EQUITY-LINKED NOTE
$75,000,000 Dated: October 1, 1999
Chicago, Illinois
FOR VALUE RECEIVED, the undersigned, The Allstate Corporation, a Delaware
corporation (the "Maker"), promises to pay to CNA Financial Corporation, a
Delaware corporation ("Holder"), at Holder's principal office at CNA Plaza, 333
South Wabash, Chicago, Illinois 60685 or at such other place or places in
Illinois as Holder may from time to time designate in writing, or to the
transferee hereof pursuant to Section 19 hereof, the principal sum of
Seventy-Five Million Dollars ($75,000,000), with interest (as hereinafter
provided) on the principal balance outstanding, plus the Principal Adjustment
(as hereinafter defined), all as hereinafter set forth. This Note is issued
pursuant to the terms and conditions of the Asset Purchase and Investment
Agreement dated June 9, 1999 among Holder, the Maker, certain affiliates of
Holder and certain affiliates of the Maker, as amended and restated as of
September 30, 1999 (the "Asset Purchase Agreement").
1. Definitions. As used in this Note, each of the following terms shall
have the following
meanings, respectively:
(i) "ALAE" shall have the meaning set forth in Chapter 17 of the NAIC
Accounting Practices and Procedures Manual for Property and Casualty Insurance
Companies in effect for the year ended December 31, 1998 (with reference to
guidance contained therein which became effective on January 1, 1998).
(ii) "Business Day" shall mean any day (other than a Saturday or Sunday) on
which commercial banks are generally open for business in Chicago, Illinois.
(iii) "Distribution and License Agreement" shall have the meaning set forth
in the Asset Purchase Agreement."
(iv) "Earned Premiums" means the direct voluntary earned premiums on the
Policies to the extent such Policies are used as the basis for the calculation
of the License Fee pursuant to Section 4.1(a)(i) and 4.1(a)(ii) of the
Distribution and License Agreement, excluding all direct voluntary earned
premiums which would be excluded from such calculation pursuant to the terms
thereof.
(v) "Interest Rate" shall mean 6.915%.
(vi) "Involuntary Mechanisms" shall have the meaning set forth in the Asset
Purchase Agreement.
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(vii) "LAE" means ALAE and ULAE.
(viii) "License Fee" shall have the meaning set forth in the Distribution
and License Agreement.
(ix) "Loss" means the amount of liability paid or to be paid with respect
to claims arising under the Policies, after making deduction for all salvage and
subrogation.
(x) "Maturity Date" shall mean the first to occur of the Stated Maturity
Date or the earlier date (if any) on which the unpaid principal balance of,
unpaid interest on, and Principal Adjustment with respect to, this Note shall
become due and payable on account of acceleration by Holder or otherwise
pursuant to Section 4 or 7 hereof.
(xi) "Policies" means the insurance products (excluding insurance written
through Involuntary Mechanisms) described in Sections 4.1(a)(i) and 4.1(a)(ii)
of the Distribution and License Agreement and with respect to which a License
Fee has been paid or is due to be paid under Sections 4.1(a)(i) and 4.1(a)(ii)
thereof, subject to the limitations set forth in Section 4.1(b) thereof.
(xii) "Principal Adjustment" shall mean an amount, if any, of up to ten
million dollars ($10,000,000) (which may be a negative number) which shall be
added to the principal amount of this Note to calculate the amount (other than
in respect of interest) due at the Maturity Date of this Note. The Principal
Adjustment is intended to reflect cumulative adjusted underwriting earnings over
the period from the date hereof to the Maturity Date (the "Cumulative
Earnings"), calculated as set forth below. The Principal Adjustment shall be
equal to the sum of (i) +$10,000,000 plus (ii) the product of (A) $20,000,000
times (B) the ratio of (a) the Cumulative Earnings to (b) $19.302 billion;
provided, however, that the Principal Adjustment shall be +$10,000,000 if the
Cumulative Earnings is $0 or less and shall be $10,000,000 if the Cumulative
Earnings is $19.302 billion or more; provided, further, that if the Maturity
Date shall be any date earlier than the Stated Maturity Date, the Principal
Adjustment shall be $0 if Cumulative Earnings is $9.651 billion or less.
For purposes of the Principal Adjustment, Cumulative Earnings shall be
calculated for the period from and including the date hereof to and including
the Maturity Date, as follows:
Cumulative Earnings = Earned Premiums - Total Incurred Losses.
(xiii) "Stated Maturity Date" means September 30, 2009.
(xiv) "Total Incurred Losses" means total Loss incurred by any Seller or
any Newco Insurance Company (as such terms are defined in the Distribution and
License Agreement) under the Policies with respect to losses occurring on or
after the date hereof (including incurred catastrophe losses but excluding LAE
and changes in Loss and LAE reserves for accident periods prior to the date
hereof).
(xv) "ULAE" means all expenses incurred in connection with the adjusting,
recording and paying of claims under the Policies, other than ALAE.
2. Interest. Prior to the occurrence of a Default or after all Defaults
have been cured or waived, interest on this Note shall be due and payable in
arrears on the principal amount outstanding hereunder, in cash, semi-annually on
the last day of March and September of each year beginning March 31, 2000, and
continuing until this Note is paid in full, at the Interest Rate per annum. From
and after the occurrence of a Default (after expiration of any applicable notice
and cure periods) under this Note and until such Default is cured or waived,
interest shall be payable on demand at the rate of twelve percent (12.0%) per
annum (the "Default Rate"). Interest shall be calculated on the basis of a
360-day year and actual days elapsed. The Maker and Holder agree that the
Principal Adjustment shall be treated as contingent interest as contemplated in
Treasury Regulation ss. 1.1275-4. The Maker and Holder further agree that, as a
result of the difficulty in predicting the Principal Adjustment, the projected
amount of the Principal Adjustment for purposes of Treasury Regulation ss.
1.1275-4 shall be zero.
3. Payment. The Maker promises to pay to Holder interest as, in the
amounts, and at the times provided in Section 2 hereof. The Maker also agrees
that, on the Maturity Date, the Maker will pay to Holder the entire principal
balance of this Note then outstanding, together with the Principal Adjustment.
Unless the Maker is otherwise directed in writing by Holder, all payments and
prepayments hereunder shall be paid in immediately available funds in Chicago,
Illinois.
On or before the Maturity Date, the Maker shall provide to Holder copies of
such of its financial and other records as Holder shall reasonably request to
evidence the calculation of the Principal Adjustment pursuant to the terms of
this Note, together with a certificate of the Maker's Chief Financial Officer
certifying that such records are true, complete and correct. Holder, or an
independent certified public accountant or firm of independent certified public
accountants selected by Holder, shall have the right at Holder's sole cost and
expense to conduct an audit of such financial and other records upon which the
calculation of the Principal Adjustment is based, and the Maker shall cooperate
as reasonably requested in such audit. In the event that Holder disagrees with
the calculation of the Principal Adjustment as certified by the Maker by
delivering notice of disagreement to the Maker within 30 days of receipt of such
certification, the Maker and Holder shall, if they are unable to resolve the
differences 15 days thereafter, submit such differences to a national accounting
firm reasonably acceptable to the Maker and Holder. The determination of such
firm shall be binding on the Maker and Holder and the Maker and Holder shall
share equally the fees and expenses of such firm.
4. Payment prior to the Stated Maturity Date. In the event that (a) Holdco
(as defined in the Asset Purchase Agreement) ceases at any time to be directly
or indirectly wholly owned by the Maker, or (b) any person or group of persons
(within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934,
as amended) shall acquire beneficial ownership (within the meaning of Rule 13d-3
promulgated under such Act) of 25% or more of the outstanding shares of common
stock of the Maker, or (c) during any 24-month period, individuals who at the
beginning of such period constituted the Maker's board of directors (together
with any new directors whose election by the Maker's shareholders was approved
by a vote of at least two-thirds of the directors who either were directors at
the beginning of such period or whose election or nomination was previously so
approved) cease for any reason to constitute a majority of the board of
directors of the Maker, then, at any time until the date 90 days after the Maker
shall have given written notice to Holder of any such event, (i) the Maker shall
have the right to prepay, and (ii) Holder shall have the right to require the
Maker to prepay, on 30 days' prior notice, all but not less than all, of the
principal and Principal Adjustment of, interest on, and any other amounts with
respect to, this Note. No other prepayment of the principal or Principal
Adjustment of this Note shall be permitted.
5. Making of Payments. Each payment of principal or Principal Adjustment
of, interest on, or any other amounts of any kind with respect to, this Note
shall be made by the Maker to Holder at its office in Chicago, Illinois (or at
any other place which Holder may hereafter designate for such purpose in a
notice duly given to the Maker hereunder), not later than noon, Chicago time, on
the date due thereof; and funds received after that hour shall be deemed to have
been received by Holder on the next following Business Day. Whenever any payment
to be made under this Note shall be stated to be due on a date which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day, and interest shall be payable at the applicable rate during such
extension.
6. Cooperation. The Maker shall provide such information as Holder shall
reasonably request to the Securities Valuation Office of the National
Association of Insurance Commissioners in connection with obtaining a rating by
such office of this Note.
7. Default; Remedies. Any one of the following occurrences shall constitute
a default ("Default") under this Note: (i) failure by the Maker to pay any
interest, principal or Principal Adjustment due on this Note within 5 Business
Days after any such payment is due; (ii) failure by the Maker to comply with or
to perform any other provision of this Note and continuance of such failure for
10 Business Days after receipt of notice of such Default; (iii) the Maker shall
become insolvent or generally fail to pay, or admit in writing its inability to
pay, its debts as they become due; or the Maker shall apply for, consent to, or
acquiesce in the appointment of a trustee, receiver, sequestrator or other
custodian for it or any of its property; or, in the absence of such application,
consent or acquiescence, a trustee, receiver or other custodian is appointed for
the Maker or for a substantial part of its property and is not discharged or
dismissed within 60 days; any bankruptcy, reorganization, liquidation or similar
case or proceeding shall be commenced by or against the Maker and, if such case
or proceeding is commenced against the Maker, it continues for 60 days
undismissed; or the Maker shall take any corporate action to authorize, or in
furtherance of, any of the foregoing; (iv) failure by the Maker to comply with
or to perform any of its obligations under the Asset Purchase Agreement and
continuance of such failure for 10 Business Days after receipt of notice of such
default; or (v) final judgments which exceed an aggregate of $500,000,000 shall
be rendered against the Maker and shall not have been discharged or vacated or
had execution thereof stayed pending appeal within 30 days after entry or filing
of such judgments.
If any Default described in clause (iii) of the preceding paragraph occurs,
all amounts due under this Note shall, without demand or notice of any kind to
the Maker or any other person (including, but not limited to, any guarantors),
immediately become and be due and payable in full; and Holder shall have and may
exercise any and all rights and remedies available at law or in equity. If any
Default (other than a Default described in clause (iii) of the preceding
paragraph) occurs, Holder may declare the entire principal amount hereof, plus
Principal Adjustment and unpaid interest, to be immediately due and payable,
whereupon such amounts shall become immediately due and payable.
8. Allocation of Balances or of Payments. At any and all times prior to the
occurrence of a Default or after all Defaults have been cured or waived until
this Note and all amounts hereunder (including interest, principal, Principal
Adjustment and other charges and amounts, if any) are paid in full, all payments
(whether of interest, principal, Principal Adjustment or other amounts) made by
the Maker to Holder hereof shall be allocated by Holder first to interest, then
to principal, Principal Adjustment and other amounts due hereunder. From and
after the occurrence of a Default (after expiration of any applicable notice and
cure periods) under this Note and until such Default is cured or waived, all
amounts referenced in the previous sentence of this Section 8 shall be allocated
by Holder to interest, principal, Principal Adjustment or other amounts due
hereunder as Holder may determine in its sole and exclusive discretion.
9. Captions. Any headings or captions in this Note are inserted for
convenience of reference only, and they shall not be deemed to constitute a part
hereof, nor shall they be used to construe or interpret the provisions of this
Note.
10. Waiver.
(a) The Maker, for itself and for its successors, transferees and assigns
and all guarantors and endorsers, hereby waives diligence, presentment and
demand for payment, protest, notice of protest and nonpayment, dishonor and
notice of dishonor, notice of the intention to accelerate, notice of
acceleration, and all other demands or notices of any and every kind whatsoever,
and the Maker agrees that this Note and any or all payments coming due hereunder
may be extended from time to time in the sole discretion of Holder hereof
without in any way affecting or diminishing its liability hereunder.
(b) No delay in the exercise of any right or remedy hereunder shall be
deemed a waiver of such right or remedy, nor shall the exercise of any right or
remedy be deemed an election of remedies or a waiver of any other right or
remedy. Without limiting the generality of the foregoing, the failure of Holder
promptly after the occurrence of any Default hereunder to exercise its right to
declare the indebtedness remaining unmatured hereunder to be immediately due and
payable shall not constitute a waiver of such right while such Default continues
nor a waiver of such right in connection with any future Default on the part of
the Maker.
11. Payment of Costs. The Maker hereby expressly agrees that upon the
occurrence of any Default under this Note, the Maker will pay to Holder, on
demand, all costs of collection or enforcement of every kind, including (but not
limited to) all attorneys' fees and court costs.
12. Notices. All notices, demands and other communications hereunder to the
Maker or Holder shall be deemed to have been given to and served upon the
addressee thereof upon the first to occur of (i) actual delivery to the
addresses designated below for the Maker or Holder, respectively, or (ii) on the
second business day after the deposit thereof in the United States mails, first
class certified or registered mail postage prepaid, return receipt requested,
addressed as follows:
If to the Maker: The Allstate Corporation
3075 Sanders Road
Northbrook, Illinois 60062 Attention: Treasurer
Facsimile: (847) 402-9116
with a copy to: LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-5389
Attention: John M. Schwolsky
Donald B. Henderson, Jr.
Facsimile: (212) 424-8500
If to Holder: CNA Financial Corporation
CNA Plaza
333 South Wabash
Chicago, Illinois 60685
Attention: Secretary
Facsimile: (312) 822-1297
with a copy to: Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Richard W. Shepro
Facsimile: (312) 701-7711
or to either party at such other address as such party may designate for such
purpose in a written notice duly given to the other party.
13. Time of the Essence. Time is hereby declared to be of the essence of
this Note and of every part hereof.
14. Amendment. This Note may not be changed or modified except in a writing
signed by the Maker and Holder.
15. Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of Illinois applicable to contracts made
and to be performed entirely in such State.
16. Jurisdiction. The Maker agrees, and Holder by accepting this Note shall
be deemed to agree, that any suit, action or proceeding brought by the Maker or
Holder in connection with or arising from this Note shall be brought solely in
the Courts of the State of Illinois or the United States District Court for the
Northern District of Illinois, and the Maker consents, and Holder shall be
deemed to consent, to the jurisdiction and venue of each such court. The Maker
further irrevocably consents to the service of process by registered mail,
postage prepaid, or by personal service within or without the State of Illinois.
The Maker hereby waives, and Holder shall be deemed to waive, to the fullest
extent permitted by law, any objection which they may now or hereafter have to
the laying of venue of any such litigation brought in any such court referred to
above and any claim that any such litigation has been brought in an inconvenient
forum.
17. Waiver of Jury Trial. THE MAKER WAIVES, AND, BY ACCEPTING THIS NOTE,
HOLDER SHALL BE DEEMED TO WAIVE, ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS NOTE OR UNDER ANY
AMENDMENT TO THIS NOTE WHICH MAY IN THE FUTURE BE DELIVERED, AND THE MAKER
AGREES, AND, BY ACCEPTING THIS NOTE HOLDER SHALL BE DEEMED TO AGREE, THAT ANY
SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
18. Holder Not Partner of the Maker. Under no circumstances whatsoever
shall Holder of this Note be deemed to be a partner or a co-venturer with the
Maker or with any other person. The Maker shall not represent to any third party
that the Maker and Holder hereof are partners or co-venturers.
19. Assignment. This Note shall bind the Maker and its successors and
assigns. This Note shall not be assigned or transferred by Holder, except to any
direct or indirect wholly-owned subsidiary of CNA Financial Corporation, without
the express prior consent of the Maker. This Note is non-negotiable.
20. Severability. Whenever possible, each provision of this Note shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provisions of this Note shall be prohibited by or invalid under such
law, such provision shall be ineffective to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Note.
IN WITNESS WHEREOF, the undersigned has executed and delivered this
Note pursuant to proper authority duly granted, as of the date and year first
above written.
THE ALLSTATE CORPORATION
By
Name: James P. Zils
Title: Treasurer