57
-iv- TABLE OF CONTENTS ----------------- (continued)
PAGE 11.14 Jurisdiction of Disputes; Waiver of Jury Trial...............................................57 11.15 Schedules....................................................................................58 11.16 Disclaimer of Warranties.....................................................................58 11.17 Seller Representative........................................................................59 11.18 Management Stockholder Representative........................................................60 11.19 Counterparts.................................................................................61 ARTICLE XII TAX MATTERS..............................................................................61 12.1 Filing of Tax Returns........................................................................61 12.2 Proration of Taxes...........................................................................61 12.3 Cooperation on Tax Matters...................................................................61 12.4 Refunds......................................................................................62 12.5 Section 338(g) Elections.....................................................................62
-v- TABLE OF CONTENTS ----------------- (continued) SCHEDULES Schedule 1 Management Stockholders Schedule 1.1A Financial Statements Schedule 1.1B Other Stockholders Schedule 1.1C Percentages Schedule 1.1D Seller's Knowledge Schedule 2.3 Purchase Price Allocation Schedule 3.1(b) Jurisdiction; Foreign Qualification Schedule 3.1(c) Equity Investments by Companies Schedule 3.3(a) Consents and Approvals Schedule 3.3(b) No Conflict Schedule 3.4 Capitalization Schedule 3.5 Financial Statements; Undisclosed Liabilities Schedule 3.6 Adverse Effects or Changes Schedule 3.7 Title to Properties Schedule 3.8 Condition of Assets Schedule 3.9 Real Property Leases Schedule 3.10(a) Accounts Receivable Schedule 3.10(b) Loans and Advances Schedule 3.11(a) Intellectual Property Schedule 3.11(b) Proprietary Software and Licensed Software Schedule 3.11(e) Software Contracts Violations Schedule 3.12 Contracts Schedule 3.13 Permits Schedule 3.14 Employee Benefit Plans and Employment Agreements Schedule 3.15 Employment and Labor Matters Schedule 3.15(c) Significant Employees Schedule 3.15(d) OSHA Schedule 3.16 Taxes Schedule 3.17 Compliance with Law Schedule 3.18 Money Laundering Schedule 3.19 Litigation Schedule 3.20 Bank Accounts Schedule 3.21 Customers Schedule 3.22 Insurance Schedule 3.24 Net Asset Value Calculations Schedule 4.3 Consents and Approvals; No Conflict Schedule 4.5 Financing Schedule 5.3 Preservation of Business Schedule 5.11 MRM Guaranties Schedule 5.17 Indemnity Agreements -vi- TABLE OF CONTENTS ----------------- (continued) EXHIBITS Exhibit A Form of MRM Escrow Agreement Exhibit B Form of Opinion of Counsel to MRM Sellers Exhibit C Form of Opinion of Counsel to Purchaser Exhibit D Form of Indemnity Agreement -vii- STOCK PURCHASE AGREEMENT ------------------------ THIS STOCK PURCHASE AGREEMENT is made as of the 7th day of March, 2002 by and among MGL Investments, LLC, a Delaware limited liability company (the "US -- Holding Company"), MRM Financial Services Ltd., a Bermuda company (the "Non-US - --------------- ------ Holding Company"; the US Holding Company and the Non-US Holding Company being - --------------- each an "MRM Seller" and collectively the "MRM Sellers"), the Persons listed on ---------- ----------- Schedule 1 (the "Management Stockholders"; the MRM Sellers and the Management - ---------- ----------------------- Stockholders being each a "Seller" and collectively the "Sellers"), and The ------ ------- BISYS Group, Inc., a Delaware corporation (the "Purchaser"). Certain terms used --------- herein are defined in Article I. --------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the US Holding Company is the sole member of, and owns all of the limited liability company interests in, Hemisphere Financial Services LLC, a Delaware limited liability company ("Hemisphere-Boston"), and Hemisphere ----------------- Financial Group LLC, a Delaware limited liability company ("Hemisphere-NY"; ------------- Hemisphere-Boston and Hemisphere-NY being each a "US Company" and collectively ---------- the "US Companies"); ------------ WHEREAS, the Non-US Holding Company and the Management Stockholders collectively own all of the outstanding capital stock of Hemisphere Management Limited, a Bermuda company ("Hemisphere-Bermuda"); ------------------ WHEREAS, the Non-US Holding Company owns all of the outstanding capital stock of Hemisphere Management (Ireland) Limited, an Ireland company ("Hemisphere-Ireland"; the US Companies, Hemisphere-Bermuda and ------------------ Hemisphere-Ireland being each a "Target Company" and collectively the "Target -------------- ------ Companies"); - --------- WHEREAS, Purchaser wishes to purchase from each Seller, and each Seller wishes to sell to Purchaser, all of the issued and outstanding capital stock or limited liability company interests in each Target Company which are owned by such Seller, upon the terms and subject to the conditions contained herein; WHEREAS, simultaneously with the execution of this Agreement, (i) the MRM Sellers, Mutual Risk Management Ltd., a Bermuda company ("MRM"), the Management --- Stockholders and the Escrow Agent (as defined herein) are entering into an escrow agreement (the "Management Escrow Agreement"), (ii) Purchaser, the Other --------------------------- Stockholders (as defined herein) and the Escrow Agent are entering into an escrow agreement (the "Stock Escrow Agreement"), (iii) each of the Management ---------------------- Stockholders is entering into an agreement and release with the US Holding Company, the Non-US Holding Company and Hemisphere-Bermuda (the "Agreement and ------------- Release"), (iv) each of the Other Stockholders is granting an irrevocable proxy - ------- to certain officers of Purchaser and (v) each of the individuals listed in Schedule 5.17 is entering into an amendment to an indemnity agreement with MRM - ------------- (the "Amendment to Indemnity Agreement"); and -------------------------------- WHEREAS, simultaneously with the execution of this Agreement, the certificates (the "Certificates") evidencing the Remaining Shares (as defined ------------ herein), which certificates shall be duly endorsed in blank without date or accompanied by duly executed and undated stock powers or stock transfer forms, or other duly executed instruments of conveyance sufficient to validly transfer the Remaining Shares to Purchaser, shall be delivered to Appleby, Spurling & Kempe, to be deposited by them with the Escrow Agent to be held and disbursed pursuant to the Stock Escrow Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements herein contained, Purchaser and Sellers agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. The following terms shall have the following meanings for ----------- the purposes of this Agreement: "Accounts Receivable" shall have the meaning set forth in Section 3.10. ------------ "Acquisition Transaction" shall have the meaning set forth in Section 5.16. ------------ "Affiliate" shall mean, with respect to any specified Person, any other Person which, directly or indirectly, controls, is under common control with, or is controlled by, such specified Person; provided that none of XL Capital Ltd, -------- its subsidiaries or affiliates, or any of their respective officers or directors shall be deemed to be an Affiliate of MRM, the MRM Sellers or any Company. The term "control" as used in the preceding sentence means, with respect to a ------- corporation, the right to exercise, directly or indirectly, more than 50% of the voting rights attributable to the shares of such corporation, or with respect to any Person other than a corporation, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person. "Agreement" shall mean this Stock Purchase Agreement, including all Exhibits and Schedules hereto, as it may be amended, modified or supplemented from time to time in accordance with its terms. "Agreement and Release" shall have the meaning set forth in the fifth recital to this Agreement. "Amendment to Indemnity Agreement" shall have the meaning set forth in the fifth recital to this Agreement. "Benefit Plans" shall have the meaning set forth in Section 3.14(b). --------------- -2- "Business" shall mean the business presently conducted by the Companies of providing fund administration, securities services and corporate secretarial services for mutual funds and investment companies. "Business Day" shall mean any day of the year other than (i) any Saturday or Sunday or (ii) any other day on which banks located in Hamilton, Bermuda or New York, New York generally are closed for business. "Certificates" shall have the meaning set forth in the sixth recital to this Agreement. "Closing" shall mean the consummation of the transactions contemplated herein in accordance with Article VIII (other than the consummation of the ------------ transactions contemplated herein in accordance with Section 8.4). ----------- "Closing Amount" shall have the meaning set forth in Section 2.2. ----------- "Closing Date" shall mean the date on which the Closing occurs or is to occur. "Code" shall mean the United States Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder. "Companies" shall mean the US Companies and the Non-US Companies. "Company" shall mean any of the Companies. "Company Intellectual Property" shall mean all Intellectual Property used by the Companies in the conduct of the Business, including the Registered Intellectual Property. "Consents" shall mean (i) the Consent Under Credit Agreement, dated as of March 7, 2002, among the Borrowers, the Guarantors, the Lenders and the Administrative Agent (each as defined therein) and (ii) the Consent and Amendment to Debentures, dated as of March 7, 2002, among MRM, the Guarantors (as defined therein) and XL Insurance (Bermuda) Ltd. "Continuing Employees" shall have the meaning set forth in Section 5.10(b). --------------- "Contract" shall mean any contract, lease, sales order, purchase order, agreement, indenture, mortgage, guaranty, promissory note, warrant or instrument, whether in writing or oral. "Credit Agreement" shall mean the Credit Agreement dated as of September 21, 2000 among Bank of America, N.A., as administrative agent, and the borrowers, guarantors and lenders named therein. "Debentures" shall mean MRM's 9-3/8% Convertible Exchangeable Debentures due 2006. -3- "Dollars" or numbers preceded by the symbol "$" shall mean amounts in United States Dollars. "Enforceability Limitations" shall have the meaning set forth in Section ------- 3.2. - --- "Equity Interest" shall mean any share of capital stock, limited liability company interest, partnership interest or other equity interest in any Person. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any corporation, trade or business which, together with either US Company, is a member of a controlled group of corporations or a group of trades or businesses under common control within the meaning of section 414 of the Code. "Escrow Agent" shall mean The Bank of New York. "Financial Statements" shall mean the unaudited combined financial statements of the Companies as of December 31, 2000 and December 31, 2001 (which do not include any notes thereto), which are included in Schedule 1.1A, ------------- consisting of the balance sheet at such dates and the related statements of earnings and retained earnings and cash flows for the fiscal years then ended. "Governmental Authority" shall mean the government of the United States or any foreign country or any state or political subdivision thereof or any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any quasi-governmental entity established to perform such functions. "Hemisphere-Bermuda" shall have the meaning set forth in the second recital to this Agreement. "Hemisphere-Bermuda Holdings" shall mean Hemisphere Holdings Limited, a Bermuda company and a wholly owned subsidiary of Hemisphere-Bermuda. "Hemisphere-Boston" shall have the meaning set forth in the first recital to this Agreement. "Hemisphere-BVI" shall mean Hemisphere Management (B.V.I.) Ltd., a British Virgin Islands company and a wholly owned subsidiary of Hemisphere-Bermuda. "Hemisphere-Cayman" shall mean Hemisphere Fund Managers Limited, a Cayman Islands company and a wholly owned subsidiary of Hemisphere-Bermuda. "Hemisphere-Ireland" shall have the meaning set forth in the third recital to this Agreement. -4- "Hemisphere-NY" shall have the meaning set forth in the first recital to this Agreement. "Hemisphere Trust" shall have the meaning set forth in Section 5.15. ------------ "Indemnified Person" shall mean the Person or Persons entitled to, or claiming a right to, indemnification under Article X. --------- "Indemnifying Person" shall mean the Person or Persons claimed by the Indemnified Person to be obligated to provide indemnification under Article X. --------- "Initial Shares" shall mean all Shares excluding the Remaining Shares. "Instruction Letter" shall have the meaning set forth in Section 2.2. ----------- "Intellectual Property" shall mean (i) United States and foreign patents (including continuations, continuations-in-part, divisions, reissues and re-examinations thereof) and patent applications; (ii) registered and unregistered trade names, trademarks, service names and service marks (and applications for registration of the same); (iii) copyrights (whether or not registered) and copyright registrations (and applications for the same); and (iv) rights in any of the following: data files, inventions, know-how, trade secrets and domain names. "Irish Plan" shall have the meaning set forth in Section 3.14(c)(i). ------------------ "Law" shall mean any law, statute, regulation, ordinance, rule, order, decree or governmental requirement enacted, promulgated or imposed by any Governmental Authority. "Leased Real Property" shall have the meaning set forth in Section 3.9(a). -------------- "Licensed Software" shall mean all computer software in which a third party grants to any of the Companies a license for use in the Business. "Lien" shall mean any lien, mortgage, pledge, adverse claim, security interest or other encumbrance. "Loss" or "Losses" shall mean any and all losses, liabilities, costs, claims, damages and expenses, including reasonable attorneys', accountants' and experts' fees and expenses. "Major Customer" shall have the meaning set forth in Section 3.21(a). --------------- "Management Escrow Agreement" shall have the meaning set forth in the fifth recital to this Agreement. "Management Stockholder Representative" shall mean either Thomas Healy or Marty Brandt, acting alone. -5- "Management Stockholders" shall have the meaning set forth in the preamble to this Agreement. "Material Adverse Effect" shall mean an effect on the business or financial condition of the Companies as a whole which is material and adverse, excluding (i) changes in the economy of the United States or any other country, or (ii) matters that result from general industry-wide developments. "MRM" shall have the meaning set forth in the fifth recital to this Agreement. "MRM Escrow Agreement" shall mean an escrow agreement among Purchaser, the MRM Sellers and the Escrow Agent, to be entered into at the Closing, in the form attached hereto as Exhibit A. --------- "MRM Escrow Amount" shall have the meaning set forth in Section 2.2(c). -------------- "MRM 401(k) Plan" shall have the meaning set forth in Section 5.10(c). --------------- "MRM Guaranties" shall have the meaning set forth in Section 5.11. ------------ "MRM Sellers" shall have the meaning set forth in the preamble to this Agreement. "Non-Competition Period" shall have the meaning set forth in Section 5.14. ------------ "Non-US Companies" shall mean Hemisphere-Bermuda, Hemisphere-Bermuda Holdings, Hemisphere-Cayman, Hemisphere-BVI and Hemisphere-Ireland. "Non-US Holding Company" shall have the meaning set forth in the preamble to this Agreement. "Old Irish Lease" shall have the meaning set forth in Section 5.12. ------------ "OSHA" shall have the meaning set forth in Section 3.15(d). --------------- "OSHA Act" shall have the meaning set forth in Section 3.15(d). --------------- "Other Stockholders" shall mean those Management Stockholders listed on Schedule 1.1B. - ------------- "Owned Source Codes" shall have the meaning set forth in Section 3.11(c). --------------- "Percentage" shall mean, with respect to the MRM Sellers, the percentage set forth opposite such MRM Seller's name on Schedule 1.1C. ------------- "Permit" shall mean any permit, license, approval or other authorization required or granted by any Governmental Authority. -6- "Permitted Liens" shall mean (i) Liens for Taxes that are not yet delinquent or that are being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with US GAAP; (ii) workers', mechanics', materialmen's, repairmen's, suppliers', carriers' or similar Liens arising in the ordinary course of business with respect to obligations that are not yet delinquent or that are not material and are being contested in good faith by appropriate proceedings; (iii) Liens encumbering the landlord's interest in the Leased Real Property; (iv) covenants, zoning restrictions, easements, licenses, or other restrictions on the use of real property or other minor irregularities in title (including leasehold title) thereto, so long as the same do not materially impair the use of such real property, leases or leasehold estates; (v) any immaterial Liens which do not materially impair the value of the property subject to such Lien or the use of such property in the conduct of the Business; and (vi) those Liens set forth in Schedule 3.7 and designated as "Permitted Liens", but not including any liens, - ------------ security interests or pledges held by any lender as security for borrowed money or for any guaranty of the obligations of any party. "Person" shall mean any individual, corporation, company, proprietorship, firm, partnership, limited partnership, limited liability company, trust, association or other entity. "Pre-Closing Tax Period" shall mean any Tax period ending on or before the close of business on the Closing Date or, in the case of any Tax period which includes, but does not end on, the Closing Date, the portion of such period up to and including the Closing Date. "Proprietary Software" shall mean all computer software in which any of the Companies owns the intellectual property, including all source codes and object codes. "Purchase Price" shall mean the sum of the amounts payable by Purchaser pursuant to Sections 2.2(a), (b), (c) and (d) and Section 8.4(b). --------------- --- --- --- -------------- "Purchaser" shall have the meaning set forth in the preamble to this Agreement. "Purchaser's Benefit Plans" shall have the meaning set forth in Section ------- 5.10(b). - ------- "Purchaser's 401(k) Plan" shall have the meaning set forth in Section ------- 5.10(c). - ------- "Real Property Leases" shall have the meaning set forth in Section 3.9(a). -------------- "Registered Intellectual Property" shall mean all patents, copyrights, domain names, trade names and trade marks that have been registered, or for which application for registration has been made, in the name of any of the Companies as the owner in the United States Patent and Trademark Office or similar Governmental Authority in any foreign country. "Related Agreement" shall mean any Contract that is or is to be entered into at the Closing or otherwise pursuant to this Agreement. The Related Agreements -7- executed by a specified Person shall be referred to as "such Person's Related Agreements," "its Related Agreements" or another similar expression. "Remaining Shares" shall mean the 21,700 shares of capital stock of Hemisphere-Bermuda held of record by the Other Stockholders. "Second Closing" shall have the meaning set forth in Section 2.1. ----------- "Second Closing Date" shall have the meaning set forth in Section 8.4(a). -------------- "Section 338(g) Election" shall have the meaning set forth in Section 12.5. ------------ "Sellers" shall have the meaning set forth in the preamble to this Agreement. "Seller's knowledge", or any similar expression with regard to the knowledge or awareness of or receipt of notice by any Seller or any Company, means the actual, direct and personal knowledge of any of the Persons listed in Schedule 1.1D or the knowledge that any of such Persons would have after - ------------- reasonable due inquiry. "Seller Representative" shall mean the Non-US Holding Company. "Shared Expenses" shall have the meaning set forth in Section 11.1. ------------ "Shares" shall mean, collectively, the shares of capital stock and limited liability company interests in the Target Companies held of record by Sellers as set forth in Schedule 3.4. ------------ "Software" shall mean the Licensed Software and the Proprietary Software. "Software Contracts" shall have the meaning set forth in Section 3.11(e). --------------- "Specified Parties" shall have the meaning set forth in Section 5.16. ------------ "Stock Escrow Agreement" shall have the meaning set forth in the fifth recital to this Agreement. "Target Companies" shall have the meaning set forth in the third recital to this Agreement. "Taxes" shall mean all taxes, charges, fees, duties, levies or other assessments (including income, gross receipts, net proceeds, ad valorem, turnover, real and personal property (tangible and intangible), sales, use, franchise, excise, goods and services, value added, stamp, user, transfer, fuel, excess profits, occupational, interest equalization, windfall profits, severance, payroll, unemployment and Social Security or similar taxes) which are imposed by any Governmental Authority, and such term shall include any interest, penalties or additions to tax attributable thereto. "Tax Return" shall mean any report, return or other information required to be supplied to a Governmental Authority in connection with any Taxes. -8- "Tax Statute of Limitations Date" shall mean the close of business on the 45th day after the expiration of the applicable statute of limitations with respect to Taxes, including any extensions thereof (or if such date is not a Business Day, the next Business Day). "Tax Warranty" shall mean a representation or warranty in Section 3.16. ------------ "Title and Authorization Warranty" shall mean a representation or warranty in Section 3.1(a), 3.2, 3.4, 4.1, 4.2 or 4.6. -------------- --- --- --- --- --- "US Benefit Plan" shall have the meaning set forth in Section 3.14(c)(ii). ------------------- "US Companies" shall have the meaning set forth in the first recital to this Agreement. "US Continuing Employees" shall have the meaning set forth in Section ------- 5.10(c). - ------- "US GAAP" shall mean United States generally accepted accounting principles, consistently applied, provided that, with respect to any matter as to which there is more than one generally accepted accounting principle, US GAAP shall mean the generally accepted accounting principle applied in the preparation of the Financial Statements. "US Holding Company" shall have the meaning set forth in the preamble to this Agreement. 1.2 Interpretation. The headings preceding the text of Articles and -------------- Sections included in this Agreement and the headings to Schedules attached to this Agreement are for convenience only and shall not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender or the singular or plural form of words herein shall not limit any provision of this Agreement. The use of the terms "including" or "include" shall in all cases herein mean "including, without limitation" or "include, without limitation," respectively. Reference to any Person includes such Person's successors and assigns to the extent such successors and assigns are permitted by the terms of any applicable agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually. Reference to any agreement (including this Agreement), document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof. Underscored references to Articles, Sections, paragraphs, clauses, Exhibits or Schedules shall refer to those portions of this Agreement. The use of the terms "hereunder," "hereof," "hereto" and words of similar import shall refer to this Agreement as a whole and not to any particular Article, Section, paragraph or clause of, or Exhibit or Schedule to, this Agreement. -9- ARTICLE II SALE AND PURCHASE OF SHARES 2.1 Sale and Purchase. Subject to the terms and conditions of this ----------------- Agreement, at the Closing, each Seller shall sell, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and acquire from such Seller and take assignment and delivery from such Seller of, the Initial Shares which are owned by such Seller, free and clear of all Liens (other than Liens for Taxes payable by Purchaser in connection with the transfer of the Initial Shares). Pursuant to Section 8.4 and subject to the terms of this Agreement, there shall be a second - ----------- closing (the "Second Closing"), at which each of the Other Stockholders shall -------------- sell, assign, transfer and deliver to Purchaser, and Purchaser shall purchase and acquire from such Other Stockholder and take assignment and delivery from such Other Stockholder of, the Remaining Shares which are owned by such Other Stockholder, free and clear of all Liens (other than Liens for Taxes payable by Purchaser in connection with the transfer of the Remaining Shares). 2.2 Payment for the Initial Shares. In consideration for the Initial ------------------------------ Shares, at the Closing, Purchaser shall pay an aggregate amount equal to One Hundred Twenty Six Million Six Hundred Thirty Four Thousand One Hundred Thirty Six Dollars ($126,634,136) (the "Closing Amount"), all of which shall be -------------- allocated and disbursed as follows: (a) The sum of (i) One Hundred Fourteen Million Six Hundred Thousand Dollars ($114,600,000), less (ii) Fifteen Million Dollars ---- ($15,000,000), plus (iii) eight and four-tenths percent (8.4%) of the ---- amount of Shared Expenses estimated pursuant to Section 2.4, shall be ----------- allocated and disbursed pursuant to the Instruction Letter. (b) The sum of (i) Twelve Million Thirty Four Thousand One Hundred Thirty Six Dollars ($12,034,136), less (ii) One Million Nine ---- Hundred Fifteen Thousand Dollars ($1,915,000), less (iii) eight and ---- four-tenths percent (8.4%) of the amount of Shared Expenses estimated pursuant to Section 2.4, shall be paid to the Management Stockholder ----------- Representative to be disbursed to the Management Stockholders. (c) Fifteen Million Dollars ($15,000,000) (the "MRM Escrow ---------- Amount") shall be paid to the Escrow Agent to be held and disbursed ------ pursuant to the MRM Escrow Agreement. The MRM Escrow Amount shall be used to satisfy any valid claims of Purchaser for indemnification by the MRM Sellers pursuant to Article X made on or before August 1, --------- 2002. Any portion of the MRM Escrow Amount that has not been so used shall be disbursed to the Seller Representative for disbursement to the MRM Sellers pro rata in accordance with their respective Percentages. In the event that any party has received a disbursement of any amount pursuant to the MRM Escrow Agreement to which it is not entitled pursuant to the -10- terms of this Agreement, such party shall (i) if another party is entitled to such amount at that time, pay such amount to such other party, or (ii) if no other party is entitled to such amount at that time, pay such amount to the Escrow Agent to be held and disbursed pursuant to the terms of the MRM Escrow Agreement. (d) One Million Nine Hundred Fifteen Thousand Dollars ($1,915,000) shall be paid to the Escrow Agent to be held and disbursed pursuant to the Management Escrow Agreement. For purposes of Section 2.2(a), "Instruction Letter" shall refer to a letter -------------- provided to Purchaser by the MRM Sellers in accordance with the notification provisions of Section 11.3, which letter shall attach the notice received ------------ pursuant to Section 1(d) of the Consents and direct Purchaser to make the payments of the amounts specified therein to the accounts identified therein and further instruct Purchaser to pay any balance to MRM Sellers as provided therein. The instructions contained in the Instruction Letter shall be consistent with the terms and conditions of the Consents. Purchaser shall be entitled to rely conclusively on the Instruction Letter as to payment or otherwise. The MRM Sellers agree that if Purchaser receives instructions from Bank of America, N.A., as collateral agent for the lenders party to the Credit Agreement and for the holders of the Debentures, inconsistent with the Instruction Letter, Purchaser shall be entitled to refrain from taking any action under this Agreement until it has received satisfactory confirmation that such dispute has been resolved. All payments made hereunder or pursuant to Section 8.4 shall be made in ----------- accordance with Section 11.4 and to such account or accounts as the receiving ------------ party shall designate in writing to the paying party. 2.3 Allocation of Purchase Price. Purchaser and Sellers agree to allocate ---------------------------- the Purchase Price among the Shares in accordance with Schedule 2.3. Purchaser ------------ and Sellers, in connection with their respective Tax Returns, shall not take any position inconsistent with such treatment and allocation. 2.4 Allocation of Expenses. At least three Business Days prior to the ---------------------- Closing, the MRM Sellers shall deliver to the Management Stockholders a statement providing an estimate of the Shared Expenses. The MRM Sellers shall furnish the Management Stockholders with such documents and other records as the Management Stockholders shall reasonably request in order to substantiate such estimate, and the Management Stockholders shall have the right to comment on, and consult with the MRM Sellers with respect to, such estimate. The Management Stockholders shall be liable to the MRM Sellers for, in the aggregate, 13.2% of the Shared Expenses estimated pursuant to this Section 2.4. The MRM Sellers ----------- shall promptly refund to the Management Stockholder Representative for disbursement to the Management Stockholders any overpayment of Shared Expenses. -11- ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLERS Each Seller represents and warrants to Purchaser as follows with respect to itself and each Company in which it directly or indirectly owns Equity Interests: 3.1 Due Incorporation; Subsidiaries. ------------------------------- (a) The US Holding Company is a limited liability company duly formed, validly existing and in good standing under the laws of the State of Delaware. The Non-US Holding Company is a company duly formed and validly existing under the laws of Bermuda. Each Management Stockholder is an individual person. Each MRM Seller is licensed or qualified to do business and is in good standing as a foreign company or limited liability company (as the case may be) in each jurisdiction where its ownership of Shares or its execution, delivery and performance of this Agreement and its Related Agreements and the consummation of the transactions contemplated hereby and thereby require such licensing or qualification and in which the failure to be so licensed or qualified would have a material adverse effect on such MRM Seller. (b) Each Company is a company or limited liability company duly organized or formed (as applicable), validly existing and, if applicable, in good standing under the laws of the jurisdiction set forth opposite its name in Schedule 3.1(b). Each Company is licensed --------------- or qualified to do business and is in good standing as a foreign company or limited liability company (as the case may be) in each jurisdiction where the nature of the Business conducted or properties owned, leased or operated by it require such licensing or qualification and in which the failure to be so licensed or qualified would have a Material Adverse Effect. Such jurisdictions are listed in Schedule 3.1(b). --------------- (c) Except as set forth in Schedule 3.1(c), no Company directly --------------- or indirectly owns any Equity Interest in any Person. (d) Complete copies of the organizational documents and the minutes from the last five years of each Company have been made available to Purchaser. 3.2 Due Authorization. Each MRM Seller has all requisite company or limited ----------------- liability company (as the case may be) power and authority to enter into this Agreement and its Related Agreements and to consummate the transactions contemplated hereby and thereby. Each Management Stockholder has the legal capacity to enter into this Agreement and its Related Agreements and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by each MRM Seller of this Agreement and its Related Agreements, and the consummation by -12- such MRM Seller of the transactions contemplated hereby and thereby, have been duly and validly approved by such MRM Seller and no other company or limited liability company (as the case may be) actions or proceedings on the part of such MRM Seller are necessary to authorize the execution, delivery and performance of this Agreement and its Related Agreements and the consummation of the transactions contemplated hereby and thereby. Each Seller has duly and validly executed and delivered this Agreement and has duly and validly executed and delivered (or prior to or at the Closing or the Second Closing will duly and validly execute and deliver) its Related Agreements. Assuming due authorization (in the case of parties which are not individuals), execution and delivery of this Agreement and its Related Agreements by the other parties hereto and thereto, this Agreement constitutes a legal, valid and binding obligation of each Seller, and each of such Seller's Related Agreements constitute (or upon execution and delivery by such Seller will constitute) legal, valid and binding obligations of such Seller, in each case, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in effect that affect the enforcement of creditors' rights generally and by equitable limitations on the availability of specific remedies and by principles of equity (collectively, "Enforceability Limitations"). -------------------------- 3.3 Consents and Approvals; No Conflict; Releases. --------------------------------------------- (a) Except as set forth in Schedule 3.3(a), no consent, --------------- authorization or approval of, or filing or registration with, (i) any Governmental Authority, (ii) any party to any Contract disclosed or required to be disclosed on a Schedule to this Agreement or (iii) any other party that, if not obtained, would cause a Material Adverse Effect or a material adverse effect on the ability of such Seller to consummate the transactions contemplated by this Agreement, is necessary in connection with the execution, delivery or performance by each Seller of this Agreement or any of its Related Agreements or the consummation by such Seller of the transactions contemplated hereby or thereby. (b) Except as set forth in Schedule 3.3(b), the execution, --------------- delivery and performance by each Seller of this Agreement and its Related Agreements, and the consummation by such Seller of the transactions contemplated hereby and thereby, do not and will not (i) violate any material Law applicable to or binding on such Seller or any Company or any of their respective assets; (ii) violate or conflict with, result in a breach or termination of, constitute a default or give any third party any additional right (including a termination right under a change-in-control provision or otherwise) under, permit cancellation of, result in the creation of any Lien upon any of the assets of such Seller or any Company under, or result in or constitute a circumstance which, with or without notice or lapse of time or both, would constitute any of the foregoing under, any material Contract to which such Seller or any Company is a party or by which such Seller or any Company or any of their respective assets are bound; (iii) permit the acceleration of the maturity of any indebtedness of such Seller or any -13- Company or indebtedness secured by their respective assets; or (iv) violate or conflict with any provision of any of the organizational documents of such Seller or of any Company. (c) The MRM Sellers have received from each of the Management Stockholders a duly executed Agreement and Release, copies of which have been delivered to Purchaser. 3.4 Capitalization. -------------- (a) The authorized and outstanding Equity Interests of each Company are set forth in Schedule 3.4. All of such Equity Interests ------------ are validly issued as set forth in Schedule 3.4, and all Equity ------------ Interests that are shares of capital stock are fully paid and nonassessable. The Persons indicated in Schedule 3.4 are the record ------------ and beneficial owners of the Equity Interests in the Companies indicated in Schedule 3.4, free and clear of any and all Liens. There ------------ are no Equity Interests in any Company held in the treasury of any Company and no Equity Interests in any Company are currently reserved for issuance for any purpose or upon the occurrence of any event or condition. (b) Except as set forth in Schedule 3.4, there are no Equity ------------ Interests in any Company issued or outstanding or any subscriptions, options, warrants, calls, rights, convertible or exchangeable securities or other agreements or commitments of any character obligating any Seller or any Company, or obligating any Seller or any of its Affiliates to cause any Company, to issue, transfer or sell, or cause the issuance, transfer or sale of, any Equity Interests in any Company. Except as set forth in Schedule 3.4, there are no outstanding ------------ contractual obligations of any Seller or any Company that relate to the purchase, sale, issuance, repurchase, redemption, acquisition, transfer, disposition, holding or voting of any Equity Interests in any Company. (c) The assignments, endorsements, stock powers, stock transfer forms and other instruments of transfer delivered by Sellers to Purchaser at the Closing will be sufficient to transfer to Purchaser all legal and beneficial interests in the Shares, free and clear of all Liens (other than Liens for Taxes payable by Purchaser in connection with the transfer of the Shares). 3.5 Financial Statements; Undisclosed Liabilities. --------------------------------------------- (a) Except as set forth in Schedule 3.5 and for the absence of ------------ footnotes, the Financial Statements have been prepared in accordance with US GAAP and present fairly the financial position of the Companies on a combined basis as of the dates thereof and the results of operations and cash flows of the Companies on a combined basis for the periods -14- covered thereby. The Financial Statements are in accordance with the books and records of the Companies. (b) Except as set forth in Schedule 3.5 or in the Financial ------------ Statements, none of the Companies has any liabilities, debts or obligations, fixed or contingent, which were required to be reported in a combined balance sheet as of December 31, 2001 prepared in accordance with US GAAP or in the footnotes thereto. (c) Except as set forth in Schedule 3.5, since December 31, 2001, ------------ none of the Companies has incurred any liabilities, debts or obligations, fixed or contingent, which would be required to be reported in a combined balance sheet as of the date hereof prepared in accordance with US GAAP or in the footnotes thereto, other than liabilities, debts and obligations which were incurred in the ordinary course of business and other liabilities, debts and obligations that are not material to the operations or financial condition of the Business (provided that such reference to "material" shall not expand materiality for purposes of US GAAP). 3.6 No Adverse Effects or Changes. Except as listed in Schedule 3.6, since ----------------------------- ------------ December 31, 2001, none of the Companies has: (a) suffered any event or events which, individually or in the aggregate, has had or would have a Material Adverse Effect; (b) suffered any damage, destruction or loss to any of its assets in excess of $100,000 that was not covered by insurance; (c) sold, transferred, conveyed or otherwise disposed of, or encumbered with any Lien (other than Permitted Liens), any asset having an individual book value in excess of $100,000; (d) made any changes in its accounting principles or practices not required by US GAAP; (e) entered into any material transaction with any Seller or any of its Affiliates (other than another Company); (f) authorized for issuance, issued, sold or delivered, or agreed or committed to issue, sell or deliver, any Equity Interests or any other securities of any Company, or amended any of the terms of any such Equity Interests or other securities; (g) split, combined or reclassified any of its Equity Interests, declared, set aside or paid any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its Equity -15- Interests or other securities, or redeemed or otherwise acquired any Equity Interests or securities of any Company; (h) made any borrowings or incurred any indebtedness for borrowed money, or assumed, guaranteed, endorsed (except for the negotiation or collection of negotiable instruments in transactions in the ordinary course of business and consistent with past practice) or otherwise become liable for any obligations of any other Person; (i) made any loans or capital contributions to, or investments in, any other Person (other than another Company); (j) entered into, adopted, amended or terminated any bonus, profit sharing, compensation, termination, stock option, stock appreciation right, restricted stock, performance unit, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan or fund for the benefit of any director, manager, officer or employee of the Companies, or increased the compensation or benefits of any director, manager, officer or employee of the Companies, or entered into any Contract to do any of the foregoing, in each case except in the ordinary course of business and consistent with past practice or as required by Law; (k) acquired or leased any assets having an individual book value in excess of $100,000; (l) paid any amount, performed any obligation or agreed to pay any amount or perform any obligation, in settlement or compromise of any suits or claims of liability against any Company or any of its directors, managers, officers or employees; or (m) entered into any other material Contract other than in the ordinary course of business and consistent with past practice. 3.7 Title to and Sufficiency of Assets. ---------------------------------- (a) Except as disclosed in Schedule 3.7, the Companies have good ------------ title to, and are the lawful owners of, all of the tangible and intangible assets, properties and rights reflected in the balance sheet as of December 31, 2001 contained in the Financial Statements (other than assets held under lease or license and assets disposed of in the ordinary course of business since December 31, 2001) or acquired since December 31, 2001, free and clear of any Lien other than Permitted Liens. (b) The Companies either own, lease, license or otherwise have the right to use all of the assets, properties and rights currently used by the Companies in their conduct of the Business and all such assets, -16- properties and rights are sufficient for the conduct of the Business as conducted as of the date of this Agreement. 3.8 Condition of Assets. Except as disclosed in Schedule 3.8, to Seller's ------------------- ------------ knowledge, all of the tangible assets of the Companies currently used in the Business, whether real or personal, owned or leased, are in good operating condition and repair (with the exception of normal wear and tear) for the purposes of the Business as currently conducted by the Companies. 3.9 Real Property. ------------- (a) Schedule 3.9 includes a true, accurate and complete list of ------------ all real estate held by a Company under real property leases (the "Leased Real Property") and all leases covering the Leased Real -------------------- Property to which any Company is party (the "Real Property Leases"). -------------------- None of the Companies owns any real property or has any binding commitment to purchase any real property. Sellers have made available to Purchaser true and complete copies of all Real Property Leases. (b) All of the Real Property Leases are in full force and effect, valid and enforceable against the Company which is party thereto, and to Seller's knowledge, against the other parties thereto, in accordance with their respective terms, except as such enforceability may be limited by Enforceability Limitations. None of Companies has received any notice of any default under any Real Property Lease and none of the Companies has any knowledge of default by any other party thereto. 3.10 Accounts Receivable; Advances. ----------------------------- (a) Schedule 3.10(a) contains an accurate and complete aging ---------------- schedule as of December 31, 2001, of all accounts receivable due to the Companies resulting from goods sold or services provided by the Companies ("Accounts Receivable"). Except as disclosed in Schedule ------------------- -------- 3.10(a), each Account Receivable represents a bona fide sale made or ------- service provided in the ordinary course of business and, after giving effect to any reserves in the Financial Statements for collectibility, is collectible in the ordinary course of business. (b) Schedule 3.10(b) lists all loans and advances made by any of ---------------- the Companies to third parties that are outstanding on the date hereof. 3.11 Intellectual Property. --------------------- (a) Schedule 3.11(a) contains a complete and accurate list of all ---------------- Registered Intellectual Property as of the date hereof. The Company Intellectual Property constitutes all of the material Intellectual Property that is used by the Companies in the conduct of the Business. Except as set forth in Schedule 3.11(a), a Company has all right, ---------------- title and interest in and -17- to, free and clear of all Liens other than Permitted Liens, or is otherwise licensed or has the right to use, the Company Intellectual Property. The Companies have used, prior to the date hereof, in the United States, Bermuda, the British Virgin Islands, the Cayman Islands and Ireland all trade names listed on Schedule 3.11(a) in the ordinary ---------------- and regular course of the Business. To the knowledge of Sellers, there are no material infringements, misappropriations or dilutions by any third parties upon any Company Intellectual Property. Except as disclosed in Schedule 3.11(a), there are no outstanding orders, ---------------- judgments, injunctions, legal or governmental proceeding (other than pending registrations or renewals or recordation of assignments) against any Company or material stipulations, agreements or covenants to which any Company is a party restricting the ownership (in the case of Company Intellectual Property owned by one of the Companies) or use of the Company Intellectual Property by the Companies. To the knowledge of Sellers, none of the Companies are infringing in any material respect the rights of others with respect to the use of the Company Intellectual Property by such Company. There are no proceedings or notices of proceedings against any Company to oppose, cancel, or otherwise to defeat or invalidate any Companies' rights to any of the Company Intellectual Property in any jurisdiction, and, to the knowledge of Sellers, none are threatened. Except as set forth in Schedule 3.11(a), the Companies and Sellers have used commercially ---------------- reasonable measures to protect and preserve the validity and enforceability of the Company Intellectual Property that is owned by any of the Companies and that is material to the operation of the Business and the goodwill associated therewith, including the confidentiality and enforceability of trade secrets and know-how and the confidentiality and/or proprietary information included in the Company Intellectual Property that is owned by any of the Companies and that is material to the operation of the Business. (b) Schedule 3.11(b) hereto contains a complete and accurate list ---------------- of (i) all material Proprietary Software and (ii) all material Licensed Software other than off-the-shelf software licensed to any of the Companies. Each of the Companies either owns, free and clear of all Liens other than Permitted Liens, or has a valid license to use, all of the Software. (c) The source code forms of the most current versions of the Proprietary Software (the "Owned Source Codes") are in the possession ------------------ of the Companies and, to Seller's knowledge, no third party has any copy of any of the Owned Source Codes or any right, title, interest or license, conditional or otherwise, with respect to any of the Owned Source Codes and the Companies have not granted any such right, title, interest or license covering any future period, with respect to any of the Owned Source Codes. The Companies own the Owned Source Codes free and clear of all Liens other than Permitted Liens. -18- (d) The Companies own and have possession of any material documentation developed by or for the Companies with respect to the Proprietary Software, including any such documentation relating to the Owned Source Codes, and the object code form of the most recent versions of the Proprietary Software. Sellers have made available to Purchaser copies of all forms of past and present standard express warranties extended by any of the Companies, related to any Proprietary Software that is licensed to any third parties. To Seller's knowledge, Sellers have no material liability as a result of claims related to such warranties. (e) Sellers have made available to Purchaser complete copies of all material licenses, leases, contracts and other written instruments, including any material maintenance, enhancement and services agreements, granting any of the Companies rights in any Software that is not owned by a Company (collectively, the "Software -------- Contracts"). Except as provided in Schedule 3.11(e), all material --------- ---------------- maintenance and support subscription plans are current and no outstanding material invoices are past due with respect to any of the Software Contracts. Except as set forth in Schedule 3.11(e), none of ---------------- the Companies, nor, to Seller's knowledge, any other party thereto is in violation in any material respect of any Software Contract. Except as set forth in Schedule 3.11(e), there is no unlicensed or ---------------- non-rightful material use by any of the Companies of any off-the-shelf software. 3.12 Contracts. Schedule 3.12 is an accurate and complete list of all the --------- ------------- executory Contracts of the following types to which any Company is a party or by which it is bound, or to which any of its assets is subject: (a) any Contract which requires a payment by any party in excess of, or a series of payments by any Company which in the aggregate exceed, $100,000 in any calendar year or provides for the delivery of goods or performance of services, or any combination thereof, to any Company having a value in excess of $100,000 in any calendar year (excluding all Contracts with customers of the Companies other than Contracts with the Major Customers set forth in Schedule 3.21); ------------- (b) any collective bargaining agreement; (c) any Contract with a sales representative, manufacturer's representative, distributor, dealer, broker, sales agency, advertising agency or other Person engaged in sales, distributing or promotional activities, or any Contract to act as one of the foregoing on behalf of any Person; (d) any Contract pursuant to which any Company has made or will make loans, or has or will have incurred or secured indebtedness for -19- borrowed money or become a guarantor or surety or pledged its credit for or otherwise become responsible with respect to any undertaking of another Person (except for the negotiation or collection of negotiable instruments in transactions in the ordinary course of business); (e) any Contract involving a partnership, joint venture or other cooperative undertaking; (f) any Contract with an Affiliate (other than another Company); (g) any Contract involving any restrictions with respect to the geographical area of operations or scope or type of business of any Company or that requires any of the Companies to deal exclusively with any third party; (h) any power of attorney or Contract with any Person pursuant to which such Person is granted the authority to act for or on behalf of any Company or any Company is granted the authority to act for or on behalf of any Person; or (i) any confidentiality or non-disclosure agreement (except those entered into in connection with the sale of the Business and those Contracts that contain confidentiality or non-disclosure provisions which are incidental to the primary purpose of such Contract). Sellers have made available to Purchaser accurate and complete copies of each Contract listed in Schedules 3.11(e) and 3.12. Except as set forth in Schedule ----------------- ---- -------- 3.12, (i) each such Contract is in full force and effect and constitutes a - ---- legal, valid and binding obligation of the Company which is party thereto and, to Seller's knowledge, the other parties thereto, enforceable in accordance with its terms, subject to Enforceability Limitations, and (ii) as of the date hereof, no party to any such Contract has given any of the Companies written notice that it intends to terminate such Contract prior to the end of the current term of such Contract. 3.13 Permits. Schedule 3.13 is an accurate and complete list of all ------- ------------- material Permits held by the Companies. All the Permits so listed are in full force and effect and none of the Companies has received any notice that any such Permit will be revoked or canceled. Except for the Permits listed in Schedule -------- 3.13 and except for such Permits the failure to have which would not be - ---- reasonably expected to have a Material Adverse Effect, there are no Permits which are necessary for the lawful operation of the Business as currently conducted by the Companies. 3.14 Employee Benefit Plans and Employment Agreements. ------------------------------------------------ (a) General. Except as listed in Schedule 3.14, none of the ------- ------------- Companies is a party to, contributes to or participates in: -20- (i) any "employee benefit plan" (as defined in section 3(3) of ERISA); (ii) any retirement or deferred compensation plan, incentive compensation plan, stock plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements for any current or former employee or director, which does not constitute an employee benefit plan; (iii) any employment agreement, other than the basic forms of employment agreement, substantially in the forms attached in Schedule 3.14, entered into by substantially all employees of the ------------- Business; or (iv) any retirement plan governed by the laws of Bermuda other than that which provides for defined contributions to be made by Hemisphere-Bermuda and its employees from time to time. Except as set forth in Schedule 3.14, each employee benefit plan in which ------------- employees of the Companies participate is sponsored by a Company. (b) Plan Documents and Reports. A true and correct copy of each -------------------------- of the plans, arrangements and agreements listed in Schedule 3.14 ------------- (collectively, the "Benefit Plans"), each as in effect on the date ------------- hereof, has been made available to Purchaser. (c) Compliance With Laws; Liabilities. As to all Benefit Plans, --------------------------------- except as set forth in Schedule 3.14: ------------- (i) all Benefit Plans comply, and have been administered in compliance, in all material respects with all requirements of Law applicable thereto; provided that in the case of the -------- Hemisphere-Ireland Retirement Benefits Scheme (the "Irish Plan"), ---------- "Law" shall mean the Irish Pensions Act 1990; (ii) there have been no "prohibited transactions" (as described in section 406 of ERISA or section 4975 of the Code) with respect to any Benefit Plan to which either US Company is party in which either US Company participates or with respect to which either US Company has any liability (each a "US Benefit Plan"); --------------- (iii) there are no actions, suits or claims (other than routine claims for benefits) pending, or, to Seller's knowledge, threatened, involving the Benefit Plans or the assets thereof; (iv) none of the US Benefit Plans is subject to title IV of ERISA and none of the US Benefit Plans is a multiemployer plan (as -21- defined in section 3(37) of ERISA) and neither US Company nor any ERISA Affiliate of either US Company maintains or has any liability with respect to any employee pension benefit plan (as defined in section 3(2) of ERISA) which is subject to Title IV of ERISA, including a multiemployer plan; (v) all Benefit Plans have been administered in all material respects in compliance with the applicable reporting, disclosure and all other requirements of applicable law; (vi) all contributions required by the terms of any Benefit Plan have been made to such Benefit Plan in accordance with its terms; and (vii) the Irish Plan is a defined contribution scheme as defined under Section 2 of the Irish Pensions Act, 1990. 3.15 Employment and Labor Matters. ---------------------------- (a) Schedule 3.15 contains an accurate and complete list of the ------------- names, titles or job descriptions, for all the officers and directors or managers of each Company. Sellers have made available to Purchaser the annual compensation for the preceding fiscal year for all the officers and directors or managers of each Company disclosed in Schedule 3.15. Except as described in Schedule 3.15, there is, and ------------- ------------- since January 1, 2001 there has been, no labor strike, labor dispute, concerted labor slow-down, work stoppage or other material labor difficulty pending or, to Seller's knowledge, threatened, against any Company. Except as disclosed in Schedule 3.15, none of the employees ------------- of any Company is covered by any collective bargaining agreement, and, to Seller's knowledge, no attempt is currently being made or since January 1, 2001 has been made to organize any employees of any Company to form or enter a labor union or similar organization. (b) Except as disclosed in Schedule 3.15, each of the Companies ------------- has complied in all material respects with all applicable Laws (including labor laws and including the Bermuda Employment Act), and regulations relating to the hiring and employment of employees, including those related to discrimination, harassment, wages, hours and collective bargaining, and to the knowledge of Sellers, none of the Companies are liable for any material penalties or damages for failure to comply with any of the foregoing. There are no unfair labor practice claims or charges pending or, to the knowledge of Sellers, threatened involving any of the Companies. (c) Except as disclosed in Schedule 3.15(c), as of the date ---------------- hereof, (i) no executive officer or significant employee set forth in Schedule 3.15(c) ---------------- -22- of any of the Companies has given any such Company written notice that he or she intends to leave his or her employment with such Company as a result of the consummation of the transactions contemplated hereby or for any other reason, and (ii) to the knowledge of Sellers, no such person referred to in clause (i) above has expressed any present ---------- intention to leave the employ of such Company. (d) Except as described in Schedule 3.15(d) and within the past ---------------- two years, none of the Companies have received any written citation for violations of the Occupational Safety and Health Act of 1970, 29 U.S.C. sec. 651 et seq. (the "OSHA Act"), any regulation promulgated -------- pursuant to the OSHA Act, or similar foreign law and any rule or regulation promulgated pursuant thereto, or paid any fines or penalties with respect to any such citation. Except as described on Schedule 3.15(d) and within the past two years: (i) there have not ---------------- been any inspections of any of the facilities of any of the Companies by representatives of the Occupational Safety and Health Administration ("OSHA") or any other similar Governmental Authority ---- vested with authority to enforce any statute, ordinance, rule or regulation establishing standards of workplace safety; (ii) no representative of OSHA or any other such Governmental Authority has attempted to conduct any such inspection or sought permission from any of the Companies to inspect any of such Company's facilities for that purpose; (iii) none of the Companies has been notified of any complaint or charge filed by any employee or employee representative with OSHA or such similar authority, or any such Governmental Authority which alleges that any of the Companies have violated in any material respect the OSHA Act, or any other statute, ordinance, rule or regulation establishing standards of workplace safety; and (iv) none of the Companies maintains any condition, process, practice or procedure at any of its facilities which violates in any material respect either the OSHA Act or any other statute, ordinance, regulation or rule establishing standards of workplace safety. 3.16 Taxes. Except as disclosed in Schedule 3.16: ----- ------------- (a) The US Companies and the US Holding Company have filed or will timely file with respect to the business of Hemisphere-NY and Hemisphere-Boston all material Tax Returns required to be filed for periods ending on or prior to the Closing Date. Hemisphere-Ireland has filed or will timely file with respect to the business of Hemisphere-Ireland all material Tax Returns required to be filed for periods ending on or prior to the Closing Date. All such Tax Returns are or will be true, correct and complete in all material respects. All Taxes shown as due and owing on all Tax Returns have been or will be paid. None of the Companies has requested an extension of time within which to file any Tax Return in respect of any taxable year which has not since been filed. -23- (b) No federal, state, local or foreign audit or other administrative proceeding or court proceeding exists with regard to any Taxes or Tax Returns of any Company. None of the Companies has received any written notice that an audit or other administrative proceeding is pending or, to Seller's knowledge, threatened with respect to any Taxes due from or with respect to any Company or any Tax Return filed by or with respect to any Company. None of the Companies has granted or been requested to grant any waiver of any statutes of limitations applicable to any claim for Taxes. (c) All Tax deficiencies which have been claimed, proposed or asserted in writing against the Companies have been fully paid or finally settled. (d) There are no Tax Liens (other than for Taxes not yet due and payable) upon the properties or assets of any Company. (e) None of the Companies is subject to any Tax sharing agreement (other than with respect to payments specifically provided herein). (f) None of the properties owned by any of the US Companies (i) are tax-exempt use property within the meaning of Section 168(h) of the Code or (ii) have been financed with or directly or indirectly secure any industrial revenue bonds or debt the interest on which is tax-exempt under section 103(a) of the Code. (g) None of the US Companies is a partner in any joint venture, partnership or other arrangement or Contract that is treated as a partnership for U.S. federal income tax purposes. (h) None of the US Companies is a party to any safe harbor lease within the meaning of section 168(f)(8) of the Code. (i) True, correct and complete copies of any and all material tax examination reports and statements of deficiencies assessed against, or agreed to with respect to any of the Companies or the Business with respect to the last two (2) years with the U.S. Internal Revenue Service or any taxing Governmental Authority have been made available to Purchaser. The Companies or Sellers have retained all records or other information that may be materially relevant to Tax Returns, audits or other examinations relating to liability for Taxes. (j) Other than Hemisphere-NY, the Companies are not and have never been members of an "affiliated group" within the meaning of section 1504 of the Code. -24- (k) Neither Hemisphere-NY nor Hemisphere-Ireland is required to include in income any adjustment under section 481(a) of the Code by reason of a change in accounting method initiated, and to the knowledge of Sellers the U.S. Internal Revenue Service has not proposed any such adjustment or change in accounting method. None of the Companies has a private letter ruling request, Technical Advice Memorandum or Field Service Request or similar request pending with the U.S. Internal Revenue Service or similar authority. (l) All material elections with respect to Taxes affecting Hemisphere-NY and Hemisphere-Ireland as of the date hereof are set forth in Schedule 3.16. No new elections with respect to Taxes, or any ------------- change in current elections with respect to Taxes of any of the Companies or affecting any of the Companies shall be made after the date of this Agreement without the prior written consent of Purchaser. (m) All Taxes that any of the Companies is or was required by applicable Law to withhold and collect, or that any Seller is or was required to withhold or collect with respect to the Business, have been duly withheld or collected and, to the extent required, have been paid to the proper Government Authority, or other person or entity, except where the failure to withhold or collect Taxes, individually or in the aggregate, would not have a Material Adverse Effect. 3.17 Compliance with Law. Except as disclosed in Schedule 3.17: ------------------- ------------- (a) excluding Laws relating to employee benefit plans (as matters relating to Laws applicable to employee benefit plans are as set forth in Section 3.14), labor and employment matters (as matters relating to ------------ labor and employment Laws are as set forth in Section 3.15) and to ------------ Taxes (as matters relating to Tax Laws are set forth in Section 3.16), ------------ each Company is in compliance in all material respects with all Laws applicable to or binding on it or any of its assets; and (b) excluding Laws relating to employee benefit plans (as matters relating to Laws applicable to employee benefit plans are as set forth in Section 3.14) labor and employment matters (as matters relating to ------------ labor and employment Laws are as set forth in Section 3.15) and to ------------ Taxes (as matters relating to Tax Laws are set forth in Section 3.16), ------------ since January 1, 2001, no notice from any Governmental Authority has been received by any Company claiming any violation by such Company of any material Law. 3.18 Money Laundering. Except as set forth in Schedule 3.18: ---------------- ------------- (a) Each Company is in compliance in all material respects with the Proceeds of Crime Act of 1997 of Bermuda and the Proceeds of Crime -25- (Money Laundering) Regulations 1998 of Bermuda or with other applicable anti-money laundering Laws in its jurisdiction of organization. (b) Each Company has established and presently maintains anti-money laundering policies and procedures which have been made available to Purchaser and with which such Company is in compliance in all material respects. 3.19 Litigation. ---------- (a) Except as disclosed in Schedule 3.19, there are no actions, ------------- suits, arbitrations, proceedings or other litigation pending, or, to Seller's knowledge, threatened, or, to Seller's knowledge, pending or threatened investigations or material adverse claims against, or specifically affecting in a material respect the Business of, any Company or any of its officers, directors, managers, employees, stockholders or members in their capacity as such or any of its properties before any court or other Governmental Authority. Except as disclosed in Schedule 3.19, none of the Companies is subject to any ------------- order, judgment, decree, injunction, stipulation or consent order of or with any court or other Governmental Authority. None of the Companies has entered into any agreement to settle or compromise any proceeding pending or threatened against it which has involved any obligation other than the payment of money and for which any Company has any continuing obligation. (b) There are no actions, suits, proceedings or other litigation pending, or, to Seller's knowledge, threatened, by or against any Seller, any Company, or any of their respective Affiliates with respect to this Agreement or the Related Agreements, or in connection with the transactions contemplated hereby or thereby. 3.20 Bank Accounts. Schedule 3.20 sets forth an accurate and complete list ------------- ------------- of the names and locations of each bank or other financial institution at which a Company has an account (giving the account numbers) or safe deposit box and the names of all Persons authorized to draw thereon or who have access thereto. 3.21 Customers. --------- (a) Schedule 3.21 sets forth an accurate and complete list of the ------------- fifty (50) largest customers of the Companies as a whole in terms of revenue during each of the 2000 and 2001 fiscal years (collectively, the "Major Customers"), showing the total revenue received by the --------------- Companies collectively in each such period from each such customer. (b) Except as set forth in Schedule 3.21, since December 31, 2001 ------------- through the date hereof, there has been no material dispute between any Company and any Major Customer and no Major Customer has given -26- any of the Companies written notice that it intends to cease doing business with such Company. 3.22 Insurance. Schedule 3.22 hereto contains a list of all insurance --------- ------------- policies maintained by or for the benefit of any of the Companies. Schedule 3.22 ------------- further lists all claims presently pending that have been made with respect to the Companies which are covered by any such policy. None of the Companies or Sellers has received notice of cancellation or non-renewal of any such policy. 3.23 Fairness Opinion. MRM has received an opinion dated the date hereof ---------------- from Credit Suisse First Boston Corporation to the effect that as of the date hereof, the consideration to be received for the Shares is fair to MRM from a financial point of view. 3.24 Net Asset Value Calculations. Except as set forth in Schedule 3.24, ---------------------------- ------------- since December 31, 2000, the Companies have performed all net asset value calculations required to be performed on behalf of their customers correctly and accurately (excluding errors in net asset value calculation the aggregate effect of which would not be material in dollar amount). 3.25 Holding Companies. Each of the MRM Sellers is a holding company and ----------------- has no operations or trade creditors. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Sellers as follows: 4.1 Due Incorporation. Purchaser is a corporation duly organized, validly ----------------- existing and in good standing under the laws of the State of Delaware, with all requisite corporate power and authority to own, lease and operate its properties and to conduct its business as they are now being owned, leased, operated and conducted. Purchaser is licensed or qualified to do business and is in good standing as a foreign corporation in each jurisdiction where its ownership of the Shares or its execution, delivery and performance of this Agreement and its Related Agreements and the consummation of the transactions contemplated hereby and thereby require such licensing or qualification and in which the failure to be so licensed or qualified would have a material adverse effect on Purchaser. 4.2 Due Authorization. Purchaser has all requisite corporate power and ----------------- authority to enter into this Agreement and its Related Agreements and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by Purchaser of this Agreement and its Related Agreements, and the consummation by Purchaser of the transactions contemplated hereby and thereby, have been duly and validly approved by its board of directors and no other corporate actions or proceedings on the part of Purchaser are necessary to authorize the execution, delivery and performance of this Agreement and its Related Agreements and -27- the consummation of the transactions contemplated hereby and thereby. Purchaser has duly and validly executed and delivered this Agreement and has duly and validly executed and delivered (or prior to or at the Closing will duly and validly execute and deliver) its Related Agreements. Assuming due authorization (in the case of parties which are not individuals), execution and delivery of this Agreement and its Related Agreements by the other parties hereto and thereto, this Agreement constitutes a legal, valid and binding obligation of Purchaser and its Related Agreements constitute (or upon execution and delivery by Purchaser will constitute) legal, valid and binding obligations of Purchaser, in each case, enforceable in accordance with their respective terms, except as such enforceability may be limited by Enforceability Limitations. 4.3 Consents and Approvals; No Conflict. ----------------------------------- (a) Except as set forth in Schedule 4.3, no consent, ------------ authorization or approval of, or filing or registration with, any Governmental Authority or any party to any material Contract with Purchaser or any of its Affiliates is necessary in connection with the execution, delivery or performance by Purchaser of this Agreement or any of its Related Agreements or the consummation by Purchaser of the transactions contemplated hereby or thereby. (b) Except as set forth in Schedule 4.3, the execution, delivery ------------ and performance by Purchaser of this Agreement and its Related Agreements, and the consummation by Purchaser of the transactions contemplated hereby and thereby, do not and will not (i) violate any material Law applicable to or binding on Purchaser or any of its assets; (ii) violate or conflict with, result in a breach or termination of, constitute a default or give any third party any additional right (including a termination right) under, permit cancellation of, result in the creation of any Lien upon any of the assets of Purchaser under, or result in or constitute a circumstance which, with or without notice or lapse of time or both, would constitute any of the foregoing under, any material Contract to which Purchaser is a party or by which Purchaser or any of its assets are bound; (iii) permit the acceleration of the maturity of any indebtedness of Purchaser or indebtedness secured by its assets; or (iv) violate or conflict with any provision of the certificate of incorporation or bylaws of Purchaser. 4.4 Litigation. There are no actions, suits, proceedings or other ---------- litigation pending, or, to Purchaser's knowledge, threatened, by or against Purchaser or any of its Affiliates with respect to this Agreement or the Related Agreements, or in connection with the transactions contemplated hereby or thereby. 4.5 Financing. Purchaser has internal resources or financing commitments --------- from responsible financial institutions available in connection with the acquisition of the Shares which are in an aggregate amount sufficient to consummate the transactions contemplated hereby. -28- 4.6 Purchase for Investment. Purchaser is acquiring the Shares for its own ----------------------- account for investment and not with a view to, or for offer or resale in connection with, a distribution of any of the Shares or any "beneficial interest" in the Shares within the meaning of the Securities Act of 1933, as amended, and the rules and regulations thereunder, and Purchaser has no present intent, agreement or understanding to sell, pledge or otherwise dispose of any Shares or any beneficial interest in any Shares to any other Person. Purchaser understands that the Shares have not been registered under the Securities Act of 1933, as amended, or applicable foreign or state securities laws, and that none of the Shares may be offered for sale, sold or otherwise transferred unless they are registered or otherwise qualified under federal and any applicable foreign or state securities law or unless an exemption from such registrations or qualifications is available. ARTICLE V COVENANTS 5.1 Implementing Agreement. Subject to the terms and conditions hereof, ---------------------- each party hereto shall take all action required of it to fulfill its obligations under the terms of this Agreement and shall otherwise use all commercially reasonable efforts to facilitate the consummation of the transactions contemplated hereby. 5.2 Access to Information and Facilities. From and after the date of this ------------------------------------ Agreement until the Closing Date, Sellers shall cause the Companies to (a) upon reasonable notice from Purchaser to the Seller Representative, give Purchaser and Purchaser's representatives reasonable access during normal business hours to all of the facilities, properties, books, records and Contracts of the Companies, (b) upon reasonable notice from Purchaser to the Seller Representative, make the officers and management employees of the Companies available to Purchaser and its representatives as Purchaser and its representatives shall from time to time reasonably request and (c) furnish Purchaser and its representatives with any and all information concerning the Companies which is reasonably available to Sellers and which Purchaser or its representatives reasonably request, provided that nothing herein will obligate -------- any Seller or Company to take any actions that would unreasonably interrupt the normal course of its business or to violate any Law or the terms of any Contract to which any Seller or Company is a party or to which any of their assets are subject. From and after the date of this Agreement until the Closing Date, Purchaser shall not have access to or communicate with any customers of the Companies without the prior written consent of the Seller Representative and then only on such terms as are consented to by the Seller Representative. 5.3 Preservation of Business. From the date of this Agreement until the ------------------------ Closing Date, except as set forth in Schedule 5.3 or as otherwise contemplated ------------ by this Agreement, Sellers shall cause the Companies to operate only in the ordinary course of business and in a manner consistent with past practice. Without limiting the generality of the foregoing, except as set forth in Schedule 5.3 or as otherwise contemplated by - ----------- -29- this Agreement, prior to the Closing none of the Companies will, without the prior written consent of Purchaser, which shall not be unreasonably withheld: (a) sell, transfer, convey or otherwise dispose of, or encumber with any Lien (other than Permitted Liens), any asset having an individual book value in excess of $100,000; (b) make any changes in its accounting principles or practices not required by US GAAP; (c) enter into any transaction with any Seller or any of its Affiliates except in the ordinary course of business and consistent with past practice; (d) authorize for issuance, issue, sell or deliver, or agree or commit to issue, sell or deliver, any Equity Interests or any other securities of any Company, or amend any of the terms of any such Equity Interests or other securities; (e) split, combine or reclassify any Equity Interests, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its Equity Interests, or redeem or otherwise acquire any Equity Interests or other securities of any Company; (f) make any borrowings or incur any indebtedness for borrowed money, or assume, guarantee, endorse (except for the negotiation or collection of negotiable instruments in the ordinary course of business and consistent with past practice) or otherwise become liable for any obligations of any other Person; (g) make any loans or capital contributions to, or investments in, any other Person; (h) enter into, adopt, amend or terminate any bonus, profit sharing, compensation, termination, stock option, stock appreciation right, restricted stock, performance unit, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan or fund for the benefit of any director, manager, officer or employee of the Companies, or increase the compensation or benefits of any director, manager, officer or employee of the Companies, or enter into any Contract to do any of the foregoing, in each case except as required by Law or for scheduled increases in the ordinary course of business; (i) acquire or lease any assets having an individual book value in excess of $100,000; -30- (j) pay any amount, perform any obligation or agree to pay any amount or perform any obligation, in settlement or compromise of any suit or claim of liability against any Company or any of their respective directors, managers, officers or employees; (k) merge into or with or consolidate with any other Person; (l) make any change in its certificate of formation or limited liability company agreement or other organizational documents; (m) adopt any collective bargaining agreement; or (n) enter into any other Contract other than in the ordinary course of business and consistent with past practice. 5.4 Consents and Approvals. ---------------------- (a) From the date of this Agreement until the Closing Date, each Seller shall, and shall cause each Company to, use commercially reasonable efforts to obtain all consents, approvals, certificates and other documents required in connection with the performance by it of this Agreement and its Related Agreements and the consummation by it of the transactions contemplated hereby and thereby. From the date of this Agreement until the Closing Date, Purchaser shall use commercially reasonable efforts to obtain all consents, approvals, certificates and other documents required in connection with the performance by it of this Agreement and its Related Agreements and the consummation by it of the transactions contemplated hereby and thereby. Each Seller shall, or shall cause each Company to, promptly make all filings, applications, statements and reports to all Governmental Authorities and other Persons that are required to be made prior to the Closing Date by or on behalf of such Seller or such Company pursuant to any applicable Law or Contract in connection with this Agreement, its Related Agreements and the transactions contemplated hereby and thereby. Purchaser shall promptly make all filings, applications, statements and reports to all Governmental Authorities and other Persons that are required to be made prior to the Closing Date by or on behalf of Purchaser or any of its Affiliates pursuant to any applicable Law or Contract in connection with this Agreement, its Related Agreements and the transactions contemplated hereby and thereby. (b) Purchaser and Sellers agree to cooperate with each other and to take any and all steps necessary to obtain as soon as practicable each and every consent or approval under any antitrust, competition or other Law that may be asserted by any antitrust, competition or other Governmental Authority so as to enable the parties to expeditiously close the transactions contemplated hereby, provided that Purchaser -------- shall not -31- be required to (i) hold separate or divest any assets, or license or enter into any arrangement or take any other action, that would have the effect of reducing revenues of Purchaser or any of its Affiliates or revenues of the Business in excess of $250,000 per annum, or that would require Purchaser to incur expenses in excess of $250,000, or (ii) participate in any litigation or protracted regulatory proceeding. 5.5 Resignation of Officers and Directors. On or prior to the Closing Date, ------------------------------------- MRM Sellers shall cause each person who is an officer, director or member of the board of managers of any MRM Seller or any of their respective Affiliates (other than the Companies) and who is also an officer, director or member of the board of managers of, or a non-corporate trustee or fiduciary of any plan or arrangement involving employee benefits of, one or more of the Companies to tender his or her resignation from all such positions with the Companies effective as of the Closing. 5.6 Trademarks. ---------- (a) No Seller is granting Purchaser or any Company a license to use, no Seller is transferring to Purchaser or any Company, and neither Purchaser nor the Companies shall have any right, title or interest in or to, any trade names, trademarks, service names or service marks (including the MRM logo or the name "Mutual Risk Management" or "MRM" or any variation or derivation thereof, or any Internet domain name, logo, name, variation or derivation incorporating any such logo, name, mark, variation or derivation) of any Seller or any of their respective Affiliates (other than the Companies). Purchaser agrees to cause the Companies, from and after 30 days after the Closing, to cease to use, directly or indirectly, and in any manner or form (including as a corporate or fictitious name, Internet domain name, trade name, trademark, service name or service mark), the MRM logo, the names "Mutual Risk Management" and "MRM" and any variations and derivations thereof, and any Internet domain name, logo, name, variation and derivation incorporating any such logo, name, mark, variation or derivation; provided, that the Companies may -------- use any service brochures which are in existence on the Closing Date and bear any "MRM" names or logos, for a period of ninety (90) days after the Closing Date. (b) Purchaser acknowledges that Sellers and their respective Affiliates would be irreparably harmed by any breach of this Section ------- 5.6 and that any relief under Article X will be inadequate to --- --------- compensate Sellers or such Affiliates for any such breach. Accordingly, Purchaser (on behalf of itself and its Affiliates) agrees that, in addition to any relief available under Article X, Sellers and --------- their respective Affiliates shall be entitled, without the necessity of proving actual damages or posting any bond, to injunctive relief against Purchaser (or its Affiliates) in the event of any breach or threatened breach by Purchaser (or its Affiliates) of its -32- covenants and agreements in this Section 5.6 and Purchaser (on behalf ----------- of itself and its Affiliates) consents to the entry thereof. 5.7 Intercompany Payables and Receivables. ------------------------------------- (a) At or prior to the Closing, Sellers shall cause the Companies to distribute to the holders of Equity Interests in the Companies, or transfer to any of the MRM Sellers and their respective Affiliates, all receivables shown on the December 31, 2001 balance sheet included in the Financial Statements as "Due from Affiliated Companies", set off such receivables against payables owed to the MRM Sellers and their respective Affiliates or release the MRM Sellers and their respective Affiliates therefrom. (b) At or prior to the Closing, Sellers shall cause the Companies to pay all payables then owing to the MRM Sellers or their respective Affiliates, or to set off such payables against receivables then owing to the MRM Sellers and their respective Affiliates, regardless of whether the payment or setting off of such payables would be in the ordinary course of business and consistent with past practice. 5.8 Brokers. Regardless of whether the Closing shall occur, (a) each Seller ------- shall indemnify Purchaser and its Affiliates against, and hold Purchaser and its Affiliates harmless from, any and all liability for any brokers' or finders' fees or other commissions arising with respect to brokers or finders retained or engaged by such Seller or any of its Affiliates in respect of the transactions contemplated by this Agreement, including Credit Suisse First Boston Corporation, and (b) Purchaser shall indemnify each Seller and their respective Affiliates against, and hold each Seller and their respective Affiliates harmless from, any and all liability for any brokers' or finders' fees or other commissions arising with respect to brokers or finders retained or engaged by Purchaser or any of its Affiliates in respect of the transactions contemplated by this Agreement. 5.9 Preservation of Books and Records; Access. ----------------------------------------- (a) For a period of seven years after the Closing Date, Purchaser shall preserve and retain, or cause the Companies to preserve and retain, all corporate, accounting, legal, auditing and other books and records of the Companies (including any documents relating to any governmental or non-governmental claims, actions, suits, proceedings or investigations) relating to the conduct of the business and operations of the Companies prior to the Closing Date. Notwithstanding the foregoing, during such seven-year period, Purchaser may dispose of any such books and records which are offered to, but not accepted by, the Seller Representative. (b) After the Closing Date, Purchaser shall cause the Companies to permit the MRM Sellers and their authorized representatives to have reasonable access to, and to inspect and copy, all -33- books and records referred to in Section 5.9(a) and to meet with -------------- officers and employees of Purchaser and the Companies on a mutually convenient basis in order to obtain explanations with respect to such books and records and to obtain additional information and to call such officers and employees as witnesses. 5.10 Employees; Employee Benefit Plans. --------------------------------- (a) Purchaser shall be responsible for any liability, cost or expense arising from any action regarding any employee of the Companies at or after the Closing, including any liability under the Worker Adjustment and Retraining Notification Act, the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the National Labor Relations Act, the Fair Labor Standards Act, any state or local Laws that are similar to any of the foregoing and any and all common law causes of action including those for breach of contract, defamation, or retaliatory discharge. (b) Effective as of the Closing Date, the US Companies (and their respective employees) shall cease to participate in the US Benefit Plans. After the Closing Date, Purchaser shall provide all of the employees of the Companies ("Continuing Employees") with Purchaser's -------------------- standard employee benefit plans, programs, policies and arrangements which are applicable to employees of Purchaser and its Affiliates of the same category (the "Purchaser's Benefit Plans"); provided, ------------------------- -------- however, that Purchaser may provide that participation in Purchaser's employee stock purchase plan shall be made available to Continuing Employees as soon as practicable, but in no event later than the first day of the first full calendar quarter beginning after the Closing Date. Prior to the Closing Date, Sellers shall cause the Companies to, upon reasonable notice from Purchaser to the Seller Representative, grant to Purchaser reasonable access to the Continuing Employees, during normal business hours, for purposes of enrolling the Continuing Employees in Purchaser's Benefit Plans and Purchaser's 401(k) Plan (as hereinafter defined). (c) Effective as of the Closing Date, Purchaser shall make available to Continuing Employees of the US Companies ("US Continuing ------------- Employees") a defined contribution plan of Purchaser (the "Purchaser's --------- ----------- 401(k) Plan") which is intended to be qualified under section 401(a) ----------- of the Code. US Continuing Employees who receive an eligible rollover distribution (within the meaning of section 402(f)(2) of the Code) which constitutes a direct rollover distribution within the meaning of section 401(a)(31) of the Code and regulations thereunder from the defined contribution plan maintained by MRM in which US Continuing Employees were eligible to participate immediately prior to the Closing Date (the "MRM 401(k) Plan") shall, subject to the provisions --------------- of section 402 of the Code, be permitted to make a rollover contribution to the Purchaser's -34- 401(k) Plan. To the extent that, pursuant to the foregoing provisions of this paragraph (c), a US Continuing Employee is eligible to make a ------------- rollover contribution of a direct rollover distribution to the Purchaser's 401(k) Plan, such rollover contribution may include promissory notes for loans made to such US Continuing Employee under the terms of the MRM 401(k) Plan. (d) To the extent applicable with respect to the Purchaser's Benefit Plans, US Continuing Employees (and their eligible dependents) shall be given credit for their service with the US Companies and their Affiliates (i) for all purposes to the extent such service was taken into account under a corresponding US Benefit Plan, and (ii) for purposes of satisfying any waiting periods, evidence of insurability requirements, or the application of any pre-existing condition limitations and shall be given credit for amounts paid under a corresponding Benefit Plan during the same period for purposes of applying deductibles, copayments and out-of-pocket maximums as though such amounts had been paid in accordance with the terms and conditions of the Purchaser's Benefit Plans. Notwithstanding the foregoing provisions of this paragraph (d), service and other amounts shall not ------------- be credited to US Continuing Employees (or their eligible dependents) to the extent the crediting of such service or other amounts would result in the duplication of benefits, and Purchaser's Benefit Plans shall not be required to waive any pre-existing condition limitation with respect to any US Continuing Employees (or their eligible dependents) if, after taking into account the foregoing provisions of this paragraph (d), such pre-existing condition limitation would not ------------- be waived for other participants in applicable Purchaser's Benefit Plans. (e) After the Closing Date, Purchaser agrees that the Non-US Companies or Purchaser shall be liable for all benefits payable under all employee benefit plans established or maintained by the Non-US Companies, the Non-US Companies' workers' compensation obligations and all liabilities and obligations under and with respect to the Benefit Plans other than the US Benefit Plans. (f) It is understood and agreed that all provisions contained in this Agreement with respect to employee benefit plans or employee compensation are included for the sole benefit of the respective parties hereto and do not and shall not create any right in any employee or any other Person, including any participant in any Benefit Plan or any other employee benefit or compensation plan or any beneficiary thereof. 5.11 MRM Guaranties. At or prior to the Closing, Purchaser shall use -------------- commercially reasonable efforts to cause each MRM Seller and their respective Affiliates (other than the Companies) to be released, effective as of the Closing, from all guaranty, surety and other similar obligations with respect to obligations of the Companies listed on Schedule 5.11 (the "MRM Guaranties"). ------------- -------------- After the Closing, Purchaser shall (and shall cause the Companies to) indemnify each MRM Seller and -35- their respective Affiliates against, and hold each MRM Seller and their respective Affiliates harmless from, any and all Losses incurred or suffered by such MRM Seller or such Affiliate arising out of any such MRM Guaranty. 5.12 Old Irish Lease. After the Closing, Purchaser shall, and shall cause --------------- Hemisphere-Ireland to, use commercially reasonable efforts to sublet the office space located on the 2nd and 4th floors of Frederick House, South Frederick Street, Dublin, Ireland that is under lease to Hemisphere-Ireland pursuant to the leases described in more detail in Schedule 3.9 (collectively, the "Old ------------ --- Irish Lease"), or to terminate such Old Irish Lease, provided that neither - ----------- Purchaser nor Hemisphere-Ireland shall sublet such office space or terminate the Old Irish Lease without the consent of the Seller Representative. 5.13 Interim Financial Statements. From the date of this Agreement until ---------------------------- the Closing Date, Sellers shall cause the Companies to provide Purchaser with copies of the monthly management report and any interim financial statements for periods and dates after December 31, 2001 with respect to the Companies that are prepared by or for the Companies as such reports or financial statements are prepared. 5.14 Non-Competition. For a period of five (5) years from and after the --------------- Closing Date (the "Non-Competition Period"), none of the MRM Sellers or their ---------------------- Affiliates (excluding the Management Stockholders) will, directly or indirectly, anywhere in the world, conduct any business, or own, manage, operate, join, control, finance, participate in the ownership, management, operation, control or financing of, or become or be connected with or otherwise become or be interested in or associated with, any Person which is at such time engaged in competition with the Business as conducted by the Companies as of the Closing Date; provided, however, that: -------- ------- (a) the restrictions contained in this Section 5.14 shall not ------------ apply to the present operations or activities of any MRM Seller or any of its Affiliates (other than the Companies), including the provision by any MRM Seller or any of its Affiliates of incidental fund administration services as part of its trust and corporate services business; (b) the restrictions contained in this Section 5.14 shall not apply to the operations or activities of any Person not affiliated with an MRM Seller (an "Acquiring Person") which acquires Equity Interests or assets of either MRM Seller or any of their Affiliates, or any Affiliate of such Acquiring Person (other than the MRM Sellers and their Affiliates prior to such acquisition) and which immediately prior to such acquisition is engaged in operations or activities in competition with the Business; (c) any of the MRM Sellers or their Affiliates may sell or otherwise provide goods and services to competitors of the Business, so long as the sale or provision of such goods and services in and of itself does not directly compete with the Business; -36- (d) any of the MRM Sellers or their Affiliates may purchase fund administration services, securities services and corporate secretarial services from competitors of the Business; and (e) any of the MRM Sellers or their Affiliates may, after the Closing Date, own securities of any competitor of the Business (or its corporate parent) which is listed on a national or foreign securities exchange or regularly traded in the over-the-counter market, so long as its total holdings in any such competitor (or its corporate parent) do not comprise more than 5% of the outstanding securities of any class of such competitor and provided that it does not have the power to control or direct the management or affairs of such competitor. It is recognized by the MRM Sellers that the Business is or will be after the Closing Date conducted throughout the entire world, and that more limited geographical limitations on this non-competition covenant are therefore not appropriate. Each MRM Seller represents and warrants to Purchaser that the present operations or activities of any MRM Seller or any of its Affiliates (other than the Companies) that overlap with that of the Business are only incidental to the other businesses of any MRM Seller or any of its Affiliates. 5.15 Use of Hemisphere Name. ---------------------- After the Closing Date, Sellers shall use commercially reasonable efforts to promptly (a) change the name of The Hemisphere Trust Company Limited, an indirect subsidiary of MRM ("Hemisphere Trust"), to discontinue use of ---------------- "Hemisphere," (b) cause Hemisphere Trust to revise its product literature to delete all references to "Hemisphere" and (c) cause Hemisphere Trust to change its signage and stationery and otherwise discontinue use of "Hemisphere." 5.16 Negotiation With Others. ----------------------- During the period between the date of this Agreement and the earlier to occur of the Closing or the termination of this Agreement pursuant to Section ------- 9.1, none of the MRM Sellers or the Companies or their respective Affiliates - --- (collectively, the "Specified Parties") shall, or shall permit any agent or ----------------- other representative of any of the Specified Parties to, directly or indirectly: (a) solicit, initiate or engage in discussions or negotiations with any Person other than Purchaser or its Affiliates or their respective directors, officers, employees, representatives or agents (whether such negotiations are initiated by any of the Specified Parties or otherwise), or intentionally take any other action to facilitate the efforts of any Person, other than Purchaser or its Affiliates, relating to the possible acquisition of any of the Companies, whether by way of merger or consolidation, purchase of capital stock, purchase or lease of assets (excluding sales of assets in the ordinary course of business not in violation of other -37- provisions of this Agreement) or otherwise, or of any portion of the capital stock or assets (excluding sales of assets in the ordinary course of business not in violation of other provisions of this Agreement) of the Companies, other than as permitted under this Agreement (any such acquisition being referred to as an "Acquisition ----------- Transaction"); ----------- (b) provide non-public information to any Person, other than to Purchaser or its Affiliates, relating to a possible Acquisition Transaction; (c) enter into an agreement with any Person, other than Purchaser or any of its Affiliates, relating to or providing for a possible Acquisition Transaction; (d) consummate an Acquisition Transaction with any Person other than Purchaser or any of its Affiliates; or (e) make or authorize any statement, recommendation or solicitation in support of any possible Acquisition Transaction not involving Purchaser or its Affiliates. 5.17 Indemnity Agreement. On or prior to the Closing Date, Purchaser shall ------------------- enter into an agreement with each employee listed in Schedule 5.17 substantially ------------- in the form of Exhibit D attached hereto indemnifying such employees from and --------- against any and all claims relating to the period on or after the Closing Date that may be payable by such employee as a consequence of such employee's position as a director, officer of trustee of one or more clients of the Business. 5.18 Remaining Shares. From and after the date of this Agreement until the ---------------- Second Closing (hereinafter defined) none of the Other Stockholders shall create, suffer or permit to be created any Lien on (a) any of the Remaining Shares or (b) any of the rights of such Other Stockholder in or to such Remaining Shares, whether arising under the Hemisphere-Bermuda 2001 Restricted Stock Plan or the related Restricted Stock Agreement or otherwise. 5.19 Acceleration of Vesting of Remaining Shares; Forfeiture of Remaining -------------------------------------------------------------------- Shares. Purchaser and the Other Stockholders agree that promptly after the - ------ Closing, Purchaser shall cause Hemisphere-Bermuda to take such action as shall be necessary to (a) fully vest as of the Closing Date the Remaining Shares held by each of the Other Stockholders under the terms of Hemisphere-Bermuda's 2001 Restricted Plan and the Restricted Stock Agreements pursuant to which such Remaining Shares were granted to such Other Stockholders and (b) provide with respect to such vesting that if, on or after the Closing Date and on or prior to the Second Closing Date, any such Remaining Shares become subject to a Lien that cannot be discharged by the payment by Purchaser to the holder of such Lien of all or a portion of the consideration for the Remaining Shares subject to such Lien payable pursuant to Section 8.4 hereof, such Remaining Shares shall be ----------- forfeited by the Other Stockholder who is the owner thereof and the vesting thereof shall be null and void. For avoidance of doubt, for purposes of -38- this Section 5.19, a Lien on any Remaining Shares shall affect only such ------------ Remaining Shares and not affect any of the other Remaining Shares which are not subject to said Lien or the obligations of the Other Stockholders holding such other Remaining Shares to sell, and Purchaser to purchase, such other Remaining Shares for the consideration in accordance with Section 8.4, without deduction ----------- or setoff as a result of such Lien. 5.20 Certain Releases of Remaining Shares to Purchaser Under Stock Escrow -------------------------------------------------------------------- Agreement. If the Remaining Shares are released to Purchaser pursuant to Section - --------- 3(b) of the Stock Escrow Agreement, Purchaser shall distribute such Remaining Shares (including to itself or to another party which shall have the right thereto) in accordance with the terms of this Agreement. ARTICLE VI CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER The obligations of Purchaser under Article II (other than with respect to ---------- the Second Closing) are subject to the satisfaction or waiver by Purchaser of the following conditions precedent on or before the Closing Date: 6.1 Warranties True as of Both Present Date and Closing Date. The -------------------------------------------------------- representations and warranties of each Seller contained herein and in its Related Agreements shall have been accurate, true and correct in all material respects, except that all such representations and warranties that are qualified by materiality shall be true and correct, on and as of the date hereof and of such Related Agreements, respectively, and, except to the extent that any such representation or warranty is made solely as of the date hereof or as of another date earlier than the Closing Date, shall also be accurate, true and correct in all material respects, except that all such representations and warranties that are qualified by materiality shall be true and correct, on and as of the Closing Date with the same force and effect as though made by such Seller on and as of the Closing Date. 6.2 Compliance with Agreements and Covenants. Each Seller shall have ---------------------------------------- performed and complied in all material respects with all of its covenants and obligations contained in this Agreement and in its Related Agreements to be performed and complied with by it on or prior to the Closing Date. 6.3 Certificate of Compliance. Each MRM Seller shall have delivered to ------------------------- Purchaser a certificate dated as of the Closing Date, signed by such MRM Seller, certifying as to compliance with Sections 6.1 and 6.2. ------------ --- 6.4 Consents and Approvals. Purchaser shall have received written evidence ---------------------- satisfactory to Purchaser that (a) all consents and approvals set forth in Schedule 3.3(a) and marked with an asterisk have been obtained, and (b) the - --------------- consent of holders owning no less than 95% of the outstanding aggregate principal amount of 9-3/8% Convertible -39- Exchangeable Debentures due 2006 issued by MRM to the consummation of the transactions contemplated hereby has been obtained. 6.5 Actions or Proceedings. No action or proceeding by any Governmental ---------------------- Authority or other Person shall have been instituted, and no Law shall have been enacted or come into effect, after the date hereof, which enjoins, restrains, prohibits or results in substantial damages to Purchaser or any of its Affiliates in respect of, any provision of this Agreement or any Related Agreement or the consummation of the transactions contemplated hereby or thereby. 6.6 Opinion of Counsel. Purchaser shall have received opinions, dated the ------------------ Closing Date, of counsel to the MRM Sellers, to the effect set forth in Exhibit ------- B. - - 6.7 Material Adverse Effect. No Material Adverse Effect shall have occurred ----------------------- since the date of this Agreement. 6.8 Insolvency. No bankruptcy or insolvency proceeding shall have been ---------- instituted against or by MRM or either of the MRM Sellers and be continuing, and neither MRM nor either MRM Seller shall have taken any steps to initiate such a proceeding. 6.9 MRM Escrow Agreement. The Escrow Agent shall have delivered to -------------------- Purchaser the MRM Escrow Agreement duly executed by the Escrow Agent. ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS The obligations of Sellers (other than the Other Stockholders) under Article II are subject to the satisfaction or waiver by the Seller - ---------- Representative of the following conditions precedent on or before the Closing Date: 7.1 Warranties True as of Both Present Date and Closing Date. The -------------------------------------------------------- representations and warranties of Purchaser contained herein and in its Related Agreements shall have been accurate, true and correct in all material respects, except that all such representations and warranties that are qualified by materiality shall be true and correct, on and as of the date hereof and of such Related Agreements, respectively, and shall also be accurate, true and correct in all material respects on, except that all such representations and warranties that are qualified by materiality shall be true and correct, and as of the Closing Date with the same force and effect as though made by Purchaser on and as of the Closing Date. 7.2 Compliance with Agreements and Covenants. Purchaser shall have ---------------------------------------- performed and complied in all material respects with all of its covenants and obligations contained in this Agreement and in its Related Agreements to be performed and complied with by it on or prior to the Closing Date. -40- 7.3 Certificate of Compliance. Purchaser shall have delivered to the Seller ------------------------- Representative a certificate of Purchaser dated as of the Closing Date, signed by Purchaser, certifying as to compliance with Sections 7.1 and 7.2. ------------ --- 7.4 Consents and Approvals. The Seller Representative shall have received ---------------------- all consents and approvals of Governmental Authorities set forth on Schedule -------- 3.3(a) and marked with an asterisk and shall have received written evidence - ------ satisfactory to the Seller Representative that all consents and approvals set forth in Schedule 4.3 have been obtained. ------------ 7.5 Actions or Proceedings. No action or proceeding by any Governmental ---------------------- Authority or other Person shall have been instituted, and no Law shall have been enacted or come into effect, after the date hereof, which enjoins, restrains, prohibits or results in substantial damages to any Seller or any of its Affiliates in respect of, any provision of this Agreement or any Related Agreement or the consummation of the transactions contemplated hereby or thereby. 7.6 Opinion of Counsel. Sellers shall have received an opinion, dated the ------------------ Closing Date, of counsel to Purchaser, to the effect set forth in Exhibit C. --------- 7.7 MRM Escrow Agreement. The Escrow Agent shall have delivered to the MRM -------------------- Sellers the MRM Escrow Agreement duly executed by the Escrow Agent. ARTICLE VIII CLOSINGS 8.1 Closing. Subject to Articles VI and VII, the Closing shall take place ------- ----------- --- at the offices of Conyers Dill & Pearman, Hamilton, Bermuda, at 10:00 a.m., Atlantic Standard Time three (3) Business Days after the satisfaction or waiver of the conditions precedent set forth in Sections 6.4 and 7.4. The Closing, and ------------ --- all transactions to occur at the Closing, shall be deemed to have taken place at, and shall be effective as of, 11:59 p.m., Atlantic Standard Time, on the Closing Date. 8.2 Certain Deliveries by Sellers. At the Closing, Sellers shall deliver to ----------------------------- Purchaser the following: (a) certificates evidencing all of the Initial Shares which are certificated, which certificates shall be duly endorsed in blank or accompanied by duly executed stock powers or stock transfer forms, assignments of Shares which are uncertificated or other duly executed instruments of conveyance sufficient to validly transfer the Shares to Purchaser; (b) the resignations referred to in Section 5.5; ----------- (c) a certificate of the secretary or an assistant secretary of each MRM Seller certifying resolutions of the board of directors or -41- managers of such MRM Seller approving and authorizing the execution, delivery and performance by such MRM Seller of this Agreement and its Related Agreements and the consummation by such MRM Seller of the transactions contemplated hereby and thereby (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of such MRM Seller); (d) a certificate of a director of Hemisphere-Ireland certifying resolutions of the board of directors of Hemisphere-Ireland approving transfers of the capital stock of Hemisphere-Ireland to Purchaser (subject to stamping); (e) the certificate of formation of the US Holding Company, certified by the Secretary of State of Delaware, and the limited liability company agreement of the US Holding Company, certified by the secretary or an assistant secretary of the US Holding Company; (f) a certificate of good standing for the US Holding Company from the State of Delaware; (g) the certificate of formation of each US Company, certified by the Secretary of State of Delaware, and the limited liability company agreement of each US Company, certified by the secretary of an assistant secretary of such US Company; (h) a certificate of good standing for each US Company from the State of Delaware; (i) the organizational documents of each of the Non-US Holding Company and the Companies, certified by the applicable Governmental Authority in their respective jurisdictions of organization or by the secretary or an assistant secretary of the Non-US Holding Company or such Company as appropriate; (j) a certificate of compliance or good standing for each of the Non-US Holding Company and the Companies (other than Hemisphere-Ireland) from the applicable Governmental Authority in their respective jurisdictions of organization; (k) the MRM Escrow Agreement duly executed by each MRM Seller; and (l) such other documents and instruments as may be required by any other provision of this Agreement or any Related Agreement or as may reasonably be required to consummate the transactions contemplated by this Agreement and the Related Agreements. -42- 8.3 Certain Deliveries by Purchaser. At the Closing, Purchaser shall ------------------------------- deliver to the Escrow Agent the amounts payable to the Escrow Agent pursuant to Section 2.2(c) and Section 2.2(d); and shall deliver to Sellers the following: - -------------- -------------- (a) the amount payable to Sellers at the Closing pursuant to Section 2.2(a) and Section 2.2(b); -------------- -------------- (b) a certificate of the secretary or an assistant secretary of Purchaser certifying resolutions of the board of directors of Purchaser approving and authorizing the execution, delivery and performance by Purchaser of this Agreement and its Related Agreements and the consummation by Purchaser of the transactions contemplated hereby and thereby (together with an incumbency and signature certificate regarding the officer(s) signing on behalf of Purchaser); and (c) certificate of incorporation of Purchaser, certified by the Secretary of State of Delaware and the by-laws of Purchaser, certified by the secretary or an assistant secretary of Purchaser; (d) a certificate of good standing for Purchaser from the State of Delaware; (e) copies of all releases of the MRM Guaranties that have been obtained as of the Closing Date; (f) the MRM Escrow Agreement duly executed by Purchaser; and (g) such other documents and instruments as may be required by any other provision of this Agreement or any Related Agreement or as may reasonably be required to consummate the transactions contemplated by this Agreement and the Related Agreements. 8.4 Second Closing. -------------- (a) Subject to the satisfaction or waiver of the conditions set forth in Section 8.4(d), the Second Closing shall take place at the -------------- offices of Conyers Dill & Pearman, Hamilton, Bermuda, at 10:00 a.m., Atlantic Standard Time, on a date no earlier than June 3, 2002 and no later than June 7, 2002 (the "Second Closing Date"). The Second ------------------- Closing, and all transactions to occur at the Second Closing, shall be deemed to have taken place at, and shall be effective as of, 11:59 p.m., Atlantic Standard Time, on the Second Closing Date. (b) At the Second Closing, in consideration for the Remaining Shares, Purchaser shall pay an aggregate amount equal to Six Million Eight Hundred Eighteen Thousand Two Hundred Ninety Six Dollars ($6,818,296), less amounts attributable to Remaining Shares that are ---- -43- forfeited pursuant to Section 5.19, all of which shall be allocated ------------ and disbursed as follows: (i) The sum of (A) Five Million Seven Hundred Thirty- Three Thousand Two Hundred Ninety-Six Dollars ($5,733,296), less (B) four ---- and eight-tenths percent (4.8%) of the amount of Shared Expenses estimated pursuant to Section 2.4, less (C) fees and expenses of the ----------- ---- Escrow Agent under the Stock Escrow Agreement, and (D) less amounts ---- attributable to Remaining Shares that are forfeited pursuant to Section 5.19, shall be paid to the Management Stockholder ------------ Representative to be disbursed to the Other Stockholders. (ii) One Million Eighty Five Thousand Dollars ($1,085,000) shall be paid to the Escrow Agent to be held and distributed pursuant to the Management Escrow Agreement. (iii) Four and eight-tenths percent (4.8%) of the amount of Shared Expenses estimated pursuant to Section 2.4, shall be allocated ----------- and disbursed to the MRM Sellers pro rata in accordance with their respective Percentages. (c) At the Second Closing, the Remaining Shares shall be delivered to Purchaser in accordance with the provisions of the Stock Escrow Agreement, and Purchaser shall be entitled to the release by the Escrow Agent of the Remaining Shares from escrow to Purchaser upon payment of the consideration for the Remaining Shares as provided herein. (d) The obligations of: (i) Purchaser and the Other Stockholders under Section ------- 8.4(b) are subject to the satisfaction or waiver by the parties on or ------ before the Second Closing Date of the condition that the Closing shall have taken place; (ii) the Other Stockholders under Section 8.4(b) are subject -------------- to the satisfaction or waiver by the Other Stockholders of the following conditions: (A) No bankruptcy or insolvency proceeding shall have been instituted against or by Purchaser and be continuing, and Purchaser shall not have taken any steps to initiate such a proceeding; and (B) No action or proceeding by any Governmental Authority or other Person shall have been instituted, and no Law shall have been enacted or come into effect, after the date hereof, -44- which enjoins, restrains or prohibits the consummation of the transactions contemplated by this Section 8.4. ----------- (iii) Purchaser under Section 8.4(b) are subject to the -------------- satisfaction or waiver by Purchaser on or before the Second Closing Date of the following conditions: (A) Warranties True as of the Closing Date. The -------------------------------------- representations and warranties of each Other Stockholder contained herein and in its Related Agreements, except to the extent that any such representation or warranty is made solely as of the date hereof or as of another date earlier than the Closing Date, shall have been accurate, true and correct in all material respects, except that all such representations and warranties that are qualified by materiality shall have been true and correct, on and as of the Closing Date and to the extent such representation and warranty concerns the Other Stockholders as Sellers in their individual capacities, on and as of the Second Closing Date, with the same force and effect as though made by such Other Stockholder on and as of the Closing Date and the Second Closing Date. (B) Compliance with Agreements and Covenants. Each Other ---------------------------------------- Stockholder shall have performed and complied in all material respects with all of its covenants and obligations contained in this Agreement and in its Related Agreements to be performed and complied with by such stockholder on or prior to the Closing Date and the Second Closing Date. (C) Certificate of Compliance. Each Other Stockholder shall ------------------------- have delivered to Purchaser a certificate dated as of the Second Closing Date, signed by such Other Stockholder, certifying as to compliance with Sections 8.4(d)(iii)(A) and 8.4(d)(iii)(B). ----------------------- -------------- (D) Actions or Proceedings. No action or proceeding by any ---------------------- Governmental Authority or other Person shall have been instituted, and no Law shall have been enacted or come into effect, after the date hereof, which enjoins, restrains, prohibits the consummation of the transactions contemplated hereby or thereby. (e) Notwithstanding the provisions of this Section 8.4, in the ----------- event that any of the representations and warranties made by any of the Other Stockholders in Section 3.4 hereof shall not be true and ----------- correct as of the Second Closing Date, or in the event of a breach by any of the Other Stockholders of the covenants set forth in Section ------- 5.18 hereof, Purchaser may, in its sole discretion, elect to purchase ---- the Remaining Shares held by any or all of such Other Stockholders in accordance with -45- the provisions of this Section 8.4, in which event Purchaser shall be ----------- entitled to deduct from the consideration to be paid for such Remaining Shares any amount thereof that Purchaser shall determine to be necessary in order for Purchaser to satisfy in full, discharge or remove any Lien on such Remaining Shares or the rights of such Other Stockholders therein or thereto. 8.5 No Second Closing. Notwithstanding anything to the contrary herein, if ----------------- the Closing shall occur at any time after June 7, 2002 then this Agreement shall be amended (without any action by any of the parties hereto) as follows: (a) The sixth recital shall be deleted in its entirety and be of no further force or effect; (b) The definition of "Closing" in Article I shall be amended to delete the words "(other than the consummation of the transactions contemplated herein in accordance with Section 8.4)"; ----------- (c) The definition of "Purchase Price" in Article I shall be amended to delete the words "and Section 8.4(b)"; ------------- (d) The second sentence of Section 2.1 shall be deleted and of no force or effect; (e) All references in this Agreement to "Initial Shares" shall be deemed references to "Shares"; (f) Section 2.2 shall be amended to provide that the aggregate amount paid by Purchaser at the Closing shall equal One Hundred Thirty Three Million Four Hundred Fifty Two Thousand Four Hundred Thirty Two Dollars ($133,452,432); (g) The percentage set forth in Section 2.2(a)(iii) shall be ------------------- amended to thirteen and two-tenths percent (13.2%); (h) The dollar amounts set forth in Section 2.2(b)(i) and (ii) shall be amended to Eighteen Million Eight Hundred Fifty Two Thousand Four Hundred Thirty Two Dollars ($18,852,432) and Three Million Dollars ($3,000,000), respectively, and the reference "eight and four-tenths percent (8.4%) of" in Section 2.2(b)(iii) shall be amended to "thirteen and two-tenths percent (13.2%)"; (i) The dollar amount set forth in Section 2.2(d) shall be amended to Three Million Dollars ($3,000,000); (j) The first sentence of Article VI shall be amended to delete "(other than with respect to the Second Closing)"; -46- (k) The first sentence of Article VII shall be amended to delete "(other than the Other Stockholders )"; (l) Section 8.4, and all references in this Agreement thereto, shall be of no further force or effect; (m) any other appropriate adjustments to this Agreement to reflect a single closing wherein Purchaser shall receive all Shares and the Sellers shall receive the full Purchase Price hereunder; and (n) Sections 5.18 and 5.19, and all references thereto, shall be ---------------------- deleted and shall be of no further force or effect. ARTICLE IX TERMINATION 9.1 Termination. This Agreement may be terminated, and the transactions ----------- contemplated herein may be abandoned, at any time on or prior to the Closing Date: (a) with the mutual written consent of the Seller Representative and Purchaser; (b) by the Seller Representative or Purchaser, if the Closing shall not have taken place on or before June 30, 2002; provided, that -------- the right to terminate this Agreement under this Section 9.1(b) shall -------------- not be available to (i) the Seller Representative if the failure of any MRM Seller to fulfill any of its obligations under this Agreement, or the breach of or inaccuracy in any representation or warranty by any MRM Seller in this Agreement, has been the cause of or resulted in the failure of the Closing to occur on or before such date or (ii) Purchaser if the failure of Purchaser to fulfill any of its obligations under this Agreement, or the breach of or inaccuracy in any representation or warranty by Purchaser in this Agreement, has been the cause of or resulted in the failure of the Closing to occur on or before such date; or (c) by either Purchaser or the Seller Representative if a Governmental Authority shall have issued an order, decree or ruling or taken any other action (which order, decree or ruling the parties hereto shall use their reasonable best efforts to lift), in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement, and such order, decree, ruling or other action becomes final and nonappealable. In the event of termination by the Seller Representative or Purchaser pursuant to this Section 9.1 (other than Section 9.1(a)), written notice thereof ----------- -------------- shall be given to the other party. -47- 9.2 Effect of Termination. If this Agreement is terminated pursuant to --------------------- Section 9.1, all obligations of the parties hereunder shall terminate, - ----------- except for the obligations set forth in Sections 5.8 (Brokers), 11.1 ------------ ---- (Expenses) and 11.8 (Publicity), which shall survive the termination of ---- this Agreement, and except that no such termination shall relieve any party from liability for any prior intentional breach of this Agreement or any prior breach of Section 4.5. ----------- ARTICLE X INDEMNIFICATION 10.1 Survival. The representations and warranties of the parties hereto -------- contained herein and in the Related Agreements shall survive the Closing until September 1, 2003, except that (i) Tax Warranties shall survive until the Tax Statute of Limitations Date, and (ii) Title and Authorization Warranties shall survive forever. Neither Purchaser nor any Seller shall have any liability with respect to claims first asserted in connection with any representation or warranty after the survival period specified therefor in this Section 10.1. ------------ 10.2 Indemnification by Seller. Subject to Section 10.4, each MRM Seller, ------------------------- ------------ jointly and severally, agrees to indemnify Purchaser against, and agrees to hold Purchaser harmless from, any and all Losses incurred or suffered by Purchaser arising out of any of the following: (a) any breach of or any inaccuracy in any representation or warranty made by any Seller in this Agreement or any Related Agreement or any document delivered by any Seller at the Closing; provided, that -------- no MRM Seller shall have any liability under this Section 10.2(a) for --------------- any breach of or inaccuracy in any representation or warranty unless (i) in the case of all representations and warranties, except for Tax Warranties and Title and Authorization Warranties, a notice of Purchaser's claim is given to the Seller Representative not later than the close of business on September 1, 2003, and (ii) in the case of Tax Warranties, a notice of Purchaser's claim is given to the Seller Representative not later than the close of business on the Tax Statute of Limitations Date; (b) any breach of or failure by any Seller to perform any covenant or obligation of any Seller set out in this Agreement or any Related Agreement or any document delivered by any Seller at the Closing; provided, that no MRM Seller shall have any liability under -------- this Section 10.2(b) for any breach or failure occurring on or prior --------------- to the Closing Date unless a notice of Purchaser's claim is given to the Seller Representative not later than the close of business on September 1, 2003; (c) any liability for Taxes for a Company attributable to the Pre-Closing Tax Period in excess of reserves for such Tax liability set forth in the Financial Statements, provided, however, that, -------- notwithstanding the -48- foregoing, Sellers shall not be liable for any Tax liability arising out of, resulting from, or accelerated by the Section 338(g) Election by Purchaser; or (d) any rent owed by Hemisphere-Ireland under the Old Irish Lease in excess of any amounts received by Hemisphere-Ireland under any sublease with respect to the office space covered by the Old Irish Lease, provided that Purchaser and Hemisphere-Ireland shall have -------- complied with Section 5.12. ------------ 10.3 Indemnification by Purchaser. Purchaser agrees to indemnify each ---------------------------- Seller against, and agrees to hold each Seller harmless from, any and all Losses incurred or suffered by such Seller arising out of any of the following: (a) any breach of or any inaccuracy in any representation or warranty made by Purchaser in this Agreement or any Related Agreement or any document delivered by Purchaser at the Closing; provided, that -------- Purchaser shall have no liability under this Section 10.3(a) for any --------------- breach of or inaccuracy in any representation or warranty unless, in the case of all representations and warranties, except for Title and Authorization Warranties, a notice of such Seller's claim is given to Purchaser not later than the close of business on September 1, 2003; (b) any breach of or failure by Purchaser to perform any covenant or obligation of Purchaser set out in this Agreement or any Related Agreement or any document delivered by Purchaser at the Closing; or (c) any liability of any Company arising out of the conduct of the Business after the Closing Date, other than a liability of such Company which provides the basis for a right of Purchaser to indemnification under Section 10.2. ------------ 10.4 Limitations on Liability of Sellers. Notwithstanding any other ----------------------------------- provision of this Agreement: (a) Purchaser shall have the right to payment by the MRM Sellers under Section 10.2(a) for any inaccuracy in or breach of any --------------- representation or warranty (other than Title and Authorization Warranties and Tax Warranties) only if, and only to the extent that, Purchaser shall have incurred as to all inaccuracies and breaches by Sellers collectively, indemnifiable Losses in excess of One Million Dollars ($1,000,000) and then only for such excess. (b) The MRM Sellers shall not have any liability under or in connection with this Agreement or the Related Agreements or the transactions contemplated hereby or thereby (including under Section ------- 10.2(a) or otherwise) for any breach of or inaccuracy in any ------- representation -49- or warranty (other than Tax Warranties) or any related matter in excess of (i) as to all representations and warranties, with respect to Sellers collectively, other than Title and Authorization Warranties and Tax Warranties, Twenty-Five Million Dollars ($25,000,000) in the aggregate, and (ii) as to Title and Authorization Warranties and the indemnity obligation of Sellers set forth in Section 10.2(c), the --------------- Purchase Price in the aggregate; provided, that in no event shall the -------- MRM Sellers' collective aggregate liability for any and all matters referred to in clauses (i) and (ii) exceed the Purchase Price in the ----------- ---- aggregate. (c) None of the Management Stockholders shall have any liability to Purchaser under this Agreement, it being understood that the MRM Sellers may be entitled to recover from Management Stockholders pursuant to the Management Escrow Agreement certain Losses for which the MRM Sellers have indemnified Purchaser pursuant to this Agreement. (d) In no event shall any Seller have any liability for punitive damages. (e) The sole and exclusive liability and responsibility of Sellers to Purchaser under or in connection with the Shares, this Agreement or the Related Agreements or the transactions contemplated hereby or thereby (including for any breach of or inaccuracy in any representation or warranty or for any breach of any covenant or obligation or for any other reason), and the sole and exclusive remedy of Purchaser with respect to any of the foregoing, shall be as set forth in this Article X and in Section 5.8 and Section 11.4(b); --------- ----------- --------------- provided, that in the event of a breach by any Seller in the -------- performance of its obligation to consummate the sale of any Shares to Purchaser in accordance with, and subject to, the terms of this Agreement, Purchaser shall be entitled to seek injunctive relief against such Seller to compel such performance. To the extent that Purchaser or any of its Affiliates has any Losses for which it may assert any other right to indemnification, contribution or recovery from any Seller or any of their respective Affiliates (whether under this Agreement or under any common law or any statute, including any environmental Law, or otherwise), Purchaser hereby waives, releases and agrees not to assert such right, and Purchaser agrees to cause each of its Affiliates to waive, release and agree not to assert such right. (f) In no event shall any Seller have any liability for any claims by or with respect to any past, current or future employees of any Company (or for any Losses relating thereto) which are first made after the Closing and which arise out of or in connection with any injuries to, or deaths or illnesses of, such employees. 10.5 Claims. As promptly as is reasonably practicable after becoming aware ------ of a claim for indemnification under this Agreement not involving a claim, or the -50- commencement of any suit, action or proceeding, of the type described in Section ------- 10.6, but in any event no later than ten (10) Business Days after first becoming - ---- aware of such claim, the Indemnified Person shall give notice to the Indemnifying Person of such claim, which notice shall specify the facts alleged to constitute the basis for such claim, the representations, warranties, covenants and obligations alleged to have been breached and a good faith estimate of the amount that the Indemnified Person seeks hereunder from the Indemnifying Person. The Indemnifying Person shall have the right to request and receive from the Indemnified Person such other information that is reasonably available to the Indemnified Person as may be necessary for the Indemnifying Person to determine that the limitations in Section 10.4 have been satisfied or ------------ do not apply with respect to such claim; provided, that the failure of the -------- Indemnified Person to give such notice shall not relieve the Indemnifying Person of its obligations under this Article X except to the extent (if any) that the --------- Indemnifying Person shall have been prejudiced thereby. 10.6 Notice of Third Party Claims; Assumption of Defense. The Indemnified --------------------------------------------------- Person shall give notice as promptly as is reasonably practicable, but in any event no later than ten (10) Business Days after receiving notice thereof, to the Indemnifying Person of the assertion of any claim, or the commencement of any suit, action or proceeding, by any Person not a party hereto in respect of which indemnity may be sought under this Agreement, which notice shall specify in reasonable detail the nature and amount of such claim. The Indemnifying Person shall have the right to request and receive from the Indemnified Person such other information that is reasonably available to the Indemnified Person as may be necessary for the Indemnifying Person to determine that the limitations in Section 10.4 have been satisfied or do not apply; provided, that the failure ------------ -------- of the Indemnified Person to give such notice shall not relieve the Indemnifying Person of its obligations under this Article X except to the extent (if any) --------- that the Indemnifying Person shall have been prejudiced thereby. The Indemnifying Person may, at its own expense, (a) participate in the defense of any such claim, suit, action or proceeding and (b) upon notice to the Indemnified Person, at any time during the course of any such claim, suit, action or proceeding, assume the defense thereof with counsel of its own choice and in the event of such assumption, shall have the exclusive right, subject to clause (i) of Section 10.7, to settle or compromise such claim, suit, action or - ---------- ------------ proceeding; provided, that the Indemnifying Person shall not have the right to -------- assume the defense of any such claim, suit, action or proceeding if at such time, it is reasonably foreseeable that such claim, suit, action or proceeding would result in damages in excess of $7.5 million of the amount which would be indemnifiable by the Indemnifying Person under this Agreement with respect to such claim, suit, action or proceeding. If the Indemnifying Person assumes such defense, the Indemnified Person shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at its own expense, separate from the counsel employed by the Indemnifying Person. Whether or not the Indemnifying Person chooses to defend or prosecute any such claim, suit, action or proceeding, all of the parties hereto shall cooperate in the defense or prosecution thereof. 10.7 Settlement or Compromise. Any settlement or compromise made or caused ------------------------ to be made by the Indemnified Person (unless the Indemnifying Person has the -51- exclusive right to settle or compromise under clause (b) of Section 10.6) or the ---------- ------------- Indemnifying Person, as the case may be, of any such claim, suit, action or proceeding of the kind referred to in Section 10.6 shall also be binding upon ------------ the Indemnifying Person or the Indemnified Person, as the case may be, in the same manner as if a final judgment or decree had been entered by a court of competent jurisdiction in the amount of such settlement or compromise; provided, -------- that (i) no obligation, restriction or Loss shall be imposed on the Indemnified Person as a result of such settlement or compromise without its prior written consent, which consent shall not be unreasonably withheld, and (ii) the Indemnified Person will not compromise or settle any claim, suit, action or proceeding without the prior written consent of the Indemnifying Person, which consent shall not be unreasonably withheld. 10.8 Time Limits. If any claim for indemnification or other recovery is ----------- timely asserted under this Article X, the Indemnified Person shall have the --------- right to bring an action, suit or proceeding with respect to such claim within two (2) years after the earlier of (a) becoming aware of a claim for indemnification or (b) receiving notice thereof, as the case may be, but may not bring any such action, suit or proceeding thereafter. 10.9 Net Losses and Subrogation. -------------------------- (a) Notwithstanding anything contained herein to the contrary, the amount of any Losses incurred or suffered by any Indemnified Person shall be calculated after giving effect to (i) any insurance proceeds received by the Indemnified Person (or any of its Affiliates) with respect to such Losses, and (ii) any recoveries obtained by the Indemnified Person (or any of its Affiliates) from any other third party. Each Indemnified Person shall exercise commercially reasonable efforts to obtain such proceeds and recoveries. If any such proceeds or recoveries are received by an Indemnified Person (or any of its Affiliates) with respect to any Losses after an Indemnifying Person has made a payment to the Indemnified Person with respect thereto, the Indemnified Person (or such Affiliate) shall pay to the Indemnifying Person the amount of such proceeds or recoveries (up to the amount of the Indemnifying Person's payment). (b) Upon making any payment to an Indemnified Person in respect of any Losses, the Indemnifying Person will, to the extent of such payment, be subrogated to all rights of the Indemnified Person (and its Affiliates) against any third party in respect of the Losses to which such payment relates to the extent of such payment. Such Indemnified Person (and its Affiliates) and Indemnifying Person will execute upon request all instruments reasonably necessary to evidence or further perfect such subrogation rights. 10.10 Purchase Price Adjustments. To the extent permitted by Law, any -------------------------- amounts payable under Section 10.2 or Section 10.3 shall be treated by Purchaser ------------ ------------ and Sellers as an adjustment to the Purchase Price. -52- 10.11 Role of Seller Representative. Purchaser shall be entitled to deal ----------------------------- with and rely on the Seller Representative on all matters involving Sellers in connection with this Article X. --------- ARTICLE XI MISCELLANEOUS 11.1 Expenses. Each party hereto shall bear its own fees and expenses with -------- respect to the transactions contemplated hereby, provided, that Purchaser shall -------- pay all sales, use, value added, stamp, transfer, service, recording and like taxes and fees imposed by any Governmental Authority in connection with the transfer and assignment of the Shares. Notwithstanding the foregoing, with respect to fees and expenses incurred by MRM Sellers on behalf of themselves and the Management Stockholders, and by the Management Stockholders on their own behalf, in connection with the transactions contemplated by this Agreement, any Related Agreement, the Management Escrow Agreement and the Agreement and Release, (a) the MRM Sellers shall pay for the fees of Credit Suisse First Boston Corporation, and (b) the MRM Sellers shall bear 86.8%, and the Management Stockholders shall bear 13.2%, of all other expenses incurred by the MRM Sellers (including any expenses (but not fees) to be paid to Credit Suisse First Boston Corporation) and the reasonable fees and expenses of legal counsel incurred by the Management Stockholders (the "Shared Expenses"). --------------- 11.2 Amendment. Except as provided in Section 11.15, this Agreement may be --------- ------------- amended, modified or supplemented but only in writing signed by Purchaser and the Seller Representative; provided that no such amendment, modification or -------- waiver shall disproportionately affect the Management Stockholders or any one or portion of them without the consent of the Management Stockholder Representative (it being understood and agreed that any amendment, modification or waiver that would cause the Management Stockholders to bear more than 13.2% of any decrease in the Purchase Price shall be deemed to have a disproportionate effect on the Management Stockholders for purposes of this Section 11.2). ------------ 11.3 Notices. Any notice, request, instruction or other document to be ------- given hereunder by a party hereto shall be in writing and shall be deemed to have been given, (a) when received if given in person or by courier or a courier service or (b) on the date of transmission if sent by facsimile transmission (receipt confirmed) on a Business Day during or before the normal business hours of the intended recipient, and if not so sent on such a day and at such a time, on the following Business Day: (i) If to Purchaser, addressed as follows: -53- The BISYS Group, Inc. 90 Park Avenue, 10th Floor New York, New York 10016 Attention: General Counsel Facsimile: (212) 907-6035 with a copy to: Drinker Biddle & Shanley LLP 500 Campus Drive Florham Park, New Jersey 07932 Attention: Stewart E. Lavey Facsimile: (973) 360-9831 (ii) If to any MRM Seller or the Seller Representative, addressed as follows: c/o Mutual Risk Management Ltd. 44 Church Street Hamilton, Bermuda HM HX Attention: Chairman Facsimile: (441) 295-6052 with a copy to: Mayer, Brown, Rowe & Maw 190 South LaSalle Street Chicago, Illinois 60603 Attention: Richard W. Shepro Marc F. Sperber Facsimile: (312) 701-7711 (iii) If to any Management Stockholder or the Management Stockholder Representative, addressed as follows: c/o Hemisphere Management Limited Hemisphere House, 9 Church Street Hamilton, Bermuda HM DX Attention: Thomas Healy Facsimile: (441) 292-6145 -54- with a copy to: c/o Hemisphere Management Limited Hemisphere House, 9 Church Street Hamilton, Bermuda HM DX Attention: Marty Brandt Facsimile: (441) 295-7141 or to such other individual or address as a party hereto may designate for itself by notice given as herein provided. 11.4 Disbursements and Payments in Dollars. ------------------------------------- (a) Except as otherwise provided in a Related Agreement or as expressly provided herein, all payments pursuant hereto shall be made by wire transfer in Dollars in same day or immediately available funds without any set-off, deduction or counterclaim whatsoever. (b) Not later than one Business Day prior to the Closing and one Business Day prior to the Second Closing, the MRM Sellers shall instruct Purchaser in writing as to each of the portions of amounts to be disbursed by Purchaser pursuant to Sections 2.2(a), 2.2(b), --------------- ------ 8.4(b)(i) and 8.4(b)(iii), as applicable. Purchaser assumes no --------- ----------- responsibility or liability to any other party to this Agreement with respect to such written instructions, and Purchaser shall be entitled to conclusively rely on such instructions in disbursing such amounts. The MRM Sellers, jointly and severally, agree to indemnify and hold Purchaser harmless from and against any and all Losses incurred or suffered by any party hereto resulting, directly or indirectly, from Purchaser's following such instructions. The limitations on the indemnification of Purchaser set forth in Sections 10.4(a), 10.4(b) ---------------- ------- and 10.4(d) shall not apply to such indemnification. ------- 11.5 Waivers. The failure of a party hereto at any time or times to require ------- performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No waiver by a party of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty. 11.6 Assignment. This Agreement shall be binding upon and inure to the ---------- benefit of the parties hereto and their respective successors and permitted assigns; provided, that, except as otherwise provided herein, no assignment of -------- any rights or obligations hereunder, by operation of law or otherwise, shall be made by any Seller without the written consent of Purchaser, or by Purchaser without the written consent of the Seller Representative; provided, further that -------- no such assignment shall -55- disproportionately affect the Management Stockholders or any one or portion of them without the consent of the Management Stockholder Representative. Notwithstanding the foregoing, Purchaser may assign any or all of its rights (but not its obligations) under this Agreement to one or more of Purchaser's wholly owned subsidiaries without the consent of any other party hereto, provided that no such assignment shall increase or otherwise adversely - -------- affect the obligations of any Seller hereunder. Notwithstanding the foregoing, the MRM Sellers may grant a security interest in all of their respective rights to receive moneys under this Agreement to Bank of America, N.A., as collateral agent for the lenders party to the Credit Agreement and for the holders of the Debentures, without the consent of any other party hereto. 11.7 No Third Party Beneficiaries. This Agreement is solely for the benefit ---------------------------- of the parties hereto and, to the extent provided herein, their respective Affiliates, and no provision of this Agreement shall be deemed to confer upon other third parties any remedy, claim, liability, reimbursement, cause of action or other right. 11.8 Publicity. Prior to the Closing Date, no public announcement or other --------- publicity regarding the existence of this Agreement or its contents or the transactions contemplated hereby shall be made by Purchaser, any Seller or any of their respective Affiliates, officers, directors, employees, representatives or agents, without the prior written agreement of Purchaser and the Seller Representative, in any case, as to form, content, timing and manner of distribution or publication. On and after the Closing Date, each Seller and Purchaser agree to hold confidential the terms and provisions of this Agreement and the terms of the transactions contemplated hereby. Notwithstanding the foregoing, nothing in this Section 11.8 shall prevent any party or its ------------ Affiliates from (a) making any public announcement or disclosure required by Law or the rules of any stock exchange, (b) discussing this Agreement or its contents or the transactions contemplated hereby with officers, directors, managers, employees, representatives and agents of such party and its Affiliates and with those Persons whose approval, agreement or opinion, as the case may be, is required for consummation of such particular transaction or transactions, or (c) enforcing its rights hereunder. 11.9 Further Assurances. Upon the reasonable request of Purchaser, each ------------------ Seller shall on and after the Closing Date execute and deliver to Purchaser such assignments and other instruments as may be reasonably requested by Purchaser and are required to effectuate completely the transfer and assignment to Purchaser of the Shares, and to otherwise carry out the purposes of this Agreement. 11.10 Severability. If any provision of this Agreement shall be held ------------ invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue. 11.11 Entire Understanding. This Agreement and the Related Agreements set -------------------- forth the entire agreement and understanding of the parties hereto with respect to the transactions contemplated hereby and supersede any and all prior agreements, -56- arrangements and understandings among the parties relating to the subject matter hereof, excluding the letter agreement, dated February 1, 2002, between Purchaser and Credit Suisse First Boston Corporation, as exclusive agent for MRM (relating to confidentiality and other matters), which remains in full force and effect. 11.12 Language. Sellers and Purchaser agree that the language used in this -------- Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any Seller or Purchaser. 11.13 Applicable Law. This Agreement shall be governed by and construed and -------------- enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. 11.14 Jurisdiction of Disputes; Waiver of Jury Trial. In the event either ---------------------------------------------- party to this Agreement commences any litigation, proceeding or other legal action in connection with or relating to this Agreement, any Related Agreement or any matters contemplated hereby or thereby, each party to this Agreement hereby (a) agrees that any such litigation, proceeding or other legal action may be brought in a court of competent jurisdiction located within the County of New York, in the State of New York, whether a state or federal court; (b) agrees that in connection with any such litigation, proceeding or action, such party will consent and submit to personal jurisdiction in any such court described in clause (a) of this Section 11.14 and to service of process upon it in accordance - ---------- ------------- with the rules and statutes governing service of process; (c) agrees to waive to the full extent permitted by law any objection that it may now or hereafter have to the venue of any such litigation, proceeding or action in any such court or that any such litigation, proceeding or action was brought in an inconvenient forum; (d) designates, appoints and directs Corporation Service Company as its authorized agent to receive on its behalf service of any and all process and documents in any such litigation, proceeding or action in the State of New York, except that each of the Management Stockholders instead designates, appoints and directs the Management Stockholder Representative as his or her authorized agent to receive on his or her behalf, delivered by registered mail to the address of the Management Stockholder Representative set forth in Section 11.3, service of ------------ any and all process and documents in any such litigation, proceeding or action in the State of New York; (e) agrees to notify the other party to this Agreement immediately if such agent shall refuse to act, or be prevented from acting, as agent and, in such event, promptly to designate another agent in the State of New York to serve in place of such agent and deliver to the other party written evidence of such substitute agent's acceptance of such designation; (f) agrees as an alternative method of service to service of process in any such litigation, proceeding or action by mailing of copies thereof to such party at its address set forth in Section 11.3; (g) agrees that any service made as ------------ provided herein shall be effective and binding service in every respect; and (h) agrees that nothing herein shall affect the rights of either party to effect service of process in any other manner permitted by Law. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY DISPUTE IN CONNECTION WITH OR RELATING TO THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY MATTERS CONTEMPLATED HEREBY OR -57- THEREBY, AND AGREES TO TAKE ANY AND ALL ACTION NECESSARY OR APPROPRIATE TO EFFECT SUCH WAIVER. 11.15 Schedules. Any information disclosed pursuant to any Schedule hereto --------- shall also be deemed to be disclosed to Purchaser for all other purposes of this Agreement to the extent that the relevance of such information for such other purposes is reasonably apparent. Neither the specification of any Dollar amount in any item or matter in any provision of this Agreement nor the inclusion of any specific item or matter in any Schedule hereto is intended to imply that such amount, or higher or lower amounts, or the item or matter so specified or included or other items or matters, are or are not material, and no party shall use the fact of the specification of any such amount or the inclusion of any such item or matter in any dispute or controversy between the parties as to whether any item or matter not specified herein or included in any Schedule hereto is or is not material for purposes of this Agreement. Neither the specification of any item or matter in any provision of this Agreement nor the inclusion of any specific item or matter in any Schedule hereto is intended to imply that such item or matter, or other items or matters, are or are not in the ordinary course of business, and no party shall use the fact of the specification or the inclusion of any such item or matter in any dispute or controversy between the parties as to whether any item or matter not specified herein or included in any Schedule hereto is or is not in the ordinary course of business for purposes of this Agreement. The Seller Representative or the Management Stockholder Representative may, from time to time prior to or at the Closing, by notice in accordance with the terms of this Agreement, supplement or amend any Schedule, including one or more supplements or amendments thereto to correct any matter which, if not corrected, would constitute a breach or a failure to be true at the Closing of any representation, warranty, covenant or obligation contained herein. Such supplemental or amended Schedule shall be deemed to cure any breach or a failure to be true at the Closing for purposes of Section 6.1, provided, that such breach or a failure to be true at the Closing - ----------- -------- did not have a materially adverse economic impact on the Business. Further, if the Closing occurs, any such supplement and amendment will be effective to cure and correct for all other purposes any breach of any representation, warranty, covenant or obligation which would have existed if the Seller Representative had not made such supplement or amendment, and all references to any Schedule hereto which is supplemented or amended as provided in this Section 11.15 shall for all ------------- purposes after the Closing be deemed to be a reference to such Schedule as so supplemented or amended. 11.16 Disclaimer of Warranties. None of the Sellers makes any ------------------------ representations or warranties with respect to any projections, forecasts or forward-looking statements provided to Purchaser. There is no assurance that any projected or forecasted results will be achieved. Except to the extent of the express representations and warranties contained in Article III, Sellers ----------- disclaim all other representations and warranties, whether express or implied. Purchaser acknowledges and agrees that neither Sellers, their respective Affiliates, any of their representatives nor any other Person has made any representation or warranty, express or implied, as to the accuracy or completeness of any memoranda, charts, summaries, schedules or other information heretofore made available by Sellers, their respective Affiliates or their representatives to Purchaser, any -58- of its Affiliates or their representatives (including any materials or other information provided by Credit Suisse First Boston Corporation) or any information that is not included in this Agreement or the Schedules hereto, and neither Sellers, its Affiliates, any of their representatives nor any other Person will have or be subject to any liability to Purchaser, any of its Affiliates or their representatives resulting from the distribution of any such information to, or the use of any such information by, Purchaser, any of its Affiliates or any of their agents, consultants, accountants, counsel or other representatives. 11.17 Seller Representative. --------------------- (a) Each Seller hereby appoints the Non-US Holding Company as the Seller Representative. The Non-US Holding Company hereby accepts such appointment and agrees to perform all of the duties of the Seller Representative hereunder. (b) Each Seller hereby authorizes the Seller Representative to make all decisions and take all actions on its behalf to administer the transactions contemplated hereby (except to the extent that this Agreement specifically requires Purchaser to deal directly with a particular Seller or the Management Stockholder Representative), including (i) the receipt from Purchaser of all payments made by Purchaser to MRM Sellers pursuant to this Agreement, (ii) giving and receiving of notices to be given or received by any Seller, and (iii) the contest, defense or settlement of any claims for which any Seller may be required or requested to indemnify Purchaser pursuant to Section 10.2. All decisions and actions by the Seller Representative ------------ permitted by this Agreement shall be binding upon all of the Sellers, and no Seller shall have any right to object, dissent, protest or otherwise contest the same. (c) Purchaser shall be entitled to deal with and rely conclusively on the Seller Representative as provided herein as if, and with the same effect as if, the Seller Representative constituted all of the Sellers, and Purchaser shall be under no obligation to involve itself with the Seller Representative's performance for the benefit of the Sellers, or the Sellers' relationships inter se. -------- Notwithstanding the foregoing provisions of this Section 11.17, or any ------------- other provisions of this Agreement, Purchaser may in its sole discretion elect to deal directly with any Seller instead of the Seller Representative. (d) The provisions of this Section 11.17 are irrevocable and ------------- coupled with an interest and shall be enforceable notwithstanding any rights or remedies that any Seller may have in connection with the transactions contemplated by this Agreement. -59- 11.18 Management Stockholder Representative. ------------------------------------- (a) Each Management Stockholder hereby appoints each of Thomas Healy and Marty Brandt as the Management Stockholder Representative. Thomas Healy and Marty Brandt hereby accept such appointment and agree to perform all of the duties of the Management Stockholder Representative hereunder. (b) Each Management Stockholder hereby authorizes the Management Stockholder Representative to make all decisions and take all actions on his behalf with respect to the transactions contemplated hereby (except to the extent that this Agreement specifically requires Purchaser to deal directly with each Seller or the Seller Representative), including (i) the receipt from Purchaser of all payments and disbursements made by Purchaser to Management Stockholders pursuant to this Agreement and (ii) giving and receiving of notices to be given or received by any Management Stockholder. All decisions and actions by the Management Stockholder Representative permitted by this Agreement shall be binding upon all of the Management Stockholders, and no Management Stockholder shall have any right to object, dissent, protest or otherwise contest the same. (c) Purchaser and the MRM Sellers shall be entitled to deal with and rely conclusively on the Management Stockholder Representative as provided herein as if, and with the same effect as if, the Management Stockholder Representative constituted all of the Management Stockholders, and none of Purchaser or the MRM Sellers shall be under any obligation to involve itself with the Management Stockholder Representative's performance for the benefit of the Management Stockholders, or the Management Stockholders' relationships inter se. -------- Notwithstanding the foregoing provisions of this Section 11.18, or any ------------- other provisions of this Agreement, Purchaser and the MRM Sellers may in its sole discretion elect to deal directly with any Management Stockholder instead of the Management Stockholder Representative. (d) The Management Stockholders hereby agree to hold Purchaser and MRM Sellers harmless from and against any and all Losses which Purchaser, MRM Sellers or the Management Stockholders may become subject insofar as such Losses arise out of or are based upon any act taken or omitted to be taken by Purchaser or MRM Sellers in reliance on the action or inaction of the Management Stockholder Representative as provided herein. (e) The provisions of this Section 11.18 are irrevocable and ------------- coupled with an interest and shall be enforceable notwithstanding any -60- rights or remedies that any Management Stockholder may have in connection with the transactions contemplated by this Agreement. 11.19 Counterparts. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. ARTICLE XII TAX MATTERS 12.1 Filing of Tax Returns. Except as otherwise provided in this Section --------------------- ------- 12.1, Purchaser shall prepare or cause to be prepared and file or cause to be - ---- filed all Tax Returns for the Companies for all (a) taxable years ending on or prior to the Closing Date which are filed after the Closing Date, (b) taxable years beginning before and ending after the Closing Date and (c) taxable years beginning after the Closing Date. Purchaser shall permit the Seller Representative to review and comment on each Tax Return described in (a) and (b) above prior to filing. Notwithstanding the foregoing, Sellers shall prepare or cause to be prepared all state, local, or foreign combined or consolidated Tax Returns that require a Company to be included in such returns for any Pre-Closing Tax Period. Sellers shall prepare and timely file all such returns on a basis that is consistent with its prior practices. 12.2 Proration of Taxes. In each case of a jurisdiction or Tax with respect ------------------ to which the taxable year of a Company does not end on the Closing Date, for purposes of allocating liability for Taxes there shall be deemed a short taxable year ending on and including the Closing Date and a second deemed short taxable year beginning on and including the day after such date. Any Taxes for a taxable period beginning during the Pre-Closing Tax Period and ending after the Closing Date shall be apportioned between the Pre-Closing Tax Period and the subsequent period based, in the case of property taxes, on a per diem basis, and, in the case of other Taxes, on an interim closing of the books as of the close of the Pre-Closing Tax Period. 12.3 Cooperation on Tax Matters -------------------------- (a) Sellers and Purchaser agree to furnish or cause to be furnished to the other, upon request, as promptly as practicable, such information (including access to books and records) and assistance relating to each Company as is reasonably necessary for the filing of any Tax Return, the preparation for any Tax audit, the prosecution or defense of any claim, suit or proceeding relating to any proposed Tax adjustment for a Company attributable to the Pre-Closing Tax Period. Sellers and Purchaser shall keep all such information and documents received by them confidential unless otherwise required by Law. (b) Sellers and Purchaser agree to retain or cause to be retained all books and records pertinent to each Company until the -61- applicable period for assessment of Taxes under applicable Law (giving effect to any and all extensions or waivers) has expired, and such additional period as necessary for any administrative or judicial proceedings relating to any proposed assessment, and to abide by and cause each Company to abide by all record retention agreements entered into with any Taxing authority. Sellers and Purchaser agree to give the other reasonable notice prior to transferring, discarding or destroying any such books and records relating to Tax matters and, if so requested, Sellers and Purchaser shall allow the requesting party to take possession of such books and records. (c) Sellers and Purchaser shall cooperate with each other in the conduct of any audit or other proceedings for any Tax purposes and they shall each execute and deliver such powers of attorney and other documents as are reasonably necessary to carry out the intent of this Agreement. 12.4 Refunds. Sellers shall be entitled to any refunds of Taxes (including ------- interest thereon) received by Purchaser or an Affiliate of Purchaser to the extent such refunds (a) relate to Taxes paid by a Seller or a Company with respect to the operations of a Company, (b) relate to Taxes attributable to the Pre-Closing Tax Period, and (c) were not accrued as a receivable in the Financial Statements. 12.5 Section 338(g) Elections. Sellers acknowledge that Purchaser may, in ------------------------ its discretion, make an election under Section 338(g) of the Code (a "Section ------- 338(g) Election") with respect to any or all of the Non-US - --------------- Companies. * * * * * -62- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. PURCHASER: THE BISYS GROUP, INC. By: /s/ Dennis R. Sheehan -------------------------------------------- Name: Dennis R. Sheehan Title: President MRM SELLERS: MGL INVESTMENTS, LLC By: /s/ Richard E. O'Brien -------------------------------------------- Name: Richard E. O'Brien Title: Vice President, Secretary and Treasurer MRM FINANCIAL SERVICES LTD. By: /s/ Robert A. Mulderig -------------------------------------------- Name: Robert A. Mulderig Title: President S-1 MANAGEMENT STOCKHOLDERS: /s/ Eric Bertrand --------------------------------------------- Eric Bertrand /s/ Marty Brandt --------------------------------------------- Marty Brandt /s/ Mark Briers --------------------------------------------- Mark Briers /s/ Stephen Caton --------------------------------------------- Stephen Caton /s/ Vanessa Crabtree --------------------------------------------- Vanessa Crabtree /s/ Ronan Daly --------------------------------------------- Ronan Daly /s/ Ann Marie Davis --------------------------------------------- Ann Marie Davis /s/ Alberto DeBrito --------------------------------------------- Alberto DeBrito /s/ Robert Donahoe --------------------------------------------- Robert Donahoe /s/ Brendan Fahy --------------------------------------------- Brendan Fahy S-2 /s/ Noel Ford --------------------------------------------- Noel Ford /s/ Dan Fronchak --------------------------------------------- Dan Fronchak /s/ Paul Garvey --------------------------------------------- Paul Garvey /s/ Thomas Healy --------------------------------------------- Thomas Healy /s/ Stephen Hixon --------------------------------------------- Stephen Hixon /s/ Marianne Hoar --------------------------------------------- Marianne Hoar /s/ Jamie Jared --------------------------------------------- Jamie Jared /s/ Peter Mastriano --------------------------------------------- Peter Mastriano /s/ Colm Mooney --------------------------------------------- Colm Mooney /s/ Alison Morrison --------------------------------------------- Alison Morrison /s/ Christine Perinchief --------------------------------------------- Christine Perinchief S-3 /s/ Bruno Richard --------------------------------------------- Bruno Richard /s/ Alain Roberge --------------------------------------------- Alain Roberge /s/ Michael Rodriguez --------------------------------------------- Michael Rodriguez /s/ Paul Sinnott --------------------------------------------- Paul Sinnott /s/ Jennifer Stier --------------------------------------------- Jennifer Stier /s/ Karen Tyrrell --------------------------------------------- Karen Tyrrell /s/ Wallace Varga --------------------------------------------- Wallace Varga S-4 MRM, which indirectly owns all of the outstanding capital stock or limited liability company interests in the MRM Sellers, absolutely and irrevocably guarantees to Purchaser the prompt payment and satisfaction of all obligations (monetary or otherwise) of the MRM Sellers under this Agreement and the MRM Sellers' Related Agreements. MUTUAL RISK MANAGEMENT LTD. By: /s/ Richard E. O'Brien ------------------------------------------ Name: Richard E. O'Brien Title: Senior Vice President and General Counsel S-5 EX-10.24 4 dex1024.txt CONSENT UNDER CREDIT AGREEMENT Exhibit 10.24 CONSENT UNDER CREDIT AGREEMENT THIS CONSENT UNDER CREDIT AGREEMENT (this "Consent") is entered into as of March 7, 2002, among MUTUAL RISK MANAGEMENT LTD., a company incorporated under the laws of Bermuda ("Mutual Risk"), MUTUAL GROUP, LTD., a Delaware corporation ("Mutual Group" and, together with Mutual Risk, the "Borrowers"), MGL INVESTMENTS LLC (successor to MGL Investments Ltd.), a Delaware limited liability company ("MGL Investments"), LEGION FINANCIAL CORPORATION, a Missouri corporation ("Legion"), MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., a company incorporated under the laws of Bermuda ("MRM Holdings"), MRM SECURITIES LTD., a company incorporated under the laws of Bermuda ("MRM Securities"), MUTUAL FINANCE LTD., a company incorporated under the laws of Bermuda ("MRM Finance"), MRM SERVICES LTD., a company incorporated under the laws of Bermuda ("MRM Services"), MSL (US) LTD., a Delaware corporation ("MSL"), and MRM SERVICES (BARBADOS) LTD., a company incorporated under the laws of Barbados ("MSBL" and, together with MGL Investments, Legion, MRM Holdings, MRM Securities, MRM Finance, MRM Services, MSL, MSBL, Mutual Risk, and Mutual Group, the "Guarantors"), the Lenders (hereinafter defined) and BANK OF AMERICA, N.A., a national banking association, as the Administrative Agent for the Lenders (the "Administrative Agent"). RECITALS A. The Borrowers, the Guarantors, the Lenders (herein so called) party thereto and the Administrative Agent are party to that certain Credit Agreement dated as of September 21, 2000 (as heretofore modified, amended or supplemented, the "Credit Agreement"). Unless otherwise defined herein, defined terms used herein shall have the meanings given such terms in the Credit Agreement. B. Mutual Risk has advised the Administrative Agent and the Lenders that certain Events of Default have occurred and are continuing under Sections 6.1 and 6.2 of the Credit Agreement (the "Existing Events of Default"). Mutual Risk has advised the Administrative Agent and the Lenders that one or more of its Wholly Owned Subsidiaries desires to sell all or substantially all of the capital stock or limited liability company interests (the "Sale") of Hemisphere Management Limited, a Bermuda company, Hemisphere Financial Services LLC, a Delaware limited liability company, Hemisphere Financial Group LLC, a Delaware limited liability company, and Hemisphere Management (Ireland) Limited, an Ireland company (collectively, "Hemisphere"), and, as required by Sections 6.5 and 6.6 of the Credit Agreement, the Borrowers and the Guarantors have requested that the Lenders consent to the Sale of Hemisphere. C. Notwithstanding the existence of, and without waiving, such Existing Events of Default, the Lenders have agreed to consent to the Sale of Hemisphere upon and subject to the terms and conditions set forth herein. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Borrowers, the Lenders and the Administrative Agent agree as follows: 1. Consent. The Lenders hereby irrevocably consent to the Sale of ------- Hemisphere upon the following terms and conditions: (a) The Sale of Hemisphere shall be consummated on or before June 30, 2002; (b) The Sale of Hemisphere shall be consummated pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), in the form attached hereto as Exhibit A, without waiver or 1 amendment of any of the terms or conditions thereof that would reduce the minimum amount paid to the Lenders and the holders of the Debentures pursuant to clause (c) following or that would otherwise be materially adverse to the Lenders, unless such waiver or amendment has been consented to by the Required Lenders in advance in writing; (c) The net cash proceeds (the "Hemisphere Net Proceeds") paid by the Purchaser (as defined in the Stock Purchase Agreement) for the account of the MRM Sellers (as defined in the Stock Purchase Agreement) at the initial Closing (as defined in the Stock Purchase Agreement) of the Sale of Hemisphere and paid to the Lenders and the holders of the Debentures pursuant to clause (d) following shall not be less than $88,300,000; and (d) The Hemisphere Net Proceeds shall be paid directly by the Purchaser to the Lenders and the holders of the Debentures that elect to receive such proceeds (after receipt of reasonable notice to the holders of the Debentures from Mutual Risk) (the "Electing Holders") to such account(s) as (i) the Administrative Agent may direct in writing, in the case of amounts to be paid to the Lenders, and (ii) the Electing Holders may direct in writing, in the case of amounts to be paid to the Electing Holders. 2. Additional Agreements Relating to the Sale of Hemisphere. The -------------------------------------------------------- Borrowers and the Guarantors agree with the Lenders as follows: (a) The aggregate expenses associated with and payable in connection with the Sale of Hemisphere pursuant to the Stock Purchase Agreement shall not exceed $4,800,000; (b) The Borrowers and the Guarantors shall cause the MRM Sellers to cause the Purchaser to pay the Hemisphere Net Proceeds in accordance with Subparagraph 1(d). As a result of the existence of the Existing Events of Default under the Credit Agreement and under the Debentures, the Borrowers and the Guarantors consent and agree that an amount of principal owing under the Credit Agreement (and the Guarantees thereof) and under the Debentures (and the Guarantees thereof) equal to such Hemisphere Net Proceeds shall become due and payable concurrently with the occurrence of the initial Closing (and concurrently with each payment of Hemisphere Net Proceeds pursuant to clause (d) following), without further action by the Administrative Agent, any Lender or any holder of the Debentures. The portion of such Hemisphere Net Proceeds paid for the account of MGL Investments LLC shall be a payment by MGL Investments LLC on account of its Guarantee of the Obligations and of the Debt evidenced by the Debentures. The portion of such Hemisphere Net Proceeds paid for the account of MRM Financial Services Ltd. shall be declared as a dividend by MRM Financial Services Ltd. to MRM Services Ltd. in accordance with applicable law and shall be a payment by MRM Services Ltd. on account of its Guarantee of the Obligations and of the Debt evidenced by the Debentures; (c) The Hemisphere Net Proceeds shall be shared pro rata (based, at the time in question, upon the aggregate principal Debt or Indebtedness owing to the Lenders, on the one hand, and to the holders of the Debentures, on the other hand) among the Lenders (for application to the principal of the Obligations, with an automatic reduction in the aggregate amount of the Commitments under the Credit Agreement in a like amount), and the Electing Holders; provided, however, that, in the event any holder of the Debentures elects to not receive its share of any Hemisphere Net Proceeds, such holder's portion of such Hemisphere Net Proceeds shall be payable to the Electing Holders on a pro rata basis; (d) Any moneys (net of any reasonable, substantiated costs and expenses incurred in the collection or realization of such moneys) paid for the account of the MRM Sellers after the initial Closing pursuant to the Stock Purchase Agreement, whether pursuant to the MRM Escrow Agreement (as defined in the Stock Purchase Agreement), the Management Escrow Agreement (as defined in the Stock Purchase Agreement) or otherwise, including, without limitation, any indemnity payment or expense reimbursement, shall also be Hemisphere Net Proceeds and shall be paid for the account of the MRM 2 Sellers and otherwise treated or transferred as provided in clause (b) preceding and applied as provided in clause (c) preceding; and (e) Neither this Consent, nor the payment of the Hemisphere Net Proceeds pursuant hereto, shall constitute the waiver by Lenders of the Existing Events of Default that have occurred and are continuing on the date hereof. 3. Conditions Precedent. This Consent shall become effective when (a) -------------------- counterparts of this Consent are executed by the Borrowers, the Guarantors, the Required Lenders and the Administrative Agent, (b) a written consent is executed by XL Insurance (Bermuda) Ltd. and the other parties shown on the signature pages thereof, in the form attached hereto as Exhibit B, and (c) a written consent is executed by the Required Lenders (as defined in the Letter of Credit and Reimbursement Agreement referenced therein) and the other parties shown on the signature pages thereof, in the form attached hereto as Exhibit C. 4. Representations and Warranties. The Borrowers and the Guarantors hereby ------------------------------ jointly and severally represent, warrant and acknowledge to the Lenders and the Administrative Agent that (a) immediately after the execution and delivery of this Consent and after giving effect hereto, the Existing Events of Default exist under the Credit Agreement, the Borrowers and the Guarantors have no defense thereto, and neither the Administrative Agent nor any of the Lenders has waived or agreed to forbear from the exercise of any of their rights and remedies that are presently existing as a result of such Existing Events of Default or any other Event of Default that may now exist or hereafter occur under the Credit Agreement, all of which rights and remedies are hereby reserved by the Administrative Agent and the Lenders and may be exercised by the Administrative Agent and the Lenders at any time in their sole discretion, (b) all of the provisions of the Loan Documents, including the Guarantee of the Guarantors, are in full force and effect and are hereby ratified and confirmed, (c) this Consent and the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action and require the consent of no Governmental Authority or other Person that has not been delivered and is not in full force and effect, (d) the execution, delivery and performance by the Borrowers and the Guarantors of this Consent is of corporate benefit to them, including as a result of the reduction of the Obligations and the Guarantees thereof contemplated hereby, (e) the copy of the Stock Purchase Agreement attached hereto is a true, correct and complete copy of the execution form thereof and includes all exhibits and schedules thereto, (f) the dividends contemplated by Subparagraphs 2(b) and 2(d) of this Consent are within the corporate power and authority of MRM Financial Services Ltd., have been duly authorized by all necessary corporate action of MRM Financial Services Ltd., will be lawful and not violate or breach any contract, agreement or law to which MRM Financial Services Ltd. is a party or which is binding on MRM Financial Services Ltd., and will not cause MRM Financial Services Ltd. to be insolvent or to be unable to pay its debts and obligations when due, (g) it is believed that United States income taxes in an estimated amount of $3,500,000 will be payable in connection with the Sale of Hemisphere, and (h) attached hereto as Exhibit D is a calculation of the gross cash proceeds payable by the Purchaser for the account of the MRM Sellers at the initial Closing of the Sale of Hemisphere and of the deductions from such gross cash proceeds that will be made in determining the Hemisphere Net Proceeds to be received by the Lenders and the holders of the Debentures at the initial Closing. The breach by the Borrowers and the Guarantors of any of their representations and warranties set forth in this Paragraph 4 shall constitute an Event of Default but shall not negate the consent given in Paragraph 1. 5. Covenants. The Borrowers and the Guarantors jointly and severally --------- covenant and agree with the Administrative Agent and the Lenders as follows: (a) As soon as practicable, but in any event on or before March 13, 2002, Mutual Risk shall execute and deliver, or cause to be executed and delivered, a share charge and related documentation and 3 opinions, in form and substance satisfactory to the Administrative Agent, on the shares of MRM Services Ltd. owned by Mutual Risk. (b) As soon as practicable but in any event on or before the date of the initial Closing under the Stock Purchase Agreement, Mutual Risk shall cause the MRM Sellers to grant a security interest in all of their respective rights to receive moneys under the MRM Escrow Agreement, the Management Escrow Agreement or otherwise pursuant to the Stock Purchase Agreement, and shall cause to be delivered such agreements, documents, instruments, consents and legal opinions as may be requested by the Administrative Agent in order to create, evidence, perfect or otherwise give effect to and protect such security interest. Such security interest shall be granted in consideration of the consents and agreements of the Lenders given herein and for other good and valuable consideration, and such security interest shall be granted to Bank of America, N.A., as collateral agent for the Lenders and the holders of the Debentures, and shall secure the repayment of the Obligations and the Debt or Indebtedness evidenced by the Debentures and the other obligations owing to the holders of the Debentures under the Transaction Documents on a pari passu, pro rata basis based on the principal Debt or Indebtedness owing to each of the Lenders and the holders of the Debentures. (c) Mutual Risk shall cause the MRM Sellers to deliver to the Administrative Agent a copy of any proposed amendment or waiver to the Stock Purchase Agreement promptly after such amendment or waiver is proposed and to deliver to the Administrative Agent true and correct copies of any supplements to or amendments of any of the Schedules to the Stock Purchase Agreement that are delivered pursuant to Section 11.15 of the Stock Purchase Agreement. (d) The Borrowers and the Guarantors shall pay all expenses, including legal fees and expenses of counsel to the Administrative Agent and each Lender, incurred by the Administrative Agent or any Lender in connection with this Consent. (e) On the date of the initial Closing of the Sale of Hemisphere, Mutual Risk shall deliver or caused to be delivered to the Administrative Agent (i) a certified copy of a resolution of the board of directors of MRM Financial Services Ltd authorizing the payment of the dividends contemplated by Subparagraphs 2(b) and 2(d), and (ii) a certificate of solvency executed by two directors of MRM Financial Services Ltd in form and substance satisfactory to Administrative Agent. (f) On the date of the initial Closing of the Sale of Hemisphere, Mutual Risk shall cause $3,500,000 of the cash proceeds received by the MRM Sellers to be deposited in a restricted account at a bank acceptable to the Administrative Agent and XL Insurance (Bermuda) Ltd., and such amount, together with the investment earnings thereon, shall be withdrawn from such account and used only to pay United States income taxes due and owing in connection with the Sale of Hemisphere. (g) The Borrowers and the Guarantors shall execute and deliver such other agreements, documents, instruments and items as the Administrative Agent or any Lender may reasonably request in order to give effect to the terms and conditions of this Consent. The breach by the Borrowers and the Guarantors of any of their covenants set forth in Paragraph 2 or in this Paragraph 5 shall constitute an Event of Default but shall not negate the consent given in Paragraph 1. 6. Effect of Consent. This Consent is a Loan Document. The consent of the ----------------- Lenders and the Administrative Agent hereunder is expressly limited to the Sale of Hemisphere and shall not constitute the consent or waiver by any Lender or the Administrative Agent to, of or with respect to any other matter now or hereafter requiring its consent or waiver under the Loan Documents. Except as 4 amended hereby, the Credit Agreement and the other Loan Documents are unchanged and are hereby ratified and confirmed. 7. Engagement of Advisor. Mutual Risk has advised the Administrative --------------------- Agent and the Lenders that Mutual Risk has engaged Greenhill Partners (the "Advisor") to advise Mutual Risk and its Subsidiaries with respect to their financial condition, business operations, and properties, and with respect to the restructuring thereof. On or before the date hereof, Mutual Risk has delivered to the Administrative Agent and the Lenders a copy of the engagement letter evidencing such engagement. The Borrowers and the Guarantors shall cause the Advisor to be available at such times and places as the Administrative Agent may reasonably request to discuss with the Administrative Agent and the Lenders the financial condition, business operations, and prospects, and the restructuring thereof, of Mutual Risk and its Subsidiaries and shall otherwise cause the Advisor to cooperate with the Administrative Agent and the Lenders in their review, analysis, and administration of the Credit Agreement and the other Loan Documents and the transactions contemplated thereby. Mutual Risk shall not terminate the engagement of the Advisor unless Mutual Risk concurrently engages another financial and business advisor reasonably acceptable to the Administrative Agent. 8. Release of Claims. In consideration of the execution by the ----------------- Administrative Agent and the Lenders of this Consent, the Borrowers and the Guarantors hereby RELEASE, ACQUIT AND FOREVER DISCHARGE the Administrative Agent and each Lender, together with its officers, directors, employees, agents, attorneys, representatives, and affiliates (collectively, the "Lender Parties"), from any and all losses, costs, expenses, claims, damages, actions, causes of action, liability, or suits in law or equity, of whatever kind or nature (including those that may arise out of the negligence, gross negligence, or willful misconduct of any Lender Party) that any Borrower or Guarantor have ever had or may now have against any Lender Party and that have accrued or arisen on or prior to the date of this Consent and that arise from or are related in any manner to or concern the Loan Documents, the transactions contemplated thereby, or the acts or omissions of any Lender Party in connection therewith. 9. Counterparts. This Consent may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 10. Governing Law. This Consent shall be governed by and construed in ------------- accordance with the laws of the State of New York. 11. No Third Party Beneficiary. The Purchaser shall have no rights or -------------------------- obligations under this Consent, except that the Purchaser may rely on the consent given in Paragraph 1 and on the acknowledgment given in Paragraph 12. 12. Companies Not Obligors. The Lenders acknowledge that none of the ---------------------- Companies (as defined in the Stock Purchase Agreement) is a Borrower or Guarantor of the Obligations under the Credit Agreement. 13. ENTIRETY. THIS CONSENT, THE CREDIT AGREEMENT AND THE OTHER LOAN -------- DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERCEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THESE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. [Remainder of Page Intentionally Left Blank] MUTUAL RISK MANAGEMENT LTD., as a Borrower and as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig --------------------------------------- Title: _______________________________________ MUTUAL GROUP, LTD., as a Borrower and as a Guarantor By: /s/ Richard E. O'Brien ---------------------------------------------- Name: Richard E. O'Brien --------------------------------------- Title: _______________________________________ MGL INVESTMENTS LLC (successor to MGL Investments Ltd.), as a Guarantor By: /s/ Richard E. O'Brien ---------------------------------------------- Name: Richard E. O'Brien --------------------------------------- Title: _______________________________________ LEGION FINANCIAL CORPORATION, as a Guarantor By: /s/ Richard E. O'Brien ---------------------------------------------- Name: Richard E. O'Brien --------------------------------------- Title: _______________________________________ MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig --------------------------------------- Title: _______________________________________ MRM SECURITIES LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig --------------------------------------- Title: _______________________________________ MUTUAL FINANCE LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig --------------------------------------- Title: _______________________________________ MRM SERVICES LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig --------------------------------------- Title: _______________________________________ MSL (US) LTD., as a Guarantor By: /s/ Richard E. O'Brien ---------------------------------------------- Name: Richard E. O'Brien --------------------------------------- Title: _______________________________________ MRM SERVICES (BARBADOS) LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig Title: _______________________________________ Signature Page to Consent Under Credit Agreement BANK OF AMERICA, N.A., as Administrative Agent and a Lender By: /s/ Bridget Garavalia ---------------------------------- Name: Bridget Garavalia ----------------------------- Title: Managing Director ----------------------------- FLEET NATIONAL BANK, as a Lender By: /s/ Donald R. Nicholson ---------------------------------- Name: Donald R. Nicholson ----------------------------- Title: Senior Vice President ----------------------------- FIRST UNION NATIONAL BANK, as a Lender By: /s/ Kimberly Shaffer ---------------------------------- Name: Kimberly Shaffer ----------------------------- Title: Director ----------------------------- NATIONAL WESTMINSTER BANK PLC NEW YORK AND/OR NASSAU BRANCH, as a Lender By: /s/ Peter Ballard ---------------------------------- Name: Peter Ballard ----------------------------- Title: Head of Mid Corporate Team Specialized lending Services ----------------------------- Signature Page to Consent Under Credit Agreement EX-10.25 5 dex1025.txt CONSENT OF AMENDMENT TO DEBENTURES Exhibit 10.25 CONSENT AND AMENDMENT TO DEBENTURES THIS CONSENT AND AMENDMENT TO DEBENTURES (this "Consent and Amendment") is entered into as of March 7, 2002, among MUTUAL RISK MANAGEMENT LTD., a company incorporated under the laws of Bermuda ("Mutual Risk" or the "Issuer"), MUTUAL GROUP, LTD., a Delaware corporation ("Mutual Group"), MGL INVESTMENTS LLC (successor to MGL Investments Ltd.), a Delaware limited liability company ("MGL Investments"), LEGION FINANCIAL CORPORATION, a Missouri corporation ("Legion"), MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., a company incorporated under the laws of Bermuda ("MRM Holdings"), MRM SECURITIES LTD., a company incorporated under the laws of Bermuda ("MRM Securities"), MUTUAL FINANCE LTD., a company incorporated under the laws of Bermuda ("MRM Finance"), MRM SERVICES LTD., a company incorporated under the laws of Bermuda ("MRM Services"), MSL (US) LTD., a Delaware corporation ("MSL"), and MRM SERVICES (BARBADOS) LTD., a company incorporated under the laws of Barbados ("MSBL" and, together with MGL Investments, Legion, MRM Holdings, MRM Securities, MRM Finance, MRM Services, MSL, MSBL, Mutual Risk, and Mutual Group, the "Guarantors") and XL INSURANCE (BERMUDA) LTD ("XL Insurance"). RECITALS A. XL Insurance is a holder of over $50.0 million in principal amount of the Issuer's 9 3/8% Convertible Exchangeable Debentures due 2006 (as hereafter modified, amended or supplemented, the "Debentures". Unless otherwise defined herein, defined terms used herein shall have the meanings given such terms in the Debentures. B. Mutual Risk has advised XL Insurance that certain Events of Default have occurred and are continuing under Sections 7(r) and 7(s) of the Debentures (the "Existing Events of Default"). Mutual Risk has advised XL Insurance that one or more of its Wholly Owned Subsidiaries desires to sell all or substantially all of the capital stock or limited liability company interests (the "Sale") of Hemisphere Management Limited, a Bermuda company, Hemisphere Financial Services LLC, a Delaware limited liability company, Hemisphere Financial Group LLC, a Delaware limited liability company, and Hemisphere Management (Ireland) Limited, an Ireland company (collectively, "Hemisphere"), and, as required by Section 7(n) of the Debentures, the Issuer and the Guarantors have requested that XL Insurance consent to the Sale of Hemisphere. C. Notwithstanding the existence of, and without waiving, such Existing Events of Default, XL Insurance has agreed to consent to the Sale of Hemisphere upon and subject to the terms and conditions set forth herein. The Issuer and the Guarantors have also agreed to amend the Debentures in certain respects. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Issuer and XL Insurance agree as follows: 1. Consent. XL Insurance hereby irrevocably consents to the Sale of ------- Hemisphere upon the following terms and conditions: (a) The Sale of Hemisphere shall be consummated on or before June 30, 2002; (b) The Sale of Hemisphere shall be consummated pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), in the form attached hereto as Exhibit A, without waiver or amendment of any of the terms and conditions thereof that would reduce the minimum amount paid to the -2- Electing Holders (as defined below) and the Lenders pursuant to clause (c) following or that would otherwise be materially adverse to XL Insurance or the other holders of the Debentures, unless such waiver or amendment has been consented to by XL Insurance in advance in writing; (c) The net cash proceeds (the "Hemisphere Net Proceeds") paid by the Purchaser (as defined in the Stock Purchase Agreement) for the account of the MRM Sellers (as defined in the Stock Purchase Agreement) at the initial Closing (as defined in the Stock Purchase Agreement) of the Sale of Hemisphere and paid to the Lenders (the "Lenders") under that certain Credit Agreement dated as of September 21, 2000 (as heretofore modified, amended or supplemented, the "Credit Agreement") and the holders of the Debentures who elect to receive such proceeds (after receipt of reasonable written notice to the holders of such right from the Issuer) (the "Electing Holders") pursuant to clause (d) shall not be less than $88,300,000; (d) The Hemisphere Net Proceeds shall be paid directly by the Purchaser to the Lenders and the Electing Holders to such account(s) as (i) the Administrative Agent for the Lenders under the Credit Agreement (the "Administrative Agent") may direct in writing, in the case of amounts to be paid to the Lenders and (ii) the Electing Holders may direct in writing, in the case of amounts to be paid to the Electing Holders. 2. Additional Agreements Relating to the Sale of Hemisphere. The -------------------------------------------------------- Issuer and the Guarantors agree with XL Insurance as follows: (a) The aggregate expenses associated with and payable in connection with the Sale of Hemisphere pursuant to the Stock Purchase Agreement shall not exceed $4,800,000; (b) The Issuer and the Guarantors shall cause the MRM Sellers to cause the Purchaser to pay the Hemisphere Net Proceeds in accordance with Subparagraph 1(d). As a result of the existence of the Existing Events of Default under the Credit Agreement (and the Guarantees thereof) and under the Debentures, the Issuer and the Guarantors consent and agree that an amount of principal owing under the Credit Agreement and under the Debentures (and the Guarantees thereof) equal to such Hemisphere Net Proceeds shall become due and payable concurrently with the occurrence of the initial Closing (and concurrently with each payment of Hemisphere Net Proceeds pursuant to clause (c) following) without further action by the Administrative Agent, any Lender or any holder of the Debentures. The portion of such Hemisphere Net Proceeds paid for the account of MGL Investments LLC shall be a payment by MGL Investments LLC on account of its Guarantee of the Obligations and of the Debt evidenced by the Debentures. The portion of such Hemisphere Net Proceeds paid for the account of MRM Financial Services Ltd. shall be declared as a dividend by MRM Financial Services Ltd. to MRM Services Ltd. in accordance with applicable law and shall be a payment by MRM Services Ltd. on account of its Guarantee of the Obligations and of the Debt evidenced by the Debentures; (c) The Hemisphere Net Proceeds shall be shared pro rata (based, at the time in question, upon the aggregate principal Debt or Indebtedness owing to the Lenders, on the one hand, and to the holders of the Debentures (whether or not Electing Holders) on the other hand) among the Lenders (for application to the principal of the Obligations, with an automatic reduction in the aggregate amount of the Commitments under the Credit Agreement in a like amount), and the Electing Holders; provided, however, that in the event any holder of Debentures elects to not receive its share of such Hemisphere Net Proceeds, such holder's portion of the Hemisphere Net Proceeds shall be payable to the Electing Holders on a pro rata basis; (d) Any moneys (net of any reasonable, substantiated costs and expenses incurred in the collection or realization of such moneys) paid for the account of the MRM Sellers after the initial Closing pursuant to the Stock Purchase Agreement, whether pursuant to the MRM Escrow Agreement (as defined in the Stock Purchase Agreement), the Management Escrow Agreement (as defined in the -3- Stock Purchase Agreement) or otherwise, including, without limitation, any indemnity payment or expense reimbursement, shall also be Hemisphere Net Proceeds and shall be paid for the account of the MRM Sellers and otherwise treated or transferred as provided in clause (b) preceding and applied as provided in clause (c) preceding; and (e) Neither this Consent and Amendment, nor the payment of the Hemisphere Net Proceeds pursuant hereto, shall constitute the waiver by XL Insurance or the other holders of Debentures of the Existing Events of Default that have occurred and are continuing on the date hereof. 3. Amendment. The Debentures shall be amended to the following effect. --------- (a) Section 4 of the Debentures and Section 4 of the Newco Debenture are hereby amended to provide that the repayment of Debentures with a portion of the Hemisphere Net Proceeds will not have the effect of reducing the number of shares of Newco Common Stock that are issuable upon exchange or conversion of the Debentures or the Newco Debentures, respectively. The number of shares of Newco Common Stock issuable upon exchange of the Debentures or conversion of the Newco Debentures shall be calculated without giving effect to any reduction in the outstanding amount of Debentures resulting from the application of the Hemisphere Net Proceeds. 4. Conditions Precedent. This Consent and Amendment shall become -------------------- effective when (a) counterparts of this Consent and Amendment are executed by the Issuer and the Guarantors, (b) a written consent is executed by the Administrative Agent and the Requisite Lenders (as defined in the Credit Agreement) and the other parties shown on the signature pages thereof the form attached hereto as Exhibit B and (c) a written consent is executed by the Required Lenders (as defined in the Letter of Credit and Reimbursement Agreement dated as of July 11, 2001, as amended, among Mutual Risk, certain Subsidiaries of Mutual Risk, such lenders, and Bank of America, N.A., as administrative agent for such lenders), and the other parties shown on the signature pages thereof in the form attached hereto as Exhibit C. 5. Representations and Warranties. The Issuer and the Guarantors ------------------------------ hereby jointly and severally represent, warrant and acknowledge to XL Insurance that (a) immediately after the execution and delivery of this Consent and Amendment and after giving effect hereto, the Existing Events of Default exist under the Debentures, the Issuer and the Guarantors have no defense thereto, and neither XL Insurance nor any of the other holders of Debentures has waived or agreed to forbear from the exercise of any of their rights and remedies that are presently existing as a result of such Existing Events of Default or any other Event of Default that may now exist or hereafter occur under the Debentures, all of which rights and remedies are hereby reserved by XL Insurance and the other holders of Debentures, and may be exercised the holders of the Debentures at any time in their sole discretion (b) all of the provisions of the Transaction Documents, including the Guarantee of the Guarantors, are in full force and effect and are hereby ratified and confirmed, (c) this Consent and Amendment and the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action and require the consent of no Governmental Authority or other Person that has not been delivered and is not in full force and effect, (d) the execution, delivery and performance by the Issuer and the Guarantors of this Consent and Amendment is of corporate benefit to them, including as a result of the reduction of the principal amount of Debentures and the Guarantees thereof contemplated hereby, (e) the copy of the Stock Purchase Agreement attached hereto is a true, correct and complete copy of the execution form thereof and includes all exhibits and schedules thereto, (f) the dividends contemplated by Subparagraphs 2(b) and 2(d) of this Consent and Amendment are within the corporate power and authority of MRM Financial Services Ltd., have been duly authorized by all necessary corporate action of MRM Financial Services Ltd., will be lawful and not violate or breach any contract, agreement or law to which MRM Financial Services Ltd. is a party or which is binding on MRM Financial Services Ltd., and will not cause MRM Financial Services Ltd. to be insolvent or to be unable to pay its debts and -4- obligations when due, (g) it is believed that United States income taxes in an estimated amount of $3,500,000 will be payable in connection with the Sale of Hemisphere and (h) attached hereto as Exhibit D is a calculation of the gross cash proceeds payable by the Purchaser for the account of the MRM Sellers at the initial Closing of the Sale of Hemisphere and of the deductions from such gross cash proceeds that will be made in determining the Hemisphere Net Proceeds to be received by the Lenders and the holders of the Debentures at the initial Closing. The breach by the Issuer and the Guarantors of any of their representations and warranties set forth in this Paragraph 5 shall constitute an Event of Default but shall not negate the consent given in Paragraph 1.. 6. Covenants. The Issuer and the Guarantors jointly and severally --------- covenant and agree with XL Insurance as follows: (a) As soon as practicable, but in any event on or before March 13, 2002, Mutual Risk shall execute and deliver, or cause to be executed and delivered, a share charge and related documentation and opinions, in form and substance satisfactory to XL Insurance on the shares of MRM Services Ltd. owned by Mutual Risk. (b) As soon as practicable, but in any event on or before the date of the initial Closing under the Stock Purchase Agreement, Mutual Risk shall cause the MRM Sellers to grant a security interest in all of their respective rights to receive moneys under the MRM Escrow Agreement, the Management Escrow Agreement or otherwise pursuant to the Stock Purchase Agreement, and shall cause to be delivered such agreements, documents, instruments, consents and legal opinions as may be requested by XL Insurance in order to create, evidence, perfect or otherwise give effect to and protect such security interest. Such security interest shall be granted in consideration of the consents and agreements of XL Insurance given herein and for other good and valuable consideration, and such security interest shall be granted to Bank of America, N.A., as collateral agent for the Lenders and the holders of the Debentures, and shall secure the repayment of the Obligations and the Debt or Indebtedness evidenced by the Debentures and the other obligations owing to the holders of the Debentures under the Transaction Documents on a pari passu, pro rata basis based on the principal amount of Debt or Indebtedness owing to each of the Lenders and the holders of the Debentures. (c) Mutual Risk shall cause the MRM Sellers to deliver to XL Insurance a copy of any proposed amendment or waiver to the Stock Purchase Agreement promptly after such amendment or waiver is proposed and to deliver to XL Insurance true and correct copies of any supplements to or amendments of any of the Schedules to the Stock Purchase Agreement that are delivered pursuant to Section 11.15 of the Stock Purchase Agreement. (d) The Issuer and the Guarantors shall pay all expenses, including legal fees and expenses of counsel to XL Insurance and each other Electing Holder, incurred by XL Insurance or any other such Electing Holder in connection with this Consent and Amendment. (e) On the date of the initial Closing of the Sale of Hemisphere, Mutual Risk shall deliver or cause to be delivered to XL Insurance (i) a certified copy of a resolution of the board of directors of MRM Financial Services Ltd. authorizing the payment of the dividends contemplated by Subparagraphs 2(b) and 2(d), and (ii) a certificate of solvency executed by two directors of MRM Financial Services Ltd. in form and substance satisfactory to XL Insurance. (f) On the date of the initial Closing of the Sale of Hemisphere, Mutual Risk shall cause $3,500,000 of the cash proceeds received by the MRM Sellers to be deposited in a restricted account at a bank acceptable to the Administrative Agent and XL Insurance and such amount, together with the investment earn- -5- ings thereon, shall be withdrawn from such account and used only to pay United States income taxes due and owing in connection with the Sale of Hemisphere. (g) The Issuer and the Guarantors shall execute and deliver such other agreements, documents instruments and items as XL Insurance may reasonably request in order to give effect to the terms and conditions of this Consent and Amendment. The breach by the Issuer and the Guarantors of any of its covenants set forth in Paragraph 2 or this Paragraph 6 shall constitute an Event of Default but shall not negate the consent given in Paragraph 1. 7. Effect of Consent and Amendment. This Consent and Amendment is a ------------------------------- Transaction Document. The consent of XL Insurance hereunder is expressly limited to the Sale of Hemisphere and shall not constitute the consent or waiver by XL Insurance or any other holder of Debentures to, of or with respect to any other matter now or hereafter requiring its consent or waiver under the Transaction Documents. Except as amended hereby, the Debentures and the other Transaction Documents are unchanged and are hereby ratified and confirmed. 8. Engagement of Advisor. Mutual Risk has advised XL Insurance that --------------------- Mutual Risk has engaged Greenhill Partners (the "Advisor") to advise Mutual Risk and its Subsidiaries with respect to their financial condition, business operations, and properties, and with respect to the restructuring thereof. On or before the date hereof, Mutual Risk has delivered to XL Insurance a copy of the engagement letter evidencing such engagement. The Issuer and the Guarantors shall cause the Advisor to be available at such times and places as XL Insurance may reasonably request to discuss with XL Insurance the financial condition, business operations, and prospects, and the restructuring thereof, of Mutual Risk and its Subsidiaries and shall otherwise cause the Advisor to cooperate with XL Insurance in its review, analysis, and administration of the Debentures and the other Transaction Documents and the transactions contemplated thereby. Mutual Risk shall not terminate the engagement of the Advisor unless Mutual Risk concurrently engages another financial and business advisor reasonably acceptable to XL Insurance. 9. Release of Claims. In consideration of the execution by XL ----------------- Insurance of this Consent and Amendment, the Issuer and the Guarantors hereby RELEASE, ACQUIT AND FOREVER DISCHARGE XL Insurance and each of the other holders of Debentures, together with their respective officers, directors, employees, agents, attorneys, representatives, and affiliates (collectively, the "Debenture Parties"), from any and all losses, costs, expenses, claims, damages, actions, causes of action, liability, or suits in law or equity, of whatever kind or nature (including those that may arise out of the negligence, gross negligence, or willful misconduct of holder of Debentures) that the Issuer or any Guarantor have ever had or may now have against any holder of Debentures and that have accrued or arisen on or prior to the date of this Consent and Amendment and that arise from or are related in any manner to or concern the Loan Documents, the transactions contemplated thereby, or the acts or omissions of any Debenture Party in connection therewith. 10. Counterparts. This Consent and Amendment may be executed in any ------------ number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 11. Governing Law. This Consent and Amendment shall be governed by and ------------- construed in accordance with the laws of the State of New York. 12. Companies Not Guarantors. XL Insurance acknowledges that none of ------------------------- the Companies (as such term is defined in the Stock Purchase Agreement) is a Guarantor of the Debentures. -6- 13. No Third Party Beneficiary. The Purchaser shall have no rights or -------------------------- obligations under this Consent and Amendment, except that the Purchaser may rely on the consent given in Paragraph 1 and on the acknowledgment contained in paragraph 12. 14. ENTIRETY. THIS CONSENT AND AMENDMENT, THE DEBENTURES AND THE OTHER -------- TRANSACTION DOCUMENTS EMBODY THE ENTIRE AGREEMENT BETWEEN THE PARTIES AND SUPERCEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THESE TRANSACTION DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. [Remainder of Page Intentionally Left Blank] MUTUAL RISK MANAGEMENT LTD., as Issuer By: /s/ Robert A. Mulderig -------------------------------------------- Name: Robert A. Mulderig ----------------------------------- Title: ----------------------------------- MUTUAL GROUP, LTD., as a Guarantor By: /s/ Richard E. O'Brien -------------------------------------------- Name: Richard E. O'Brien ----------------------------------- Title: ----------------------------------- MGL INVESTMENTS LLC (successor to MGL Investments Ltd.), as a Guarantor By: /s/ Richard E. O'Brien -------------------------------------------- Name: Richard E. O'Brien ----------------------------------- Title: ----------------------------------- LEGION FINANCIAL CORPORATION, as a Guarantor By: /s/ Richard E. O'Brien -------------------------------------------- Name: Richard E. O'Brien ----------------------------------- Title: ----------------------------------- MUTUAL RISK MANAGEMENT (HOLDINGS) LTD., as a Guarantor By: /s/ Robert A. Mulderig -------------------------------------------- Name: Robert A. Mulderig ----------------------------------- Title: ----------------------------------- MRM SECURITIES LTD., as a Guarantor By: /s/ Robert A. Mulderig --------------------------------------------- Name: Robert A. Mulderig -------------------------------------- Title: -------------------------------------- MUTUAL FINANCE LTD., as a Guarantor By: /s/ Robert A. Mulderig --------------------------------------------- Name: Robert A. Mulderig -------------------------------------- Title: -------------------------------------- MRM SERVICES LTD., as a Guarantor By: /s/ Robert A. Mulderig --------------------------------------------- Name: Robert A. Mulderig -------------------------------------- Title: -------------------------------------- MSL (US) LTD., as a Guarantor By: /s/ Richard E. O'Brien -------------------------------------------- Name: Richard E. O'Brien -------------------------------------- Title: -------------------------------------- MRM SERVICES (BARBADOS) LTD., as a Guarantor By: /s/ Robert A. Mulderig -------------------------------------------- Name: Robert A. Mulderig -------------------------------------- Title: -------------------------------------- XL INSURANCE (BERMUDA) LTD By: /s/ Paul S. Giordano -------------------------------------------- Name: Paul S. Giordano ----------------------------------- Title: Director ----------------------------------- EX-10.26 6 dex1026.txt CONSENT UNDER LETTER OF CREDIT AGREEMENT Exhibit 10.26 CONSENT UNDER LETTER OF CREDIT ------------------------------ AND REIMBURSEMENT AGREEMENT --------------------------- THIS CONSENT UNDER LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT (this "Consent") is entered into as of March 7, 2002, among MUTUAL FINANCE LTD., a company existing under the laws of Bermuda (the "Applicant"); MUTUAL INDEMNITY LTD., a company existing under the laws of Bermuda, MUTUAL INDEMNITY (U.S.) LTD., a company existing under the laws of Bermuda, MUTUAL INDEMNITY (BERMUDA) LTD., a company existing under the laws of Bermuda, MUTUAL INDEMNITY (DUBLIN) LIMITED, a company existing under the laws of the Republic of Ireland, and MUTUAL INDEMNITY (BARBADOS) LTD., a company existing under the laws of Barbados, (collectively, the "Co-Obligors" and individually, a "Co-Obligor"); MUTUAL RISK MANAGEMENT LTD., a company existing under the laws of Bermuda, MRM SERVICES LTD., a company existing under the laws of Bermuda, MSL (US) LTD., a Delaware corporation, and MRM SERVICES (BARBADOS) LTD., a company existing under the laws of Barbados (the "Guarantors" and, collectively with the Applicant and the Co-Obligors, the "Loan Parties"); the Lenders under the Letter of Credit and Reimbursement Agreement (hereinafter defined); and BANK OF AMERICA, N.A., a national banking association, in its capacity as the Administrative Agent for the Lenders under the Letter of Credit and Reimbursement Agreement (the "Administrative Agent"). Reference is made to the Letter of Credit and Reimbursement Agreement dated as of July 11, 2001 (as amended, modified, supplemented, or restated from time to time, the "Letter of Credit and Reimbursement Agreement"), among the Loan Parties, the Administrative Agent, and the Lenders party thereto. Unless otherwise defined in this Consent, capitalized terms used herein shall have the meaning set forth in the Letter of Credit and Reimbursement Agreement. Unless otherwise indicated, all Section references herein are to Sections of the Letter of Credit and Reimbursement Agreement and all Paragraph references herein are to Paragraphs in this Consent. R E C I T A L S --------------- A. The Parent has advised the Administrative Agent and the Lenders that an Event of Default has occurred under Section 7.1(r) of the Letter of Credit and Reimbursement Agreement due to the failure of the Parent to observe and comply at December 31, 2001 and thereafter with Sections 6.1 and 6.2 of the Parent Credit Agreement. B. The Parent has advised the Lenders that one or more of its Wholly Owned Subsidiaries desires to sell all or substantially all of the capital stock or limited liability company interests (the "Sale") of Hemisphere Management Limited, a Bermuda company, Hemisphere Financial Services LLC, a Delaware limited liability company, Hemisphere Financial Group LLC, a Delaware limited liability company, and Hemisphere Management (Ireland) Limited, an Ireland company (collectively, "Hemisphere"), and the Loan Parties have requested that the Lenders consent that the Sale of Hemisphere shall not constitute an Event of Default under Section 7.1(o) of the Letter of Credit and Reimbursement Agreement. Notwithstanding the existence of, and without waiving, the Event of Default under Section 7.1(r) of the Letter of Credit and Reimbursement Agreement, the Lenders are willing to provide such consent subject to the terms, conditions, and representations set forth herein. NOW, THEREFORE, in consideration of these premises and other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1 Paragraph 1. Consent. The Lenders hereby irrevocably consent to the Sale of ------- Hemisphere upon the 0ollowing terms and conditions: (a) The Sale of Hemisphere shall be consummated on or before June 30, 2002; (b) The Sale of Hemisphere will be consummated pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), in the form attached hereto as Exhibit A, without waiver or amendment of any of its terms and conditions that would be materially adverse to the Lenders, unless such waiver or amendment has been consented to by the Required Lenders in advance in writing; and (c) As a result of the Sale of Hemisphere, the Administrator shall not be released or discharged from any, and immediately after the Sale of Hemisphere shall ratify and confirm in writing all, of its obligations under the Loan Documents. Paragraph 2. Conditions. This Consent shall be effective when (a) counterparts ---------- of this Consent are executed by the Applicant, each Co-Obligor, each Guarantor, and the Required Lenders and (b) a consent, in the form of Exhibit B attached hereto, is executed by XL Insurance Bermuda Ltd. and the other parties shown on the signature pages thereof, and a consent, in the form of Exhibit C attached hereto, is executed by the Required Lenders (as defined in the Parent Credit Agreement) and the other parties shown on the signature pages thereof. Paragraph 3. Acknowledgment and Ratification. As a material inducement to the ------------------------------- Administrative Agent and the Lenders to execute and deliver this Consent, the Loan Parties, jointly and severally, (a) consent to this Consent and (b) agree and acknowledge that the execution, delivery, and performance of this Consent shall in no way release, diminish, impair, reduce, or otherwise affect the respective obligations of the Loan Parties under the Loan Documents, which Loan Documents shall remain in full force and effect, and all Liens, guaranties, and rights thereunder are hereby ratified and confirmed. This Consent shall not constitute the waiver by Lenders of the Event of Default under Section 7.1(r) of the Letter of Credit and Reimbursement Agreement that has occurred and is continuing on the date hereof. Paragraph 4. Representations. As a material inducement to the Administrative --------------- Agent and the Lenders to execute and deliver this Consent, the Loan Parties, jointly and severally, represent, warrant and acknowledge to such parties (with the knowledge and intent that the Lenders and the Administrative Agent are relying upon the same in entering into this Consent) that, as of the date hereof and after giving effect to this Consent, (a) all representations and warranties made by each of the Loan Parties in the Loan Documents are true and correct in all material respects, except to the extent that (i) any of them speak to a different specific date or (ii) the facts on which any of them were based have been changed by transactions permitted by the Loan Documents; (b) an Event of Default exists after giving effect hereto, and neither the Administrative Agent nor any of the Lenders has waived or agreed to forbear from the exercise of any of their rights and remedies that are presently existing as a result of such Event of Default or any other Event of Default that may now exist or hereafter occur under the Letter of Credit and Reimbursement Agreement, all of which rights and remedies are hereby reserved by the Administrative Agent and the Lenders and may be exercised by the Administrative Agent and the Lenders at any time in their sole discretion, (c) this Consent has been duly authorized and approved by all necessary corporate action and requires the consent of no other Person; and (d) the copy of the Stock Purchase Agreement attached hereto is a true, correct and complete copy of the execution form thereof and includes all exhibits and schedules thereto. The breach by the Loan Parties of any of their representations and warranties set forth in this Paragraph 4 shall constitute an Event of Default but shall not negate the consent given in Paragraph 1. 2 Paragraph 5. Expenses. The Loan Parties, jointly and severally, agree to pay all -------- costs, fees, and expenses paid or incurred by the Administrative Agent and the Lenders incident to this Consent, including, without limitation, the reasonable fees and expenses of the Administrative Agent's and each Lender's counsel in connection with the negotiation, preparation, delivery, and execution of this Consent and any related documents. Paragraph 6. Miscellaneous. ------------- 6.1 This Consent is a "Loan Document" referred to in the Letter of Credit and Reimbursement Agreement, and the provisions of Section 10 of the Letter of Credit and Reimbursement Agreement are incorporated herein by reference. Unless stated otherwise (a) the singular number includes the plural and vice versa and words of any gender include each other gender, in each case, as appropriate; (b) headings and captions shall not be construed in interpreting provisions; (c) this Consent shall be construed, and its performance enforced, under New York law; and (d) this Consent may be executed in any number of counterparts with the same effect as if all signatories had signed the same document, and all of those counterparts shall be construed together to constitute the same document. 6.2 The Loan Documents shall remain unchanged and in full force and effect, except as provided in this Consent, and are hereby ratified and confirmed. The execution, delivery, and effectiveness of this Consent shall not, except as expressly provided herein, operate as a waiver of any Default or Event of Default or of any rights of the Lenders under any Loan Document. 6.3 The Parent will deliver to the Administrative Agent a copy of any proposed amendment or waiver to the Stock Purchase Agreement promptly after such amendment or waiver is proposed and will deliver true and correct copies of any supplements to or amendments of any of the Schedules to the Stock Purchase Agreement that are delivered pursuant to Section 11.15 of the Stock Purchase Agreement. 6.4 The breach by any Loan Party of any of its covenants set forth herein shall constitute an Event of Default but shall not negate the consent given in Paragraph 1. 6.5 The Lenders acknowledge that none of the Companies (as defined in the Stock Purchase Agreement) is an Applicant, Co-Obligor, or Guarantor of the Obligations under the Letter of Credit and Reimbursement Agreement. Paragraph 7. ENTIRETIES. THIS CONSENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE ---------- PARTIES REGARDING THE SUBJECT MATTER OF THIS CONSENT AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Paragraph 8. Parties. This Consent binds and inures to the benefit of each of ------- the Loan Parties, the Administrative Agent, the Lenders, and their respective successors and permitted assigns. The Purchaser (as defined in the Stock Purchase Agreement) shall have no rights or obligations hereunder, except that the Purchaser may rely on the consent given in Paragraph 1 and the acknowledgment given in Paragraph 6.5. [REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.] 3 Signature Page to that certain Consent and Amendment to Letter of Credit and Reimbursement Agreement dated as of the date first stated above, among Mutual Finance Ltd., as Applicant; Mutual Indemnity Ltd., Mutual Indemnity (U.S.) Ltd., Mutual Indemnity (Bermuda) Ltd., Mutual Indemnity (Dublin) Limited, and Mutual Indemnity (Barbados) Ltd., as Co-Obligors; Mutual Risk Management Ltd., MRM Services Ltd., MSL (US) Ltd., and MRM Services (Barbados) Ltd., as Guarantors; Bank of America, N.A., as the Administrative Agent; and the Lenders. MUTUAL FINANCE LTD., as Applicant By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MUTUAL INDEMNITY LTD., as a Co-Obligor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MUTUAL INDEMNITY (U.S.) LTD., as a Co-Obligor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MUTUAL INDEMNITY (BERMUDA) LTD., as a Co-Obligor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- SIGNED, SEALED AND DELIVERED BY MUTUAL INDEMNITY (DUBLIN) LIMITED ACTING BY ITS LAWFUL ATTORNEY, as a Co-Obligor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MUTUAL INDEMNITY (BARBADOS) LTD., as a Co-Obligor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MUTUAL RISK MANAGEMENT LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MRM SERVICES LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- MSL (US) LTD., as a Guarantor By: /s/ Richard E. O'Brien ---------------------------------------------- Name: Richard E. O'Brien ------------------------------------- Title: ------------------------------------- MRM SERVICES (BARBADOS) LTD., as a Guarantor By: /s/ Robert A. Mulderig ---------------------------------------------- Name: Robert A. Mulderig ------------------------------------- Title: ------------------------------------- Signature Page to Consent Under Letter of Credit and Reimbursement Agreement Signature Page to that certain Consent and Amendment to Letter of Credit and Reimbursement Agreement dated as of the date first stated above, among Mutual Finance Ltd., as Applicant; Mutual Indemnity Ltd., Mutual Indemnity (U.S.) Ltd., Mutual Indemnity (Bermuda) Ltd., Mutual Indemnity (Dublin) Limited, and Mutual Indemnity (Barbados) Ltd., as Co-Obligors; Mutual Risk Management Ltd., MRM Services Ltd., MSL (US) Ltd., and MRM Services (Barbados) Ltd., as Guarantors; Bank of America, N.A., as the Administrative Agent; and the Lenders. BANK OF AMERICA, N.A., as the Administrative Agent and a Lender By: /s/ Bridget Garavalia ---------------------------------------------- Name: Bridget Garavalia ------------------------------------- Title: Managing Director ------------------------------------- FLEET NATIONAL BANK, as a Lender By: /s/ Donald R. Nicholson ---------------------------------------------- Name: Donald R. Nicholson ------------------------------------- Title: Senior Vice President ------------------------------------- THE BANK OF N.T. BUTTERFIELD & SON LIMITED, as a Lender By: /s/ Johnathan Raynor ---------------------------------------------- Name: Johnathan Raynor ------------------------------------- Title: Vice President ------------------------------------- COMERICA BANK, as a Lender By: /s/ Martin G. Ellis ---------------------------------------------- Name: Martin G. Ellis ------------------------------------- Title: Vice President ------------------------------------- NATIONAL WESTMINSTER BANK PLC NEW YORK AND/OR NASSAU BRANCH, as a Lender By: /s/ Peter Ballard ---------------------------------------------- Name: Peter Ballard ------------------------------------- Title: Head of MidCorporate Team Specialized Lending Services ------------------------------------------------------ FIRSTAR BANK, NATIONAL ASSOCIATION, as a Lender By: /s/ Caroline V. Krider ---------------------------------------------- Name: Caroline V. Krider ------------------------------------- Title: Vice President ------------------------------------- Signature Page to Consent Under Letter of Credit and Reimbursement Agreement EX-10.27 7 dex1027.txt PENNSYLVANIA REHABILITATION ORDER EXHIBIT 10.27 IN THE COMMONWEALTH COURT OF PENNSYLVANIA M. Diane Koken, : Insurance Commissioner of the : Commonwealth of Pennsylvania, : : Plaintiff : : v. : : Villanova Insurance Company : One Logan Square, Suite 1400 : Philadelphia, PA 19103 : Docket No. __________________ : Defendant ORDER AND NOW, this __ day of _______ , 2002, upon consideration of the Petition for Rehabilitation ("Petition") filed by the Insurance Commissioner of the Commonwealth of Pennsylvania ("Commissioner"), the Court hereby finds that it is in the best interest of Villanova Insurance Company ("Villanova"), its policyholders, creditors, and the public, that Villanova be placed into Rehabilitation in accordance with provisions of Article V of the Insurance Department Act of 1921, Act of May 17, 1921, P.L. 789, as amended, 40 P.S. ss.ss.221.1-221.63, and that sufficient grounds exist for the entry of an Order of Rehabilitation ("Order"), based on Villanova's consent to rehabilitation under 40 P.S. ss.221.14(12). NOW, therefore, it is hereby ORDERED, ADJUDGED AND DECREED that: 1. The Petition for Rehabilitation filed by the Commissioner is granted. 1 2. Effective April 1, 2002, Villanova is hereby placed in rehabilitation pursuant to the provisions of Article V of the Insurance Department Act, supra. ----- 3. M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, is, and her successors in office are, hereby appointed Rehabilitator of Villanova, directed to take immediate possession of its property, business and affairs as Rehabilitator pursuant to the provisions of Article V of the Insurance Department Act, supra, and to take such action as the ----- nature of this case and the interests of the policyholders, creditors, or the public may require. 4. The Rehabilitator shall have full powers and authority given the Rehabilitator under Article V of the Insurance Department Act, supra, and under ----- provisions of all other applicable laws, as are reasonable and necessary to fulfill the duties and responsibilities of the Rehabilitator under Article V of the Insurance Department Act, supra, and under this Order. ----- ASSETS OF THE ESTATE -------------------- 5. As provided in Section 515(c) of Article V of the Insurance Department Act, supra, as Rehabilitator, the Commissioner is hereby directed to take possession of the assets, contracts and rights of action of Villanova, of whatever nature and wherever located, whether held directly or indirectly. According to Section 515(c), supra, "the ----- 2 filing or recording of this Order with the clerk of the Commonwealth Court or recorder of deeds of the county in which the principal business of Villanova is conducted, or the county in which its principal office or place of business is located, shall impart the same notice as a deed, bill of sale or other evidence of title duly filed or recorded with that recorder of deeds would have imparted." 6. All banks, investment bankers, or other companies, entities, or persons having in their possession assets which are, or may be, the property of Villanova are hereby ordered to advise the Rehabilitator, and any agents and attorneys for the Rehabilitator (collectively, the "Rehabilitator") immediately of such assets and to identify such assets for the Rehabilitator, and are further ordered not to disburse, convey, transfer, pledge, assign, hypothecate, encumber or in any manner dispose of such assets without the prior written consent of, or unless directed in writing by, the Rehabilitator. Any checks or other payments which have, as of the date of this Order, been actually mailed or actually delivered to the payee will, provided same are otherwise proper and in compliance with relevant law, be honored without prejudice to the rights of the Rehabilitator regarding recoupment from the recipient. Such persons and entities, and all other persons and entities, are enjoined from disposing of or destroying any records pertaining to any business transactions between Villanova and banks, brokerage houses or other persons or companies having done business with Villanova or having in their possession assets, which are, or were, the property of Villanova. 3 7. All insurance agents, managing general agents, brokers or other persons having sold policies of insurance and/or collected premiums on behalf of Villanova shall account for all earned premiums and commissions and shall account for and pay all premiums and commissions unearned due to policies canceled in the normal course of business, directly to the Rehabilitator at the offices of Villanova within 30 days of the date of this Order, or the date of receipt, whichever is later, or appear before this Court to show good cause as to why they should not be required to account to the Rehabilitator. No insurance agent, broker, or other person shall use premium monies owed to Villanova for any purpose other than payment to the Rehabilitator. 8. At the request of the Rehabilitator, all attorneys employed or retained by Villanova as of the date of this Order shall, within 30 days of such request, report to the Rehabilitator the name, company claim number, if applicable, and status of each case or matter they are handling on behalf of Villanova. The Rehabilitator need not make payment for any unsolicited reports. 9. At the request of the Rehabilitator, any company providing telephone service to Villanova shall provide new telephone numbers and refer calls from the numbers presently assigned to Villanova to any such new numbers and perform any other changes necessary to the conduct of the Rehabilitation of Villanova. 4 10. Any premium finance company which has entered into a contract to finance a policy which has been issued by Villanova shall pay the premium owed to Villanova directly to the Rehabilitator at the Offices of Villanova. 11. The United States Postal Service is requested to provide any information requested regarding Villanova and to handle future deliveries of Villanova mail, as directed by the Rehabilitator. 12. Any entity furnishing water, electric, sewage, garbage or trash removal services to Villanova shall maintain such services and transfer any such accounts to the Rehabilitator as of the date of this Order, unless instructed to the contrary by the Rehabilitator. 13. Any entity furnishing claims processing or data processing services to Villanova shall maintain such services and transfer any such accounts to the Rehabilitator as of the date of this Order, unless instructed to the contrary by the Rehabilitator. 14. Any entity which has custody or control of any data processing information and records including, but not limited to, source documents, all types of electronically stored information, master tapes or any other recorded information relating to Villanova, shall transfer, at the request of the Rehabilitator, custody and control of such records to the Rehabilitator. 5 15. At the request of the Rehabilitator, Villanova, its affiliates, and its officers, directors, trustees, employees, agents and attorneys, are hereby ordered to deliver to the Rehabilitator keys or access codes to the premises where Villanova conducts its business and to any safe deposit boxes, and to advise the Rehabilitator of the combinations or access codes of any safes or safe keeping devices of Villanova. 16. Villanova, its affiliates, and its officers, directors, trustees, employees, agents, accountants, actuaries, auditors and attorneys, are hereby ordered to identify for the Rehabilitator all of the assets, books, contracts, causes of actions, funds, documents, records, files, credit cards, work papers and related documents, investigative materials, or other property of any nature of or related to Villanova, whether in paper, electronic, magnetic, or other form, to tender or make readily available to the Rehabilitator, at the Rehabilitator's request, all of the foregoing, and to advise and cooperate with the Rehabilitator in identifying and locating any of Villanova's assets. 17. Except for policies or contracts of insurance, the Rehabilitator, in her discretion, may affirm or disavow any executory contracts to which Villanova is a party. The entry of this Order of Rehabilitation shall not constitute an anticipatory breach of any such contracts. 6 EXPENSES, POLICYHOLDER AND CERTIFICATE CLAIMS, ---------------------------------------------- OTHER PAYMENTS AND LAWSUITS --------------------------- 18. The Rehabilitator may, in her discretion, pay expenses incurred in the ordinary course of Villanova's business in rehabilitation and may, in her discretion, pay the actual, reasonable, and necessary costs of preserving or recovering the assets of Villanova and the costs of goods and services provided to Villanova's estate. Such costs shall include but not be limited to: (a) reasonable professional fees for accountants, actuaries, attorneys and consultants with other expertise retained by the Commonwealth of Pennsylvania Insurance Department ("Department"), the Commissioner or the Rehabilitator to perform services relating to the Rehabilitation of Villanova or the feasibility, preparation, implementation, or operation of a rehabilitation plan; (b) compensation and other costs related to representatives and employees of Villanova or its affiliates who perform services for Villanova; and (c) a reasonable allocation of costs and expenses associated with time spent by Department personnel in connection with the Rehabilitation of Villanova. 19. In the event that this Court issues an order appointing the Insurance Commissioner of the Commonwealth of Pennsylvania as liquidator of Villanova, the actual, reasonable and necessary costs of preserving or recovering assets of Villanova and the costs of goods or services provided to and approved by Villanova (In Rehabilitation), under paragraph 18 of this Order, during the period of Rehabilitation will be treated as "costs and expenses of administration," pursuant to 40 P.S. (S)221.44. 7 20. The Rehabilitator may, in her discretion, pay claims for losses, in whole or in part, under policies and contracts of insurance and loss adjustment expenses as identified in Section 544(b) of the Insurance Department Act, supra, 40 P.S. (S)221.44(b), provided, however, that the Rehabilitator shall not have the discretion to pay, and may not pay, bad faith claims or claims for extra-contractual charges or damages. 21. No payments of any type shall be made to any claimants of Villanova as identified in Section 544(c) through (i) of the Insurance Department Act of 1921, supra, 40 P.S. (S)221.44(c) through (i), except in the discretion of the Rehabilitator. ----- 22. All persons, in the Commonwealth or elsewhere, are enjoined and restrained from: (a) instituting or further prosecuting any court action (whether at law, in equity, or otherwise) or arbitration or mediation against Villanova or the Rehabilitator; (b) obtaining preferences, judgments, attachments, garnishments or liens, including obtaining collateral in any litigation, mediation, or arbitration involving Villanova, the Rehabilitator, or Villanova's assets and property; (c) levying any execution process against Villanova, the Rehabilitator or Villanova's assets and property in the Commonwealth of Pennsylvania or elsewhere; or (d) making any assessments or indirectly collecting such assessments by setting them off against amounts otherwise payable to Villanova. 23. Pursuant to Section 221.15(c) of the Insurance Department Act of 1921, supra, the Rehabilitator is specifically authorized, in her sole - ----- discretion, to enter into 8 agreements to and otherwise take possession of the statutory deposits held by any state or territory and to do all things necessary to manage and apply the deposits in accordance with any such agreements. Villanova shall not post additional statutory security deposits in any state or territory. 24. a. All court actions, arbitrations and mediations currently or hereafter pending against Villanova in the Commonwealth of Pennsylvania or elsewhere are hereby stayed. b. All court actions, arbitrations and mediations currently or hereafter pending against an insured of Villanova in the Commonwealth of Pennsylvania or elsewhere are stayed for ninety (90) days from the effective date of this Order or such additional time as the Rehabilitator may request. 25. No judgment, order or arbitration award against Villanova or an insured of Villanova entered after the date of filing of the Petition for Rehabilitation and no judgment, order or arbitration award against Villanova or an insured of Villanova entered at any time by default or by collusion need be considered as evidence of liability or quantum of damages by the Rehabilitator. REINSURANCE ----------- 26. The amounts recoverable by the Rehabilitator from any reinsurer of Villanova shall not be reduced as a result of this rehabilitation proceeding or by reason of 9 any partial payment or distribution on a reinsured policy, contract or claim, and each such reinsurer of Villanova is, without first obtaining leave of this Court, hereby enjoined and restrained from terminating, canceling, failing to extend or renew, or reducing or changing coverage under any reinsurance policy or contract with Villanova. The Rehabilitator may, in her discretion, terminate, rescind, or commute any contract with a reinsurer or reinsurers. NEW OR RENEWAL BUSINESS ----------------------- 27. The Rehabilitator is authorized to accept or reject new, existing, or renewal business. In implementing this paragraph, the Rehabilitator shall have the discretion to, inter alia, accept, reject, or cancel new, existing or ----- ---- renewal business, and write renewal business for time periods less than one year. INJUNCTION AGAINST INTERFERING WITH REHABILITATION -------------------------------------------------- 28. Until further order of this Court, all affiliates of Villanova, persons, corporations, partnerships, associations, accountants, actuaries, auditors, counsel, custodians, and all other entities, wherever located, are hereby enjoined and restrained from interfering in any manner with the Rehabilitator's possession and rights to the assets and property of Villanova and from interfering in any manner with the conduct of the rehabilitation of Villanova. Those affiliates of Villanova, persons, corporations, partnerships, associations, accountants, actuaries, auditors, counsel, custodians, and all other entities are hereby enjoined and restrained from wasting, transferring, selling, 10 concealing, terminating, canceling, destroying, shredding, disbursing, disposing of, or assigning any assets, books, contracts, causes of action, funds, records, files, credit cards, work papers and related documents, investigative materials, or other property of any nature of or related to Villanova, whether in paper, electronic, magnetic, or other form. INJUNCTION AGAINST ACTIONS BY SECURED CREDITORS ----------------------------------------------- 29. All secured creditors or parties, pledgees, lienholders, collateral holders or other persons claiming secured, priority or preferred interests in any property or assets of Villanova are hereby enjoined from taking any steps whatsoever to transfer, sell, assign, encumber, attach, dispose of, or exercise, purported rights in or against any property or assets of Villanova. NOT A DECLARATION OF INSOLVENCY ------------------------------- 30. This Order shall not be deemed a finding or declaration of insolvency such as would activate the provisions of the Pennsylvania Property and Casualty Insurance Guaranty Act, 40 P.S. (S)(S)991.1801-9911.1820, or the provisions of similar acts of any other state or territory. 11 VIOLATIONS OF THIS ORDER ------------------------ 31. Any person violating any provision of this Order may be held in contempt of Court. JURISDICTION ------------ 32. This Court shall retain jurisdiction for all purposes necessary to effectuate and enforce this Order. BY THE COURT, ------------------------------ J. 12 IN THE COMMONWEALTH COURT OF PENNSYLVANIA M. Diane Koken, : Insurance Commissioner of the : Commonwealth of Pennsylvania, : : Plaintiff : : v. : : Legion Insurance Company : One Logan Square, Suite 1400 : Philadelphia, PA 19103 : Docket No. __________________ : Defendant ORDER AND NOW, this __ day of ________ , 2002, upon consideration of the Petition for Rehabilitation ("Petition") filed by the Insurance Commissioner of the Commonwealth of Pennsylvania ("Commissioner"), the Court hereby finds that it is in the best interest of Legion Insurance Company ("Legion"), its policyholders, creditors, and the public, that Legion be placed into Rehabilitation in accordance with provisions of Article V of the Insurance Department Act of 1921, Act of May 17, 1921, P.L. 789, as amended, 40 P.S. (S)(S)221.1-221.63, and that -- ------- sufficient grounds exist for the entry of an Order of Rehabilitation ("Order"), based on Legion's consent to rehabilitation under 40 P.S. (S)221.14(12). NOW, therefore, it is hereby ORDERED, ADJUDGED AND DECREED that: 1. The Petition for Rehabilitation filed by the Commissioner is granted. 1 2. Effective April 1, 2002, Legion is hereby placed in rehabilitation pursuant to the provisions of Article V of the Insurance Department Act, supra. ----- 3. M. Diane Koken, Insurance Commissioner of the Commonwealth of Pennsylvania, is, and her successors in office are, hereby appointed Rehabilitator of Legion, directed to take immediate possession of its property, business and affairs as Rehabilitator pursuant to the provisions of Article V of the Insurance Department Act, supra, and to take such action as the nature of ----- this case and the interests of the policyholders, creditors, or the public may require. 4. The Rehabilitator shall have full powers and authority given the Rehabilitator under Article V of the Insurance Department Act, supra, and under ----- provisions of all other applicable laws, as are reasonable and necessary to fulfill the duties and responsibilities of the Rehabilitator under Article V of the Insurance Department Act, supra, and under this Order. ----- ASSETS OF THE ESTATE -------------------- 5. As provided in Section 515(c) of Article V of the Insurance Department Act, supra, as Rehabilitator, the Commissioner is hereby directed to take ----- possession of the assets, contracts and rights of action of Legion, of whatever nature and wherever located, whether held directly or indirectly. According to Section 515(c), supra, "the ----- 2 filing or recording of this Order with the clerk of the Commonwealth Court or recorder of deeds of the county in which the principal business of Legion is conducted, or the county in which its principal office or place of business is located, shall impart the same notice as a deed, bill of sale or other evidence of title duly filed or recorded with that recorder of deeds would have imparted." 6. All banks, investment bankers, or other companies, entities, or persons having in their possession assets which are, or may be, the property of Legion are hereby ordered to advise the Rehabilitator, and any agents and attorneys for the Rehabilitator (collectively, the "Rehabilitator") immediately of such assets and to identify such assets for the Rehabilitator, and are further ordered not to disburse, convey, transfer, pledge, assign, hypothecate, encumber or in any manner dispose of such assets without the prior written consent of, or unless directed in writing by, the Rehabilitator. Any checks or other payments which have, as of the date of this Order, been actually mailed or actually delivered to the payee will, provided same are otherwise proper and in compliance with relevant law, be honored without prejudice to the rights of the Rehabilitator regarding recoupment from the recipient. Such persons and entities, and all other persons and entities, are enjoined from disposing of or destroying any records pertaining to any business transactions between Legion and banks, brokerage houses or other persons or companies having done business with Legion or having in their possession assets, which are, or were, the property of Legion. 15 7. All insurance agents, managing general agents, brokers or other persons having sold policies of insurance and/or collected premiums on behalf of Legion shall account for all earned premiums and commissions and shall account for and pay all premiums and commissions unearned due to policies canceled in the normal course of business, directly to the Rehabilitator at the offices of Legion within 30 days of the date of this Order, or the date of receipt, whichever is later, or appear before this Court to show good cause as to why they should not be required to account to the Rehabilitator. No insurance agent, broker, or other person shall use premium monies owed to Legion for any purpose other than payment to the Rehabilitator. 8. At the request of the Rehabilitator, all attorneys employed or retained by Legion as of the date of this Order shall, within 30 days of such request, report to the Rehabilitator the name, company claim number, if applicable, and status of each case or matter they are handling on behalf of Legion. The Rehabilitator need not make payment for any unsolicited reports. 9. At the request of the Rehabilitator, any company providing telephone service to Legion shall provide new telephone numbers and refer calls from the numbers presently assigned to Legion to any such new numbers and perform any other changes necessary to the conduct of the Rehabilitation of Legion. 16 10. Any premium finance company which has entered into a contract to finance a policy which has been issued by Legion shall pay the premium owed to Legion directly to the Rehabilitator at the Offices of Legion. 11. The United States Postal Service is requested to provide any information requested regarding Legion and to handle future deliveries of Legion mail, as directed by the Rehabilitator. 12. Any entity furnishing water, electric, sewage, garbage or trash removal services to Legion shall maintain such services and transfer any such accounts to the Rehabilitator as of the date of this Order, unless instructed to the contrary by the Rehabilitator. 13. Any entity furnishing claims processing or data processing services to Legion shall maintain such services and transfer any such accounts to the Rehabilitator as of the date of this Order, unless instructed to the contrary by the Rehabilitator. 14. Any entity which has custody or control of any data processing information and records including, but not limited to, source documents, all types of electronically stored information, master tapes or any other recorded information relating to Legion, shall transfer, at the request of the Rehabilitator, custody and control of such records to the Rehabilitator. 17 15. At the request of the Rehabilitator, Legion, its affiliates, and its officers, directors, trustees, employees, agents and attorneys, are hereby ordered to deliver to the Rehabilitator keys or access codes to the premises where Legion conducts its business and to any safe deposit boxes, and to advise the Rehabilitator of the combinations or access codes of any safes or safe keeping devices of Legion. 16. Legion, its affiliates, and its officers, directors, trustees, employees, agents, accountants, actuaries, auditors and attorneys, are hereby ordered to identify for the Rehabilitator all of the assets, books, contracts, causes of actions, funds, documents, records, files, credit cards, work papers and related documents, investigative materials, or other property of any nature of or related to Legion, whether in paper, electronic, magnetic, or other form, to tender or make readily available to the Rehabilitator, at the Rehabilitator's request, all of the foregoing, and to advise and cooperate with the Rehabilitator in identifying and locating any of Legion's assets. 17. Except for policies or contracts of insurance, the Rehabilitator, in her discretion, may affirm or disavow any executory contracts to which Legion is a party. The entry of this Order of Rehabilitation shall not constitute an anticipatory breach of any such contracts. 18 EXPENSES, POLICYHOLDER AND CERTIFICATE CLAIMS, --------------------------------------------- OTHER PAYMENTS AND LAWSUITS --------------------------- 18. The Rehabilitator may, in her discretion, pay expenses incurred in the ordinary course of Legion's business in rehabilitation and may, in her discretion, pay the actual, reasonable, and necessary costs of preserving or recovering the assets of Legion and the costs of goods and services provided to Legion's estate. Such costs shall include but not be limited to: (a) reasonable professional fees for accountants, actuaries, attorneys and consultants with other expertise retained by the Commonwealth of Pennsylvania Insurance Department ("Department"), the Commissioner or the Rehabilitator to perform services relating to the Rehabilitation of Legion or the feasibility, preparation, implementation, or operation of a rehabilitation plan; (b) compensation and other costs related to representatives and employees of Legion or its affiliates who perform services for Legion; and (c) a reasonable allocation of costs and expenses associated with time spent by Department personnel in connection with the Rehabilitation of Legion. 19. In the event that this Court issues an order appointing the Insurance Commissioner of the Commonwealth of Pennsylvania as liquidator of Legion, the actual, reasonable and necessary costs of preserving or recovering assets of Legion and the costs of goods or services provided to and approved by Legion (In Rehabilitation), under paragraph 18 of this Order, during the period of Rehabilitation will be treated as "costs and expenses of administration," pursuant to 40 P.S. (S)221.44. 19 20. The Rehabilitator may, in her discretion, pay claims for losses, in whole or in part, under policies and contracts of insurance and loss adjustment expenses as identified in Section 544(b) of the Insurance Department Act, supra, ----- 40 P.S. (S)221.44(b), provided, however, that the Rehabilitator shall not have the discretion to pay, and may not pay, bad faith claims or claims for extra-contractual charges or damages. 21. No payments of any type shall be made to any claimants of Legion as identified in Section 544(c) through (i) of the Insurance Department Act of 1921, supra, 40 P.S.(S)221.44(c) through (i), except in the discretion of the ----- Rehabilitator. 22. All persons, in the Commonwealth or elsewhere, are enjoined and restrained from: (a) instituting or further prosecuting any court action (whether at law, in equity, or otherwise) or arbitration or mediation against Legion or the Rehabilitator; (b) obtaining preferences, judgments, attachments, garnishments or liens, including obtaining collateral in any litigation, mediation, or arbitration involving Legion, the Rehabilitator, or Legion's assets and property; (c) levying any execution process against Legion, the Rehabilitator or Legion's assets and property in the Commonwealth of Pennsylvania or elsewhere; or (d) making any assessments or indirectly collecting such assessments by setting them off against amounts otherwise payable to Legion. 23. Pursuant to Section 221.15(c) of the Insurance Department Act of 1921, supra, the Rehabilitator is specifically authorized, in her sole discretion, to - ----- enter into agreements to and otherwise take possession of the statutory deposits held by any state or 20 territory and to do all things necessary to manage and apply the deposits in accordance with any such agreements. Legion shall not post additional statutory security deposits in any state or territory. 24. a. All court actions, arbitrations and mediations currently or hereafter pending against Legion in the Commonwealth of Pennsylvania or elsewhere are hereby stayed. b. All court actions, arbitrations and mediations currently or hereafter pending against an insured of Legion in the Commonwealth of Pennsylvania or elsewhere are stayed for ninety (90) days from the effective date of this Order or such additional time as the Rehabilitator may request. 25. No judgment, order or arbitration award against Legion or an insured of Legion entered after the date of filing of the Petition for Rehabilitation and no judgment, order or arbitration award against Legion or an insured of Legion entered at any time by default or by collusion need be considered as evidence of liability or quantum of damages by the Rehabilitator. REINSURANCE ----------- 26. The amounts recoverable by the Rehabilitator from any reinsurer of Legion shall not be reduced as a result of this rehabilitation proceeding or by reason of any partial payment or distribution on a reinsured policy, contract or claim, and each such 21 reinsurer of Legion is, without first obtaining leave of this Court, hereby enjoined and restrained from terminating, canceling, failing to extend or renew, or reducing or changing coverage under any reinsurance policy or contract with Legion. The Rehabilitator may, in her discretion, terminate, rescind, or commute any contract with a reinsurer or reinsurers. NEW OR RENEWAL BUSINESS ----------------------- 27. The Rehabilitator is authorized to accept or reject new, existing, or renewal business. In implementing this paragraph, the Rehabilitator shall have the discretion to, inter alia, accept, reject, or cancel new, existing or ----- ---- renewal business, and write renewal business for time periods less than one year. INJUNCTION AGAINST INTERFERING WITH REHABILITATION -------------------------------------------------- 28. Until further order of this Court, all affiliates of Legion, persons, corporations, partnerships, associations, accountants, actuaries, auditors, counsel, custodians, and all other entities, wherever located, are hereby enjoined and restrained from interfering in any manner with the Rehabilitator's possession and rights to the assets and property of Legion and from interfering in any manner with the conduct of the rehabilitation of Legion. Those affiliates of Legion, persons, corporations, partnerships, associations, accountants, actuaries, auditors, counsel, custodians, and all other entities are hereby enjoined and restrained from wasting, transferring, selling, concealing, terminating, canceling, destroying, shredding, disbursing, disposing of, or assigning any 22 assets, books, contracts, causes of action, funds, records, files, credit cards, work papers and related documents, investigative materials, or other property of any nature of or related to Legion, whether in paper, electronic, magnetic, or other form. INJUNCTION AGAINST ACTIONS BY SECURED CREDITORS ----------------------------------------------- 29. All secured creditors or parties, pledgees, lienholders, collateral holders or other persons claiming secured, priority or preferred interests in any property or assets of Legion are hereby enjoined from taking any steps whatsoever to transfer, sell, assign, encumber, attach, dispose of, or exercise, purported rights in or against any property or assets of Legion. NOT A DECLARATION OF INSOLVENCY ------------------------------- 30. This Order shall not be deemed a finding or declaration of insolvency such as would activate the provisions of the Pennsylvania Property and Casualty Insurance Guaranty Act, 40 P.S. ss.ss.991.1801-9911.1820, or the provisions of similar acts of any other state or territory. 23 VIOLATIONS OF THIS ORDER ------------------------ 31. Any person violating any provision of this Order may be held in contempt of Court. JURISDICTION ------------ 32. This Court shall retain jurisdiction for all purposes necessary to effectuate and enforce this Order. BY THE COURT, ------------------------------ J. 24 EX-10.28 8 dex1028.txt LETTER DATED MARCH 12, 2002 Exhibit 10.28 [LETTERHEAD OF BERMUDA MONETARY AUTHORITY] - -------------------------------------------------------------------------------- Burnaby House Jeremy Cox 26 Burnaby Street Supervisor of Insurance Hamilton HM 11 Bermuda 12th March, 2002 Mutual Risk Management, Ltd. MRM House, 44 Church Street, Hamilton HM 12 Attention: Mr. Robert A. Mulderig Chairman and C.E.O. Dear Sirs, We refer to our recent meeting and subsequent telephone calls regarding the issues affecting the MRM group of companies. As discussed, the Supervisor of Insurance has deemed it appropriate in the circumstances to appoint an independent agent in addition to representatives from the Bermuda Monetary Authority and/or the Registrar of Companies (collectively to be known as "The Review Team") to review the business of the MRM group of companies ("MRM"). We understand that MRM are amenable to such a review and will allow full free and unrestricted access to the Review Team for that purpose. The terms and conditions which will govern the Review Team's conduct and appointment for the duration of this review are as follows:- 1. Definitions ----------- "Review Team" shall mean the agent or agents from KPMG Bermuda ("the Firm") appointed by the Supervisor of Insurance together with representatives from Bermuda Monetary Authority. "The Appointment" shall mean the carrying out of the functions set out in Section 2 below in accordance with the terms of this Agreement and for the purposes of providing a report to the Supervisor of Insurance on the affairs of MRM. "The Information" shall mean all documentation created and received by MRM in original, copy, faxed or electronic form as is reasonably requested by the Agent for the purpose of carrying out the Appointment. "KPMG Contact" shall mean the person on the Review Team appointed by the Firm to manage the review team and to report directly to the Supervisor of Insurance. In the first instance this person shall be Richard Lightowler. "MRM" shall mean the companies set out in the schedules attached. "MRM Contact" shall mean the person who from time to time MRM appoints as the person with whom the Review Team will liaise in respect of the carrying out of the Appointment. In the first instance this person shall be Angus Ayliffe. "Personnel" shall mean all those persons employed by MRM. "The Report" shall mean any report or reports from time to time prepared by the Review Team pertaining to MRM and in respect of this Appointment. 2. The Appointment --------------- (i) With effect from the date hereof the Review Team shall have full and free access to Information at any of MRM's offices during normal working hours for the purpose of carrying out the functions of the Appointment. Access outside normal working hours will be permitted by prior arrangement with the MRM Contact. (ii) Within 48 hours of the Appointment, the Review Team will provide to the MRM Contact a list of those persons within the Review Team who will be employed on the Appointment including the KPMG Contact. (iii) MRM will provide an office for the Review Team at MRM together with full and free access to the MRM Contact. (iv) All requests for Information by the Review Team will be made through the MRM Contact unless otherwise agreed by the MRM contact and will be acted upon expeditiously and fully. (v) All requests for access to personnel will be made through the MRM Contact and personnel shall be authorized by MRM to freely and fully answer any and all questions of the Review Team pertaining to MRM's business. The MRM Contact, or his appointed designate, will have the right to attend any interviews by the Review Team of personnel. (vi) With respect to Information pertaining to MRM which is not the property of MRM or access to persons who are not employed by MRM but who may have knowledge of MRM's business, MRM will make every effort to assist the Review Team in obtaining such information or to access such persons. 3. Costs of Review Team -------------------- MRM will pay all reasonable fees and disbursements of the Review Team in carrying out the Appointment on the following conditions: (i) The firm will be engaged on a retainer basis whereby MRM will pay to it the sum of One Hundred and fifty-thousand Bermuda Dollars (BD$150,000.00) prior to the commencement of the Appointment. This will be held by the Firm on behalf of MRM subject to MRM paying invoices of the Firm approved by the Supervisor of Insurance within 7 days of receipt of approved invoices. Should payment of such approved invoices not be rendered within 7 days of receipt by MRM the Firm will be entitled to draw the amount of the outstanding approved invoices forthwith from said retainer. (ii) The Firm will render invoices to the Supervisor of Insurance at the end of each week with a summary of the work performed, identity of the fee earner, dates of the work and details of the disbursements. (iii) The Supervisor of Insurance, upon approval of the invoice, shall provide copies of those invoices submitted by the Firm within 7 days of receipt (marked as approved) to the MRM Contact for payment. Payment will be made by MRM within 7 days of receipt of the approved invoice subject to the provisions of paragraph (iv) below. (iv) If MRM has any questions pertaining to the invoices submitted it shall have the right to discuss these questions with the Firm directly in an effort to resolve them. If no resolution can be reached, MRM will submit its questions to the Supervisor of Insurance for resolution with the Firm and will agree to abide by the decision of the Supervisor of Insurance regarding the ultimate liability under the invoice. MRM, the Firm and the Supervisor of Insurance will resolve all such questions within 7 days of a dispute arising pertaining to the invoice and failure to do so shall entitle the Firm to draw such payment against the retainer held by the Firm. (v) On completion of the Appointment, as confirmed in writing by the Supervisor of Insurance to MRM and the Firm, the Firm will repay the balance of any retainer held by the Firm to MRM within 14 days. 4. Operations of MRM for duration of Appointment --------------------------------------------- (i) The Appointment shall not and is not intended to interfere, restrict or otherwise impact on the normal business operations of MRM. MRM will continue to operate its business in the normal course, including but not limited to any steps it is advised or believes it should take with respect to the reorganization or sale of any or all parts of its business or assets. (ii) MRM will continue to report to the regulatory authorities in Bermuda as required and to do any and all other acts and take such steps as required by Bermuda law to ensure compliance with the Companies Act 1981, the Insurance Act 1978 and any other legislation pertaining to the conduct of its business. 5. Confidentiality --------------- (i) The disclosure of all Reports and Information obtained as a result of this review shall be subject to the provisions of the Insurance Act 1978 as amended by the Insurance Amendment Act 2001. The Supervisor of Insurance will keep any and all Reports and Information confidential and access to Reports and Information will be limited to those persons employed by the Review Team and appropriate personnel within the Authority. The Information and Reports received in connection with the Appointment will not be given to any third parties, other than to those permitted by law. (ii) Each member of the Review team will be bound by the terms of S.31 of the Bermuda Monetary Authority Act 1969. 6. Duration of Appointment ----------------------- The Appointment will be for such period as is deemed necessary for the completion of the Appointment by the Review Team or as shall be determined by the Supervisor of Insurance. Please sign the enclosed copy of this letter if you agree to these terms and we will so instruct our agent. Yours faithfully /s/ Cheryl-Ann Lister Cheryl-Ann Lister (Mrs.) Chairman & CEO for Supervisor of Insurance /s/ Robert A. Mulderig For and on behalf of MRM Group of Companies MRM Companies
Company Name Ownership Domicile Percentage - ------------------------------------------------------------------------------------------------- Mutual Risk Management Ltd. N/A Bermuda Alpine Meadow Ltd. 100% Bermuda Asset Risk Managers Ltd. 100% Bermuda Buckeye Reinsurance Co. Ltd. 100% Bermuda Capital Mgt. Of Bermuda 100% Bermuda CF&M Insurance Managers 100% Bermuda Chesapeake Insurance Co. 100% Bermuda FICL 100% Bermuda GAIL 25% Bermuda H&H Mgmt. Services Ltd. 100% Bermuda H&H Park International 100% Bermuda Hemisphere Holdings Ltd. 100% Bermuda Hemisphere Mgmt. Ltd. 100% Bermuda Hemisphere Trust Co. Ltd. 40% Bermuda Hurst Holme Insurance Co. 100% Bermuda IAS (Barbados) Ltd. 100% Bermuda International Advisory Services Ltd. 100% Bermuda IPC Mutual Holdings Ltd. 100% Bermuda Jedims Ltd. 100% Bermuda Laguna Reinsurance Co. Ltd. 100% Bermuda MRM (Holdings) Ltd. 100% Bermuda MRM Financial Services Ltd. 100% Bermuda MRM Global Captive Group Ltd. 100% Bermuda MRM Life (US) Ltd. 100% Bermuda MRM Life Ltd. 100% Bermuda MRM Private Clients 100% Bermuda MRM Securities Ltd. 100% Bermuda MRM Services Ltd. 100% Bermuda MRM Specialty Brokerage Ltd. 100% Bermuda Mutual Finance Ltd. 100% Bermuda Mutual Holdings Ltd. 100% Bermuda Mutual Indemnity (Bermuda) Ltd. 100% Bermuda Mutual Indemnity (US) Ltd. 100% Bermuda Mutual Indemnity Ltd. 100% Bermuda Mutual Risk Captive Group Ltd. 100% Bermuda Premium Securities (Bermuda) (SAC) Limited 100% Bermuda Premium Securities Ltd. 100% Bermuda Shoreline Mutual (Bermuda) Ltd. 100% Bermuda Shoreline Mutual Mgt. (Bermuda) Ltd. 100% Bermuda SPDA 100% Bermuda Valmet (Bermuda) Limited 100% Bermuda
On request MRM will also provide access to information on its non Bermuda subsidiaries -----END PRIVACY-ENHANCED MESSAGE-----