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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000893220-01-000415.txt : 20010409
<SEC-HEADER>0000893220-01-000415.hdr.sgml : 20010409
ACCESSION NUMBER: 0000893220-01-000415
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20001231
FILED AS OF DATE: 20010402
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: RADIAN GROUP INC
CENTRAL INDEX KEY: 0000890926
STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351]
IRS NUMBER: 232691170
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-11356
FILM NUMBER: 1590498
BUSINESS ADDRESS:
STREET 1: 1601 MARKET STREET
STREET 2: 12TH FLOOR
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
BUSINESS PHONE: 2155646600
MAIL ADDRESS:
STREET 1: 1601 MARKET ST
STREET 2: 12TH FLOOR
CITY: PHILADELPHIA
STATE: PA
ZIP: 19103
FORMER COMPANY:
FORMER CONFORMED NAME: CMAC INVESTMENT CORP
DATE OF NAME CHANGE: 19960126
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>w46732e10-k405.txt
<DESCRIPTION>FORM 10-K405 RADIAN GROUP INC.
<TEXT>
<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11356
------------------------
RADIAN GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 23-2691170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1601 MARKET STREET, PHILADELPHIA, PA 19103
(Address of principal executive offices) (zip code)
</TABLE>
(215) 564-6600
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
COMMON STOCK, $.001 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ].
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 46,404,356 shares of Common
Stock, $.001 par value, outstanding on March 26, 2001, and the aggregate market
value of the voting stock held by non-affiliates of the registrant is
$2,947,604,693.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
Radian Group Inc. (the "Company") provides, through its wholly owned
principal operating subsidiaries, Radian Guaranty Inc. and Amerin Guaranty
Corporation (individually referred to as "Radian Guaranty" and "Amerin
Guaranty," and together referred to as "Radian"), private mortgage insurance
coverage in the United States on residential mortgage loans. The Company was
formed on June 9, 1999 by the merger of CMAC Investment Corporation ("CMAC") and
Amerin Corporation ("Amerin"). Private mortgage insurance protects mortgage
lenders and investors from default related losses on residential mortgage loans
made primarily to homebuyers who make downpayments of less than 20% of the
home's purchase price. Private mortgage insurance also facilitates the sale of
such mortgage loans in the secondary mortgage market, principally to Freddie Mac
and Fannie Mae. Radian is restricted, both by state insurance laws and
regulations and the eligibility requirements of Freddie Mac and Fannie Mae, to
providing insurance on residential first mortgage loans only. Radian currently
offers two principal types of private mortgage insurance coverage, primary and
pool. At December 31, 2000, primary insurance comprised 94.7% of Radian's risk
in force and pool insurance comprised 5.3% of Radian's risk in force. In
addition, during the third quarter of 2000, the Company commenced operations in
Radian Insurance Inc. ("RIINC"), a subsidiary which writes credit insurance on
non-traditional mortgage related assets such as second mortgages and
manufactured housing. There was a minimal amount of business written by RIINC in
2000, but this amount is expected to increase significantly in 2001 and beyond.
Primary Insurance
Primary insurance provides mortgage default protection on individual loans
at a specified coverage percentage which is applied to the unpaid loan
principal, delinquent interest and certain expenses associated with the default
and subsequent foreclosure (collectively, the "claim amount"). Radian's
obligation to an insured lender in respect of a claim is determined by applying
the appropriate coverage percentage to the claim amount. Radian's "risk" on each
insured loan is the unpaid loan principal multiplied by the coverage percentage.
Much of Radian's current business is written with 30% coverage on loans with a
loan-to-value ("LTV") ratio between 90.01% and 95% ("95s") and 25% coverage on
loans with an LTV ratio between 85.01% and 90% ("90s"). As of December 31, 2000,
approximately 60% of Radian's primary insurance in force had such coverage. In
January 1999, Fannie Mae announced a new program which allows for lower levels
of required mortgage insurance for certain low downpayment loans approved
through its "Desktop Underwriter" automated underwriting system. The insurance
levels in this program are similar to those required prior to 1995. In March
1999, Freddie Mac announced a similar program for loans approved through its
"Loan Prospector" automated underwriting system. Through the end of 2000, a
minimal amount of insurance was written in these programs. For more information
on these developments, see "Freddie Mac and Fannie Mae" on page 22.
Under its master policy, upon a default, Radian has the option of paying
the entire claim amount and taking title to the mortgage property, or paying the
coverage percentage in full satisfaction of its obligations under the insurance
written. In 2000, the entire claim amount was paid in approximately 6% of filed
claims because of the expected economic advantage associated with that choice.
This is significantly higher than in past years and is due to the good economic
conditions experienced over the past few years in which property values have
remained generally strong. There is no guarantee that housing values will remain
strong in the future.
Pool Insurance
Pool insurance differs from primary insurance in that the exposure on pool
insurance is not limited to a specific coverage percentage on each individual
loan. Because of this feature and the generally lower premium rates associated
with pool insurance, the rating agency capital requirements for the product are
more
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<PAGE> 3
restrictive than primary insurance. There is an aggregate exposure limit ("stop
loss") on a "pool" of loans which is generally between 1% and 10% of the initial
aggregate loan balance. Modified pool insurance has a stop loss like pool
insurance, but also has exposure limits on each individual loan. The use of
modified pool insurance is more limited than traditional pool insurance.
Radian offers pool insurance on a selected basis to various state housing
finance agencies on the collateral for their bond issues, as a credit
enhancement to mortgage loans included in mortgage-backed securities or in whole
loan sales, and in certain other specific situations. Since 1996, Radian has
offered pool insurance on mortgage product sold to Freddie Mac and Fannie Mae by
Radian's primary insurance customers ("GSE Pool"). This pool insurance has a
very low stop loss, generally 1.0% to 1.5%, and the insured pools contain loans
with and without primary insurance. Loans without primary insurance have an LTV
ratio of 80.0% or below. Premium rates on this business are significantly lower
than primary insurance rates and the expected profitability on this business is
lower than that of primary insurance. The volume of such business increased
significantly from 1997 to 1998 due to the strong demand for this product from
Radian's customers and due to the increased size of the mortgage market. During
2000, Radian had pool risk written of $188 million consisting mostly of GSE Pool
business, compared to $421 million in 1999 and $475 million in 1998. This
significant decrease is due to Radian's effort to curtail use of the product due
to the capital requirements and the Company's development of alternative
products, primarily captive reinsurance. Radian expects to continue to write a
minimal amount GSE Pool insurance in 2001. GSE Pool risk in force at December
31, 2000 represented 4.3% of Radian's total risk in force.
Structured Transactions
Radian and RIINC, from time to time, engage in structured transactions
which may include either primary insurance, pool insurance or some form of
combination thereof. A structured transaction generally involves insuring a
large group of seasoned or unseasoned loans or issuing a commitment to insure
new loan originations under negotiated terms. Some structured transactions
contain a risk-sharing component under which the insured or a third party
assumes a first-loss position or shares in losses in some other manner.
Opportunities for structured transactions have increased during the last two
years, however Radian and RIINC compete with other mortgage insurers as well as
capital market executions such as senior/subordinated security structures to
obtain such business. The use of structured transactions increased significantly
in 2000. Most structured transactions involve non-traditional mortgage or
mortgage related assets such as Alternative A or A minus ("Non-Prime")
mortgages. Competition for this business is generally based upon price. Radian
wrote $1.2 billion in new primary insurance in structured transactions in 2000
which represented 4.8% of primary new insurance written, and RIINC wrote $1.6
billion of new insurance in structured transactions in 2000 which represented
all of the new insurance written in RIINC.
Revenue Sharing Products
Radian, like other mortgage insurers, offers financial products to its
mortgage lender customers that are designed to allow the customer to participate
in the risks and rewards of the mortgage insurance business. One such product is
captive reinsurance, in which a lender sets up a reinsurance company that
assumes part of the risk associated with that lender's insured book of business.
In most cases, the risk assumed by the reinsurer is an excess layer of aggregate
losses that would be penetrated only in a situation of adverse loss development.
Radian had approximately 30 active captive reinsurance agreements in place at
December 31, 2000 and could enter into several new agreements or modify existing
agreements in 2001, some with large national lenders. Premiums ceded to captive
reinsurance companies in 2000 were $39.6 million, representing 7.0% of total
premiums earned, as compared to $27.5 million, or 5.8% of total premiums earned
in 1999, and primary insurance written in 2000 that had captive reinsurance
associated with it was $8.1 billion, or 32.6% of Radian's total as compared to
$13.7 billion or 41.3% in 1999. During 2000, Freddie Mac issued standards for
captive reinsurance through its mortgage insurance eligibility requirements.
Additionally, a task force consisting of lenders, mortgage insurers and
accounting firms has been set up to study the risk transferability and the
appropriate accounting treatment for captive reinsurance.
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<PAGE> 4
Radian Insurance Inc.
RIINC was reorganized and rated in September 2000 to write credit insurance
on non-traditional mortgage related assets such as second mortgages and
manufactured housing and to provide credit enhancement to mortgage related
capital market transactions. The Company feels that there are many opportunities
to take advantage of its expertise in credit underwriting and evaluation of
asset performance to write business which it is precluded from writing in its
monoline mortgage guaranty companies, Radian Guaranty and Amerin Guaranty. RIINC
obtained a AA rating from Standard & Poor's Rating Services ("S&P") and a Aa3
rating from Moody's Investors Service, Inc. ("Moody's") based on a prudent
business plan and a Net Worth and Liquidity Maintenance Agreement from Radian
Guaranty, which obligates Radian Guaranty to maintain at least $30 million of
capital in RIINC. In 2000, RIINC wrote $1.6 billion of new insurance
representing approximately $211 million in risk. The Company expects the
business written in RIINC to increase significantly in 2001, mostly consisting
of insurance on second mortgages and home equity loans. The insurance structures
typically used in RIINC are pool insurance or modified pool insurance which can
have a reserve or first loss position in front of RIINC's layer of risk. In
addition to the Net Worth and Liquidity Maintenance Agreement, the Company
intends to capitalize RIINC at all times in an amount that would support the
existing risk in force.
Customers
Mortgage originators, such as mortgage bankers, mortgage brokers,
commercial banks and savings institutions, are Radian's principal customers,
although individual mortgage borrowers generally incur the cost of primary
insurance coverage. Radian does offer lender-paid mortgage insurance whereby
mortgage insurance premiums are charged to the mortgage lender or loan servicer.
On the lender-paid product, the interest rate to the borrower is usually higher
to compensate for the mortgage insurance premium that the lender is paying. In
2000, approximately 19% of Radian's primary insurance was originated on a
lender-paid basis. This lender-paid business is highly concentrated among a few
large mortgage lender customers.
To obtain primary insurance from Radian, a mortgage lender must first apply
for and receive a master policy from Radian. Radian's approval of a lender as a
master policyholder is based, among other factors, upon an evaluation of the
lender's financial position and its management's demonstrated adherence to sound
loan origination practices. Radian's quality control function then monitors the
master policyholder based on a number of criteria.
The number of primary individual policies Radian had in force was 858,413
at December 31, 2000, 807,286 at December 31,1999, and 718,789 at December 31,
1998.
Radian's top 10 customers were responsible for 43.4% of Radian's primary
new insurance written in 2000 compared to 44.6% in 1999 and 51.4% in 1998. The
largest single customer of Radian (including branches and affiliates of such
customer), measured by primary new insurance written, accounted for 10.4% of
primary new insurance written during 2000 compared to 12.2% in 1999 and 18.3% in
1998.
ExpressClose.com Acquisition
On November 9, 2000, the Company acquired ExpressClose.com, Inc., an Iowa
Corporation engaged in the business of Internet-based mortgage processing,
closing and settlement services for approximately $8.0 million in cash, shares
of the Company's common stock, options to purchase shares of the Company's
common stock and other consideration. This transaction has allowed the Company
to expand further into the mortgage service business which is considered an
important adjunct to both the primary mortgage insurance business and the second
mortgage activities of RIINC.
Enhance Acquisition
On February 28, 2001, the Company acquired Enhance Financial Services Group
Inc. ("Enhance Financial"), a New York based insurance holding company.
Shareholders of Enhance Financial received 0.22 shares of the Company's common
stock in return for each share of Enhance Financial common stock. The
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<PAGE> 5
acquisition, which will be accounted for as a purchase with a value of
approximately $540 million, has allowed the Company to diversify into financial
guaranty reinsurance of municipal and asset-backed debt obligations, direct
financial guaranty insurance and other credit based insurance businesses, as
well as several asset based businesses. The asset based businesses include a 46%
interest in Credit-Based Asset Servicing and Securitization LLC and subsidiaries
("C-BASS"), a buyer, servicer and securitizer of credit sensitive single family
residential mortgage assets and residential mortgage-backed securities.
SALES, MARKETING AND COMPETITION
Sales and Marketing
Radian employs a field sales force of approximately eighty-four (84)
persons, organized into three regions, providing local sales representation
throughout the United States. Each of the three regions is supervised by a
Regional Business Manager who is directly responsible for several Area Sales
Managers and several Service Centers where underwriting and application
processing are performed. The Regional Business Managers are responsible for
managing the profitability of business in their regions including premiums,
losses and expenses. The Area Sales Managers are responsible for managing a
small sales force in different areas within the region. In addition, a new
position of Key Account Manager ("KAM") was created in 2000. KAMs are intended
to manage specific accounts within a region that are not national accounts but
that need more targeted oversight and attention. Radian sales personnel are
compensated by salary, commissions on new insurance written and a production
incentive based on the achievement of various goals. During 2000, these goals
were related to volume and market share and this is generally expected to
continue in 2001. In addition to securing business from small and mid-size
regional customers, the Radian business regions provide support to the National
Account effort in the field.
National Accounts
In recognition of the increased consolidation in the mortgage lending
business and the large proportional amount of mortgage business done by large
national accounts, Radian has a focused National Accounts Team consisting of
five national account managers ("NAM") and a dedicated "A Team" that is directly
and solely responsible for supporting national accounts. Each NAM is responsible
for a select group of dedicated accounts and is compensated on the results for
those accounts as well as the results of the Company. There has been a trend
among National Accounts to move to a more centralized decision about mortgage
insurance based on revenue sharing products and other value added services
provided by the mortgage insurance companies. The Company also has a dedicated
NAM who is primarily responsible for relations with and programs implemented
with Fannie Mae and Freddie Mac. National Accounts business represented
approximately 65% of Radian's primary new insurance written in 2000 and is
expected to provide a similar percentage in 2001.
Competition
Radian and other private mortgage insurers compete directly with various
federal government agencies, principally the Federal Housing Administration
("FHA"). In addition to competition from federal agencies, Radian and other
private mortgage insurers face competition from state-supported mortgage
insurance funds. The private mortgage insurance industry consists of Radian and
six other active mortgage insurance companies. During 2000, Radian was the
fourth largest private mortgage insurer, measured by market share and had,
according to industry data, a market share of new primary mortgage insurance
written of 15.2% as compared to 17.5% in 1999. Radian believes that the decline
in market share over the past year was due to the loss of business from a few
national accounts which rebalanced their mortgage insurance allocation after the
CMAC/Amerin merger, and due to Radian's relatively smaller market share of
structured transactions, which are done almost exclusively based on the lowest
price bid.
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RISK MANAGEMENT
Radian considers effective risk management to be critical to its long-term
financial stability. Market analysis, prudent underwriting, the use of automated
risk evaluation models and quality control are all important elements of
Radian's risk management process.
Risk Management Personnel
In addition to a centralized Risk Management department in the home office,
each of Radian's service regions has an assigned Risk Manager responsible for
evaluating risk and monitoring the risk profiles of major lenders in the region.
Radian employs an underwriting and support staff of approximately ninety (90)
persons who are located in Radian's twelve (12) service centers. Additionally,
Radian has two agency operations in place for the states of Alaska and Hawaii.
Underwriting Process
Radian has generally accepted applications for primary insurance (other
than in connection with structured transactions) under three basic programs: the
traditional fully documented program, a limited documentation program and the
delegated underwriting program. Programs that involve less than fully documented
file submissions have become more prevalent in recent years. In order to meet
this demand, Radian introduced to the marketplace the process referred to as
Radian Steamlined Doc ("Streamlined Doc"). A lender utilizing Streamlined Doc
can submit loans to Radian for insurance with abbreviated levels of
documentation based on the type of loan being submitted for insurance. During
2000, 67% of the commitments issued for primary insurance were received by
Radian under the Streamlined Doc program. In the Streamlined Doc program, Radian
has agreed to underwrite certain loans with less documentation by relying upon a
scoring model created by Radian during 1996 known as the "Prophet Score(R)"
System (described below).
Delegated Underwriting
Radian has a delegated underwriting program with a majority of its
customers. Radian's delegated underwriting program, which was implemented in
1989, currently involves only lenders that are approved by Radian's risk
management department. The delegated underwriting program allows the lender's
underwriters to commit Radian to insure loans based on agreed upon underwriting
guidelines. Delegated loans are submitted to Radian in various ways - fax,
electronic data interchange ("EDI") and through the Internet. Radian routinely
audits loans submitted under this program. As of December 31, 2000,
approximately 72% of the primary loans on Radian's books were originated on a
delegated basis and during 2000 and 1999, respectively, 63% and 74% of the
primary loans insured by Radian during such years were originated on a delegated
basis.
Mortgage Scoring Models
During the last few years, the use of scoring mechanisms to predict loan
performance has become prevalent in the marketplace, especially with Fannie Mae
and Freddie Mac's ("GSEs") advocacy of the use of credit scores in the mortgage
loan underwriting process. The use of credit scores was pioneered by Fair Isaac
and Company ("FICO") and became popular in the mid-1980s. The FICO model
calculates a score based on a borrower's credit history. This credit score based
"scorecard" is used to predict the future performance of a loan over a one or
two year time horizon. The higher the credit score the lower the likelihood that
a borrower will default on a loan. Radian's Prophet Score begins with a FICO
score then adds specific additional data regarding the borrower, the loan and
the property such as LTV, loan type, loan amount, property type, occupancy
status and borrower employment. Radian believes that it is this additional
mortgage data that expands the integrity of Radian's Prophet Score over the
entire life of the loan. In addition to the Prophet Score, Radian's housing
analysts regularly review major metropolitan areas to assess the impact that key
indicators such as housing permits, employment trends, and median home sale
prices have on local lending. The healthier the real estate market, the lower
the risk. Radian refers to this score as a GEOScore.
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Beginning in October 1996, the Prophet Score and GEOScore appeared on each
insurance commitment that Radian issued.
Automated Underwriting
Radian's frontline computer system for input and underwriting loan file
information is called MINACS. In utilizing MINACS, Radian captures information
from all segments of a loan file including the borrower's employment and income
history and appraisal information. This information is then channeled through
various edits and subfiles (including Prophet and GEOScore) to assist the
underwriter in determining the total risk profile on a given file. This system
also includes: a) tracking loans by borrowers who have previously defaulted on
Radian insured loans or loans where Radian has paid a claim, b) identifying
borrowers who have previously applied for Radian insurance, and c) information
about the lender involved including volume, commitment rates and delinquency
rates.
Alternative Products
An increasingly popular form of mortgage lending is in the area of
Non-Prime loans. Subsets of this category in which Radian has become involved
are Alternative A ("Alt A"), A minus and B/C loans. Radian has continued to
limit its participation in these Non-Prime markets to Alt A and A minus loans
rather than "B" or "C" loans and has targeted the business insured to specific
lenders with proven good results and servicing experience in this area. Radian's
corporate due diligence has identified such lenders as "Tier 1" lenders.
Alternative A Loans
Alt A loans can now be segregated into two distinct credit profiles:
borrowers with a better credit profile than Radian's typical insured borrowers,
with a FICO score greater than 680 ("FICO >680"), and borrowers with a credit
profile equal to Radian's typical insured borrower, with a FICO score from 660
to 679 ("FICO 660-679"). Radian charges a higher premium for Alt A business due
to the reduced income and/or asset documentation received at origination. The
premium rate is also risk adjusted to reflect the difference in credit profile
of the FICO >680 borrower and FICO 660-679 borrower. While Radian believes the
Alt A loans in the FICO 660-679 category present a slightly higher risk than its
normal business, the premium surcharge compensates Radian for this additional
risk. Alt A loans represented 6.3% of Radian's primary risk in force at the end
of 2000 and Alt A products made up 13.4% of Radian's primary new insurance
written in 2000 as compared to 6.2% in 1999.
A Minus Loans
The A minus program can also be segregated into two distinct credit
profiles. A "near-miss" prime A loan has a FICO score from 590-619 ("FICO
590-619"). These borrowers were forced into the A minus markets in 1996 when the
GSEs set a 620 FICO score as the base for a prime borrower. These were typically
borrowers Radian insured prior to 1996 and mortgage insurance on loans made to
this class of borrowers has resurfaced as the GSEs have entered the A minus
market. Radian receives a significantly higher premium for insuring this product
that is commensurate with the additional default risk. The second credit profile
contains borrowers with a FICO score from 570-589 ("FICO 570-589"). This product
comes to Radian primarily through primary bulk transactions and the insurance is
typically lender-paid. Radian also receives a significantly higher premium for
insuring this product that is commensurate with the increased default risk and
which is normally a variable rate based on the Prophet Score. A minus loans
represented 3.4% of Radian's primary risk in force at the end of 2000 and A
minus loans made up 8.1% of Radian's primary new insurance written in 2000 as
compared to 3.5% in 1999.
B/C Loans
Radian has no approved programs to insure loans that are defined as B/C
risk grades. However, some pools of loans submitted for insurance as primary
bulk transactions might contain a limited number of these
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loans. Typically these B/C grades are less than 1% of the pool of loans
submitted. Radian receives significantly higher premium on these loans due to
the increased default risk associated with this type of loan. B/C loans
represented less than 1% of Radian's primary risk in force at the end of 2000.
Contract Underwriting
Radian utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. For a fee, Radian underwrites fully
documented underwriting files for secondary market compliance, while at the same
time assessing the file for mortgage insurance, if applicable. The automated
underwriting service introduced in the latter part of 1997 has become a major
part of Radian's contract underwriting service. This service offers customers
access to Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector
loan origination systems. Contract underwriting continues to be a popular
service to Radian's customers. During 2000, loans underwritten via contract
underwriting accounted for 30% of applications, 26% of commitments for insurance
and 19% of insurance certificates issued by Radian. Radian gives recourse to its
customers on loans it underwrites for compliance. If the loan does not meet
agreed upon guidelines, Radian agrees to remedy the situation either by placing
mortgage insurance coverage on the loan or by purchasing the loan. During 2000,
Radian processed requests for remedies on less than 1% of the contract loans
underwritten and sold a number of loans previously acquired as part of the
remedy process. Providing these remedies means Radian assumes some credit risk
and interest rate risk if an error is found during the limited remedy period in
the agreements. Rising mortgage interest rates or an economic downturn may
expose Radian to higher losses. During 2000, the financial impact of these
remedies was insignificant although there is no assurance that such results will
continue in 2001 and beyond.
Quality Control
As part of the Company's system of internal control, the Risk Management
function maintains a Quality Control ("QC") Department. The QC function is
responsible for ensuring that the Company's portfolio of insured loans meets
good underwriting standards and conforms to Radian's guidelines for
insurability, thus minimizing Radian's exposure to controllable risk. Among its
other activities, the QC function accomplishes this objective primarily by
performing contract underwriting audits, delegated lender audits, and due
diligence reviews of bulk transactions.
Contract Underwriting Audits
The QC function routinely audits the performance of the Company's contract
underwriters. In order to ensure the most effective use and allocation of audit
resources, a risk assessment model has been developed which identifies high,
medium, and low risk contract underwriters based upon six weighted risk factors
applied to each underwriter. The models are continually updated with current
information. Audit rotation is more frequent for high risk underwriters and less
frequent for those classified as low risk. Audit results are communicated to
management and impact whether additional targeted training is necessary or
whether termination of the underwriter's services is appropriate.
Contract underwriting audits help to ensure that customers receive quality
underwriting services. The audits also protect Radian in that they facilitate
Radian's efforts to improve quality control.
Delegated Lender Audits
Through the use of borrower credit scoring and its own proprietary mortgage
scoring system, Radian is able to monitor the credit quality of loans submitted
for insurance. Radian also conducts a periodic, on-site review of a delegated
lender's insured business. Lenders with significant risk concerns, as identified
in past reviews and through Radian's regular risk reporting and analysis of the
business, may be reviewed more frequently.
Loans are selected for review on a random sample basis, and this sample may
be augmented by a targeted sample based upon specific risk factors or trends
identified through the monitoring process described above. The objective of the
loan review is to identify errors in the loan data transmitted to Radian, to
determine
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lender compliance with Radian's underwriting guidelines and eligible loan
criteria, to assess the quality of a lender's underwriting decisions, and to
rate the risk of the individual loans insured. Radian has developed a
proprietary data collection and risk analysis application to facilitate these
reviews. Audits are graded based upon the risk ratings of the loans reviewed,
lender compliance, and data integrity. The results of each audit are summarized
in a report to the lender and to Radian management. The audit results are used
as a means to improve the quality of the business the lender submits to Radian
for insurance. Issues raised in the reports that are not resolved in a manner
and within a time period acceptable to Radian may result in restriction or
termination of the lender's delegated underwriting authority.
Due Diligence of Bulk Transactions
The QC function, in conjunction with other members of the Risk Management
group, also performs due diligence of bulk transactions. These due diligence
reviews may be precipitated either by a desire to develop an ongoing
relationship with selected lenders, or by the submission of a proposed
transaction by a given lender. Due diligence can take two forms: business level
and loan level.
Business Level Due Diligence. Radian believes that a key component of
understanding the risks posed by a potential business deal is to understand the
business partner. The Company's objective is to understand the lender's business
model in sufficient depth to determine whether Radian should have confidence in
the firm as a potential long-term business partner and customer. Business level
due diligence may be performed on any prospective lender with whom a bulk deal
is contemplated and with whom Radian has had no prior business experience.
Business level due diligence includes a review of: the lender's company
structure, management, business philosophy, and financial health, the company's
credit management processes, the quality control processes, and servicing
relations.
Loan Level Due Diligence. Loan level due diligence is conducted on pending
bulk transactions in order to determine whether appropriate underwriting
guidelines have been adhered to, whether loans conform to Radian guidelines, to
evaluate data integrity, and to detect any fraudulent loans. Loans are selected
for audit on a sample basis, and audit results are communicated to Radian
management. The results of loan level due diligence assist management in
determining whether the pending deal should be consummated, and if so, provides
data that can be used to determine appropriate pricing. It also provides
management with a database of information on the quality of a particular
lender's underwriting practices for future reference.
The results of these due diligence reviews are summarized in reports to
Radian management. Letter grades are assigned to each section of the business
and loan level reviews. Weights are then assigned to each section of the review
(e.g., corporate, credit, quality control, servicing) that vary based upon the
product under review, (e.g., prime first liens, A minus first liens, prime
second liens, etc.) which results in an overall letter grade assigned to the
lender. The grade conveys to Radian management the opinion of Risk Management as
to the overall risk profile presented by a lender and therefore the relative
appeal of a potential relationship with that lender.
Ratings
Radian has its claims-paying ability and/or financial strength rated by
S&P, Moody's and Fitch IBCA Duff & Phelps ("Fitch"). The rating criteria used by
the rating agencies focus on the following factors: capital resources; financial
strength; commitment of management to, and alignment of shareholder interests
with, the insurance business; demonstrated management expertise in the insurance
business conducted by the company; credit analysis; systems development;
marketing; capital markets and investment operations, including the ability to
raise additional capital; and a minimum policyholders' surplus comparable to
primary company requirements, with initial capital sufficient to meet projected
growth as well as access to such additional capital as may be necessary to
continue to meet standards for capital adequacy. As part of their rating
process, S&P, Moody's and Fitch test the Company's insurance subsidiaries by
subjecting them to a "worst-case depression scenario." Expected losses over a
depression period are established by applying capital charges to the existing
and projected insurance portfolio.
9
<PAGE> 10
The claims-paying ability and financial strength ratings assigned by the
rating agencies to an insurance or reinsurance company are based upon factors
relevant to policyholders and are not directed toward the protection of the
insurer's or reinsurer's securityholders. Such a rating is neither a rating of
securities nor a recommendation to buy, hold or sell any security. Claims-paying
ability and financial strength ratings assigned to the Company's insurance
subsidiaries should not be viewed as indicative of or relevant to any ratings
which may be assigned to the Company's outstanding debt securities by any rating
agency and should not be considered an evaluation of the likelihood of the
timely payment of principal or interest under such securities. However, these
ratings are an indication to an insurer's customers of the insurer's present
financial strength and its capacity to honor its future claims payment
obligations. Therefore, ratings are generally considered critical to an
insurer's ability to compete for new insurance business. Currently, Radian is
rated "AA" by S&P and Fitch, and "Aa3" by Moody's.
Reinsurance
Amerin Guaranty and Radian Guaranty currently use reinsurance from
affiliated companies in order to remain in compliance with the insurance
regulations of certain states which require that a mortgage insurer limit its
coverage percentage of any single risk to 25%. Amerin Guaranty and Radian
Guaranty currently intend to use such reinsurance solely for purposes of such
compliance.
Radian Guaranty reinsures all direct insurance in force under an excess of
loss reinsurance program which it considers to be an effective catastrophic
reinsurance coverage. Under this program, the reinsurer is responsible for 100%
of covered losses in excess of Radian Guaranty's retention. The annual retention
is determined by a formula which contains variable components. The estimated
2001 retention is approximately $735 million of loss which represents 150% of
expected premiums earned by Radian Guaranty. The reinsurer's aggregate annual
limit of liability is also determined by a formula with variable components and
is currently estimated to be $140 million. In addition, in 1999, a limit was set
on the amount of annual pool insurance losses that can be counted in the
reinsurance recoverable calculation. For 2001, this limit is $90 million. If the
reinsurer decides not to renew the reinsurance arrangement and is not replaced
by Radian Guaranty, the reinsurer must provide six years of runoff coverage.
There is an overall aggregate limit of liability applicable to any runoff period
equal to four times the annual limit in effect for the calendar year of such
nonrenewal. For 2001, this aggregate limit is estimated to be $560 million. The
excess of loss reinsurance program also provides restrictions and limitations on
the payment of dividends by Radian Guaranty, investments, mergers or
acquisitions involving other private mortgage insurance companies and
reinsurance of exposure retained by Radian Guaranty.
In addition, Radian Guaranty entered into a variable quota-share ("VQS")
treaty for primary risk in the 1994 to 1997 origination years and a portion of
the pool risk written in 1997. In this treaty, quota-share loss relief is
provided at varying levels ranging from 7.5% to 15.0% based upon the loss ratio
on the reinsured book. The higher the loss ratio, the greater the potential
reinsurance relief which protects Radian Guaranty in adverse loss situations. A
ceding commission is paid by the reinsurer to Radian Guaranty and the agreement
is noncancelable for ten years by either party. As of December 31, 2000, the
risk in force covered by the VQS treaty was approximately $5.8 billion, or
approximately 23.5% of Radian's primary risk in force and $57 million, or
approximately 4.3% of Radian's pool risk in force. It is Radian's present
intention not to reinsure any additional business pursuant to the VQS treaty for
the 2001 origination year, although the ultimate decision on reinsurance will be
impacted by business volume, capital adequacy and other factors.
Amerin Guaranty was party until December 31, 2000 to a reinsurance
agreement pursuant to which the reinsurer was obligated to repay, up to an
aggregate amount of $100 million, all losses and allocated loss adjustment
expenses paid by Amerin Guaranty during periods in which (i) the ratio of Amerin
Guaranty's risk in force divided by the sum of policyholders' surplus plus the
contingency reserve calculated in accordance with statutory accounting practices
exceeded 24.9 to 1 and (ii) the sum of Amerin Guaranty's expense ratio and loss
ratio exceeded 100%. This reinsurance treaty was cancelled as of January 1,
2001.
10
<PAGE> 11
Cross Guaranty Agreement
A Guaranty Agreement was entered into on August 11, 1999 by Radian Guaranty
and Amerin Guaranty. The agreement provides that in the event Radian Guaranty
fails to make a payment to any of its policyholders, Amerin Guaranty will make
the payment; in the event Amerin Guaranty fails to make a payment to any of its
policyholders, then Radian Guaranty will make the payment. Under the terms of
the agreement, the obligations of both parties are unconditional and
irrevocable; however, no payments will be made without prior approval by the
Pennsylvania Department of Insurance.
DEFAULTS AND CLAIMS
Defaults
The default and claim cycle on loans which have private mortgage insurance
begins with the insurer's receipt from the lender of notification of a default
on an insured loan. The master policy requires lenders to notify Radian of an
uncured default on a mortgage loan within 75 days (45 days for an uncured
default in the first year of the loan), although many lenders do so earlier. The
incidence of default is affected by a variety of factors, including change in
borrower income, unemployment, divorce and illness, the level of interest rates
and general borrower creditworthiness. Defaults that are not cured result in
claims to Radian. Borrowers may cure defaults by making all delinquent loan
payments or by selling the property and satisfying all amounts due under the
mortgage.
The following table shows the number of primary and pool loans insured,
related loans in default and the percentage of loans in default (default rate)
as of the dates indicated:
DEFAULT STATISTICS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
2000 1999 1998(3)
------- ------- -------
<S> <C> <C> <C>
PRIMARY INSURANCE:
Prime:
Insured loans in force.............................. 792,813 774,003 N/A
Loans in default (1)................................ 17,840 16,605 N/A
Percentage of loans in default...................... 2.3% 2.2% N/A
Non-Prime:
Insured loans in force.............................. 65,600 33,283 N/A
Loans in default (1)................................ 2,690 1,193 N/A
Percentage of loans in default...................... 4.1% 3.6% N/A
Total:
Insured loans in force.............................. 858,413 807,286 718,789
Loans in default (1)................................ 20,530 17,798 15,228
Percentage of loans in default...................... 2.4% 2.2% 2.1%
POOL INSURANCE (2):
Insured loans in force.............................. 768,388 676,454 474,630
Loans in default (1)................................ 5,989 4,352 3,547
Percentage of loans in default...................... 0.8% 0.6% 0.7%
</TABLE>
- ---------------
(1) Loans in default exclude those loans 45 days past due or less and loans in
default for which Radian feels it will not be liable for a claim payment.
(2) Includes traditional and modified pool insurance of prime and Non-Prime
loans.
(3) Prior to 1999, the Company did not track prime and Non-Prime business
separately. Therefore, the breakdown of prime and Non-Prime default
statistics is not available ("N/A") as of December 31, 1998.
Regions of the United States may experience different default rates due to
varying economic conditions. The following table shows the primary default rates
by Radian's regions as of the dates indicated, including prime and Non-Prime
loans.
11
<PAGE> 12
DEFAULT RATES BY RADIAN'S REGION
<TABLE>
<CAPTION>
DECEMBER 31
------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
North....................................................... 2.50% 1.88% 1.97%
South....................................................... 2.10 2.59 2.81
West........................................................ 2.21 2.10 2.31
Alaska...................................................... 1.08 0.82 0.64
Hawaii...................................................... 2.23 2.03 1.74
Guam........................................................ -- 0.64 --
</TABLE>
As of December 31, 2000, primary default rates for Radian's two largest
states measured by risk in force, California and Florida, were 2.3% and 3.9%
respectively, compared to 2.5% and 3.9% respectively, at December 31, 1999. The
relatively high default rate in Florida is due primarily to the increased
"affordable housing" business done in Florida since 1994 and the high default
development on such business.
Claims
The likelihood that a claim will result from a default and the amount of
such claim depend principally on the borrower's equity at the time of default
and the borrower's (or the lender's) ability to sell the home for an amount
sufficient to satisfy all amounts due under the mortgage, as well as the
effectiveness of loss mitigation efforts. Claims are also affected by local
housing prices, interest rates, unemployment levels and the housing supply.
Claim activity is not evenly spread through the coverage period of a book
of business. Relatively few claims are received during the first two years
following issuance of the policy. This is followed by a period of rising claims
which, based on industry experience, has historically reached its highest level
in the third through fifth years after the year of loan origination. Thereafter,
the number of claims received has historically declined at a gradual rate,
although the rate of decline can be affected by conditions in the economy.
Approximately 72.9% of Radian's primary risk in force, including most of
Radian's risk in force on alternative products, and almost all of Radian's pool
risk in force at December 31, 2000 had not yet reached its anticipated highest
claim frequency years.
Loss Mitigation
Radian's loan workout staff consists of thirteen (13) employees, including
several full time loan workout specialists who proactively intervene in the
default process, working with borrowers to reduce the frequency and severity of
foreclosure losses. The size of the loan workout staff has decreased over the
past few years, primarily due to an enhancement in the ability of loan servicers
to perform this function adequately with less assistance needed by Radian. Once
a notice of default is received, Radian scores the default using a proprietary
model that predicts the likelihood that the default will become a claim. Using
this model the loan workout specialists prioritize cases for proactive
intervention to counsel and assist borrowers. Loss mitigation techniques include
pre-foreclosure sales, extensions of credit to borrowers to reinstate insured
loans, loan modifications and deficiency settlements. Radian still considers its
loss mitigation efforts to be an effective way to reduce claim payments.
Subsequent to foreclosure, Radian uses post-foreclosure sales and the
exercise of the full claim payment option to further mitigate loss. This was
considered an extremely effective loss mitigation tool in 2000 due to relatively
strong property values, although there can be no assurance that such positive
results will continue.
Homeownership Counseling
In 1995, Radian established a Homeownership Counseling Center (the
"Center") to work with borrowers receiving insured loans under Community
Homebuyer, 97% LTV ("97s") or other "affordable housing" programs. Radian
considers this counseling to be very important to the future success of those
12
<PAGE> 13
particular borrowers with regard to sustaining their mortgage payments. In
addition, the Center counsels such borrowers early in the default process in an
attempt to help cure the loan and assist the borrower in meeting their mortgage
obligation.
Loss Reserves
Radian establishes reserves to provide for the estimated costs of settling
claims in respect of loans reported to be in default and loans that are in
default which have not yet been reported to Radian. Consistent with generally
accepted accounting principles and industry accounting practices, Radian does
not establish loss reserves for future claims on insured loans which are not
currently in default. In determining the liability for unpaid losses related to
reported outstanding defaults, Radian establishes loss reserves on a
case-by-case basis. The amount reserved for any particular loan is dependent
upon the characteristics of the loan, the status of the loan as reported by the
servicer of the insured loan as well as the economic condition and estimated
foreclosure period in the area in which the default exists. As the default
progresses closer to foreclosure, the amount of loss reserve for that particular
loan will be increased, in stages, to approximately 100% of Radian's exposure.
ANALYSIS OF PRIMARY RISK IN FORCE
Radian's business strategy has been to disperse risk as widely as possible.
Radian analyzes its portfolio in a number of ways to identify any concentrations
or imbalances in risk dispersion. Radian believes the quality of its insurance
portfolio is affected significantly by:
- the geographic dispersion of the properties securing the insured loans;
- the quality of loan originations;
- the types of loans insured (including LTV ratio, purpose of the loan,
type of loan instrument and type of underlying property securing the
loan); and
- the age of the loans insured.
Primary Risk In Force By Policy Year
The following table sets forth the percentage of Radian's primary risk in
force by policy origination year as of December 31, 2000:
<TABLE>
<S> <C>
1995 and prior.............................................. 10.5%
1996........................................................ 6.6
1997........................................................ 10.0
1998........................................................ 26.2
1999........................................................ 25.3
2000........................................................ 21.4
-----
100.0%
=====
</TABLE>
13
<PAGE> 14
Geographic Dispersion
The following tables reflect the percentage of direct primary risk in force
on Radian's book of business (by location of property) for the top ten states
and top 15 metropolitan statistical areas ("MSAs") as of December 31, 2000 and
1999:
<TABLE>
<CAPTION>
TOP TEN STATES 2000 1999
-------------- ---- ----
<S> <C> <C>
California.................................................. 16.8% 17.2%
Florida..................................................... 7.4 7.4
New York.................................................... 6.1 6.2
Texas....................................................... 5.3 5.4
Georgia..................................................... 4.3 4.0
New Jersey.................................................. 3.9 4.0
Arizona..................................................... 3.8 3.7
Illinois.................................................... 3.7 3.8
Pennsylvania................................................ 3.7 3.7
Colorado.................................................... 3.1 3.0
---- ----
Total............................................. 58.1% 58.4%
==== ====
</TABLE>
<TABLE>
<CAPTION>
TOP FIFTEEN MSAS 2000 1999
---------------- ---- ----
<S> <C> <C>
Los Angeles-Long Beach, CA.................................. 4.1% 4.4%
Atlanta, GA................................................. 3.4 3.2
Chicago, IL................................................. 3.2 3.3
Phoenix/Mesa, AZ............................................ 3.1 3.0
Washington, DC-MD-VA........................................ 2.9 2.9
New York, NY................................................ 2.5 2.4
Philadelphia, PA-NJ......................................... 2.4 2.4
Riverside-San Bernardino, CA................................ 2.1 2.1
Nassau/Suffolk, NY.......................................... 1.9 1.9
Denver, CO.................................................. 1.6 1.6
Detroit, MI................................................. 1.6 1.5
Orange County, CA........................................... 1.6 1.8
Minneapolis/St. Paul, MN.................................... 1.5 1.6
Las Vegas, NV............................................... 1.5 N/A
Houston, TX................................................. 1.4 1.5
Dallas, TX.................................................. N/A 1.4
---- ----
Total............................................. 34.8% 35.0%
==== ====
</TABLE>
Lender and Product Characteristics
While geographic dispersion is an important component of overall risk
dispersion and it has been a strategy of the Company to limit its exposure in
the top ten states and top 15 MSAs, the Company believes the quality of the risk
in force should be considered in conjunction with other elements of risk
dispersion, such as product distribution, as well as Radian's risk management
and underwriting practices.
The following tables reflect the percentage of direct risk in force (as
determined on the basis of information available on the date of mortgage
origination) by the categories indicated as of December 31, 2000 and 1999:
DIRECT RISK IN FORCE
<TABLE>
<CAPTION>
2000 1999
----- -----
<S> <C> <C>
Product Type:
Primary................................................ 94.7% 94.3%
Pool(1)................................................ 5.3 5.7%
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>
- ---------------
(1) Includes traditional and modified pool insurance.
14
<PAGE> 15
DIRECT PRIMARY RISK IN FORCE
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Direct Primary Risk in Force (dollars in millions).......... $24,622 $20,912
Lender Concentration:
Top 10 lenders (by original applicant)................. 42.8% 43.9%
Top 20 lenders (by original applicant)................. 58.7% 55.6%
LTV:
95.01% to 100.00%...................................... 6.7% 4.8%
90.01% to 95.00%....................................... 39.5 44.3
85.01% to 90.00%....................................... 41.4 43.9
85.00% and below....................................... 12.4 7.0
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Grade:
Prime.................................................. 90.3 95.1
Non-Prime.............................................. 9.7 4.9
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Type:
Fixed.................................................. 86.0% 88.9%
Adjustable rate mortgage ("ARM") (fully indexed)(1).... 11.8 10.1
ARM (potential negative amortization)(2)............... 2.2 1.0
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Term:
15 years and under..................................... 2.7% 4.0%
Over 15 years.......................................... 97.3 96.0
------- -------
Total............................................. 100.0% 100.0%
======= =======
Property Type:
Non-condominium (principally single-family detached)... 97.1% 96.2%
Condominium or cooperative............................. 2.9 3.8
------- -------
Total............................................. 100.0% 100.0%
======= =======
Occupancy Status:
Primary residence...................................... 94.6% 96.3%
Second home............................................ 2.2 1.4
Non-owner occupied..................................... 3.2 2.3
------- -------
Total............................................. 100.0% 100.0%
======= =======
Mortgage Amount:
$200,000 or less....................................... 85.9% 82.1%
Over $200,000.......................................... 14.1 17.9
------- -------
Total............................................. 100.0% 100.0%
======= =======
Loan Purpose:
Purchase............................................... 81.5% 79.1%
Refinance.............................................. 18.5 20.9
------- -------
Total............................................. 100.0% 100.0%
======= =======
</TABLE>
- ---------------
(1) Refers to loans where payment adjustments are the same as mortgage interest
rate adjustments.
(2) Loans with potential negative amortization will not have increasing
principal balances unless interest rates increase as contrasted with
scheduled negative amortization where an increase in loan balance will occur
even if interest rates do not change.
15
<PAGE> 16
One of the most important determinants of claim incidence is the relative
amount of borrower's equity, or downpayment, in the home. The expectation of
claim incidence on 95s is approximately two times the expected claim incidence
on 90s. Radian believes that the higher premium rates it charges on 95s
adequately reflect the additional risk on these loans. The industry and Radian
have been insuring 97s since 1995 and 100% LTV Loans ("100s") beginning in 2000.
These loans are expected to have a higher claim incidence than 95s; however,
with proper counseling efforts and by limiting insurance on these loans to
sensible affordable housing programs, it is Radian's belief that the claim
incidence should not be materially (more than one and one-half times) worse than
on 95s, although there can be no assurance that claim incidence will not be
materially worse on 97s or 100s than on 95s. Premium rates on 100s and 97s are
higher than on 95s to compensate for the additional risk and the higher expected
frequency and severity of claims.
In recent years, Radian has increased its insurance on mortgages identified
by its customers as "affordable housing" loans. These loans are typically made
to low- and moderate-income borrowers in conjunction with special programs
developed by state or local housing agencies, Fannie Mae or Freddie Mac. Such
programs usually include 95s, 97s and 100s and may require the liberalization of
certain underwriting guidelines in order to achieve their objectives. Radian's
participation in these programs is dependent upon acceptable borrower
counseling. Default experience on these programs has been worse than
non-"affordable housing" loans; however, Radian does not believe the ultimate
claims will materially affect its financial results due to the relatively small
amount of such business in Radian's insured book combined with higher premium
rates and risk-sharing elements.
Radian believes that the risk of claim on Non-Prime loans is significantly
higher than that of prime loans. Non-Prime loans generally include Alternative A
and A minus products and although higher premium rates and surcharges are
charged in order to compensate for the additional risk, these products are
relatively new and have never been insured in an adverse economic situation so
there is no assurance that the premium rates are adequate or the loss
performance will be at, or close to, expected levels.
Radian's claim frequency on insured ARMs has been higher than on all other
loan types. Radian believes that the risk on ARM loans is greater than on fixed
rate loans due to possible monthly payment increases if interest rates rise.
Radian believes that 15-year mortgages present a lower level of risk than
30-year mortgages, primarily as a result of the faster amortization and the more
rapid accumulation of borrower equity in the property. Premium rates for 15-year
mortgages are lower to reflect the lower risk.
Radian believes that the risk of claim is also affected by the type of
property securing the insured loan. In Radian's opinion, loans on single-family
detached housing are subject to less risk of claim incidence than loans on other
types of properties. Conversely, loans on attached housing types, particularly
condominiums and cooperatives, are generally considered by Radian to be a higher
risk, due to the higher density of such properties and because a detached unit
is the preferred housing type in most areas. Radian's more stringent
underwriting guidelines on condominiums and cooperatives reflect this higher
expected risk.
Radian believes that the risk of claim on relocation loans and loans
originated by credit unions is extremely low and offers lower premium rates on
such loans to compensate for the lower risk.
Radian believes that loans on non-owner occupied homes purchased for
investment purposes represent a substantially higher risk of claim incidence,
and are subject to greater value declines than loans on either primary or second
homes. Radian underwrites loans on non-owner occupied homes more stringently,
and sometimes requires that the investor indemnify Radian directly for any loss
suffered by Radian. Radian also charges a significantly higher premium rate than
the rate charged for insuring loans on owner occupied homes.
Radian believes that higher priced properties experience wider fluctuations
in value than moderately priced residences and that the income of many people
who buy higher priced homes is less stable than that of people with moderate
incomes. Underwriting guidelines for such higher priced properties reflect this
concern.
16
<PAGE> 17
INVESTMENT POLICY AND PORTFOLIO
The Company's income from its investment portfolio is one of the Company's
primary sources of cash flow to support its operations and claim payments.
The Company follows an investment policy which at a minimum requires:
- 95% of its investment portfolio to consist of cash equivalents and debt
securities (including redeemable preferred stocks) which, at the date of
purchase, were rated investment grade by a nationally recognized rating
agency (e.g., "BBB" or better by S&P); and
- at least 50% of its investment portfolio to consist of cash, cash
equivalents and debt securities (including redeemable preferred stocks)
which, at the date of purchase, were rated the highest investment grade
by a nationally recognized rating agency (e.g., "AAA" by S&P).
The Company is permitted to invest in equity securities (including
convertible debt and convertible preferred stock), provided its equity component
does not exceed 20% of the total investment portfolio.
At December 31, 2000, the Company's investment portfolio had a carrying
value of $1,750.5 million and a market value of $1,771.7 million, including
$95.8 million of short-term investments. The Company's investment portfolio did
not include any real estate or mortgage loans. The portfolio included 16
privately placed, investment-grade securities with an aggregate carrying value
of $25.7 million. At December 31, 2000, 99.8% of the Company's investment
portfolio (which excludes cash) consisted of cash equivalents and debt
securities (including redeemable preferred stocks) which were rated investment
grade.
The Company's investment policies and strategies are subject to change
depending upon regulatory, economic and market conditions and the then existing
or anticipated financial condition and operating requirements, including the tax
position, of the Company.
The diversification of the Company's investment portfolio (other than
short-term investments) at December 31, 2000 is shown in the table below:
INVESTMENT PORTFOLIO DIVERSIFICATION
<TABLE>
<CAPTION>
DECEMBER 31, 2000
------------------------------------
AMORTIZED FAIR
COST VALUE PERCENT(1)
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities held to maturity:
U.S. government securities(2)................. $ 8,765 $ 9,393 1.9%
State and municipal obligations(3)............ 460,826 481,399 98.1
---------- ---------- -----
Total.................................... $ 469,591 $ 490,792 100.0%
========== ========== =====
Fixed maturities available for sale:
U.S. government securities(2)................. $ 33,126 $ 33,527 3.0%
U.S. government agency securities(2).......... 59,200 60,031 5.4
State and municipal obligations(3)............ 822,501 848,048 75.7
Corporate obligations(3)...................... 152,052 157,115 14.0
Redeemable preferred stocks(3)................ 20,312 22,119 1.9
---------- ---------- -----
Total.................................... $1,087,191 $1,120,840 100.0%
========== ========== =====
Equity securities available for sale:
Equity securities............................. $ 58,877 $ 64,202 100.0%
========== ========== =====
</TABLE>
- ---------------
(1) Percentage of amortized cost.
(2) Substantially all of these securities are backed by the full faith and
credit of the U.S. government.
(3) Consists primarily of investment-grade securities.
17
<PAGE> 18
The following table shows the scheduled maturities of the securities held
in the Company's investment portfolio at December 31, 2000:
INVESTMENT PORTFOLIO SCHEDULED MATURITY (1)
<TABLE>
<CAPTION>
DECEMBER 31, 2000
---------------------------
CARRYING
VALUE PERCENT
-------------- -------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments...................................... $ 95,824 5.5%
Less than one year.......................................... 26,138 1.5
One to five years........................................... 248,773 14.2
Five to ten years........................................... 386,627 22.1
Over ten years.............................................. 846,743 48.4
Mortgage-backed securities(2)............................... 60,031 3.4
Redeemable preferred stocks(3).............................. 22,119 1.2
Equity securities(3)........................................ 64,202 3.7
---------- -----
Total.................................................. $1,750,457 100.0%
========== =====
</TABLE>
- ---------------
(1) Actual maturities may differ as a result of calls prior to scheduled
maturity.
(2) Substantially all of these securities are backed by the Government National
Mortgage Association ("GNMA") or the Federal National Mortgage Association
("Fannie Mae").
(3) No stated maturity date.
The following table shows the ratings by S&P of the Company's investment
portfolio (other than short-term investments) as of December 31, 2000:
INVESTMENT PORTFOLIO BY S&P RATING
<TABLE>
<CAPTION>
DECEMBER 31, 2000
---------------------------
CARRYING
RATING(1) VALUE PERCENT
--------- -------------- -------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
U.S. government and agency securities..................... $ 102,323 6.2%
AAA....................................................... 972,430 58.8
AA........................................................ 247,406 14.9
A......................................................... 82,818 5.0
BBB....................................................... 84,449 5.1
BB and below and other(2)................................. 3,366 0.2
Not rated(3).............................................. 97,639 5.9
Equity securities........................................... 64,202 3.9
---------- -----
Total............................................. $1,654,633 100.0%
========== =====
</TABLE>
- ---------------
(1) As assigned by S&P as of December 31, 2000.
(2) Securities in this category have been rated non-investment grade by S&P as
of December 31, 2000.
(3) Securities in this category have not been rated by S&P as of December 31,
2000 but have been rated investment grade as of December 31, 2000 by at
least one other nationally recognized securities rating agency.
18
<PAGE> 19
REGULATION
Direct Regulation
State Regulation
The Company and its insurance subsidiaries are subject to comprehensive,
detailed regulation principally designed for the protection of policyholders,
rather than for the benefit of investors, by the insurance departments in the
various states where the Company and its insurance subsidiaries are licensed to
transact business. Insurance laws vary from state to state, but generally grant
broad supervisory powers to agencies or officials to examine insurance companies
and enforce rules or exercise discretion affecting almost every significant
aspect of the insurance business.
Insurance regulations relate, among other things, to the licensing of
companies to transact business, claims handling, reinsurance requirements,
premium rates and policy forms offered to customers, financial statements,
periodic reporting, permissible investments and adherence to financial standards
relating to surplus, dividends and other criteria of solvency intended to assure
the satisfaction of obligations to policyholders.
Mortgage insurers are generally restricted to writing residential mortgage
guaranty insurance business only. The non-insurance businesses of the Company,
which consist of mortgage insurance related services, are not generally subject
to regulation under state insurance laws.
Insurance Holding Company Regulation. All states have enacted legislation
that requires each insurance company in an insurance holding company system to
register with the insurance regulatory authority of its state of domicile and to
furnish to such regulator financial and other information concerning the
operations of companies within the holding company system that may materially
affect the operations, management or financial condition of insurers within the
system.
Because the Company is an insurance holding company, Radian Guaranty and
RIINC are Pennsylvania insurance companies, and Amerin Guaranty is an Illinois
insurance company, the Pennsylvania and Illinois insurance laws regulate, among
other things, certain transactions in the Company's common stock and certain
transactions between Radian Guaranty, RIINC, Amerin Guaranty, the Company's
other insurance subsidiaries, and their parent or affiliates. Specifically, no
person may, directly or indirectly, offer to acquire or acquire "control" of the
Company, or insurance subsidiaries, unless such person files a statement and
other documents with the relevant state's Commissioner of Insurance and obtains
such Commissioner's prior approval. The Commissioner may hold a public hearing
on the matter. "Control" is presumed to exist if 10% or more of the Company or
its insurance subsidiaries' voting securities are owned or controlled, directly
or indirectly, by a person, although "control" may or may not be deemed to exist
where a person owns or controls a lesser amount of securities. In addition,
material transactions between the Company and its insurance subsidiaries and
their parent or affiliates are subject to certain conditions, including that
they be "fair and reasonable." These restrictions generally apply to all persons
controlling or under common control with the Company or its insurance
subsidiaries. Certain transactions between the Company's insurance subsidiaries
and their parent or affiliates may not be entered into unless the relevant
Commissioner of Insurance is given 30 days prior notification and does not
disapprove the transaction during such 30-day period.
Dividends. The ability of Radian Guaranty to pay dividends on its common
stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends which may
be paid without prior approval by the Pennsylvania Insurance Commissioner. Under
such test, Radian Guaranty may pay dividends during any 12-month period in an
amount equal to the greater of (i) 10% of the preceding year-end statutory
policyholders' surplus or (ii) the preceding year's statutory net income. In
accordance with such restrictions, $198.0 million would be available for
dividends in 2001. However, an amendment to the Pennsylvania statute requires
that dividends and other distributions be paid out of an insurer's unassigned
surplus. Because of the unique nature of the method of accounting for
contingency reserves, Radian Guaranty has negative unassigned surplus. Thus,
prior approval by the Pennsylvania Insurance Commissioner is required for Radian
Guaranty to pay dividends or make other distributions so long as Radian Guaranty
has negative
19
<PAGE> 20
unassigned surplus. The Pennsylvania Insurance Commissioner has approved all
distributions by Radian Guaranty since the passage of this amendment and
management has every expectation that the Insurance Department will continue to
approve such distributions in the future, provided that the financial condition
of Radian Guaranty does not materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from positive unassigned
surplus by an insurer without prior approval by the Illinois Insurance
Commissioner. Under such test, Amerin Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10 percent of the
preceding year-end statutory policyholders' surplus or (ii) the preceding year's
statutory net income. In accordance with such restrictions, $58.0 million would
be available for dividends in 2001 without prior regulatory approval, which
represents the positive unassigned surplus of Amerin Guaranty at December 31,
2000.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9.9 million), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
Radian Guaranty's current excess of loss reinsurance agreement prohibits
the payment of any dividend that would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 2000, Radian Guaranty had statutory
policyholders' surplus of $171.6 million and a contingency reserve of $799.0
million, for a total of $970.6 million.
Risk to Capital. A number of states and Freddie Mac limit a private
mortgage insurer's risk in force to 25 times the total of the insurer's
policyholders' surplus plus the statutory contingency reserve, commonly known as
the "risk-to-capital" requirement. As of December 31, 2000, Radian's
consolidated risk-to-capital ratio was 15.4 to 1, compared to 16.9 to 1 in 1999.
The Cross Guaranty Agreement between Radian Guaranty and Amerin Guaranty makes
it appropriate to look at risk-to-capital on a consolidated basis.
Reserves. For statutory reporting, Radian is annually required to provide
for additions to the contingency reserve in an amount equal to 50% of earned
premiums. Such amounts cannot be withdrawn for a period of 10 years except under
certain circumstances. The contingency reserve, designed to be a reserve against
catastrophic losses, essentially restricts dividends and other distributions by
Radian. Radian classifies the contingency reserve as a statutory liability. At
December 31, 2000, Radian Guaranty had policyholders' surplus of $171.6 million
and a contingency reserve of $799.0 million and Amerin Guaranty had
policyholders' surplus of $284.8 million and a contingency reserve of $277.3
million.
Premium Rates and Policy Forms. Radian's premium rates and policy forms
are subject to regulation in every state in which it is licensed to transact
business in order to protect policyholders against the adverse effects of
excessive, inadequate or unfairly discriminatory rates and to encourage
competition in the insurance marketplace. In most states, premium rates and
policy forms must be filed prior to their use. In some states, such rates and
forms must also be approved prior to use. Changes in premium rates are subject
to justification, generally on the basis of the insurer's loss experience,
expenses and future trend analysis. The general default experience in the
mortgage insurance industry may also be considered.
Reinsurance. Certain restrictions apply under the laws of several states
to any licensed company ceding business to an unlicensed reinsurer. Under such
laws, if a reinsurer is not admitted or approved in such states, the company
ceding business to the reinsurer cannot take credit in its statutory financial
statements for the risk
20
<PAGE> 21
ceded to such reinsurer absent compliance with certain reinsurance security
requirements. In addition, several states also have special restrictions on
mortgage guaranty insurance and, several states limit the amount of risk a
mortgage insurer may retain with respect to coverage on an insured loan to 25%
of the insured's claim amount. Coverage in excess of 25% (i.e., deep coverage)
must be reinsured.
Examination. The Company's insurance subsidiaries are subject to
examination of their affairs by the insurance departments of each of the states
in which they are licensed to transact business.
New York Circular Letter. The New York Insurance Department (the
"Department") issued Circular Letter No. 2 dated February 1, 1999 (the "Letter")
which discusses their position concerning various transactions between mortgage
guaranty insurance companies licensed in New York and mortgage lenders. The
Letter confirms that captive reinsurance transactions are permissible if they
"constitute a legitimate transfer of risk" and "are fair and equitable to the
parties". The Letter also states that "supernotes/performance notes," "dollar
pool" insurance, and "un-captive captives" violate New York law.
Federal Regulation
RESPA. The origination or refinance of a federally regulated mortgage loan
is a settlement service, and therefore subject to the Real Estate Settlement
Practices Act of 1974, and the regulations promulgated thereunder (collectively,
"RESPA"). In December 1992, regulations were issued which stated that mortgage
insurance is also a settlement service, and therefore, that mortgage insurers
are subject to the provisions of Section 8(a) of RESPA, which generally
prohibits persons from accepting anything of value for referring real estate
settlement services to any provider of such services. Although many states
prohibit mortgage insurers from giving rebates, RESPA has been interpreted to
cover many non-fee services as well. HUD's interest in pursuing violations of
RESPA has increased awareness of both mortgage insurers and their customers of
the possible sanctions of this law.
Radian and all of its competitors have been sued in similar actions
alleging violations of RESPA. The Company is contesting the action brought
against it and believes its products and services comply with RESPA, as well as
all other applicable laws and regulations. See "Item 3. Legal Proceedings" below
for further details.
HMDA. Most originators of mortgage loans are required to collect and
report data relating to a mortgage loan applicant's race, nationality, gender,
marital status and census tract to HUD or the Federal Reserve under the Home
Mortgage Disclosure Act of 1975 ("HMDA"). The purpose of HMDA is to detect
possible discrimination in home lending and, through disclosure, to discourage
such discrimination. Mortgage insurers are not required pursuant to any law or
regulation to report HMDA data, although under the laws of several states,
mortgage insurers are currently prohibited from discriminating on the basis of
certain classifications.
The active mortgage insurers, through their trade association, Mortgage
Insurance Companies of America ("MICA"), entered into an agreement with the
Federal Financial Institutions Examinations Council ("FFIEC") to report the same
data on loans submitted for insurance as is required for most mortgage lenders
under HMDA. Reports of HMDA-type data for the mortgage insurance industry have
been submitted by MICA to the FFIEC since 1993. Management is not aware of any
pending or expected actions by governmental agencies in response to the reports
submitted by MICA to the FFIEC.
Mortgage Insurance Cancellation. The Homeowners Protection Act of 1998
(the "Act") was signed into law on July 29, 1998. The Act imposes certain
cancellation and termination requirements for borrower-paid private mortgage
insurance and requires certain disclosures to borrowers regarding their rights
under the law. The Act also requires certain disclosures for loans covered by
lender-paid private mortgage insurance. Specifically, the Act provides that
private mortgage insurance on most loans originated on or after July 29, 1999
may be canceled at the request of the borrower once the LTV reaches 80%,
provided that certain conditions are satisfied. Private mortgage insurance must
be canceled automatically once the LTV reaches 78% (or, if the loan is not
current on that date, on the date that the loan becomes current). The Act
establishes special rules for the termination of private mortgage insurance in
connection with loans that are
21
<PAGE> 22
"high risk". The Act does not define "high risk" loans but leaves that
determination to Fannie Mae and Freddie Mac for loans up to the conforming loan
limit and to the mortgagee for any other loan. For "high risk" loans above the
conforming loan limit, private mortgage insurance must be terminated on the date
that the LTV is first scheduled to reach 77%. In no case, however, may private
mortgage insurance be required beyond the midpoint of the amortization period of
the loan if the mortgagor is current on the payments required by the terms of
the mortgage. Radian feels that the Act will have an immaterial impact on the
persistency of Radian's insured loans, on Radian's insured book of business, and
on the Company's financial results.
Other Direct Regulation
Freddie Mac and Fannie Mae
As the most significant purchasers and sellers of conventional mortgage
loans and beneficiaries of private mortgage insurance, Freddie Mac and Fannie
Mae impose requirements on private mortgage insurers so that they may be
eligible to insure loans sold to such agencies. Freddie Mac's current
eligibility requirements impose limitations on the type of risk insured,
standards for the geographic and customer diversification of risk, procedures
for claims handling, acceptable underwriting practices, standards for certain
reinsurance cessions and financial requirements which generally mirror state
insurance regulatory requirements. These requirements are subject to change from
time to time. Fannie Mae also has eligibility requirements, although such
requirements are not published. Radian Guaranty and Amerin Guaranty are approved
mortgage insurers for both Freddie Mac and Fannie Mae.
In 1995, Freddie Mac and Fannie Mae began to require deeper coverage on
certain loans with LTV ratios greater than 85%. Radian believes that this deeper
coverage did not have a material effect on its financial results, although
premiums earned and the level of risk have increased and the risk-to-capital
ratio is relatively higher as a result of the increase in risk.
In 1995, Radian issued a new Master Policy which applies to all business
written after June 1, 1995. Changes in the terms include a broader scope of
coverage for certain environmental and bankruptcy related claims, and somewhat
more limited rights to reject claim payments, neither of which Radian believes
will have a material adverse effect on its operations or financial results. The
new Master Policy was approved by Fannie Mae and Freddie Mac, as well as by all
states which require approval of policy forms.
In January 1999, Fannie Mae announced a new program which allows for lower
levels of required mortgage insurance coverage for low downpayment 30-year fixed
rate loans approved through its Desktop Underwriter automated underwriting
system. The insurance levels are similar to those required prior to 1995. Fannie
Mae will replace some of the coverage with a layer of investor mortgage
insurance coverage provided by at least two mortgage insurers, one of which will
be Radian. Fannie Mae also announced that it intends to purchase additional
insurance for certain eligible "Flex 97" and investor loans, and Radian has been
selected to provide this coverage on a pilot basis. The Company does not believe
that these developments will adversely affect the demand for or the
profitability of mortgage insurance in the near future.
Indirect Regulation
The Company and Radian are also indirectly, but significantly, impacted by
regulations affecting originators and purchasers of mortgage loans, particularly
Freddie Mac and Fannie Mae, and regulations affecting governmental insurers such
as the FHA and VA. Private mortgage insurers, including Radian, are highly
dependent upon federal housing legislation and other laws and regulations which
affect the demand for private mortgage insurance and the housing market
generally. For example, legislation which increases the number of persons
eligible for FHA or VA mortgages could have a material adverse effect on
Radian's ability to compete with the FHA or VA.
The FHA single family loan limits were raised in the fall of 1998. These
increased loan limits vary by geographic region from $109,032 to $197,620.
Radian does not believe that demand for private mortgage insurance has been or
will be materially adversely affected by this change.
22
<PAGE> 23
Proposals have been advanced which would allow Fannie Mae and Freddie Mac
additional flexibility in determining the amount and nature of alternative
recourse arrangements or other credit enhancements which they could utilize as
substitutes for private mortgage insurance. The Company cannot predict if or
when any of the foregoing legislation or proposals will be adopted, but if
adopted and depending upon the nature and extent of revisions made, demand for
private mortgage insurance may be adversely affected. There can be no assurance
that other federal laws affecting such institutions and entities will not
change, or that new legislation or regulations will not be adopted. In addition,
Fannie Mae and Freddie Mac have entered into, and may in the future seek to
enter into, alternative recourse arrangements or other credit enhancements based
on their existing legislative authority.
In the fall of 1998, Freddie Mac proposed to Congress an amendment to its
charter that would have permitted it to substitute other forms of loss
protection for private mortgage insurance. Although the proposed amendment was
defeated, Freddie Mac may be actively exploring alternatives to conventional
mortgage insurance. Although it is not clear what, if any, changes or new
products may emerge, there is a possibility that any changes in this regard may
materially affect the mortgage insurance industry.
Recent discussions with the Federal Trade Commission with regard to the
adverse action disclosure provisions of the Fair Credit Reporting Act ("FCRA")
have raised the possibility that Radian will need to make certain changes to its
loan servicing and tracking procedures in order to give FCRA adverse action
notices directly to borrowers. The Company does not believe that such changes
will have a material effect on its operations.
There can be no assurance that the above-mentioned federal laws and
regulations or other federal laws and regulations affecting lenders, private and
governmental mortgage insurers, or purchasers of insured mortgage loans, will
not be amended, or that new legislation or regulations will not be adopted, in
either case, in a manner which will adversely affect the demand for private
mortgage insurance.
Employees
At December 31, 2000, Radian had approximately 835 employees, of which
approximately one-third were located at its Philadelphia headquarters facility.
Radian's employees are not unionized and management considers employee relations
to be very good.
ITEM 2. PROPERTIES
The Company leases approximately 59,000 square feet for its corporate
headquarters in Philadelphia under leases which expire in 2003. In addition, it
leases space for its Regional, Service Center and On-site offices throughout the
United States comprising approximately 57,000 square feet with leases expiring
between 2001 and 2003. With respect to all facilities, the Company believes it
will be able to obtain satisfactory lease renewal terms.
The Company believes its existing properties are well utilized and are
suitable and adequate for its present circumstances.
Radian maintains a mini-computer network from its corporate data center
located in its headquarters building to support its data processing requirements
for accounting, claims, marketing, risk management, underwriting and
non-insurance operations. In 1997, Radian centralized all computer operations.
All the service centers are linked to the home office in Philadelphia via a high
speed frame-relay network. The centralized environment is based on the Business
Recovery Server ("BRS") architecture. The BRS consists of two geographically
dispersed, identical data centers. Each data center is currently running at 40%
of capacity. Either data center is capable of supporting the entire company. The
data centers are linked via a fiber-optic link allowing simultaneous data
updates through disk shadowing. Each center is part of a separate power grid.
This redundant configuration provides disaster tolerance and automatic back-up,
resource sharing and fail-over. The Company believes that its data processing
systems are adequate to support its current needs and have the capacity to
support a greater volume of insurance business.
23
<PAGE> 24
ITEM 3. LEGAL PROCEEDINGS
In December 2000, a complaint seeking class action status on behalf of a
nationwide class of home mortgage borrowers was filed against Radian in the
United States District Court for the Middle District of North Carolina
(Greensboro Division). The complaint alleges that Radian violated Section 8 of
the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits
the giving of any fee, kickback or thing of value pursuant to any agreement or
understanding that real estate settlement services will be referred. The
complaint asserts that the pricing of pool insurance, captive reinsurance,
contract underwriting, performance notes and other, unidentified "structured
transactions," should be interpreted as imputed kickbacks made in exchange for
the referral of primary mortgage insurance business, which, according to the
complaint, is a settlement service under RESPA. The complaint seeks injunctive
relief and damages of three times the amount of any mortgage insurance premiums
paid by persons who were referred to Radian pursuant to the alleged agreement or
understanding. The plaintiffs in the lawsuit are represented by the same group
of plaintiffs' lawyers who last year filed similar lawsuits against other
providers of primary mortgage insurance in federal court in Georgia. The Georgia
court dismissed those lawsuits for failure to state a claim. Three of those
lawsuits were settled prior to appeal; two are currently on appeal. Radian has
responded to the complaint by filing a motion to dismiss. Because this case is
at a very early stage, it is not possible to evaluate the likelihood of an
unfavorable outcome or to estimate the amount or range of potential loss.
In addition to the above, the Company is involved in certain litigation
arising in the normal course of its business. The Company is contesting the
allegations in each other such pending action and believes, based on current
knowledge and after consultation with counsel, that the outcome of such
litigation will not have a material adverse effect on the Company's consolidated
financial position and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2000 to a vote of
holders of the Company's common stock.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information with respect to this item is included on page 44 of the
Company's 2000 Annual Report to Stockholders under the caption "Common Stock"
and is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth in the tables on page 16 of the Company's 2000
Annual Report to Stockholders under the caption "Selected Financial and
Statistical Data" is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information set forth on pages 36 through 42 in the Company's 2000
Annual Report to Stockholders under the caption "Management's Discussion and
Analysis of Results of Operations and Financial Condition" is hereby
incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth on page 42 in the Company's 2000 Annual Report to
Stockholders under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition -- Quantitative and Qualitative
Disclosures about Market Risk" is hereby incorporated by reference.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated statements of income, of changes in common stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000, and the related consolidated balance sheets of the Company as
of December 31, 2000 and 1999, together with the related notes thereto and the
independent auditors' report, as well as the unaudited quarterly financial data,
all set forth on pages 17 through 35 of the Company's 2000 Annual Report to
Stockholders, are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on the directors and executive officers of the Registrant
is included in the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders, and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is included in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is included in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders, and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is included in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders, and is hereby incorporated by reference.
PART IV
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
(a) 1. Financial statements -- The financial statements listed in the
accompanying Index to Consolidated Financial Statements and
Financial Statement Schedules are filed as part of this Form 10-K.
2. Financial statement schedules -- The financial statement schedules
listed in the accompanying Index to Consolidated Financial
Statements and Financial Statement Schedules are filed as part of
this Form 10-K.
3. Exhibits -- The exhibits listed in the accompanying Index to
Exhibits are filed as part of this Form 10-K.
(b) Reports on Form 8-K.
On November 14, 2000, the Company filed a Report on Form 8-K in which the
Company, a wholly owned subsidiary of the Company, GOLD Acquisition Corporation,
and Enhance Financial Services Group Inc. ("Enhance Financial"), entered into an
Agreement and Plan of Merger dated as of November 13, 2000, pursuant to which,
upon consummation of the merger, each outstanding share of common stock of
Enhance Financial will be converted into 0.22 shares of common stock of the
Company.
25
<PAGE> 26
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(ITEMS 14(A) 1 AND 2)
<TABLE>
<CAPTION>
PAGE
----------------------
ANNUAL
FORM REPORT TO
10-K STOCKHOLDERS*
------- -------------
<S> <C> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets at December 31, 2000 and 1999... -- 17
Consolidated statements of income for each of the three
years in the period ended December 31, 2000............... -- 18
Consolidated statements of changes in common stockholders'
equity for each of the three years in the period ended
December 31, 2000......................................... -- 19
Consolidated statements of cash flows for each of the three
years in the period ended December 31, 2000............... -- 20
Notes to consolidated financial statements.................. -- 21-34
Independent auditors' report................................ -- 35
FINANCIAL STATEMENT SCHEDULES
Independent auditors' report on financial statement
schedules................................................. F-1 --
Schedule I -- Summary of investments -- other than
investments in related parties (December 31,
2000)......................................... F-2 --
Schedule III -- Condensed financial information of
Registrant (December 31, 2000).............. F-3-F-7 --
Schedule VI -- Reinsurance (December 31, 2000).............. F-8 --
</TABLE>
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the consolidated
financial statements and notes thereto.
26
<PAGE> 27
INDEX TO EXHIBITS
(ITEM 14(A) 3)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated as of November 22, 1998
between Registrant and Amerin Corporation. (13) (15)
(Exhibit 2.1)
*2.2 -- Stock Purchase Agreement dated as of October 27, 2000 by and
among Registrant, ExpressClose.com, Inc. and The Founding
Stockholders of ExpressClose.com, Inc.
2.3 -- Agreement and Plan of Merger dated as of November 13, 2000
by and among Registrant, GOLD Acquisition Corporation, and
Enhance Financial Services Group Inc. (14) (17) (Exhibit
2.1)
2.4 -- Shareholder Support Agreement by and among Registrant and
Daniel Gross, dated as of November 18, 2000. (17) (Exhibit
2.2)
2.5 -- Shareholder Support Agreement by and among Registrant and
Wallace O. Sellers, dated as of November 18, 2000. (17)
(Exhibit 2.3)
2.6 -- Shareholder Support Agreement by and among Registrant and
Allan R. Tessler, dated as of November 18, 2000. (17)
(Exhibit 2.4)
3.1 -- Second Amended and Restated Certificate of Incorporation of
the Registrant. (16) (Appendix II)
3.2 -- Amended and restated by-laws of the Registrant. (15)
(Exhibit 3.2)
4.1 -- Specimen certificate for Common Stock. (9)
4.2 -- Certificate of Designations relating to $4.125 Preferred
Stock of the Company. (2)(Exhibit 4.2)
4.3 -- Specimen certificate for $4.125 Preferred Stock of the
Company. (1)(Exhibit 4.3)
4.4 -- Standstill and Voting Agreement dated October 27, 1992
between the Company and Reliance Group Holdings, Inc.
(2)(Exhibit 4.4)
4.5 -- Amended and Restated Shareholders Rights Agreement. (13)
(15) (Exhibit 4.4)
10.1 -- Tax Indemnification Agreement dated October 28, 1992 among
the Company, Commonwealth Land Title Insurance Company,
Reliance Insurance Company and Reliance Group Holdings, Inc.
(2)(Exhibit 10.3)
10.2 -- Tax Allocation Agreement dated as of April 1, 1992, among
Reliance Insurance Company and certain of its subsidiaries,
including Commonwealth Mortgage Assurance Company.
(1)(Exhibit 10.4)
10.3 -- Form of Change of Control Agreement dated January 25, 1995,
between the Company and each of Frank P. Filipps, Paul F.
Fischer and C. Robert Quint, (5) (11) (Exhibit 10.6)
10.4 -- Change of Control Agreement dated October 30, 1997, between
the Company and Howard S. Yaruss. (7) (11) (Exhibit 10.7)
10.5 -- Change of Control Agreement dated February 6, 1998, between
the Company and Scott Stevens. (8) (11) (Exhibit 10.5)
10.6 -- Change of Control Agreement dated June 9, 1999, between the
Company and Andrew Luczakowsky. (9) (11) (Exhibit 10.6)
10.7 -- Change of Control Agreement dated March 12, 1999, between
the Company and Roy J. Kasmar. (11) (15) (Exhibit 10.40)
*10.8 -- Change of Control Agreement dated July 19, 2000, between the
Company and Bruce Van Fleet. (11)
10.9 -- Employment Agreement dated March 12, 1999, between the
Company and Roy J. Kasmar. (11) (15) (Exhibit 10.39)
10.10 -- CMAC Investment Corporation Pension Plan. (2)(12)(Exhibit
10.8)
10.11 -- CMAC Investment Corporation Savings Incentive Plan, as
amended and restated through January 1, 1994. (5) (12)
(Exhibit 10.9)
10.12 -- CMAC Investment Corporation 1992 Stock Option Plan as
amended as of January 1, 1995. (5) (12) (Exhibit 10.10)
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
10.13 -- Amended and restated CMAC Investment Corporation Equity
Compensation Plan. (8) (11) (Exhibit 10.9) (16) (Appendix V)
10.14 -- Radian Deferred Compensation Plan. (11) (9) (Exhibit 10.13)
10.15 -- Purchase Agreement dated October 29, 1992 between the
Company and Commonwealth Land Title Insurance Company
regarding $4.125 Preferred Stock. (2)(Exhibit 10.14)
10.16 -- Registration Rights Agreement dated October 27, 1992 between
the Company and Commonwealth Land Title Insurance Company.
(2)(Exhibit 10.15)
10.17 -- Form of Commonwealth Mortgage Assurance Company Master
Policy. (1)(Exhibit 10.16)
10.18 -- Risk-to-Capital Ratio Maintenance Agreement between the
Company and Commonwealth Mortgage Assurance Company
regarding matters relating to Moody's financial strength
rating as amended through October 22, 1993. (3) (Exhibit
10.15)
10.19 -- Reserve Account Agreement dated August 14, 1992, between the
Company and Commonwealth Mortgage Assurance Company
regarding $4.125 Preferred Stock.(1)(Exhibit 10.18)
10.20 -- First Layer Binder of Reinsurance, effective March 1, 1992,
among Commonwealth Mortgage Assurance Company, Commonwealth
Mortgage Assurance Company of Arizona, and AXA Reinsurance
SA. (1) (Exhibit 10.19)
10.21 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1994, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company.(4) (Exhibit 10.19)
10.22 -- Capital Reinsurance Company Reinsurance Agreement, effective
January 1, 1994, between Commonwealth Mortgage Assurance
Company and Capital Reinsurance Company. (4) (Exhibit 10.20)
10.23 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1995, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company. (5)(Exhibit 10.20)
10.24 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1996, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company. (6)(Exhibit 10.21)
10.25 -- Capital Mortgage Reinsurance Company Variable Quota Share
Reinsurance Agreement, effective January 1, 1997, between
Commonwealth Mortgage Assurance Company and its affiliates
and Capital Mortgage Reinsurance Company. (7) (Exhibit
10.22)
10.26 -- Amended form of Commonwealth Mortgage Assurance Company
Master Policy, effective June 1, 1995. (4)(Exhibit 10.22)
10.27 -- CMAC Investment Corporation 1997 Employee Stock Purchase
Plan. (10)
10.28 -- Amended and Restated Amerin Corporation 1992 Long-Term
Incentive Plan. (15) (Exhibit 10.33)
*21.1 -- Revised Subsidiaries of the Company.
*23.1 -- Consent of Deloitte & Touche LLP.
*23.2 -- Consent of Ernst & Young LLP.
*99 -- Report of Ernst & Young LLP, Independent Auditors.
</TABLE>
- ---------------
* Filed herewith.
(1) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Registration Statement on Form S-1 filed
August 24, 1992 and amendments thereto (File No. 33-51188).
(2) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1992.
(3) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993.
(4) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994.
(5) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995.
28
<PAGE> 29
(6) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996.
(7) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
(8) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998.
(9) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999, and any amendments thereto.
(10) Incorporated by reference filed in the Registrant's Registration Statement
on Form S-8 filed November 19, 1997 (File No. 333-40623).
(11) Management contract or compensatory plan or arrangement required to be
filed pursuant to Item 14(c) of Form 10-K.
(12) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Report on Form 8-K filed May 1, 1998.
(13) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Report on Form 8-K filed November 25,
1998.
(14) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Report on Form 8-K filed November 14,
2000.
(15) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Registration Statement on Form S-4 filed
May 6, 1999 (File No. 333-77957).
(16) Incorporated by reference to the appendix identified in parentheses, filed
as an appendix to the DEF 14A filed May 11, 1999.
(17) Incorporated by reference to the exhibit identified in parentheses, filed
as an exhibit in the Registrants' Registration Statement on Form S-4 filed
December 27, 2000 and any amendment thereto (File No. 333-52762).
29
<PAGE> 30
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, on April 2, 2001.
Radian Group Inc.
By: /s/ FRANK P. FILIPPS
------------------------------------
Frank P. Filipps
(principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 2, 2001 by the following persons on behalf
of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ FRANK P. FILIPPS Chairman of the Board, Chief Executive
- -------------------------------------------------------- Officer and Director
Frank P. Filipps
/s/ ROY J. KASMAR President, Chief Operating Officer and
- -------------------------------------------------------- Director
Roy J. Kasmar
/s/ C. ROBERT QUINT Executive Vice President, Chief Financial
- -------------------------------------------------------- Officer (principal accounting officer)
C. Robert Quint
/s/ HOWARD S. YARUSS Senior Vice President, Secretary & General
- -------------------------------------------------------- Counsel
Howard S. Yaruss
/s/ HERBERT WENDER Lead Director
- --------------------------------------------------------
Herbert Wender
/s/ DAVID C. CARNEY Director
- --------------------------------------------------------
David C. Carney
/s/ HOWARD B. CULANG Director
- --------------------------------------------------------
Howard B. Culang
/s/ CLAIRE M. FAGIN, PH.D., R.N. Director
- --------------------------------------------------------
Claire M. Fagin, Ph.D., R.N.
/s/ ROSEMARIE B. GRECO Director
- --------------------------------------------------------
Rosemarie B. Greco
/s/ STEPHEN T. HOPKINS Director
- --------------------------------------------------------
Stephen T. Hopkins
/s/ JAMES W. JENNINGS Director
- --------------------------------------------------------
James W. Jennings
/s/ JAMES C. MILLER Director
- --------------------------------------------------------
James C. Miller
/s/ RONALD W. MOORE Director
- --------------------------------------------------------
Ronald W. Moore
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<S> <C>
/s/ ROBERT W. RICHARDS Director
- --------------------------------------------------------
Robert W. Richards
/s/ ANTHONY W. SCHWEIGER Director
- --------------------------------------------------------
Anthony W. Schweiger
/s/ LARRY E. SWEDROE Director
- --------------------------------------------------------
Larry E. Swedroe
</TABLE>
31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radian Group Inc.
Philadelphia, Pennsylvania
We have audited the consolidated financial statements of Radian Group Inc.
and subsidiaries (the "Company") as of December 31, 2000 and 1999, and for each
of the three years in the period ended December 31, 2000, and have issued our
report thereon dated March 2, 2001, which makes reference to the report of other
auditors; such consolidated financial statements and report are included in your
2000 Annual Report to Stockholders and are incorporated herein by reference. Our
audits also included the consolidated financial statement schedules of Radian
Group Inc. and subsidiaries, listed in Item 14. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
based on our audits and the report of other auditors, such consolidated
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 2, 2001
F-1
<PAGE> 33
RADIAN GROUP INC.
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
SHOWN ON
AMORTIZED FAIR THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
------------------ ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
U.S. government and government agencies and
authorities.................................. $ 101,091 $ 102,951 $ 102,323
State and municipal obligations................ 1,283,327 1,329,447 1,308,874
Corporate obligations.......................... 152,052 157,115 157,115
Redeemable preferred stocks......................... 20,312 22,119 22,119
---------- ---------- ----------
Total fixed maturities................................... 1,556,782 1,611,632 1,590,431
Equity securities........................................ 58,877 64,202 64,202
Short-term investments................................... 95,824 95,824 95,824
---------- ---------- ----------
Total investments other than investments in related
parties................................................ $1,711,483 $1,771,658 $1,750,457
========== ========== ==========
</TABLE>
F-2
<PAGE> 34
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
2000 1999
(in thousands, except share and per-share amounts) ---------- ----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities held to maturity -- at amortized cost
(fair value $10,160 and $10,141)...................... $ 9,808 $ 9,781
Fixed maturities available for sale -- at fair value
(amortized cost $391
and $391)............................................ 407 378
Short-term investments................................. 4,724 705
Cash........................................................ 21 106
Investment in subsidiaries, at equity in net assets......... 1,401,026 1,091,306
Federal income taxes........................................ -- 268
Other assets................................................ 427 876
---------- ----------
$1,416,413 $1,103,420
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable -- affiliates.............................. $ 2,183 $ 927
Accounts payable -- other................................... 1,742 1,337
Notes payable............................................... 6,684 3,487
Federal income taxes........................................ 3,194 --
Other liabilities........................................... 413 413
---------- ----------
14,216 6,164
---------- ----------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding -- at redemption
value..................................................... 40,000 40,000
---------- ----------
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000
shares authorized; 37,907,777 and 37,307,504 shares,
respectively, issued and outstanding.................. 38 37
Treasury stock; 38,006 shares redeemed................. (2,159) --
Additional paid-in capital............................. 549,154 524,408
Retained earnings...................................... 789,831 548,684
Accumulated other comprehensive income (loss).......... 25,333 (15,873)
---------- ----------
1,362,197 1,057,256
---------- ----------
$1,416,413 $1,103,420
========== ==========
</TABLE>
See supplementary notes.
F-3
<PAGE> 35
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Equity in undistributed net income of subsidiaries..... $251,161 $160,584 $140,291
Dividends received from subsidiaries................... 6,000 -- 4,000
Net investment income.................................. 83 200 669
Gain on sales of investments, net...................... -- -- 7
-------- -------- --------
257,244 160,784 144,967
-------- -------- --------
Expenses
Operating expenses..................................... 6,455 2,241 3,691
Merger expenses........................................ -- 12,812 --
-------- -------- --------
6,455 15,053 3,691
-------- -------- --------
Pretax income............................................... 250,789 145,731 141,276
Income tax (expense) benefit................................ (1,851) 2,407 961
-------- -------- --------
Net income.................................................. $248,938 $148,138 $142,237
======== ======== ========
</TABLE>
See supplementary notes.
F-4
<PAGE> 36
RADIAN GROUP INC.
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income............................................ $ 248,938 $ 148,138 $ 142,237
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in undistributed net income of
subsidiaries................................... (251,161) (160,584) (140,291)
Increase (decrease) in federal income taxes...... 3,462 (3,645) (1,910)
Increase in notes payable........................ 3,197 1,444 2,009
Net change in other assets, accounts payable and
other liabilities.............................. 2,110 1,589 (76)
--------- --------- ---------
Net cash provided by (used in) operating activities........ 6,546 (5,768) 1,969
--------- --------- ---------
Cash flows from investing activities
Proceeds from sales of fixed maturity investments
available for sale.................................. -- -- 1,600
Purchases of fixed maturity investments available for
sale................................................ -- -- (1,205)
Purchases of short-term investments--net.............. (4,019) (530) (140)
Other................................................. (27) (16) (23)
--------- --------- ---------
Net cash (used in) provided by investing activities........ (4,046) (546) 232
--------- --------- ---------
Cash flows from financing activities
Dividends paid........................................ (7,791) (6,860) (6,019)
Capital contribution.................................. (11,067) (2,593) (1,759)
Redemption of treasury stock.......................... (2,159) -- --
Proceeds from issuance of common stock................ 18,432 13,488 7,882
--------- --------- ---------
Net cash (used in) provided by financing activities........ (2,585) 4,035 (104)
--------- --------- ---------
(Decrease) increase in cash................................ (85) (2,279) 2,305
Cash, beginning of year.................................... 106 2,385 80
--------- --------- ---------
Cash, end of year.......................................... $ 21 $ 106 $ 2,385
========= ========= =========
</TABLE>
See supplementary notes.
F-5
<PAGE> 37
RADIAN GROUP INC.
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES
NOTE A
The accompanying Parent Company financial statements should be read in
conjunction with the Consolidated Financial Statements and Notes to Consolidated
Financial Statements appearing on pages 17 through 34 of the Radian Group Inc.
2000 Annual Report to Stockholders.
NOTE B
On November 9, 2000, Radian Group Inc. (the "Company") completed the
acquisition of ExpressClose.com, Inc. ("ExpressClose"), an Internet-based
settlement company that provides real estate information products and services
to the first and second mortgage industry, for approximately $8.0 million of
cash, shares of the Company's common stock, options to purchase shares of the
Company's common stock and other consideration. The acquisition was treated as a
purchase for accounting purposes, and accordingly, the assets and liabilities
were recorded based on their fair values at the date of acquisition. The excess
of purchase price over fair value of net assets acquired of $7.4 million was
allocated to goodwill and will be amortized over 20 years. The results of
ExpressClose's operations have been included in the Company's financial
statements for the period from November 10, 2000 through December 31, 2000. The
cash component of the acquisition was financed using the Company's cash flow
from operations.
The purchase price of ExpressClose reflects the issuance of 30,000 shares
of the Company's common stock at $65.813 per share which was the closing price
of the Company's common stock on the date of the acquisition. Under the terms of
the merger agreement, the Company has also issued 20,001 options to purchase the
common stock of the Company. The value of the option grant was based on a
Black-Scholes valuation model assuming an average life of 7.0 years, a risk-free
interest rate of 6.75%, volatility of 39.3% and a dividend yield of 0.18%.
On November 22, 1998, the board of directors of CMAC Investment Corporation
("CMAC") and the board of directors of Amerin Corporation ("Amerin") each
approved an Agreement and Plan of Merger pursuant to which CMAC and Amerin
merged. The merger closed on June 9, 1999 after approval by the stockholders of
both companies, at which time the name of the merged company was changed to
Radian Group Inc. At the same time, the name of the Company's main operating
subsidiary, Commonwealth Mortgage Assurance Company, was changed to Radian
Guaranty Inc. ("Radian Guaranty"), while the main operating subsidiary of
Amerin, Amerin Guaranty Corporation ("Amerin Guaranty"), retained its name. As a
result of the merger, Amerin stockholders received 0.5333 shares (14,168,635
shares were issued) of CMAC common stock in a tax-free exchange for each share
of Amerin common stock that they owned. CMAC stockholders continued to own their
existing shares after the merger. The merger transaction was accounted for on a
pooling of interests basis and, therefore, all financial statements presented
reflect the combined entity.
The Company's preferred stock is entitled to cumulative annual dividends of
$4.125 per share, payable quarterly in arrears. The preferred stock is
redeemable at the option of the Company at $54.125 per share on or after August
15, 2002, and declining to $50.00 per share on or after August 15, 2005 (plus in
each case accumulated and unpaid dividends), or is subject to mandatory
redemption at a redemption price of $50.00 per share plus accumulated and unpaid
dividends based upon specified annual sinking fund requirements from 2002 to
2011.
The Company is a holding company whose principal source of income is
dividends from Radian Guaranty and Amerin Guaranty. The ability of Radian
Guaranty to pay dividends on its common stock is restricted by certain
provisions of the insurance laws of the Commonwealth of Pennsylvania, its state
of domicile. The insurance laws of Pennsylvania establish a test limiting the
maximum amount of dividends which may be paid by an insurer without prior
approval by the Pennsylvania Insurance Commissioner. Under such test, Radian
Guaranty may pay dividends during any 12-month period in an amount equal to the
greater of (i) 10% of the preceding year-end statutory policyholders' surplus or
(ii) the preceding year's statutory net income. In
F-6
<PAGE> 38
SCHEDULE III--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY
SUPPLEMENTARY NOTES -- (CONTINUED)
accordance with such restrictions, $197,979,000 would be available for dividends
in 2001. However, an amendment to the Pennsylvania statute requires that
dividends and other distributions be paid out of an insurer's unassigned
surplus. Because of the unique nature of the method of accounting for
contingency reserves, Radian Guaranty has negative unassigned surplus. Thus,
prior approval by the Pennsylvania Insurance Commissioner is required for Radian
Guaranty to pay dividends or make other distributions so long as Radian Guaranty
has negative unassigned surplus. The Pennsylvania Insurance Commissioner has
approved all distributions by Radian Guaranty since the passage of this
amendment and management has every expectation that the Commissioner of
Insurance will continue to approve such distributions in the future, provided
that the financial condition of Radian Guaranty does not materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from positive unassigned
surplus by an insurer without prior approval by the Illinois Insurance
Commissioner. Under such test, Amerin Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $58,036,000 would be available
for dividends in 2001 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 2000.
Radian Guaranty's current excess of loss reinsurance arrangement prohibits
the payment of any dividend which would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 2000, Radian Guaranty had statutory
policyholders' surplus of $171,644,000 and a contingency reserve of
$798,954,000, for a total of $970,598,000.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for so long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9,900,000), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
The Company may not pay any dividends on shares of common stock unless the
Company has paid all accrued dividends on and has complied with all sinking fund
and redemption obligations relating to its outstanding shares of $4.125
Preferred Stock.
NOTE C
In the first quarter of 2001, the Company completed the previously
announced agreement to acquire Enhance Financial Services Group Inc. ("Enhance")
through the merger of a subsidiary of the Company with and into Enhance. As a
result of the merger, Enhance stockholders received 0.22 shares (8,464,968
shares were issued) of the Company's common stock for each share of Enhance
common stock that they owned in a tax-free exchange. The Company's stockholders
continued to own their existing shares after the merger. The acquisition will be
accounted for under the purchase method of accounting.
In conjunction with the merger, the Company guaranteed payment of up to
$12.5 million of a $25.0 million revolving credit facility issued to Sherman
Financial Group LLC, a 45.5% owned affiliate of Enhance ("Sherman"), on a pari
passu basis with the $12.5 million guaranty of another 45.5% owner of Sherman.
There were no drawdowns on this line of credit as of December 31, 2000 and
therefore, the Company had no liability under the guaranty.
F-7
<PAGE> 39
RADIAN GROUP INC.
SCHEDULE VI--REINSURANCE
MORTGAGE INSURANCE PREMIUMS EARNED
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2000...................................... $570,425 $49,634 $ 80 $520,871 0.02%
======== ======= ==== ========
1999...................................... $517,364 $44,816 $ 87 $472,635 0.02%
======== ======= ==== ========
1998...................................... $448,668 $43,545 $129 $405,252 0.03%
======== ======= ==== ========
</TABLE>
F-8
<PAGE> 40
This document has been printed entirely on recycled paper.
<PAGE> 41
RADIAN GROUP INC.
SELECTED FINANCIAL AND STATISTICAL DATA(1)
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT PER-SHARE AMOUNTS AND RATIOS) 2000 1999 1998 1997 1996
- -------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME
Premiums earned................................ $ 520.9 $ 472.6 $ 405.3 $ 330.0 $ 250.3
Net investment income.......................... 82.9 67.3 59.9 52.4 46.9
Total revenues................................. 615.4 552.8 483.6 390.0 302.0
Provision for losses........................... 154.3 174.1 166.4 147.4 112.6
Policy acquisition costs and other operating
expenses..................................... 108.6 121.4 118.2 83.4 67.2
Merger expenses................................ -- 37.8 1.1 -- --
Pretax income.................................. 352.5 219.5 197.9 159.2 122.2
Net income..................................... 248.9 148.1 142.2 115.7 90.5
Net income per share(2)(3)..................... $ 6.44 $ 3.83 $ 3.67 $ 2.99 $ 2.35
Average shares outstanding(2)(3)............... 38.1 37.9 37.8 37.5 37.2
CONSOLIDATED BALANCE SHEET
Assets......................................... $2,272.8 $1,776.7 $1,513.4 $1,222.7 $1,015.0
Investments.................................... 1,750.5 1,388.7 1,175.5 974.7 842.0
Unearned premiums.............................. 77.2 54.9 75.5 72.7 73.9
Reserve for losses............................. 390.0 335.6 245.1 179.9 126.9
Redeemable preferred stock..................... 40.0 40.0 40.0 40.0 40.0
Common stockholders' equity.................... 1,362.2 1,057.3 932.2 780.1 657.0
Book value per share(3)........................ $ 35.93 $ 28.34 $ 25.30 $ 21.38 $ 18.10
STATUTORY RATIOS
Loss ratio..................................... 30.5% 37.6% 42.0% 46.1% 46.7%
Expense ratio.................................. 17.9 24.2(4) 24.6 22.5 24.5
-------- -------- -------- -------- --------
Combined ratio................................. 48.4% 61.8% 66.6% 68.6% 71.2%
OTHER STATUTORY DATA
New primary insurance written.................. $ 24,934 $ 33,256 $ 37,067 $ 21,481 $ 20,018
Direct primary insurance in force.............. 100,859 97,089 83,178 67,294 54,215
Direct primary risk in force................... 24,622 22,901 19,840 15,158 12,023
Direct pool risk in force...................... 1,388 1,361 993 601 342
Other risk in force............................ 211 -- -- -- --
</TABLE>
- ---------------
(1) Effective June 9, 1999, Radian Group Inc. was formed by the merger of CMAC
Investment Corporation and Amerin Corporation pursuant to an Agreement and
Plan of Merger dated November 22, 1998. The transaction was accounted for on
a pooling of interests basis and, therefore, all financial statements
presented reflect the combined entity. See note 1 of Notes to Consolidated
Financial Statements set forth on page 21 herein.
(2) Diluted net income per share and average share information per Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." See note 1 of
Notes to Consolidated Financial Statements set forth on page 23 herein.
(3) All share and per-share data for prior periods have been restated to reflect
a 2-for-1 stock split in 1996.
(4) Expense ratio calculated net of merger expenses of $21.8 million recognized
by statutory companies.
16
<PAGE> 42
RADIAN GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS) 2000 1999
-------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
Investments
Fixed maturities held to maturity -- at amortized cost
(fair value $490,792 and $475,257)..................... $ 469,591 $ 468,549
Fixed maturities available for sale -- at fair value
(amortized cost $1,087,191 and $839,845)............... 1,120,840 804,776
Equity securities -- at fair value (cost $58,877 and
$47,719).................................................. 64,202 58,378
Short-term investments...................................... 95,824 56,974
Cash........................................................ 2,424 7,507
Deferred policy acquisition costs........................... 70,049 61,680
Prepaid federal income taxes................................ 270,250 204,701
Provisional losses recoverable.............................. 43,740 40,065
Other assets................................................ 135,891 74,082
---------- ----------
$2,272,811 $1,776,712
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums........................................... $ 77,241 $ 54,925
Reserve for losses.......................................... 390,021 335,584
Deferred federal income taxes............................... 291,294 206,168
Accounts payable and accrued expenses....................... 112,058 82,779
---------- ----------
870,614 679,456
---------- ----------
Redeemable preferred stock, par value $.001 per share;
800,000 shares issued and outstanding -- at redemption
value..................................................... 40,000 40,000
---------- ----------
COMMITMENTS AND CONTINGENCIES
Common stockholders' equity
Common stock, par value $.001 per share; 80,000,000 shares
authorized; 37,907,777 and 37,307,504 shares,
respectively, issued and outstanding................... 38 37
Treasury stock; 38,006 shares redeemed.................... (2,159) --
Additional paid-in capital................................ 549,154 524,408
Retained earnings......................................... 789,831 548,684
Accumulated other comprehensive income (loss)............. 25,333 (15,873)
---------- ----------
1,362,197 1,057,256
---------- ----------
$2,272,811 $1,776,712
========== ==========
</TABLE>
See notes to consolidated financial statements
17
<PAGE> 43
RADIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) 2000 1999 1998
---------------------------------------- -------- -------- --------
<S> <C> <C> <C>
REVENUES
Net premiums written...................................... $544,272 $451,817 $406,467
(Increase) decrease in unearned premiums.................. (23,401) 20,818 (1,215)
-------- -------- --------
Premiums earned........................................... 520,871 472,635 405,252
Net investment income..................................... 82,946 67,259 59,862
Gain on sales of investments, net......................... 4,179 1,568 3,156
Other income.............................................. 7,438 11,349 15,317
-------- -------- --------
615,434 552,811 483,587
-------- -------- --------
EXPENSES
Provision for losses...................................... 154,326 174,143 166,377
Policy acquisition costs.................................. 51,471 58,777 58,479
Other operating expenses.................................. 57,167 62,659 59,720
Merger expenses........................................... -- 37,766 1,098
-------- -------- --------
262,964 333,345 285,674
-------- -------- --------
Pretax income............................................... 352,470 219,466 197,913
Provision for income taxes.................................. (103,532) (71,328) (55,676)
-------- -------- --------
Net income.................................................. 248,938 148,138 142,237
Dividends to preferred stockholder.......................... 3,300 3,300 3,300
-------- -------- --------
Net income available to common stockholders................. $245,638 $144,838 $138,937
======== ======== ========
Basic net income per share.................................. $ 6.53 $ 3.92 $ 3.78
======== ======== ========
Diluted net income per share................................ $ 6.44 $ 3.83 $ 3.67
======== ======== ========
</TABLE>
See notes to consolidated financial statements
18
<PAGE> 44
RADIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE
COMMON TREASURY PAID-IN RETAINED INCOME
(IN THOUSANDS) STOCK STOCK CAPITAL EARNINGS (LOSS) TOTAL
-------------- ------ -------- ---------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998............. $36 $ -- $496,736 $271,188 $12,138 $ 780,098
Comprehensive income:
Net income......................... -- -- -- 142,237 -- 142,237
Unrealized holding gains arising
during period, net of tax of
$3,914........................... -- -- -- -- 7,270
Less: Reclassification adjustment
for net gains included in net
income, net of tax of $1,041..... -- -- -- -- (1,934)
-------
Net unrealized gain on investments,
net of tax of $2,873............. -- -- -- -- 5,336 5,336
----------
Comprehensive income................. 147,573
Issuance of common stock............. 1 -- 10,546 -- -- 10,547
Dividends............................ -- -- -- (6,019) -- (6,019)
--- ------- -------- -------- ------- ----------
BALANCE, DECEMBER 31, 1998........... 37 -- 507,282 407,406 17,474 932,199
Comprehensive income:
Net income......................... -- -- -- 148,138 -- 148,138
Unrealized holding losses arising
during period, net of tax benefit
of $17,398....................... -- -- -- -- (32,311)
Less: Reclassification adjustment
for net gains included in net
income, net of tax of $558....... -- -- -- -- (1,036)
-------
Net unrealized loss on investments,
net of tax benefit of $17,956.... -- -- -- -- (33,347) (33,347)
----------
Comprehensive income................. 114,791
Issuance of common stock............. -- -- 17,126 -- -- 17,126
Dividends............................ -- -- -- (6,860) -- (6,860)
--- ------- -------- -------- ------- ----------
BALANCE, DECEMBER 31, 1999........... 37 -- 524,408 548,684 (15,873) 1,057,256
Comprehensive income:
Net income......................... -- -- -- 248,938 -- 248,938
Unrealized holding gains arising
during period, net of tax of
$23,658.......................... -- -- -- -- 43,937
Less: Reclassification adjustment
for net gains included in net
income, net of tax of $1,470..... -- -- -- -- (2,731)
-------
Net unrealized gain on investments,
net of tax of $22,188............ -- -- -- 41,206 41,206
----------
Comprehensive income................. 290,144
Issuance of common stock............. 1 -- 24,746 -- -- 24,747
Treasury stock redeemed.............. -- (2,159) -- -- -- (2,159)
Dividends............................ -- -- -- (7,791) -- (7,791)
--- ------- -------- -------- ------- ----------
BALANCE, DECEMBER 31, 2000........... $38 $(2,159) $549,154 $789,831 $25,333 $1,362,197
=== ======= ======== ======== ======= ==========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 45
RADIAN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
(IN THOUSANDS) 2000 1999 1998
-------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $248,938 $148,138 $142,237
Adjustments to reconcile net income to net cash provided
by operating activities Gain on sales of fixed maturity
investments, net........................................ (3,586) (1,478) (3,182)
(Gain) loss on sales of equity securities available for
sale, net............................................. (439) (90) 26
Gain on sales of short-term investments, net............ (154) -- --
Increase (decrease) in unearned premiums................ 22,316 (20,613) 2,854
Amortization of deferred policy acquisition costs....... 51,471 58,777 58,479
Increase in deferred policy acquisition costs........... (59,840) (71,474) (74,661)
Increase in reserve for losses.......................... 54,437 90,459 65,217
Increase in deferred federal income taxes............... 62,942 57,849 44,249
Increase in prepaid federal income taxes................ (65,549) (51,837) (45,993)
Increase in provisional losses recoverable.............. (3,675) (7,347) (1,393)
Depreciation and other amortization..................... 3,158 2,289 4,228
Net change in other assets, accounts payable and accrued
expenses.............................................. (30,042) 57,000 (255)
-------- -------- --------
Net cash provided by operating activities................... 279,977 261,673 191,806
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of fixed maturity investments
available for sale...................................... 552,439 131,170 234,259
Proceeds from sales of fixed maturity investments held to
maturity................................................ 1,922 10 1,031
Proceeds from sales of equity securities available for
sale.................................................... 18,988 3,076 823
Proceeds from redemptions of fixed maturity investments
available for sale...................................... 16,467 24,769 23,973
Proceeds from redemptions of fixed maturity investments
held to maturity........................................ 2,897 19,981 13,843
Purchases of fixed maturity investments available for
sale.................................................... (813,627) (380,683) (421,754)
Purchases of equity securities available for sale......... (29,713) (25,595) (25,958)
Purchases of short-term investments, net.................. (38,859) (32,560) (10,685)
Purchases of property and equipment, net.................. (9,419) (12,509) (8,216)
Other..................................................... (952) (1,468) (1,093)
-------- -------- --------
Net cash used in investing activities..................... (299,857) (273,809) (193,777)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid............................................ (7,791) (6,860) (6,019)
Redemption of treasury stock.............................. (2,159) -- --
Proceeds from issuance of common stock.................... 24,747 17,126 10,547
-------- -------- --------
Net cash provided by financing activities................. 14,797 10,266 4,528
-------- -------- --------
(Decrease) increase in cash............................... (5,083) (1,870) 2,557
Cash, beginning of year................................... 7,507 9,377 6,820
-------- -------- --------
Cash, end of year......................................... $ 2,424 $ 7,507 $ 9,377
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid......................................... $ 74,768 $ 61,450 $ 50,700
======== ======== ========
Interest paid............................................. $ 817 $ 181 $ 66
======== ======== ========
</TABLE>
See notes to consolidated financial statements
20
<PAGE> 46
RADIAN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Nature of Operations
Radian Group Inc. (the "Company"), through its wholly owned principal
operating subsidiaries, Radian Guaranty Inc. ("Radian Guaranty") and Amerin
Guaranty Corporation ("Amerin Guaranty") (together referred to as "Radian"),
provides private mortgage insurance and risk management services to mortgage
lending institutions located throughout the United States. Private mortgage
insurance protects lenders from default-related losses on residential first
mortgage loans made to homebuyers who make downpayments of less than 20% of the
purchase price and facilitates the sale of these mortgages in the secondary
market. Consistent with the rest of the private mortgage insurance industry,
Radian's highest state concentration of risk is in California. As of December
31, 2000, California accounted for 17.1% of Radian's total direct primary
insurance in force and 11.2% of Radian's total direct pool insurance in force.
In addition, California accounted for 18.1% of Radian's direct primary new
insurance written for the year ended December 31, 2000. The largest single
customer of Radian (including branches and affiliates of such customer),
measured by new insurance written, accounted for 11.2% of new insurance written
during 2000, compared to 12.2% in 1999 and 18.3% in 1998.
On November 9, 2000, the Company completed the acquisition of
ExpressClose.com, Inc. ("ExpressClose"), an Internet-based settlement company
that provides real estate information products and services to the first and
second mortgage industry, for approximately $8.0 million of cash, Radian common
stock and stock options, and other consideration. The acquisition was treated as
a purchase for accounting purposes, and accordingly, the assets and liabilities
were recorded based on their fair values at the date of acquisition. The excess
of purchase price over fair value of net assets acquired of $7.4 million was
allocated to goodwill and will be amortized over 20 years. The results of
ExpressClose's operations have been included in the Company's financial
statements for the period from November 10, 2000 through December 31, 2000. The
cash component of the acquisition was financed using the Company's cash flows
from operations.
The purchase price of ExpressClose reflects the issuance of 30,000 shares
of the Company's common stock at $65.813 per share which was the closing price
of the Company's common stock on the date of the acquisition. Under the terms of
the merger agreement, the Company has also issued 20,001 options to purchase
shares of the Company's common stock. The value of the option grant was based on
a Black-Scholes valuation model assuming an average life of 7.0 years, a
risk-free interest rate of 6.75%, volatility of 39.3% and a dividend yield of
0.18%.
On November 22, 1998, the board of directors of CMAC Investment Corporation
("CMAC") and the board of directors of Amerin Corporation ("Amerin") each
approved an Agreement and Plan of Merger pursuant to which CMAC and Amerin
merged. The merger closed on June 9, 1999 after approval by the stockholders of
both companies, at which time the name of the merged company was changed to
Radian Group Inc. At the same time, the name of the Company's main operating
subsidiary, Commonwealth Mortgage Assurance Company, was changed to Radian
Guaranty, while the main operating subsidiary of Amerin, Amerin Guaranty,
retained its name. As a result of the merger, Amerin stockholders received
0.5333 shares (14,168,635 shares were issued) of CMAC common stock in a tax-free
exchange for each share of Amerin common stock that they owned. CMAC's
stockholders continued to own their existing shares after the merger. The merger
transaction was accounted for on a pooling of interests basis and, therefore,
all financial statements presented reflect the combined entity. There were no
intercompany transactions requiring elimination for any periods presented prior
to the merger.
The operating results of the separate companies through the merger in 1999
and prior to the merger are as follows (in thousands):
<TABLE>
<CAPTION>
NET NET
REVENUES INCOME
-------- --------
<S> <C> <C>
For the year ended December 31, 1999:
Radian Group Inc...................................... $419,611 $110,785
CMAC Investment Corporation (through March 31,
1999).............................................. 89,787 22,878
Amerin Corporation (through March 31, 1999)........... 43,413 14,475
-------- --------
Combined........................................... $552,811 $148,138
======== ========
For the year ended December 31, 1998:
CMAC Investment Corporation........................... $332,966 $ 91,054
Amerin Corporation.................................... 150,621 51,183
-------- --------
Combined........................................... $483,587 $142,237
======== ========
</TABLE>
21
<PAGE> 47
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and include the accounts of all subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
the Company to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Insurance Premiums
Statement of Financial Accounting Standards ("SFAS") No. 60, "Accounting
and Reporting by Insurance Enterprises," specifically excludes mortgage guaranty
insurance from its guidance relating to the earning of insurance premiums.
Consistent with GAAP and industry accounting practices, premiums written on an
annual and multiyear basis are initially deferred as unearned premiums and
earned over the policy term, and premiums written on a monthly basis are
primarily earned as they are received. Annual premiums are amortized on a
monthly, straight-line basis. Multiyear premiums are amortized over the terms of
the contracts in accordance with the anticipated claim payment pattern based on
historical industry experience. Ceded premiums written are initially set up as
prepaid reinsurance and are amortized in accordance with direct premiums earned.
Reserve for Losses
The reserve for losses consists of the estimated cost of settling claims on
defaults reported and defaults that have occurred but have not been reported.
SFAS 60 specifically excludes mortgage guaranty insurance from its guidance
relating to the reserve for losses. Consistent with GAAP and industry accounting
practices, the Company does not establish loss reserves for future claims on
insured loans that are not currently in default. In determining the liability
for unpaid losses related to reported outstanding defaults, the Company
establishes loss reserves on a case-by-case basis. The amount reserved for any
particular loan is dependent upon the characteristics of the loan, the status of
the loan as reported by the servicer of the insured loan as well as the economic
condition and estimated foreclosure period in the area in which the default
exists. As the default progresses closer to foreclosure, the amount of loss
reserve for that particular loan is increased, in stages, to approximately 100%
of the Company's exposure and that adjustment is included in current operations.
The Company also reserves for defaults that have occurred but have not been
reported using historical information on defaults not reported on a timely basis
by lending institutions. The estimates are continually reviewed and, as
adjustments to these liabilities become necessary, such adjustments are
reflected in current operations.
Deferred Policy Acquisition Costs
Costs associated with the acquisition of mortgage insurance business,
consisting of compensation and other policy issuance and underwriting expenses,
are initially deferred. Because SFAS 60 specifically excludes mortgage guaranty
insurance from its guidance relating to the amortization of deferred policy
acquisition costs, amortization of these costs for each underwriting year book
of business is charged against revenue in proportion to estimated gross profits
over the life of the policies using the guidance provided by SFAS No. 97,
"Accounting and Reporting by Insurance Enterprises For Certain Long Duration
Contracts and for Realized Gains and Losses From the Sale of Investments." This
includes accruing interest on the unamortized balance of capitalized acquisition
costs. The estimate for each underwriting year is updated annually to reflect
actual experience and any changes to key assumptions such as persistency or loss
development.
Income Taxes
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and the tax basis of the Company's assets and
liabilities using enacted tax rates applicable to future years.
Investments
The Company is required to group its investment portfolio in three
categories: held to maturity, available for sale, and trading securities. Debt
securities for which the Company has the positive intent and ability to hold to
maturity are classified as held to maturity and reported at amortized cost. Debt
and equity securities purchased and held principally for the purpose of selling
them in the near term are classified as trading securities and are reported at
fair value, with unrealized gains and losses included in earnings. The Company
had no trading securities in its portfolio at December 31, 2000 or 1999. All
other investments are classified as available for sale and are reported at fair
value, with unrealized gains and losses (net of tax) reported in a separate
component of stockholders' equity as accumulated other comprehensive income or
losses. Realized gains and losses are determined on a specific identification
method and are included in income.
22
<PAGE> 48
Fair Values of Financial Instruments
The following methodology was used by the Company in estimating the fair
value disclosures for its financial instruments: fair values for fixed maturity
securities (including redeemable preferred stock) and equity securities are
based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services. The carrying amounts reported on the balance sheet
for cash and short-term investments approximate their fair values.
Company-owned Life Insurance
Radian Guaranty is the beneficiary of insurance policies on the lives of
certain officers and employees of Radian Guaranty. The Company has recognized
the amount that could be realized under the insurance policies as an asset in
the balance sheet. At December 31, 2000, the amount totaled $50,374,000 and is
included as a component of other assets.
Accounting for Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages, but does not require, the recognition of compensation expense for
the fair value of stock options and other equity instruments granted as
compensation to employees. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25"), and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
In March 2000, the Financial Accounting Standards Board ("FASB")
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN 44"), was issued. FIN 44 clarifies the application of APB 25
for certain issues. The Company adopted the provisions of FIN 44 in 2000. The
adoption of the interpretation did not have a material effect on the Company's
consolidated financial statements.
Net Income Per Share
The Company is required to disclose both "basic" earnings per share and
"diluted" earnings per share. Basic net income per share is based on the
weighted average number of common shares outstanding, while diluted net income
per share is based on the weighted average number of common shares outstanding
and common share equivalents that would arise from the exercise of stock
options.
The calculation of the basic and diluted net income per share was as
follows (in thousands, except per-share amounts):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income.................................... $248,938 $148,138 $142,237
Preferred stock dividend adjustment........... (3,300) (3,300) (3,300)
-------- -------- --------
Adjusted net income........................... $245,638 $144,838 $138,937
-------- -------- --------
Average diluted stock options outstanding..... 1,926.3 2,088.1 2,212.8
Average exercise price per share.............. $ 31.18 $ 26.85 $ 22.93
Average market price per share -- diluted
basis....................................... $ 55.32 $ 46.35 $ 54.67
Average common shares outstanding............. 37,634 36,975 36,722
Increase in shares due to exercise of
options -- diluted basis.................... 515 881 1,092
-------- -------- --------
Adjusted shares outstanding -- diluted........ 38,149 37,856 37,814
======== ======== ========
Net income per share -- basic................. $ 6.53 $ 3.92 $ 3.78
======== ======== ========
Net income per share -- diluted............... $ 6.44 $ 3.83 $ 3.67
======== ======== ========
</TABLE>
Comprehensive Income
The Company is required to present, as a component of comprehensive income,
the amounts from transactions and other events that are currently excluded from
the statement of income and are recorded directly to stockholders' equity.
Recent Accounting Principles
In October 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk" ("SOP 98-7"). This statement provides
guidance on how to apply the deposit method of accounting when it is required
for insurance and reinsurance contracts that do not transfer insurance risk. The
Company adopted SOP 98-7 in 2000. The adoption of SOP 98-7 did not have a
material impact on the financial position or results of operations of the
Company.
23
<PAGE> 49
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement, originally effective for
fiscal years beginning after June 15, 1999, was deferred for one year when the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133." The
statement establishes accounting and reporting standards for derivative
instruments and hedging activity and requires that all derivatives be measured
at fair value and recognized as either assets or liabilities in the financial
statements. Changes in the fair value of derivative instruments will be recorded
each period in current earnings. This represents a change from the Company's
current accounting practices whereby these changes are recorded as a component
of stockholders' equity. In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities -- An
Amendment of FASB Statement No. 133," which addressed certain issues causing
implementation difficulties for entities that apply SFAS 133. The Company
adopted SFAS 133, as amended, on January 1, 2001. Transactions that the Company
has entered into that will be accounted for under SFAS 133, as amended, include
convertible debt securities.
Upon adoption of SFAS 133, as amended, the balance of the Company's
convertible debt securities was approximately $104.6 million. SFAS 133 requires
that the Company split its convertible debt securities into the derivative and
debt host components. Over the term of the securities, increases in the debt
instrument will be recorded in the Company's consolidated statement of changes
in common stockholders' equity, through accumulated other comprehensive income.
Concurrently, a deferred tax liability will be recognized as the recorded value
of the debt host increases. Changes in the fair value of the derivative will be
recorded to investment income or expense in the Company's consolidated statement
of income.
In connection with the adoption of SFAS 133, as amended, the Company
expects to reclassify $13.8 million from fixed maturities available for sale to
trading securities on its consolidated balance sheet as of January 1, 2001. The
impact of the adoption of SFAS 133, as amended, on the Company's consolidated
statement of income and the consolidated statement of changes in common
stockholders' equity is immaterial as of January 1, 2001.
Adoption of SFAS 133, as amended, could result in volatility from period to
period in investment income or expense as reported on the Company's consolidated
statement of income. The Company is unable to predict the effect this volatility
may have on its financial position or results of operations.
Subsequent Events
In the first quarter of 2001, the Company completed the previously
announced agreement to acquire Enhance Financial Services Group Inc. ("Enhance")
through the merger of a subsidiary of the Company with and into Enhance. As a
result of the merger, Enhance stockholders received 0.22 shares (8,464,968
shares were issued) of the Company's common stock for each share of Enhance
common stock that they owned in a tax-free exchange. The Company's stockholders
continued to own their existing shares after the merger. The acquisition will be
accounted for under the purchase method of accounting.
In conjunction with the merger, the Company guaranteed payment of up to
$12.5 million of a $25.0 million revolving credit facility issued to Sherman
Financial Group LLC, a 45.5% owned affiliate of Enhance. There were no drawdowns
on this line of credit as of December 31, 2000.
Reclassifications
Certain items in the 1998 consolidated financial statements have been
reclassified to conform with the presentation in the 1999 and 2000 consolidated
financial statements.
2. INVESTMENTS
Fixed maturity and equity investments at December 31, 2000 and 1999
consisted of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity
at amortized cost:
Bonds and notes:
United States government.... $ 8,765 $ 9,393 $ 628 $ --
State and municipal
obligations............... 460,826 481,399 21,070 497
---------- ---------- ------- ------
$ 469,591 $ 490,792 $21,698 $ 497
========== ========== ======= ======
Fixed maturities available for
sale:
Bonds and notes:
United States government.... $ 33,126 $ 33,527 $ 756 $ 355
State and municipal
obligations............... 822,501 848,048 28,541 2,994
Corporate................... 152,052 157,115 8,807 3,744
Mortgage-backed securities..... 59,200 60,031 1,146 315
Redeemable preferred stock..... 20,312 22,119 2,437 630
---------- ---------- ------- ------
$1,087,191 $1,120,840 $41,687 $8,038
========== ========== ======= ======
Equity securities available for
sale:
Equity securities.............. $ 58,877 $ 64,202 $12,684 $7,359
========== ========== ======= ======
</TABLE>
24
<PAGE> 50
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------
GROSS GROSS
AMORTIZED FAIR UNREALIZED UNREALIZED
COST VALUE GAINS LOSSES
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturities held to maturity at
amortized cost:
Bonds and notes:
United States government....... $ 10,287 $ 10,266 $ 12 $ 33
State and municipal
obligations.................. 458,262 464,991 11,050 4,321
-------- -------- ------- -------
$468,549 $475,257 $11,062 $ 4,354
======== ======== ======= =======
Fixed maturities available for sale:
Bonds and notes:
United States government....... $ 24,167 $ 22,201 $ 44 $ 2,010
State and municipal
obligations.................. 623,700 590,318 1,689 35,071
Corporate...................... 82,167 83,741 5,580 4,006
Mortgage-backed securities........ 69,553 66,964 120 2,709
Redeemable preferred stock........ 40,258.. 41,552 2,006 712
-------- -------- ------- -------
$839,845 $804,776 $ 9,439 $44,508
======== ======== ======= =======
Equity securities available for
sale:
Equity securities................. $ 47,719 $ 58,378 $14,776 $ 4,117
======== ======== ======= =======
</TABLE>
The contractual maturities of fixed maturity investments are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 2000
-----------------------
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Fixed maturities held to maturity:
2001............................................... $ 7,131 $ 7,145
2002-2005.......................................... 107,144 111,554
2006-2010.......................................... 213,108 225,160
2011 and thereafter................................ 142,208 146,933
---------- ----------
$ 469,591 $ 490,792
========== ==========
Fixed maturities available for sale:
2001............................................... $ 18,977 $ 19,007
2002-2005.......................................... 139,927 141,629
2006-2010.......................................... 168,473 173,519
2011 and thereafter................................ 680,302 704,535
Mortgage-backed securities......................... 59,200 60,031
Redeemable preferred stock......................... 20,312 22,119
---------- ----------
$1,087,191 $1,120,840
========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Investment income:
Fixed maturities............................... $79,891 $66,090 $58,145
Equity securities.............................. 1,461 636 291
Short-term investments......................... 3,941 1,789 1,592
Other.......................................... 1,272 667 449
------- ------- -------
86,565 69,182 60,477
Investment expenses.............................. (3,619) (1,923) (615)
------- ------- -------
$82,946 $67,259 $59,862
======= ======= =======
</TABLE>
25
<PAGE> 51
Net gain on sales of investments consisted of (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Gains on sales and redemptions of fixed maturity
investments available for sale................. $12,732 $ 3,213 $ 4,490
Losses on sales and redemptions of fixed maturity
investments available for sale................. (9,115) (1,752) (1,328)
Gains on sales and redemptions of fixed maturity
investments held to maturity................... 4 27 43
Losses on sales and redemptions of fixed maturity
investments held to maturity................... (35) (10) (23)
Gains on sales of equity securities available for
sale........................................... 2,206 273 37
Losses on sales of equity securities available
for sale....................................... (1,767) (183) (63)
Gains on sales of short-term investments......... 184 -- --
Losses on sales of short-term investments........ (30) -- --
------- ------- -------
$ 4,179 $ 1,568 $ 3,156
======= ======= =======
</TABLE>
For the year ended December 31, 2000, the Company sold fixed maturity
investments held to maturity with an amortized cost of $1,949,000 resulting in
gross realized losses of $27,000. For the year ended December 31, 1999, the
Company sold a fixed maturity investment held to maturity with an amortized cost
of $10,000 that resulted in no gain or loss and for the year ended December 31,
1998, the Company sold a fixed maturity investment held to maturity with an
amortized cost of $1,061,000 that resulted in a gross realized gain of $30,000.
All investments were sold in response to a significant deterioration in the
issuer's creditworthiness.
Net unrealized appreciation (depreciation) on investments consisted of (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
2000 1999 1998
------- -------- ------
<S> <C> <C> <C>
Fixed maturities held to maturity................ $14,493 $(28,142) $4,860
------- -------- ------
Fixed maturities available for sale.............. $68,718 $(59,636) $5,894
Deferred tax (provision) benefit................. (24,051) 20,873 (2,063)
------- -------- ------
$44,667 $(38,763) $3,831
======= ======== ======
Equity securities available for sale............. $(5,334) $ 8,343 $2,316
Deferred tax benefit (provision)................. 1,867 (2,920) (811)
------- -------- ------
$(3,467) $ 5,423 $1,505
======= ======== ======
</TABLE>
Securities on deposit with various state insurance commissioners amounted
to $13,086,000 at December 31, 2000 and $13,119,000 at December 31, 1999.
3. REINSURANCE
Radian utilizes reinsurance to reduce net risk in force to meet regulatory
risk to capital requirements and to comply with the regulatory maximum per loan
coverage percentage limitation of 25%. Although the use of reinsurance does not
discharge an insurer from its primary liability to the insured, the reinsuring
company assumes the related liability. Included in other assets are amounts
recoverable from reinsurers pertaining to unpaid claims, claims incurred but not
reported, and unearned premiums (prepaid reinsurance). Prepaid reinsurance
premiums were $9,415,000 and $10,500,000 at December 31, 2000 and 1999,
respectively.
The effect of reinsurance on premiums written and earned is as follows for
the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Premiums written:
Direct...................................... $592,734 $496,646 $451,572
Assumed..................................... 80 93 97
-------- -------- --------
Ceded....................................... (48,542) (44,922) (45,202)
======== ======== ========
Net premiums written........................ $544,272 $451,817 $406,467
======== ======== ========
Premiums earned:
Direct...................................... $570,425 $517,364 $448,668
Assumed..................................... 80 87 129
Ceded....................................... (49,634) (44,816) (43,545)
-------- -------- --------
Net premiums earned......................... $520,871 $472,635 $405,252
======== ======== ========
</TABLE>
The 2000, 1999, and 1998 figures included $9,561,000, $14,423,000, and
$26,676,000 for premiums written and $9,772,000, $14,781,000, and $27,126,000
for premiums earned, respectively, for reinsurance ceded under variable quota
share treaties entered into in 1997, 1996, 1995, and 1994 covering the books of
business originated by Radian Guaranty in those years. The 2000, 1999 and 1998
figures included $(1,048,000), $3,183,000 and $3,614,000 for premiums written
and the 1999 and 1998 figures included $1,992,000 and $2,042,000 for premiums
earned, respectively, of reinsurance ceded under an excess of loss reinsurance
program that was entered into in 1992 covering Radian Guaranty's books of
business.
Provisional losses recoverable of $43,740,000 and $40,065,000 for 2000 and
1999, respectively, represent amounts due under variable quota
26
<PAGE> 52
share treaties entered into in 1997, 1996, 1995 and 1994, covering the books of
business originated by Radian Guaranty in those years. The term of each treaty
is ten years and is non-cancelable by either party except under certain
conditions. The treaties also include underwriting year excess coverage in years
four, seven, and ten of the treaty.
Under the terms of the contract, Radian Guaranty cedes premium to the
reinsurer based on 15% of the premiums received by Radian Guaranty on the
covered business. Radian Guaranty is entitled to receive a ceding commission
ranging from 30% to 32% of the premium paid under the treaty provided that
certain loss ratios are not exceeded. In return for the payment of premium,
Radian Guaranty receives variable quota share loss relief at levels ranging from
7.5% to 15.0% based upon the loss ratio on the covered business.
In addition, Radian Guaranty is entitled to receive, under the underwriting
year excess coverage, 8% of the ceded premium written under each treaty to the
extent that this amount is greater than the total amount received under the
variable quota share coverage on paid losses.
Premiums are payable to the reinsurer on a quarterly basis net of ceding
commissions due and any losses calculated under the variable quota share
coverage. At the end of the fourth, seventh, and tenth years of each treaty,
depending on the extent of losses recovered to date under the variable quota
share provisions of the treaty, Radian Guaranty may recover amounts due under
the underwriting year excess coverage provisions of the treaty.
The Company accounts for this reinsurance coverage under guidance provided
in EITF 93-6, "Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises." Under EITF 93-6, the Company recognizes an
asset for amounts due from the reinsurer based on experience to date under the
contract.
For the years ended December 31, 2000, 1999, and 1998, Radian Guaranty paid
$9,561,000, $14,423,000, and $26,676,000, respectively, less ceding commissions
of $4,833,000, $6,098,000, and $9,076,000 and recovered variable quota share
losses under the treaties of $2,262,000, $6,066,000, and $4,600,000,
respectively.
Radian has also entered into captive reinsurance arrangements with certain
customers. The arrangements are structured on an excess layer basis with insured
loans grouped by loan origination year. Radian retains the first layer of risk
on a particular book of business, the captive reinsurer assumes the next layer,
and Radian assumes all losses above that point. The captive reinsurers are
generally required to maintain minimum capitalization equal to 10% of the risk
assumed. At December 31, 2000, approximately $422,700,000 of risk was ceded
under captive reinsurance arrangements. For the years ended December 31, 2000,
1999, and 1998, Radian had ceded premiums written of $39,686,000, $26,931,000,
and $14,376,000, respectively and ceded premiums earned of $39,501,000,
$27,502,000, and $13,819,000, respectively, under these various captive
reinsurance arrangements.
In addition, Radian Guaranty reinsures all of its direct insurance in force
under an excess of loss reinsurance program. Under this program, the reinsurer
is responsible for 100% of Radian Guaranty's covered losses (subject to an
annual and aggregate limit) in excess of an annual retention limit. Premiums are
paid to the reinsurer on a quarterly basis, net of any losses due to Radian
Guaranty. For the years ended December 31, 1999 and 1998, Radian Guaranty had
ceded premiums written of $3,183,000 and $3,614,000, respectively, and ceded
premiums earned of $1,992,000 and $2,042,000, respectively, under this excess of
loss reinsurance program. Beginning in 2000, this treaty was accounted for under
SOP 98-7 and therefore, $5,370,000 was included in incurred losses during 2000
relating to the excess of loss reinsurance program.
Amerin Guaranty also reinsured all of its direct insurance in force under a
$100 million excess loss protection treaty that covered Amerin Guaranty in the
event the combined ratio exceeded 100% and the risk to capital ratio exceeded
24.9 to 1. This excess loss protection program was cancelled as of December 31,
2000. The amount ceded under the treaty was based on the calculated leverage
ratio at the end of each calendar quarter. The total expense recognized under
the treaty included in other operating expenses was $2,650,000 and $2,150,000 in
1999 and 1998, respectively. Beginning in 2000, this treaty was accounted for
under SOP 98-7 and therefore, $1,600,000 was included in incurred losses during
2000 relating to the excess loss protection treaty.
4. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
As described in note 1, the Company establishes reserves to provide for the
estimated costs of settling claims in respect of loans reported to be in default
and loans that are in default that have not yet been reported to the Company.
The default and claim cycle on loans that Radian covers begins with a
receipt from the lender of notification of a default on an insured loan. The
master policy with each lender requires that lender to inform Radian of an
uncured default on a mortgage loan within 75 days of the default. The incidence
of default is influenced by a number of factors, including change in borrower
income, unemployment, divorce and illness, the level of interest rates, and
general borrower creditworthiness. Defaults that are not cured result in claims
to Radian. Borrowers may cure defaults by making all delinquent loan payments or
by selling the property and satisfying all amounts due under the mortgage.
Different regions of the country experience different default rates due to
varying economic conditions and each state has different rules regarding the
foreclosure process. These rules can impact the amount of time that it takes for
a default to reach foreclosure, so the Company has developed a reserving
methodology that takes these different time periods into account in calculating
the reserve.
When a specific loan initially defaults, it is uncertain that the default
will result in a claim. It is Radian's experience that a significant
27
<PAGE> 53
percentage of loans in default end up being cured. Increasing the reserve in
stages as the foreclosure progresses approximates the estimated total loss for
that particular claim. At any time during the foreclosure process, until the
lender takes title to the property, the borrower may cure the default.
Therefore, it is appropriate to increase the reserve in stages as new insight
and information are obtained. At the time of title transfer, the Company has
approximately 100% of the estimated total loss reserved.
The following table presents information relating to the liability for
unpaid claims and related expenses (in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1.......................... $335,584 $245,125 $179,908
Add losses and LAE incurred in respect of
default notices received in:
Current year................................ 247,759 218,139 179,674
Prior years................................. (93,433) (43,996) (13,297)
-------- -------- --------
Total incurred........................... 154,326 174,143 166,377
-------- -------- --------
Deduct losses and LAE paid in respect of
default notices received in:
Current year................................ 8,891 7,353 18,196
Prior years................................. 90,998 76,331 82,964
-------- -------- --------
Total paid............................... 99,889 83,684 101,160
-------- -------- --------
Balance at December 31........................ $390,021 $335,584 $245,125
======== ======== ========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for losses and loss adjustment expenses (net of reinsurance recoveries
of $1,042,000, $28,231,000, and $11,180,000 in 2000, 1999, and 1998,
respectively) decreased by $93,433,000, $43,996,000 and $13,297,000 in 2000,
1999 and 1998, respectively, due primarily to lower than anticipated claim
payments as compared to the amounts reserved as a result of strong housing
prices.
5. REDEEMABLE PREFERRED STOCK
The Company's preferred stock is entitled to cumulative annual dividends of
$4.125 per share, payable quarterly in arrears. The preferred stock is
redeemable at the option of the Company at $54.125 per share on or after August
15, 2002, and declining to $50.00 per share on or after August 15, 2005 (plus in
each case accumulated and unpaid dividends), or is subject to mandatory
redemption at a redemption price of $50.00 per share plus accumulated and unpaid
dividends based upon specified annual sinking fund requirements from 2002 to
2011.
6. INCOME TAXES
Deferred income taxes at the end of each period are determined by applying
enacted statutory tax rates applicable to the years in which the taxes are
expected to be paid or recovered. Deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts for income tax
purposes. The effect on deferred taxes of a change in the tax rate is recognized
in earnings in the period that includes the enactment date.
Provision for income taxes includes a net deferred tax provision in 2000,
1999, and 1998 of $62,938,000, $58,083,000, and $35,875,000, respectively. Of
the 2000, 1999, and 1998 provisions, $63,685,000, $54,425,000, and $45,247,000,
respectively, were due to a deduction related to the purchase of U.S. government
non-interest-bearing tax and loss bonds as allowed by federal tax regulations,
with the 1999 and 1998 purchase deductions offset by $7,053,000 and $4,979,000,
respectively, of alternative minimum tax adjustments. These purchases are
treated as prepaid federal income taxes. The payment for the tax and loss bonds
is essentially a prepayment of federal income taxes that will become due at a
later date. All other amounts arose principally from differences in accounting
for deferred policy acquisition costs and insurance reserve tax adjustments
required as a result of the Tax Reform Act of 1986.
The significant components of the Company's net deferred tax assets and
liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
Unearned premiums................................... $ 4,746 $ 2,975
Loss reserves....................................... 8,896 7,946
Employee benefits................................... 1,225 648
Net unrealized loss on investments.................. -- 8,547
Other............................................... 1,538 --
--------- ---------
16,405 20,116
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs................... (24,520) (21,591)
Net unrealized gain on investments.................. (13,641) --
Depreciation........................................ (1,254) (1,278)
Deduction related to purchase of tax and loss
bonds............................................ (268,284) (203,343)
Other............................................... -- (72)
--------- ---------
(307,699) (226,284)
--------- ---------
Net deferred tax liability............................ $(291,294) $(206,168)
========= =========
</TABLE>
28
<PAGE> 54
The reconciliation of taxes computed at the statutory tax rate of 35% for
2000, 1999 and 1998 to the provision for income taxes is as follows (in
thousands):
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Provision for income taxes computed at the
statutory tax rate.......................... $123,365 $ 76,813 $ 69,269
Change in tax provision resulting from:
Tax-exempt municipal bond interest and
dividends received deduction (net of
proration).................................. (20,482) (15,535) (13,897)
Capitalized merger costs.................... 123 8,124 --
Other, net.................................. 526 1,926 304
-------- -------- --------
Provision for income taxes.................... $103,532 $ 71,328 $ 55,676
======== ======== ========
</TABLE>
7. STOCKHOLDERS' EQUITY AND DIVIDEND RESTRICTIONS
The Company is a holding company whose principal source of income is
dividends from Radian. The ability of Radian Guaranty to pay dividends on its
common stock is restricted by certain provisions of the insurance laws of the
Commonwealth of Pennsylvania, its state of domicile. The insurance laws of
Pennsylvania establish a test limiting the maximum amount of dividends that may
be paid by an insurer without prior approval by the Pennsylvania Insurance
Commissioner. Under such test, Radian Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $197,979,000 would be
available for dividends in 2001. However, an amendment to the Pennsylvania
statute requires that dividends and other distributions be paid out of an
insurer's unassigned surplus. Because of the unique nature of the method of
accounting for contingency reserves, Radian Guaranty has negative unassigned
surplus. Thus, prior approval by the Pennsylvania Insurance Commissioner is
required for Radian Guaranty to pay dividends or make other distributions so
long as Radian Guaranty has negative unassigned surplus. The Pennsylvania
Insurance Commissioner has approved all distributions by Radian Guaranty since
the passage of this amendment, and management has every expectation that the
Commissioner of Insurance will continue to approve such distributions in the
future, provided that the financial condition of Radian Guaranty does not
materially change.
The ability of Amerin Guaranty to pay dividends on its common stock is
restricted by certain provisions of the insurance laws of the State of Illinois,
its state of domicile. The insurance laws of Illinois establish a test limiting
the maximum amount of dividends that may be paid from positive unassigned
surplus by an insurer without prior approval by the Illinois Insurance
Commissioner. Under such test, Amerin Guaranty may pay dividends during any
12-month period in an amount equal to the greater of (i) 10% of the preceding
year-end statutory policyholders' surplus or (ii) the preceding year's statutory
net income. In accordance with such restrictions, $58,036,000 would be available
for dividends in 2001 without prior regulatory approval, which represents the
positive unassigned surplus of Amerin Guaranty at December 31, 2000.
The Company and Radian Guaranty have entered into an agreement, pursuant to
which the Company has agreed to establish and, for as long as any shares of
$4.125 Preferred Stock remain outstanding, maintain a reserve account in an
amount equal to three years of dividend payments on the outstanding shares of
$4.125 Preferred Stock (currently $9,900,000), and not to pay dividends on the
common stock at any time when the amount in the reserve account is less than
three years of dividend payments on the shares of $4.125 Preferred Stock then
outstanding. This agreement between the Company and Radian Guaranty provides
that the holders of the $4.125 Preferred Stock are entitled to enforce the
agreement's provisions as if such holders were signatories to the agreement.
Radian Guaranty's current excess of loss reinsurance arrangement prohibits
the payment of any dividend that would have the effect of reducing the total of
its statutory policyholders' surplus plus its contingency reserve below
$85,000,000. As of December 31, 2000, Radian Guaranty had statutory
policyholders' surplus of $171,644,000 and a contingency reserve of
$798,954,000, for a total of $970,598,000.
The Company may not pay any dividends on its shares of common stock unless
the Company has paid all accrued dividends on, and has complied with all sinking
fund and redemption obligations relating to, its outstanding shares of $4.125
Preferred Stock.
The Company prepares its statutory financial statements in accordance with
the accounting practices prescribed or permitted by the Insurance Department of
the respective state of domicile. Prescribed statutory accounting practices
include a variety of publications of the National Association of Insurance
Commissioners ("NAIC") as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Radian Guaranty's statutory policyholders' surplus at December 31, 2000 and
1999 was $171,644,000 and $157,693,000, respectively. Radian Guaranty's
statutory net income for 2000, 1999, and 1998 was $197,979,000, $137,094,000,
and $105,264,000, respectively.
29
<PAGE> 55
Under Illinois insurance regulations, Amerin Guaranty is required to
maintain statutory basis capital and surplus of $1,500,000. The statutory
policyholders' surplus at December 31, 2000 and 1999 was $284,813,000 and
$242,636,000, respectively. Amerin Guaranty's statutory net income for 2000,
1999, and 1998 was $101,448,000, $70,901,000, and $71,715,000, respectively.
The differences between the statutory net income and surplus and the
consolidated net income and equity presented on a GAAP basis represent
differences between GAAP and statutory accounting practices for the following
reasons:
Under statutory accounting practices, mortgage guaranty insurance companies
are required to establish each year a contingency reserve equal to 50% of
premiums earned in such year. Such amount must be maintained in the contingency
reserve for 10 years after which time it is released to unassigned surplus.
Prior to 10 years, the contingency reserve may be reduced with regulatory
approval to the extent that losses in any calendar year exceed 35% of earned
premiums for such year. Under GAAP, the contingency reserve is not required.
Under statutory accounting practices, insurance policy acquisition costs
are charged against operations in the year incurred. Under GAAP, these costs are
deferred and amortized.
Statutory financial statements only include a provision for current income
taxes due, and purchases of tax and loss bonds are accounted for as investments.
GAAP financial statements provide for deferred income taxes, and purchases of
tax and loss bonds are recorded as prepayments of income taxes.
Under statutory accounting practices, fixed maturity investments are valued
at amortized cost. Under GAAP, those investments that Radian does not have the
ability or intent to hold to maturity are considered to be available for sale
and are recorded at market value, with the unrealized gain or loss recognized,
net of tax, as an increase or decrease to stockholders' equity.
Under statutory accounting practices, certain assets, designated as
non-admitted assets, are charged directly against statutory surplus. Such assets
are reflected on the GAAP financial statements.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is effective January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The Commonwealth of Pennsylvania will
require adoption of the Codification for the preparation of statutory financial
statements effective January 1, 2001. The Company estimates that the adoption of
the Codification by Radian Guaranty will increase statutory capital and surplus
as of January 1, 2001 by approximately $10,333,000 in Radian Guaranty. The State
of Illinois will require adoption of the Codification for the preparation of
statutory financial statements effective January 1, 2001. The Company estimates
that the adoption of the Codification by Amerin Guaranty will increase statutory
capital and surplus as of January 1, 2001 by approximately $2,370,000 in Amerin
Guaranty.
In April 1998, the Company's board of directors approved a stockholder
rights plan designed to help ensure that all stockholders receive fair value for
their shares of common stock in the event of any proposed takeover of the
Company and to guard against the use of partial tender offers or other coercive
tactics to gain control of the Company without offering fair value to the
stockholders.
8. STOCK-BASED COMPENSATION
In November 1992, the Company's board of directors adopted the CMAC
Investment Corporation 1992 Stock Option Plan, which provides for the granting
of nonqualified stock options, either alone or together with stock appreciation
rights. Effective with the merger, the name of the plan was changed to the
Radian Group Inc. 1992 Stock Option Plan (the "Stock Option Plan"). Originally
up to 500,000 shares were subject to stock options. This amount was amended by a
vote of the stockholders to 900,000 in May 1993. These options may be granted to
directors, officers, and key employees of the Company at prices that are not
less than 90% of fair market value on the date the options are granted, although
all options have been granted with an exercise price equal to the fair value of
the Company's stock at the date of grant. Accordingly, no compensation expense
has been recognized for the Company's stock-based compensation plans. Each stock
option is exercisable for a period of ten years from the date of the grant and
is subject to a vesting schedule as approved by the Company's Stock Option and
Compensation Committee. In May 1995, the CMAC Investment Corporation Equity
Compensation Plan was instituted by a vote of the stockholders. Effective with
the merger, the name of the plan was changed to the Radian Group Inc. Equity
Compensation Plan (the "Equity Compensation Plan"). This plan provides for the
granting of nonqualified stock options, under terms similar to those in the
Stock Option Plan, or other forms of equity-based compensation. The aggregate
number of shares that may be issued under this new plan was 1,100,000, which
brought the total number of shares subject to stock options or other forms of
equity-based compensation to 2,000,000. Effective with the two-for-one stock
split in December 1996, all share totals within the plans were doubled, bringing
the total number
30
<PAGE> 56
of shares subject to stock options or other forms of equity-based compensation
to 4,000,000.
In June 1999, the number of shares subject to stock options was amended by
a vote of the stockholders to 5,000,000. At the same time, as a result of the
merger, the number of options outstanding from the prior Amerin plan was added
to the total number of shares subject to stock options or other forms of equity
compensation, bringing the total number of shares to 5,800,177.
Information regarding the Stock Option Plan and Equity Compensation Plan is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF PRICE
SHARES PER SHARE
--------- ---------
<S> <C> <C>
Outstanding, January 1, 1998............................ 2,611,595 $23.84
Granted............................................... 126,232 42.28
Exercised............................................. (351,477) 11.04
Cancelled............................................. (79,490) 27.47
---------
Outstanding, December 31, 1998.......................... 2,306,860 26.65
Granted............................................... 229,921 40.63
Exercised............................................. (445,558) 26.40
Cancelled............................................. (134,779) 38.52
---------
Outstanding, December 31, 1999.......................... 1,956,444 27.54
Granted............................................... 460,107 45.34
Exercised............................................. (588,678) 24.86
Cancelled............................................. (71,990) 44.00
---------
Outstanding, December 31, 2000.......................... 1,755,883 32.43
=========
Exercisable, December 31, 2000.......................... 987,167 23.95
=========
Available for grant, December 31, 2000.................. 2,325,337
=========
</TABLE>
The Company applies APB 25 in accounting for its stock-based compensation
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, the Company's
net income and earnings per share would have been reduced by approximately
$4,189,000 ($.11 per share), $2,932,000 ($.08 per share), and $3,952,000 ($.10
per share in 2000, 1999, and 1998, respectively. The pro forma effect on net
income for 2000, 1999, and 1998 is not representative of the pro forma effect on
net income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1995.
The weighted average fair values of the stock options granted during 2000,
1999, and 1998 were $23.96, $20.65, and $20.64, respectively. The fair value of
each stock option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants:
<TABLE>
<CAPTION>
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Expected life (years).................................. 7.07 7.89 6.83
Risk-free interest rate................................ 6.69% 4.91% 5.21%
Volatility............................................. 39.29% 38.73% 39.05%
Dividend yield......................................... 0.16% 0.30% 0.33%
</TABLE>
The following tables summarize information concerning currently outstanding
and exercisable options at December 31, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE
------------------------ ----------- ------------ --------
<S> <C> <C> <C>
$ 9.00 - $ 9.94.............................. 202,344 1.89 $ 9.00
$12.56 - $14.69.............................. 316,675 3.44 14.54
$22.13 - $32.50.............................. 304,010 5.35 26.27
$33.28 - $49.69.............................. 697,991 8.26 41.81
$50.39 - $67.49.............................. 234,863 7.79 56.83
---------
1,755,883
=========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
----------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE PRICE
------------------------ ----------- --------
<S> <C> <C>
$ 9.00 - $ 9.94.......................................... 202,344 $ 9.00
$12.56 - $14.69.......................................... 316,675 14.54
$22.13 - $32.50.......................................... 241,110 24.64
$33.28 - $49.69.......................................... 112,936 43.12
$50.39 - $67.49.......................................... 114,102 56.13
-------
987,167
=======
</TABLE>
31
<PAGE> 57
In 1999, the Stock Option Plan was amended to include the grant of "reload"
options. The award of a "reload" option allows the optionee to receive the grant
of an additional stock option, at the then current market price, in the event
that such optionee exercises all or part of an option (an "original option") by
surrendering already owned shares of common stock in full or partial payment of
the option price under such original option. The exercise of an additional
option issued in accordance with the "reload" feature will reduce the total
number of shares eligible for award under the Stock Option Plan. At December 31,
2000, there were 234,781 options outstanding with a "reload" feature. During
2000, there were 37,707 additional options issued in accordance with the
"reload" feature.
In July 1997, the Company's board of directors adopted the 1997 CMAC
Investment Corporation Employee Stock Purchase Plan and shareholder approval was
granted during the Company's 1998 Annual Meeting. As a result of the merger, the
name of the plan was changed to the 1997 Radian Group Inc. Employee Stock
Purchase Plan (the "ESPP"). A total of 200,000 shares of the Company's
authorized but unissued common stock has been made available under the ESPP. The
ESPP allows eligible employees to purchase shares of the Company's stock at a
discount of 15% of the beginning-of-period or end-of-period (each period being
the first and second six calendar months) fair market value of the stock,
whichever is lower. Eligibility under the ESPP is determined based on standard
weekly work hours and tenure with the Company, and eligible employees are
limited to a maximum contribution of $400 per payroll period toward the purchase
of the Company's stock. Under the ESPP, the Company sold 5,200, 5,800 and 1,900
shares to employees in 2000, 1999 and 1998, respectively. The Company applies
APB 25 in accounting for the ESPP. The pro forma effect on the Company's net
income and earnings per share had compensation cost been determined under SFAS
123 was deemed immaterial in 2000, 1999 and 1998.
9. BENEFIT PLANS
The Company maintains a noncontributory defined benefit pension plan
covering substantially all full-time employees. Retirement benefits are a
function of the years of service and the level of compensation. Assets of the
plan are allocated in a balanced fashion with approximately 40% in fixed income
securities and 60% in equity securities.
The Company also provides a nonqualified deferred compensation plan
covering certain key executives designated by the board of directors. Under this
plan, participants are eligible to receive benefits in addition to those paid
under the defined benefit pension plan if their base compensation is in excess
of the current IRS compensation limitation for the defined benefit pension plan.
Retirement benefits under the nonqualified plan are a function of the years of
service and the level of compensation and are reduced by any benefits paid under
the defined benefit plan.
In addition to providing pension benefits, the Company will provide certain
health care and life insurance benefits to retired employees. The Company
accounts for such benefits under SFAS No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions," and accrues the estimated costs of
retiree medical and life benefits over the period during which employees render
the service that qualifies them for benefits.
The funded status of the defined benefit plans and the postretirement
benefit plan were as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------- ---------------
2000 1999 2000 1999
------- ------- ------ ------
<S> <C> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation at beginning of
year.................................. $ 5,844 $ 5,258 $ 314 $ 365
Service cost............................. 1,014 797 16 19
Interest cost............................ 548 383 24 21
Increase due to plan amendments.......... 406 -- -- --
Plan participants' contributions......... -- -- 6 5
Actuarial (gain) loss.................... 1,530 (555) 16 (84)
Benefits paid............................ (40) (39) (13) (12)
------- ------- ----- -----
Benefit obligation at end of year........ $ 9,302 $ 5,844 $ 363 $ 314
------- ------- ----- -----
Change in Plan Assets
Fair value of plan assets at beginning of
year.................................. $ 4,757 $ 3,714 $ -- $ --
Actual return on plan assets............. (69) 782 -- --
Employer contributions................... 455 300 7 7
Plan participants' contributions......... -- -- 6 5
Benefits paid............................ (40) (39) (13) (12)
------- ------- ----- -----
Fair value of plan assets at end of
year.................................. $ 5,103 $ 4,757 $ -- $ --
------- ------- ----- -----
Underfunded status of the plan........... $(4,199) $(1,087) $(363) $(314)
Unrecognized prior service cost.......... 764 456 (168) (139)
Unrecognized net actuarial loss (gain)... 755 (1,248) (128) (194)
------- ------- ----- -----
Accrued benefit cost..................... $(2,680) $(1,879) $(659) $(647)
======= ======= ===== =====
</TABLE>
32
<PAGE> 58
The components of net pension and net periodic postretirement benefit costs
are as follows (in thousands):
<TABLE>
<CAPTION>
DEFINED BENEFIT PLANS
-------------------------
2000 1999 1998
------ ----- --------
<S> <C> <C> <C>
Service cost................................................ $1,014 $ 797 $ 748
Interest cost............................................... 548 383 362
Expected return on plan assets.............................. (422) (320) (219)
Amortization of prior service cost.......................... 98 69 69
Recognized net actuarial loss............................... 17 10 40
------ ----- ------
Net periodic benefit cost................................... $1,255 $ 939 $1,000
====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT
BENEFIT PLANS
------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Service cost................................................ $ 16 $19 $ 19
Interest cost............................................... 24 21 22
Expected return on plan assets.............................. -- -- --
Amortization of prior service cost.......................... (11) (11) (11)
Recognized net actuarial gain............................... (10) (8) (8)
---- --- ----
Net periodic benefit cost................................... $ 19 $21 $ 22
==== === ====
</TABLE>
Assumptions used to determine net pension and net periodic postretirement
benefit costs are as follows:
<TABLE>
<CAPTION>
DEFINED BENEFIT PLANS
---------------------
2000 1999 1998
----- ----- -----
<S> <C> <C> <C>
Weighted average assumptions as of December 31:
Discount rate............................................... 7.50% 7.50% 6.75%
Expected return on plan assets.............................. 8.50% 8.50% 8.50%
Rate of compensation increase............................... 6.00% 4.00% 4.00%
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT
BENEFIT PLANS
------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average assumptions as of December 31:
Discount rate............................................... 7.25% 7.50% 6.75%
Expected return on plan assets.............................. -- -- --
Rate of compensation increase............................... -- -- --
</TABLE>
Due to the nature of the postretirement benefit plan, no increase is
assumed in the Company's obligation due to any increases in the per capita cost
of covered health care benefits.
In addition to the defined benefit plan, the nonqualified deferred
compensation plan, and the postretirement benefit plan, the Company also
maintains a Savings Incentive Plan, which covers substantially all full-time
employees and all part-time employees employed for a minimum of 90 consecutive
days. Participants can contribute up to 15% of their base earnings as pretax
contributions. The Company will match at least 25% of the first 5% of base
earnings contributed in any given year. These matching funds are subject to
certain vesting requirements. The expense to the Company for matching funds for
the years ended December 31, 2000, 1999, and 1998 was $1,094,000, $1,220,000,
and $918,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
In December 2000, a complaint seeking class action status on behalf of a
nationwide class of home mortgage borrowers was filed against Radian in the
United States District Court for the Middle District of North Carolina
(Greensboro Division). The complaint alleges that Radian violated Section 8 of
the Real Estate Settlement Procedures Act ("RESPA") which generally prohibits
the giving of any fee, kickback or thing of value pursuant to any agreement or
understanding that real estate settlement services will be referred. The
complaint asserts that the pricing of pool insurance, captive reinsurance,
contract underwriting, performance notes and other, unidentified "structured
transactions," should be interpreted as imputed kickbacks made in exchange for
the referral of primary mortgage insurance business, which, according to the
complaint, is a settlement service under RESPA. The complaint seeks injunctive
relief and damages of three times the amount of any mortgage insurance premiums
paid by persons who were referred to Radian pursuant to the alleged agreement or
understanding. The plaintiffs in the lawsuit are represented by the same group
of plaintiffs' lawyers who last year filed similar lawsuits against other
providers of primary mortgage insurance in federal court in Georgia. The Georgia
court dismissed those lawsuits for failure to state a claim. Three of those
lawsuits were settled prior to appeal; two are currently on appeal. Radian has
responded to the complaint by filing a motion to dismiss. Because this case is
at a very early stage, it is not possible to evaluate the likelihood of an
unfavorable outcome or to estimate the amount or range of potential loss.
33
<PAGE> 59
In addition to the above, the Company is involved in certain litigation
arising in the normal course of its business. The Company is contesting the
allegations in each such other action and believes, based on current knowledge
and consultation with counsel, that the outcome of such litigation will not have
a material adverse effect on the Company's consolidated financial position or
results of operations.
Radian utilizes its underwriting skills to provide an outsource contract
underwriting service to its customers. Radian often gives recourse to its
customers on loans it underwrites for compliance. If the loan does not meet
agreed-upon guidelines and is not salable in the secondary market for that
reason, Radian agrees to remedy the situation either by placing mortgage
insurance coverage on the loan, by purchasing the loan, or indemnifying the loan
against future loss. During 2000, less than 1% of all loans were subject to
these remedies and the costs associated with these remedies were immaterial.
The Company leases office space for use in its underwriting, sales, loan
workout, and administrative support operations. Net rental expense in connection
with these leases totaled $2,970,000, $3,145,000, and $3,000,000 in 2000, 1999,
and 1998, respectively. The commitment for noncancelable operating leases in
future years is as follows (in thousands):
<TABLE>
<S> <C>
2001........................................................ $2,875
2002........................................................ 2,265
2003........................................................ 1,408
2004........................................................ 309
2005........................................................ 236
------
$7,093
======
</TABLE>
The commitment for noncancelable operating leases in future years has not
been reduced by future minimum sublease rental payments aggregating
approximately $1,844,000.
11. QUARTERLY FINANCIAL DATE (UNAUDITED)
<TABLE>
<CAPTION>
2000 QUARTER
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER-SHARE INFORMATION) FIRST SECOND THIRD FOURTH YEAR
- -------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net premiums written....................... $135,606 $128,936 $136,147 $143,583 $544,272
Net premiums earned........................ 127,297 129,539 130,236 133,799 520,871
Net investment income...................... 18,827 20,304 21,179 22,636 82,946
Provision for losses....................... 38,782 38,005 38,251 39,288 154,326
Policy acquisition and other expenses...... 26,713 25,492 26,931 29,502 108,638
Net income................................. 58,600 61,858 64,069 64,411 248,938
Net income per share (1)(2)................ $ 1.53 $ 1.60 $ 1.66 $ 1.66 $ 6.44
Average shares outstanding (1)............. 37,864 38,138 38,192 38,380 38,149
</TABLE>
<TABLE>
<CAPTION>
1999 QUARTER
---------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Net premiums written....................... $111,355 $115,907 $95,537 $129,018 $451,817
Net premiums earned........................ 112,493 116,319 120,031 123,792 472,635
Net investment income...................... 15,913 16,814 16,439 18,093 67,259
Provision for losses....................... 44,242 43,312 42,519 44,070 174,143
Policy acquisition and other expenses...... 33,130 32,255 31,122 24,929 121,436
Merger expenses............................ 2,833 22,697 11,353 883 37,766
Net income................................. 37,353 25,094 37,488 48,203 148,138
Net income per share(1) (2)................ $ 0.97 $ 0.64 $ 0.97 $ 1.25 $ 3.83
Average shares outstanding (1)............. 37,723 37,891 37,765 38,046 37,856
</TABLE>
- ---------------
(1) Diluted net income per share and average shares outstanding per SFAS No.
128, "Earnings Per Share." See note 1.
(2) Net income per share is computed independently for each period presented.
Consequently, the sum of the quarters may not equal the total net income per
share for the year.
34
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Radian Group Inc.
Philadelphia, Pennsylvania
We have audited the consolidated balance sheets of Radian Group Inc. and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in common stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements give retroactive effect to
the merger of CMAC Investment Corporation and Amerin Guaranty Corporation
("Amerin"), which has been accounted for as a pooling of interests as described
in Note 1 to the consolidated financial statements. We did not audit the related
statements of income, changes in common stockholders' equity, and cash flows of
Amerin for the year ended December 31, 1998, which statements reflect total
revenues of $145,927,000 for the year ended December 31, 1998. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Amerin for
1998, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Radian Group Inc. and subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
[Deloitte&Touche SIG]
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 2, 2001
35
<PAGE> 61
RADIAN GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following is a "Safe Harbor" Statement under the Private Securities
Litigation Reform Act of 1995:
The statements contained herein that are not historical facts are
forward-looking statements. Actual results may differ materially from those
projected in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the following
risks: that interest rates may increase rather than remain stable or decrease;
that housing demand may decrease for any number of reasons, including changes in
interest rates, adverse economic conditions, or other reasons; that Radian's
market share may decrease as a result of changes in underwriting criteria by
Radian or its competitors, or other reasons; and changes in the performance of
the financial markets, in the demand for and market acceptance of Radian
products, increased competition from government programs and the use of
substitutes for mortgage insurance, and in general financial conditions.
Investors are also directed to other risks discussed in documents filed by the
Company with the Securities and Exchange Commission.
2000 COMPARED TO 1999
Net income for 2000 was $248.9 million, a 68.0% increase compared to $148.1
million for 1999. However, net income for 1999 included merger expenses (net of
tax) of $34.4 million and without these merger expenses, net income for 1999 was
$182.6 million. This represents an increase of 36.4% or $66.3 million from 1999
to 2000. This improvement in net income, excluding merger expenses, was a result
of growth in premiums earned and net investment income combined with a lower
provision for losses and a reduction in policy acquisition costs and other
operating expenses.
New primary insurance written during 2000 was $24.9 billion, a 25.0%
decrease compared to $33.3 billion for 1999. This decrease in Radian's primary
new insurance written volume in 2000 was partially due to a 14.0% decrease in
new insurance written volume in the private mortgage insurance industry compared
to 1999. In addition, Radian's market share of the industry decreased to 15.2%
for the year ended December 31, 2000 as compared to 17.5% for the same period of
1999. Radian believes the market share decline was due in part to the reduction
in business provided by a few of the largest national accounts, which rebalanced
their mortgage insurance allocation after the merger. In addition, the Company
believes that it had a relatively low market share of certain large bulk
transactions which are included in industry new insurance written figures. For
the year ended December 31, 2000, Radian wrote $1.2 billion of such bulk
transactions. In 2000, Radian reduced the volume of pool insurance it wrote to
$187.9 million of risk written as compared to $421.2 million in 1999. Most of
this pool insurance volume relates to a group of structured transactions
composed primarily of Fannie Mae- and Freddie Mac-eligible conforming mortgage
loans ("GSE Pool") that are geographically well dispersed throughout the United
States and have lower average loan-to-value ratios than Radian's primary
business. This business contains loans with loan-to-value ratios above 80% which
have primary insurance that places the pool insurance in a secondary loss
position and loans with loan-to-value ratios of 80% and below for which the pool
coverage is in a first loss position. The performance of this business written
in prior years has been better than anticipated although the business is
relatively young and the historical performance might not be an indication of
future performance. Under a pool insurance transaction, the exposure to Radian
on each individual loan is uncapped; however, the aggregate stop-loss percentage
(typically 1.0% to 1.5% of the aggregate original loan balance in the Fannie
Mae/Freddie Mac transactions) is the maximum that can be paid out in losses
before the insurer's exposure terminates. The Company expects its pool insurance
activity to continue at the current reduced levels during 2001. Premium rates on
such pool insurance are significantly lower than on primary insurance loans due
to the low stop-loss levels, which limit the overall risk exposure to Radian,
and the focus of such product on high-quality primary insurance customers.
Standard & Poor's Insurance Rating Service ("S&P"), Moody's Investors Service
("Moody's") and Fitch Investors Service, Inc. ("Fitch") have determined that the
capital requirements to support such pool insurance will be significantly more
stringent than on primary insurance due to the low premium rates and low
stop-loss levels which increase expected losses as a percentage of risk
outstanding.
Mortgage insurance industry volume in 2000 was negatively impacted by
relatively higher interest rates which affected the entire mortgage industry for
most of the year. The trend toward higher interest rates, which began in the
third quarter of 1999, caused refinancing activity during 2000 to decline to
normal levels and contributed to the decrease in the mortgage insurance industry
new insurance written volume for 2000. Radian's refinancing activity as a
percentage of primary new insurance written was 14.0% for 2000 as compared to
27.0% for 1999. However, a decrease in interest rates during the fourth quarter
of 2000 resulted in an increase in refinancing activity for Radian during the
quarter to 17.0% of primary new insurance written as compared to 12.0% for the
third quarter of 2000. The persistency rate, which is defined as the percentage
of insurance in force that is renewed in any given year, was
36
<PAGE> 62
78.2% for 2000 as compared to 75.0% for 1999. This increase was consistent with
the declining level of refinancing activity during most of 2000, which caused
the cancellation rate to decrease. The expectation for 2001 is a higher industry
volume and lower persistency rates, influenced by lower interest rates.
Radian insures non-traditional loans, specifically Alternative A and A
minus loans (collectively, referred to as "non-prime" business). Alternative A
borrowers have an equal or better credit profile than Radian's typical insured
borrowers, but these loans are underwritten with reduced documentation and
verification of information. Radian typically charges a higher premium rate for
this business due to the reduced documentation, but does not consider this
business to be significantly more risky than its normal primary business. The A
minus loan programs typically have non-traditional credit standards that are
less stringent than standard credit guidelines. To compensate for this
additional risk, Radian receives a higher premium for insuring this product that
Radian believes is commensurate with the additional default risk. During 2000,
non-prime business accounted for $5.4 billion or 21.5% of Radian's new primary
insurance written as compared to $3.5 billion or 9.7% for the same period in
1999.
In the third quarter of 2000, the Company began to insure mortgage-related
assets in a Pennsylvania domiciled insurer, Radian Insurance Inc. ("Radian
Insurance"). Radian Insurance is rated AA by S&P and Aa3 by Moody's and was
formed to write credit insurance and financial guaranty insurance on assets that
are not permitted to be insured by monoline mortgage guaranty insurers. Such
assets include manufactured housing loans, second mortgages, home equity loans
and mortgages with loan-to-value ratios above 100%. During 2000, Radian
Insurance wrote $1.6 billion of insurance which represented $211.0 million of
risk. Such business is similar to mortgage guaranty insurance, however, the
structures can vary and thus premium rates and commensurate risk levels will be
variable.
Net premiums earned in 2000 were $520.9 million, a 10.2% increase compared
to $472.6 million for 1999. This increase, which was greater than the increase
in insurance in force, reflected the change in the mix of new insurance written
volume originated by Radian during the second half of 1999 and throughout 2000.
This change in mix included a higher percentage of loans with loan-to-value
ratios of 95% or higher and non-prime business. These types of business have
higher premium rates, which are commensurate with the increased level of risk
associated with the insurance. Radian's higher loan-to-value activity was 45.0%
for 2000 as compared to 41.0% for 1999 and the non-prime business accounted for
21.5% of Radian's new primary insurance written in 2000 as compared to 9.7% for
1999. The reduced level of refinancing activity and the resulting increase in
persistency led to an increase in direct primary insurance in force during 2000
of 3.9%, from $97.1 billion at December 31, 1999 to $100.9 billion at December
31, 2000. GSE Pool risk in force also grew to $1.1 billion at December 31, 2000,
an increase of 4.2% for the year. Radian and the industry have entered into
risk-sharing arrangements with various customers that are designed to allow the
customer to participate in the risks and rewards of the mortgage insurance
business. One such product is captive reinsurance, in which a mortgage lender
sets up a mortgage reinsurance company that assumes part of the risk associated
with that lender's insured book of business. In most cases, the risk assumed by
the reinsurance company is an excess layer of aggregate losses that would be
penetrated only in a situation of adverse loss development. For 2000, premiums
ceded under captive reinsurance arrangements were $39.5 million, or 7.6% of
total premiums earned during 2000, as compared to $27.5 million, or 5.8% of
total premiums earned for the same period of 1999. New primary insurance written
under captive reinsurance arrangements was $8.1 billion, or 32.6% of total new
primary insurance written in 2000 as compared to $13.7 billion, or 41.3% of
total new primary insurance written in 1999.
Net investment income for 2000 was $82.9 million, a 23.3% increase compared
to $67.3 million in 1999. This increase was a result of continued growth in
invested assets primarily due to positive operating cash flows of $280.0 million
during 2000. The Company has continued to invest some of its new operating cash
flows in tax-advantaged securities, primarily municipal bonds, although the
Company did modify its investment policy to allow the purchase of various other
asset classes, including common stock and convertible securities, beginning in
the second quarter of 1998 and some of the Company's cash flows have been used
to purchase these classes of securities. The Company's intent is to target the
common equity exposure at a maximum of 5% of the investment portfolio's market
value while the convertible securities and mortgage-backed securities exposures
are targeted not to exceed 10% each. The Company expects no material long-term
impact on total investment returns as a result of this investment asset
diversification.
The provision for losses was $154.3 million in 2000, a decrease of 11.4%
compared to $174.1 million in 1999. This decrease was due to a reduction from
1999 to 2000 in the percentage of delinquencies on higher loan-to-value loans
which have higher loss reserves per default and a decrease in loss severity due
to strong property value appreciation. Claim activity is not evenly spread
throughout the coverage period of a book of business. Relatively few claims are
received during the first two years following issuance of the policy.
Historically, claim activity has reached its
37
<PAGE> 63
highest level in the third through fifth years after the year of loan
origination. Approximately 76.0% of Radian's primary risk in force and almost
all of Radian's pool risk in force at December 31, 2000 had not yet reached its
anticipated highest claim frequency years. Due to the high cancellation rates
and strong new insurance volume in 1998 and the first half of 1999, this
percentage of newer risk in force is significantly higher than normal levels.
Radian's overall default rate at December 31, 2000 was 1.6% as compared to 1.5%
at December 31, 1999, while the default rate on the primary business was 2.3% at
December 31, 2000 as compared to 2.2% at December 31, 1999. The increase in
Radian's overall default rate could be a result of the slowing economy. A strong
economy generally results in better loss experience and a decrease in the
overall level of losses. A continued weakening of the economy could negatively
impact Radian's overall default rates, which would result in an increase in the
provision for losses. The number of defaults rose from 22,151 at December 31,
1999 to 26,520 at December 31, 2000 and the average loss reserve per default
declined from $15,071 at the end of 1999 to $14,707 at December 31, 2000. The
decrease in average loss reserve per default was primarily the result of a
decline in the Company's percentage of higher loan-to-value loans in default
which results in a lower overall reserve per default as lower loan-to-value
loans are perceived as having a lower risk of claim incidence. The percentage of
loans in default with loan-to-value ratios of 90.01% or higher decreased to
45.2% as of December 31, 2000 as compared to 47.9% as of December 31, 1999. The
default rate in California was 1.5% (including pool) at December 31, 2000 as
compared to 1.8% at December 31, 1999 and claims paid in California during 2000
were $15.8 million, representing approximately 16.1% of total claims as compared
to 26.8% in 1999. California represented approximately 16.8% of primary risk in
force at December 31, 2000 as compared to 17.2% at December 31, 1999. The
default rate in Florida was 2.7% (including pool) at December 31, 2000 as
compared to 3.1% at December 31, 1999 and claims paid in Florida during 2000
were $13.3 million, representing approximately 13.6% of total claims as compared
to 13.4% in 1999. Florida represented 7.4% of primary risk in force at December
31, 2000 and 1999. Radian has reported an increased number of defaults on the
non-prime business insured beginning in 1997. Although the default rate for this
business is higher than on Radian's normal books of business, it is within the
expected range for this type of business, and the higher premium rates charged
are expected to compensate for the increased level of risk. The number of
non-prime loans in default at December 31, 2000 was 2,690, which represented
13.1% of the total number of primary loans in default and the default rate on
this business was 4.1% as of December 31, 2000 as compared to the primary
default rate on Radian's prime business of 2.3% at the end of 2000. Direct
losses paid in 2000 were $93.3 million as compared to direct losses paid during
1999 of $88.2 million, an increase of 5.8%. The severity of loss payments has
declined due to property value appreciation, but any negative impact on future
property values would most likely increase the loss severity.
Underwriting and other operating expenses were $108.6 million for 2000, a
decrease of 10.5% compared to $121.4 million for 1999. These expenses consisted
of policy acquisition expenses, which relate directly to the acquisition of new
business, and other operating expenses, which primarily represent contract
underwriting expenses, overhead, and administrative costs.
Policy acquisition costs were $51.5 million in 2000, a decrease of 12.4%
compared to $58.8 million in 1999. This decrease reflects the synergies achieved
as a result of the merger and the decrease in the level of new insurance written
for 2000 as compared to 1999. Other operating expenses for 2000 were $57.2
million, a decrease of 8.8% compared to $62.7 million for 1999. This reflects a
decrease in expenses associated with contract underwriting services offset by an
increase in expenses associated with the Company's administrative and support
functions. Contract underwriting expenses for 2000 included in other operating
expenses were $20.3 million as compared to $32.4 million for 1999, a decrease of
37.5%. However, contract underwriting expenses were $6.8 million for the fourth
quarter of 2000 as compared to $6.9 million for the same period in 1999. This
$12.1 million decrease in contract underwriting expenses during 2000 reflected
the decreased demand for contract underwriting services throughout the first
nine months of 2000 as mortgage origination volume declined; however, the
increase in expenses for the fourth quarter of 2000 reflected the increasing
demand for contract underwriting services as more lenders took advantage of the
integration of the contract underwriting process with Freddie Mac's Loan
Prospector and Fannie Mae's Desktop Underwriter origination systems to eliminate
back offices origination functions, combined with the decrease in interest rates
toward the end of 2000 which resulted in an increase in the level of refinanced
mortgage origination volume. Consistent with the decline in contract
underwriting expenses, other income decreased 34.5% to $7.4 million in 2000 as
compared to $11.3 million in 1999. During 2000, loans underwritten via contract
underwriting accounted for 30.1% of applications, 26.2% of insurance
commitments, and 19.4% of certificates issued by Radian as compared to 22.2% of
applications, 18.8% of commitments, and 15.6% of certificates in 1999. In 2001,
these
38
<PAGE> 64
percentages are expected to decrease if there is a continued increase in the
level of refinancing as refinanced loans tend to have lower loan-to-value ratios
and therefore contain a relatively low percentage of loans that require mortgage
insurance.
During 1999, the Company incurred merger-related expenses of $37.8 million.
The Company incurred no additional merger-related expenses in 2000 related to
the CMAC/Amerin merger and does not expect to incur any additional expenses
related to this merger in 2001 or beyond.
The effective tax rate for 2000 was 29.4% and, excluding merger costs (net
of tax) of $34.4 million, the effective tax rate for the same period in 1999 was
29.0%. Eliminating the merger expenses of $37.8 million in 1999, operating
income accounted for 73.2% of net income in 1999 as compared to 75.3% for the
same period in 2000, thus resulting in an increase in effective tax rates for
2000.
1999 COMPARED TO 1998
Net income for 1999 was $148.1 million, a 4.1% increase compared to $142.2
million for 1998. However, net income for 1999 included merger expenses (net of
tax) of $34.4 million as compared to merger expenses (net of tax) of $714,000 in
1998. Without these merger expenses, net income for 1999 was $182.6 million as
compared to $143.0 million for 1998, an increase of 27.7% or $39.6 million. This
improvement in net income, excluding merger expenses, was a result of
significant growth in premiums earned and net investment income, partially
offset by a higher provision for losses, an increase in policy acquisition costs
and other operating expenses, and a reduction in other income.
New primary insurance written during 1999 was $33.3 billion, a 10.3%
decrease compared to $37.1 billion for 1998. This decrease in Radian's primary
new insurance written volume in 1999 was primarily due to a decline in Radian's
market share of the industry volume, which fell to 17.5% for the year ended
December 31, 1999 as compared to 19.3% for the same period of 1998. This
decrease in market share was slightly offset by an increase in primary new
insurance written volume in the private mortgage insurance industry for 1999 as
compared to 1998 of $775.0 million or 0.4%. Radian believes the market share
decline was primarily due to the reduction in business provided by a few of the
largest national accounts, which rebalanced their mortgage insurance allocation
after the merger. In 1999, Radian wrote a smaller amount of pool insurance,
which represented an addition to risk written of $421.2 million as compared to
$475.0 million in 1998. Most of this pool insurance volume related to GSE Pool
business.
Radian's volume in 1999 was positively impacted by relatively lower
interest rates that affected the entire mortgage industry for most of the year.
The trend toward lower interest rates, which began in the third quarter of 1997,
caused refinancing activity during the first half of 1999 to continue at a
higher rate than normal, and strong housing prices caused a large percentage of
the refinanced loans to be closed without private mortgage insurance at a
loan-to-value ratio of 80% or below. Therefore, the rate of growth in the
private mortgage insurance industry, although substantial, was not as high as
that of the entire mortgage market. An increase in interest rates during the
third quarter of 1999 resulted in a decline in refinancing activity for Radian
and contributed to the 15.2% decrease in the mortgage insurance industry new
insurance written volume for the second half of 1999 compared to the same period
in 1998. Radian's refinancing activity as a percentage of primary new insurance
written was 27.0% for 1999 as compared to 34.0% in 1998; however, for the fourth
quarter of 1999, that rate had declined to 13.0% from 20.0% in the third quarter
of 1999 and 39.0% in the fourth quarter of 1998. The persistency rate was 75.0%
for 1999 as compared to 66.6% for 1998. This increase was consistent with the
declining level of refinancing activity during the second half of 1999, which
caused the cancellation rate to decrease.
Radian also became more involved in insuring non-conforming loans,
specifically Alternative A and A minus loans, during 1999. In 1999, non-prime
business accounted for $3.5 billion or 9.7% of Radian's new primary insurance
written as compared to $1.7 billion or 4.7% for the same period in 1998.
Net premiums earned in 1999 were $472.6 million, a 16.6% increase compared
to $405.3 million for 1998. This increase reflected the insurance in force
growth resulting from strong new insurance volume and pool insurance written
during 1999, and was aided by the increase in persistency levels. The strong
volume led to an increase in direct primary insurance in force during 1999 of
16.7%, from $83.2 billion at December 31, 1998 to $97.1 billion at December 31,
1999. Direct pool risk in force also grew to $1.4 billion at December 31, 1999
from $993.0 million at the end of 1998, an increase of 40.8% for the year. For
1999, premiums ceded under captive reinsurance arrangements were $27.5 million,
or 5.8% of total premiums earned during 1999, as compared to $13.8 million, or
3.4% of total premiums earned for the same period of 1998. New primary insurance
written under captive reinsurance arrangements was $13.7 billion, or 41.3% of
total new primary insurance written in 1999 as compared to $9.7 billion, or
26.1% of total new primary insurance written in 1998.
Net investment income for 1999 was $67.3 million, a 12.4% increase compared
to $59.9 million in 1998. This increase was a result of continued growth in
invested assets primarily due to positive operating
39
<PAGE> 65
RADIAN GROUP INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
cash flows of $261.7 million during 1999. The Company continued to invest some
of its new operating cash flows in tax-advantaged securities, primarily
municipal bonds, although the Company did modify its investment policy to allow
the purchase of various other asset classes, including common stock and
convertible securities, beginning in the second quarter of 1998 and some of the
Company's cash flows have been used to purchase these classes of securities.
The provision for losses was $174.1 million in 1999, an increase of 4.7%
compared to $166.4 million in 1998. This increase reflected an increase in the
number of delinquent loans as a result of the significant growth and maturation
of Radian's book of business over the past several years and the continued poor
experience of certain "affordable housing" program loans insured in 1994 and
1995, especially in Florida. Approximately 65% of Radian's primary risk in force
and almost all of Radian's pool risk in force at December 31, 1999 had not yet
reached its anticipated highest claim frequency years. Due to the high
cancellation rates and strong new insurance volume in 1998 and the first half of
1999, this percentage of risk in force was significantly higher than normal
levels. Radian's overall default rate at December 31, 1999 was 1.5% as compared
to 1.6% at December 31, 1998, while the default rate on the primary business was
2.2% at December 31, 1999 as compared to 2.1% at December 31, 1998. The decrease
in Radian's overall default rate was a result of the continued strong economy
and the relatively lower interest rates that have been experienced over the past
few years. The number of defaults rose from 18,775 at December 31, 1998 to
22,151 at December 31, 1999 and the average loss reserve per default rose from
$13,056 at the end of 1998 to $15,071 at December 31, 1999. The increase in
average loss reserve per default reflected the Company's continued
implementation of a more conservative reserve calculation for certain loans in
default perceived as having a higher risk of claim incidence. In addition, an
increase in the average loan balance and the coverage percentage on loans
originated beginning in 1995 have necessitated a higher reserve balance on loans
in a default status due to the increased ultimate exposure on these loans. The
default rate in California was 1.8% (including pool) at December 31, 1999 as
compared to 2.4% at December 31, 1998 and claims paid in California during 1999
were $24.4 million, representing approximately 26.8% of total claims as compared
to 45.1% in 1998. California represented approximately 17.2% of primary risk in
force at December 31, 1999 as compared to 18.6% at December 31, 1998. The
default rate in Florida was 3.1% (including pool) at December 31, 1999 as
compared to 3.3% at December 31, 1998 and claims paid in Florida during 1999
were $12.2 million, representing approximately 13.4% of total claims as compared
to only 11.2% in 1998. Florida represented 7.4% of primary risk in force at
December 31, 1999 and 1998. In addition, Radian reported an increased number of
defaults on the non-prime business insured beginning in 1997 through 1999.
Direct losses paid in 1999 were $88.2 million as compared to direct losses paid
during 1998 of $105.5 million, a decrease of 16.5%.
Underwriting and other operating expenses were $121.4 million for 1999, an
increase of 2.7% compared to $118.2 million for 1998. These expenses consisted
of policy acquisition and other operating expenses.
Policy acquisition costs were $58.8 million in 1999, an increase of 0.5%
compared to $58.5 million in 1998. This slight increase reflected the growth in
variable sales- and underwriting-related expenses relating to Radian's continued
strong levels of new insurance written, offset by the synergies realized in the
second half of the year as a result of the merger. The Company continued
development of its marketing infrastructure needed to support a focus on larger,
national mortgage lenders in order to take advantage of the widespread
consolidation and centralized decision making occurring in the mortgage lending
industry. Other operating expenses for 1999 were $62.7 million, an increase of
4.9% compared to $59.7 million for 1998. Most of the increase was a result of an
increase in expenses associated with the Company's administrative and support
functions. Contract underwriting expenses for 1999 included in other operating
expenses were $32.4 million as compared to $34.4 million for 1998, a decrease of
5.9%. This $2.0 million decrease in contract underwriting expenses during 1999
reflected the decreasing demand for contract underwriting services as mortgage
origination volume declined. The additional costs related to running duplicate
systems and other administrative operations during the integration process
resulted in an increase in other operating expenses unrelated to contract
underwriting of $8.0 million. During 1999, loans underwritten via contract
underwriting accounted for 22.2% of applications, 18.8% of insurance
commitments, and 15.6% of certificates issued by Radian as compared to 21.2% of
applications, 17.9% of commitments, and 15.6% of certificates in 1998. In
addition to the increase in contract underwriting volume, changing market
conditions caused the cost of contract underwriting to increase during 1997 and
1998 due to the high demand for available resources. In addition, as the level
of refinancing decreased, the demand for available resources also decreased,
resulting in a decline in contract underwriting costs.
During 1999, the Company incurred merger-related expenses of $37.8 million
as compared to $1.1 million for 1998. Total merger-related
40
<PAGE> 66
expenses were $38.9 million and consisted of the following types of expenses:
- Professional services of $11.8 million;
- Compensation arrangements of $8.5 million;
- Write-offs of fixed and intangible assets of $15.8 million; and
- Miscellaneous merger-related costs of $2.8 million.
The Company incurred no additional merger-related expenses in 2000.
The effective tax rate for 1999, excluding merger costs, net of tax, of
$34.4 million, was 29.0% as compared to 28.3% for 1998. Eliminating the merger
expenses of $37.8 million and $1.1 million for 1999 and 1998, respectively,
operating income accounted for 73.2% of net income in 1999 as compared to 68.3%
for the same period in 1998, thus resulting in the increase in effective tax
rates for 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of funds consist primarily of premiums and investment
income. Funds are applied primarily to the payment of Radian's claims and
operating expenses. The Company generated positive cash flows from operating
activities in 2000, 1999, and 1998 of $280.0 million, $261.7 million, and $191.8
million, respectively. The significant increases in operating cash flows reflect
the growth in premiums written and insurance in force combined with a reduction
in claims paid and other expenses. Positive cash flows are invested pending
future payments of claims and other expenses; cash flow shortfalls, if any, are
funded primarily through sales of short-term investments and other investment
portfolio securities.
Total investments were $1.8 billion at December 31, 2000, including $95.8
million of short-term investments with maturities of 90 days or less and $102.3
million of U.S. Treasury equivalents and government agency securities. At
December 31, 2000, approximately 94.8% of the Company's investments consisted of
money market and investment-grade, readily marketable, fixed-income securities,
concentrated in maturities of greater than five years. In addition, at December
31, 2000, the Company's investment portfolio included $64.2 million of equity
securities, which includes convertible debt and convertible preferred stock.
Loss reserves increased from $335.6 million at December 31, 1999 to $390.0
million at December 31, 2000. This increase in loss reserves due to newly
reported defaults and increases to loss reserves on existing defaults was a
result of the continued growth of the in force insurance book and the increase
in defaults on the non-prime book of business. In addition, an increase in the
average loan balance and the coverage percentage on loans originated beginning
in 1995 have necessitated a higher reserve balance on loans in a default status
due to the increased ultimate exposure on these loans. Radian has experienced
abnormally high early defaults on the 1994 and 1995 origination year books of
business, which reflected the increase in "affordable housing" program loans
insured in the period. Radian also experienced an increase in defaults under the
non-prime programs insured starting in late 1997, which is a typical pattern for
such business. Unearned premiums increased from $54.9 million at December 31,
1999 to $77.2 million at December 31, 2000 due to an increase in the popularity
of annual and single premium products relating to pool insurance which generate
significant unearned premium as compared to monthly premium product which is
earned as it is received.
Stockholders' equity plus redeemable preferred stock increased to $1.4
billion at December 31, 2000, an increase of 27.8% from $1.1 billion at December
31, 1999. This increase resulted primarily from net income for 2000 of $248.9
million, an increase in the market value of securities available for sale of
$41.5 million, net of tax, and proceeds from the issuance of common stock of
$24.7 million, partially offset by dividends of $7.8 million and the purchase of
treasury stock of $2.2 million.
As protection against a period of adverse loss development, Radian Guaranty
has entered into a variable quota share reinsurance treaty for the primary books
of business originated by Radian Guaranty in 1994, 1995, 1996, and 1997 as well
as some portion of the pool book of business originated in 1997 by Radian
Guaranty. As per the terms of the reinsurance treaties, Radian Guaranty receives
variable quota share loss relief at levels ranging from 7.5% to 15.0% based upon
the loss ratio on the covered book of business. A ceding commission is paid by
the reinsurer to Radian Guaranty except for certain circumstances where the loss
ratio on the covered book exceeds a stated level. These treaties remain in force
for a period of ten years and are noncancelable by either party until after ten
years have elapsed except under certain circumstances. Premiums are payable to
the reinsurer on a quarterly basis net of ceding commissions due to Radian
Guaranty and any losses calculated under the variable quota share coverage are
recovered on a quarterly basis. At the end of the fourth, seventh, and tenth
years of each treaty, depending on the extent of losses recovered to date on the
calendar year quota share portion of the treaty, a calculation is made to
determine an amount of Underwriting Year Excess Coverage, if any, due to Radian
Guaranty. In addition, there is one other catastrophic excess loss treaty that
covers Radian Guaranty's entire book of business in periods of catastrophic
loss.
41
<PAGE> 67
As of December 31, 2000, the Company and its subsidiaries had plans to
implement a new general ledger system at a cost of approximately $2.0 million.
The Company believes that Radian will have sufficient funds to satisfy its
claim payments and operating expenses and to pay dividends to the Company for at
least the next 12 months. The Company also believes that it will be able to
satisfy its long-term (more than 12 months) needs with cash flow from Radian. As
a holding company, the Company conducts its principal operations through Radian.
The Company's ability to pay dividends on the $4.125 Preferred Stock is
dependent upon Radian's ability to pay dividends or make other distributions to
the Company. Based on the Company's current intention to pay quarterly common
stock dividends of approximately $0.03 per share, the Company will require
distributions from Radian of $7.9 million annually to pay the dividends on the
outstanding shares of $4.125 Preferred Stock and common stock. There are
regulatory and contractual limitations on the payment of dividends or other
distributions (See note 7 to the Consolidated Financial Statements.) The Company
does not believe that these restrictions will prevent the payment by Radian or
the Company of these anticipated dividends or distributions in the foreseeable
future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages its investment portfolio to achieve safety and
liquidity, while seeking to maximize total return. The Company believes it can
achieve these objectives by active portfolio management and intensive monitoring
of investments. Market risk represents the potential for loss due to adverse
changes in the fair value of financial instruments. The market risk related to
financial instruments of the Company primarily relates to the investment
portfolio, which exposes the Company to risks related to interest rates, default
prepayments, and declines in equity prices. Interest rate risk is the price
sensitivity of a fixed income security to changes in interest rates. The Company
views these potential changes in price within the overall context of asset and
liability management. The Company's analysts estimate the payout pattern of the
mortgage insurance loss reserves to determine their duration, which is the
weighted average payments expressed in years. The Company sets duration targets
for fixed income investment portfolios that the Company believes mitigates the
overall effect of interest rate risk. As of December 31, 2000, the average
duration of the fixed income portfolio was 6.3 years. Based upon assumptions the
Company uses in its duration calculations, increases in interest rates of 100
and 150 basis points would cause decreases in the market value of the fixed
maturity portfolio (excluding short-term investments) of approximately 5.1% and
7.5%, respectively. Similarly, a decrease in interest rates of 100 and 150 basis
points would cause increases in the market value of the fixed maturity portfolio
of approximately 5.2% and 7.8%, respectively.
The Company had no foreign investments or non-investment grade fixed income
securities in its investment portfolio at December 31, 2000.
At December 31, 2000, the market value and cost of the Company's equity
securities were $64.2 million and $58.9 million. The Company is exposed to
equity price risk as a result of its investment in equity securities. However,
this risk is minimal due to the relatively minor component of the overall
portfolio consisting of equity securities.
42
<PAGE> 68
DIRECTORS AND OFFICERS
DIRECTORS
FRANK P. FILIPPS
Chairman and Chief Executive Officer
ROY J. KASMAR
President and Chief Operating Officer
HERBERT WENDER
Former Vice Chairman
LandAmerica Financial Group, Inc.
DAVID C. CARNEY
Chairman
ImageMax, Inc.
HOWARD B. CULANG
President
Laurel Corporation
CLAIRE M. FAGIN, PH.D., R.N.
Independent Consultant
ROSEMARIE B. GRECO
Principal
GRECOventures
STEPHEN T. HOPKINS
President
Hopkins and Company LLC
JAMES W. JENNINGS
Senior Partner
Morgan, Lewis & Bockius LLP
JAMES C. MILLER
Former President
CMAC Investment Corporation
RONALD W. MOORE
Adjunct Professor of Business Administration, Graduate School of Business
Administration,
Harvard University
ROBERT W. RICHARDS
Former Chairman of the Board
Source One Mortgage Services Corporation
ANTHONY W. SCHWEIGER
President
The Tomorrow Group LLC
LARRY E. SWEDROE
Principal
Buckingham Asset
Management, Inc.
OFFICERS
FRANK P. FILIPPS
Chairman and Chief Executive Officer
ROY J. KASMAR
President and Chief Operating Officer
C. ROBERT QUINT
Executive Vice President
Chief Financial Officer
HOWARD S. YARUSS
Senior Vice President
Secretary and General Counsel
ANDREW R. LUCZAKOWSKY
Senior Vice President
Chief Technology Officer
43
<PAGE> 69
STOCKHOLDERS' INFORMATION
ANNUAL MEETING
The annual meeting of stockholders of Radian Group Inc. will be held on Tuesday,
May 1, 2001, at 9:00 a.m. at 1601 Market Street, 11th floor, Philadelphia,
Pennsylvania.
10-K REPORT
Copies of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be available without charge after March 31, 2001, to
stockholders upon written request to:
SECRETARY
Radian Group Inc.
1601 Market Street
Philadelphia, PA 19103
TRANSFER AGENT AND REGISTRAR
Bank of New York
P.O. Box 11002
Church Street Station
New York, NY 10286
212 815.2286
CORPORATE HEADQUARTERS
1601 Market Street
Philadelphia, PA 19103
215 564.6600
COMMON STOCK
Radian Group Inc. common stock is listed on The New York Stock Exchange
under the symbol RDN. At December 31, 2000, there were 37,907,777 shares
outstanding and approximately 8,000 holders of record. The following table sets
forth the high and low sales prices of the Company's common stock on The New
York Stock Exchange Composite Tape:
<TABLE>
<CAPTION>
1999 2000
------------- -------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter....................................... 51 35 48 1/2 34 9/16
2nd Quarter....................................... 51 5/16 33 5/16 59 1/2 45 5/16
3rd Quarter....................................... 55 9/16 42 71 9/16 51 3/4
4th Quarter....................................... 55 3/16 41 1/4 76 5/8 60 7/16
</TABLE>
Cash dividends for each share of the Company's common stock were $0.03 for
each quarter of 1999 and 2000.
(C)2001 Radian Group Inc.
Printed entirely on environmentally sensitive paper.
Design: Inc Design, incdesign.com
44
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.2
<SEQUENCE>2
<FILENAME>w46732ex2-2.txt
<DESCRIPTION>STOCK PURCHASE AGREEMENT DATED AS OF 10/27/2000
<TEXT>
<PAGE> 1
EXECUTION COPY
EXHIBIT 2.2
STOCK PURCHASE AGREEMENT
by and among
Radian Group, Inc.,
ExpressClose.com, Inc.
and
The Founding Stockholders of ExpressClose.com, Inc.
Dated as of October 27, 2000
THIS STOCK PURCHASE AGREEMENT ("Agreement") is made and entered into
as of October 27, 2000, by and among Radian Group, Inc., a Delaware
corporation (the "Purchaser"), ExpressClose.com, Inc., an Iowa corporation
(the "Acquired Company"), and the stockholders of the Acquired Company named
in Exhibit A attached hereto (each, a "Founding Stockholder" and collectively,
the "Founding Stockholders").
WHEREAS, on the date hereof, the Founding Stockholders own
beneficially and of record Ten Million Two Hundred Thousand (10,200,000)
shares (the "Shares") of common stock of the Acquired Company, no par value
per share ("Seller Common Stock"), with the number of Shares owned by each
Founding Stockholder set forth on Exhibit A attached hereto;
WHEREAS, except for the shares of Seller Common Stock owned by
Household International, Inc. ("Household"), the Founding Stockholders own all
of the issued and outstanding capital stock of the Acquired Company;
WHEREAS, on the Closing Date (as defined in Section 1.4 hereof), the
Acquired Company is redeeming from Household One Million Eight Hundred
Thousand (1,800,000) shares of Seller Common Stock owned by Household (the
"Household Shares") pursuant to the terms of a Stock Redemption Agreement (the
"Household Agreement") effective on the Closing by and between the Acquired
Company and Household;
<PAGE> 2
WHEREAS, the Company desires to purchase from the Founding
Stockholders, and the Founding Stockholders desire to sell to the Purchaser,
the Shares; and
WHEREAS, from and after the Closing, the Purchaser intends to operate
the Acquired Company as its wholly-owned subsidiary and employ the Founding
Stockholders and the Key Employees (as defined below), all pursuant to
employment agreements executed contemporaneously herewith, to manage the
operations of the Acquired Company.
NOW, THEREFORE, in consideration of the mutual premises,
representations, warranties, covenants and conditions set forth in this
Agreement, and intending to be legally bound, the parties to this Agreement
mutually agree as follows:
Certain capitalized terms used in this Agreement have the meanings
assigned them in Section 7.10 herein.
SECTION 1. PURCHASE AND SALE OF SHARES.
1.1 Sale of Shares. At the Closing provided for in Section 1.4
hereof, and subject to the terms and conditions herein, and in reliance on the
representations and warranties set forth in Sections 2 and 3 of this Agreement,
the Founding Stockholders shall sell to the Purchaser, and the Purchaser shall
purchase from the Founding Stockholders, all of the Shares for the purchase
price payable to the Founding Stockholders as provided in Section 1.2 hereof
(the "Purchase Price").
1.2 Delivery of the Purchase Price. In consideration of and in
exchange for the Shares purchased by the Purchaser hereunder, the Purchaser
shall deliver to the Founding Stockholders the Purchase Price, consisting of
the following, at the Closing (or at such other time as hereinafter
described):
(a) Five Hundred Thousand and 00/100 Dollars ($500,000.00)
to each Founding Stockholder (One Million Five Hundred Thousand and 00/100
Dollars ($1,500,000.00) in total) in cash by wire transfer of immediately
available funds;
(b) Three Thousand Three Hundred Thirty-Three (3,333) shares
of the Purchaser's common stock, $.001 par value per share ("Purchaser Common
Stock"), to each Founding Stockholder, with an additional Three Thousand Three
Hundred Thirty-Four (3,334) shares of Purchaser Common Stock to be delivered
by the Purchaser to each Founding Stockholder on the first anniversary of the
date hereof and Three Thousand Three Hundred Thirty-Three (3,333) shares of
Purchaser Common Stock to be delivered by the Purchaser to each Founding
Stockholder on the second anniversary of the date hereof (such total of 30,000
shares of Purchaser Common Stock to be delivered to the Founding Shareholders
to be hereinafter referred to as the "Payment Shares"); and
(c) A nonqualified stock option (each a "Stock Option" and
collectively the "Stock Options") to purchase Six Thousand Six Hundred
Sixty-Seven (6,667) shares of Purchaser Common Stock to each Founding
Stockholder to be issued pursuant to the terms and conditions of the Stock
Option Plan (as defined in Section 7.10 hereof) and substantially on the terms
of the "Stock Option Grant" attached as Exhibit B hereto, at an exercise price
per share
<PAGE> 3
equal to the average Market Value (as defined in Section 7.10) of the
Purchaser Common Stock for the ten (10) trading days immediately preceding the
Closing Date as reported on the New York Stock Exchange.
(d) The number of Payment Shares to be delivered pursuant to
Section 1.2(b) on the first two anniversary dates of this Agreement shall be
proportionately adjusted for any stock dividend, stock split, or any other
subdivision of the Purchaser Common Stock or any reverse stock split or other
combination of the Purchaser Common Stock.
1.3 Management Earn-Outs.
(a) In addition to the payment of the Purchase Price as
provided for herein, the Purchaser shall pay to the Founding Stockholders, as
additional consideration for the sale of the Shares, subject to the terms and
conditions set forth in this Section 1.3, the following additional amounts of
cash ("Earn-Out"):
(i) with respect to the Business (as defined in
Section 7.10 hereof) for the fiscal year ended December 31, 2001 ("Fiscal
2001"), the Purchaser shall pay an amount, divided equally among the Founding
Stockholders, equal to fifty percent (50%) of Net Income (as defined in
Section 7.10 hereof) of the Business for Fiscal 2001; and
(ii) with respect to the Business for the fiscal year
ended December 31, 2002 ("Fiscal 2002"), the Purchaser shall pay an amount,
divided equally among the Founding Stockholders, equal to twenty-five percent
(25%) of the Net Income for Fiscal 2002.
Net Income shall be determined in accordance with the
provisions of Section 1.3(b) hereof, and shall include only Net Income
generated from the conduct of the Business after the Closing Date, and shall
not include any Net Income generated by the Acquired Company not involving the
Business.
(b) Calculation of Net Income. Within ninety (90) days after
the end of Fiscal 2001 and Fiscal 2002, the Purchaser shall cause to be
prepared and delivered to the Founding Stockholders an income statement (the
"Statement") setting forth the Net Income of the Business for such fiscal
year, as well as reasonably detailed information used in determining such Net
Income. The Statement shall be prepared in accordance with United States
generally accepted accounting principles consistently applied ("GAAP"). The
Purchaser shall adjust Net Income to account for increases or decreases
therein attributable to (A) sales made by the Acquired Company at reduced
prices, for example, for promotional reasons or because the services and
products of the Acquired Company are "bundled" with other services or products
sold by the Purchaser or its Affiliates, or (B) the allocation of special
overhead costs or charges to the Acquired Company other than reasonable
inter-company charges or allocations from the Purchaser or its Affiliates (as
defined in Paragraph 7.10) for services provided to the Acquired Company by
Purchaser or its Affiliates. Each Founding Stockholder shall then have thirty
(30) days following his receipt of the Statement to review the Statement, and
the Statement shall become final and binding upon the parties unless one or
more Founding Stockholders ("Dissenting Stockholders") give written notice of
his or their disagreement (a "Notice of Disagreement") to the Purchaser within
thirty (30) days after receiving the Statement specifying such Founding
Stockholder(s)' disagreement with the Statement. If no Notice of Disagreement
is
<PAGE> 4
received by the Purchaser within such thirty (30)-day period, the Purchaser
shall pay the Earn-Out amount due for such fiscal year to the Non-Dissenting
Stockholder(s) within fifteen (15) days after the expiration of such initial
thirty (30)-day period. If a Notice of Disagreement is received by the
Purchaser in a timely manner, then the Statement shall become final and
binding upon the parties on the earlier of (x) the date the Purchaser and the
Dissenting Stockholder(s) resolve in writing any differences they may have
with respect to any matter specified in the Notice of Disagreement and (y) the
date any Disputed Matters (as hereinafter defined) are finally resolved in
writing by the Arbitrators (as hereinafter defined) (such date to be
hereinafter referred to as the "Final Determination Date"). Any such Notice of
Disagreement shall state in reasonable detail the nature of any disagreement
so asserted. During a period of thirty (30) days following the date of the
Notice of Disagreement, the Purchaser and the Dissenting Stockholders shall
attempt to promptly resolve in writing any differences that they may have with
respect to any matter specified in the Notice of Disagreement. Any such
resolution shall be evidenced by a written agreement signed by the Purchaser
and the Dissenting Stockholders. If, at the end of such thirty (30)-day
period, any matters remain in dispute, then all such matters as specified in
the Notice of Disagreement as to which such written agreement has not been
reached (the "Disputed Matters") shall be submitted to arbitration as
hereinafter provided. All of the costs and expenses of preparing the Statement
shall be borne by the Purchaser.
Within five (5) business days after the expiration of the
thirty (30)-day period during which the Purchaser and the Dissenting
Stockholder(s) have not been able to enter into a written agreement as to the
Disputed Matters, the Purchaser and the Dissenting Stockholder(s) shall
attempt to agree upon an arbitrator or arbitrators (collectively,
"Arbitrator") to resolve the Disputed Matters. If, within such five
(5)-business day period, the Purchaser and the Dissenting Stockholders are
unable to agree upon the identity of the Arbitrator, the Purchaser and the
Dissenting Stockholders, as a group, shall each select one of the "Big Five"
accounting firms having no other relationship with any party hereto during the
then previous two (2) years and such accounting firms shall agree upon the
identity of a single Arbitrator within the next three (3)-business day period.
If such accounting firms cannot agree as to the identity of the single
Arbitrator during such three (3)-business day period, then each accounting
firm shall select one nominee, and the single Arbitrator shall be chosen as
between such nominees by lot. Unless otherwise provided herein, the single
Arbitrator shall resolve the Disputed Matters in accordance with the
Commercial Rules of the American Arbitration Association. The fees and
expenses of the single Arbitrator with respect to the settlement of all
Disputed Matters shall be borne by the Purchaser. The single Arbitrator's
determination shall be made within thirty (30) days of the single Arbitrator's
selection, shall be set forth in a written statement delivered to the
Purchaser and the Dissenting Stockholders and shall be final, binding and
conclusive and shall be enforceable in accordance with its terms by any court
of competent jurisdiction.
The Purchaser shall pay to each Dissenting Stockholder
one-third (1/3) of the Earn-Out as calculated and finally determined in
accordance with this Section 1.3 within thirty (30) days after the Final
Determination Date.
1.4 Closing; Closing Date. The closing of the purchase and sale of
the Shares as contemplated hereby (the "Closing") shall take place (i) at
10:00 a.m., local time, at the offices of Schnader Harrison Segal & Lewis LLP,
Suite 3600, 1600 Market Street, Philadelphia, Pennsylvania 19103, as soon as
practicable following the satisfaction or waiver of the conditions set forth
in Section 4 hereof, but in no event later than November 3, 2000 (unless the
Purchaser,
<PAGE> 5
the Acquired Company and the Founding Stockholders agree in writing to extend
such date) or (ii) at such other place, time or date as the Purchaser, the
Acquired Company and the Founding Stockholders agree in writing. The time and
date upon which the Closing occurs is herein called the "Closing Date".
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRED COMPANY AND THE
FOUNDING STOCKHOLDERS
The Founding Stockholders hereby jointly and severally make to the
Purchaser the representations and warranties contained in this Section 2,
except that each Founding Stockholder makes the representations in Sections
2.2(b), 2.4(b), 2.6 (second sentence) and 2.10 as to such Founding Stockholder
severally as to himself. Such representations and warranties are subject to
the qualifications and exceptions set forth in the disclosure schedule
delivered to the Purchaser pursuant to this Agreement (the "Disclosure
Schedule") and to the occurrence of the transactions contemplated by this
Agreement and related agreements and documents. Subject to the provisions of
Section 4.1(j) and Section 4.2(f), all representations and warranties are made
as of the date of this Agreement unless they expressly provide otherwise.
2.1 Organization and Corporate Power. The Acquired Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Iowa and is duly qualified or registered to do business
as a foreign corporation (a) in each jurisdiction listed in Section 2.1 of the
Disclosure Schedule and (b) in each jurisdiction in which the failure to be so
duly qualified or registered has had, or would be reasonably likely to have, a
Material Adverse Effect (as defined in Section 7.10 hereof). The Acquired
Company has all required corporate power and authority to carry on its
business as presently conducted, to enter into and perform this Agreement and
the agreements contemplated hereby to which it is a party and to carry out the
transactions contemplated hereby and thereby. The copies of the Articles of
Incorporation of the Acquired Company (the "Articles") and the Bylaws of the
Acquired Company (the "Bylaws"), as amended to date, which have been furnished
to the Purchaser by the Acquired Company, are correct and complete as of the
date hereof, and the Acquired Company is not in violation of any term of the
Articles or Bylaws. The Acquired Company is the successor of ExpressClose.Com
L.C, an Iowa limited liability company (the "LC") pursuant to that certain
Business Transfer Agreement by and between the LC and the Acquired Company,
dated December 30, 1999 (the "Asset Transfer Agreement") The Asset Transfer
Agreement and documents related thereto furnished by the Founding Stockholders
to the Purchaser are true complete and accurate copies of such documents and
constitute all of the documents or instruments relating to such transfer.
<PAGE> 6
2.2 Authorization and Non-Contravention.
(a) This Agreement and all documents executed pursuant
hereto by the Acquired Company are valid and binding obligations of the
Acquired Company, enforceable in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization and similar laws relating to the enforcement of creditors'
remedies generally and by general principles of equity. The execution,
delivery and performance by the Acquired Company of this Agreement and all
agreements, documents and instruments contemplated hereby to which the
Acquired Company is a party, including, without limitation, the Household
Redemption Agreement, have been duly authorized by any and all necessary
corporate or other action of the Acquired Company. The execution, delivery and
performance by the Acquired Company of this Agreement and all agreements,
documents and instruments contemplated hereby, the redemption of the Household
Shares and the performance of the transactions contemplated by this Agreement
and such other agreements, documents and instruments related hereto do not and
will not (i) violate, conflict with or result in a default (whether after the
giving of notice, lapse of time or both) or loss of benefit under any contract
or obligation to which the Acquired Company is a party or by which any of its
assets are bound, or any provision of the Articles or Bylaws, or cause the
creation of a Claim (as defined in Section 7.10 hereof) upon any of the assets
of the Acquired Company, any of which would have a Material Adverse Effect;
(ii) violate or result in a violation of, or constitute a default (whether
after the giving of notice, lapse of time or both) under, any provision of any
law, regulation or rule, or any order of, or any restriction imposed by, any
court or other governmental agency applicable to the Acquired Company, any of
which would have a Material Adverse Effect; (iii) require from the Acquired
Company any notice to, declaration or filing with, or consent or approval of
any governmental authority or other third party (except that which has been
waived or obtained); or (iv) violate or result in a violation of, or
constitute a default (whether after the giving of notice, lapse of time or
both) under, accelerate any obligation under, or give rise to a right of
termination of, any agreement, permit, license or authorization to which the
Acquired Company is a party or by which the Acquired Company is bound.
(b) The Founding Stockholder has full authority, power and
capacity to enter into and perform this Agreement and all agreements,
documents and instruments contemplated hereby which are to be executed by such
Founding Stockholder and to carry out the transactions contemplated hereby and
thereby. This Agreement and all agreements, documents and instruments executed
by each Founding Stockholder pursuant hereto are valid and binding obligations
of such Founding Stockholder enforceable in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization and similar laws relating to the enforcement of creditors'
remedies generally and by general principles of equity. The execution,
delivery and performance by the Founding Stockholder of this Agreement and all
agreements, documents and instruments to be executed and delivered by such
Founding Stockholder pursuant hereto do not and will not: (i) violate,
conflict with or result in a default (whether after the giving of notice,
lapse of time or both) or loss of benefit under any contract or obligation to
which the Founding Stockholder is a party or by which he or his assets are
bound; (ii) violate or result in a violation of, or constitute a default
(whether after the giving of notice, lapse of time or both) under, any
provision of any law, regulation or rule, or any order of, or any restriction
imposed by, any court or other governmental agency applicable to the Founding
Stockholder; (iii) require from the Founding Stockholder any notice to,
declaration or filing with, or consent or approval of any governmental
authority or other third party (except that which has
<PAGE> 7
been waived or obtained); or (iv) violate or result in a violation of, or
constitute a default (whether after the giving of notice, lapse of time or
both) under, accelerate any obligation under, or give rise to a right of
termination of, any agreement, permit, license or authorization to which the
Founding Stockholder is a party or by which the Founding Stockholder is bound.
2.3 Corporate Records. The corporate record books of the Acquired
Company accurately reflect all corporate action taken by its stockholders and
board of directors and committees. The copies of the corporate records of the
Acquired Company, as made available to the Purchaser for review, are true and
complete copies of the originals of such documents.
2.4 Capitalization.
(a) As of the date hereof, the authorized capital stock of
the Acquired Company consists of 50,000,000 shares of Seller Common Stock, of
which 12,000,000 shares are issued and outstanding, and all such outstanding
shares are duly authorized, validly issued, fully-paid, nonassessable and,
except as described in Section 2.4(a) of the Disclosure Schedule, free of
preemptive rights. All of such outstanding shares are owned of record and
beneficially by the Founding Stockholders and Household. Section 2.4(a) of the
Disclosure Schedule sets forth the name of each holder of options to purchase
shares of Seller Common Stock, the number of shares subject to each such
option, along with the applicable vesting schedule and the applicable exercise
price. None of the options or rights disclosed in Section 2.4(a) of the
Disclosure Schedule is subject to accelerated vesting by reason of the
transactions contemplated hereby. Except as disclosed in Section 2.4(a) of the
Disclosure Schedule, there are no outstanding subscriptions, options,
warrants, commitments, preemptive rights, agreements, arrangements or
commitments of any kind for or relating to the issuance, or sale of, or
outstanding securities convertible into or exercisable or exchangeable for any
shares of capital stock of any class or other equity interests of the Acquired
Company. The Acquired Company has no obligation to purchase, redeem, or
otherwise acquire any of its capital stock or any interests therein, and has
not redeemed any shares of its capital stock in the past three (3) years, or
for such shorter period as it has been in existence as a corporation. The
Acquired Company has duly and validly authorized and reserved 1,200,000 shares
of Seller Common Stock (subject to adjustment) for issuance in connection with
awards granted or exercised under the ExpressClose.Com, Inc. 2000 Combined
Incentive and Non-Statutory Stock Option Plan (the "Seller Stock Option
Plan"). Except as described in Section 2.4(a) of the Disclosure Schedule,
there are (i) no preemptive rights, rights of first refusal, put or call
rights or obligations or anti-dilution rights with respect to the issuance,
sale or redemption of the Acquired Company's capital stock, (ii) no rights to
have the Acquired Company's capital stock registered for sale to the public in
connection with the laws of any jurisdiction, and (iii) no documents,
instruments or agreements relating to the voting of the Acquired Company's
voting securities or restrictions on the transfer of the Acquired Company's
capital stock.
(b) Each of the Founding Stockholders is the sole record and
beneficial owner of the shares of Seller Common Stock set forth opposite his
name on Exhibit A attached hereto, free and clear of any Claims, including
Claims of spouses, former spouses and other family members.
2.5 Securities Act. The offer and sale of Shares by the Founding
Stockholders to the Purchaser in accordance with the terms of this Agreement
(assuming the accuracy of the
<PAGE> 8
representations and warranties contained in Article III hereof) are exempt
from the registration requirements of the 1933 Act and all applicable state
securities laws.
2.6 Subsidiaries; Investments. The Acquired Company does not have
and has not had any direct or indirect Subsidiaries (as defined in Section
7.10 below). Except as disclosed in Section 2.6 of the Disclosure Schedule,
the Acquired Company does not have a strategic partnership or similar
relationship with or own or have any direct or indirect interest in or control
(as defined in Section 7.10 below) over any corporation, partnership, joint
venture or other entity of any kind.
2.7 Financial Statements; Projections.
(a) The Acquired Company has previously furnished to the
Purchaser copies of its audited financial statements for the year ended
December 31, 1999 and unaudited financial statements for the nine-month period
ended September 30, 2000. Such financial statements were prepared in
conformity with GAAP, are consistent in all material respects with the books
and records of the Acquired Company, and fairly present the financial position
of the Acquired Company as of the dates thereof and the results of operations
and cash flows of the Acquired Company for the periods shown therein (subject
to the absence of footnotes and normal year-end adjustments in the case of
unaudited statements).
(b) The projections previously provided to the Company
represent good faith estimates of the performance of the Acquired Company for
the periods stated therein based upon assumptions which were in good faith
believed to be reasonable when made and continue to be reasonable as of the
date hereof; provided, however, that neither the Acquired Company nor the
Founding Stockholders give any guarantee that such projections will be
achieved.
2.8 Absence of Undisclosed Liabilities. Except for liabilities or
obligations which individually or in the aggregate could not reasonably be
expected to have a Material Adverse Effect and other than those incurred in
the ordinary course of the Acquired Company's business, the Acquired Company
does not have any liabilities or obligations of any nature, whether accrued,
absolute, contingent or otherwise, asserted or unasserted, except liabilities
or obligations (i) stated or adequately reserved against in the balance sheet
of the Acquired Company as of September 30, 2000 contained in the financial
statements referred to in Section 2.7(a) (the "Balance Sheet") or (ii)
incurred as a result of or arising out of the transactions contemplated under
this Agreement.
2.9 Absence of Certain Developments. Since the date of the Balance
Sheet, the Acquired Company has conducted its business only in the ordinary
course consistent with past practice and, except in connection with or as a
result of the transactions contemplated in this Agreement or as set forth in
Section 2.9 of the Disclosure Schedule, there has not been:
(a) any change in the assets, liabilities, condition
(financial or other), properties, business, operations or prospects of the
Acquired Company, which change by itself or in conjunction with all other such
changes, whether or not arising in the ordinary course of business, has had or
would be likely to have a Material Adverse Effect;
<PAGE> 9
(b) any mortgage, encumbrance or lien placed on any of the
properties of the Acquired Company;
(c) any purchase, sale or other disposition, or any
agreement or other arrangement for the purchase, sale or other disposition, of
any properties or assets by the Acquired Company, including any of its
Intellectual Property Assets (as defined below), other than in the ordinary
course of business;
(d) any damage, destruction or loss to the Acquired
Company's properties or assets, whether or not covered by insurance, which has
had or would be likely to have a Material Adverse Effect;
(e) any declaration, setting aside or payment of any
dividend by the Acquired Company, or the making of any other distribution in
respect of the capital stock of the Acquired Company or any distribution to
the Founding Stockholders, or any direct or indirect redemption, purchase or
other acquisition by the Acquired Company of its own capital stock;
(f) any labor trouble or claim of unfair labor practices
involving the Acquired Company, any change in the compensation payable or to
become payable by the Acquired Company to any of its officers or employees
other than normal merit increases to employees in accordance with its usual
practices, or any bonus payment or arrangement made to or with any of such
officers or employees or any establishment or creation of any employment,
deferred compensation or severance arrangement or employee benefit plan with
respect to such persons or the amendment of any of the foregoing;
(g) any resignation, termination or removal of the officers
of the Acquired Company or material loss of personnel of the Acquired Company
or material change in the terms and conditions of the employment of the
Acquired Company's officers or key personnel;
(h) any payment or discharge of a material lien or liability
of the Acquired Company which was not shown on the Balance Sheet or incurred
in the ordinary course of business thereafter;
(i) any contingent liability incurred by the Acquired
Company as guarantor or otherwise with respect to the obligations of others or
any cancellation of any material debt or claim owing to, or waiver of any
material right of, the Acquired Company, including any write-off or compromise
of any accounts receivable other than in the ordinary course of business
consistent with past practice;
(j) any obligation or liability incurred by the Acquired
Company to any of its officers, directors, stockholders or employees, or any
loans or advances made by the Acquired Company to any of its officers,
directors, stockholders or employees, except normal compensation and expense
allowances payable to officers or employees;
(k) any change in accounting methods or practices,
collection policies, pricing policies or payment policies of the Acquired
Company;
<PAGE> 10
(l) any loss, or any known development that could reasonably
be expected to result in a loss, of any significant supplier, customer,
distributor or account of the Acquired Company;
(m) any amendment or termination of any material contract or
agreement to which the Acquired Company is a party or by which it is bound,
which amendment or termination would have or be likely to have a Material
Adverse Effect;
(n) any arrangements relating to any royalty, dividend or
similar payment based on the revenues, profits or sales volume of the Acquired
Company, whether as part of the terms of the Acquired Company's capital stock
or by any separate agreement;
(o) any agreement with respect to the endorsement of the
Acquired Company's products or services;
(p) any transaction or agreement involving fixed price terms
or fixed volume arrangements;
(q) any other material transaction entered into by the
Acquired Company other than transactions in the ordinary course of business;
(r) except as provided in this Agreement, any amendment to
the Articles of Incorporation or Bylaws; or
(s) any agreement or understanding whether in writing or
otherwise, for the Company to take any of the actions specified in paragraphs
(a) through (r) above.
2.10 Accounts Receivable; Accounts Payable.
(a) All of the accounts receivable of the Acquired Company
are valid and enforceable claims, are subject to no known set-off or
counterclaim, and, to the knowledge of the Founding Stockholders, are fully
collectible in the normal course of business, after deducting any allowance
for doubtful accounts stated in the Balance Sheet in accordance with generally
accepted accounting principles, which allowance is a reasonable estimate of
the Acquired Company's uncollectible accounts. Since the date of the Balance
Sheet, the Acquired Company has collected its accounts receivable in the
ordinary course of its business and in a manner which is consistent with past
practices and has not accelerated any such collections. As of the date hereof,
and except as described in Section 2.10(a) to the Disclosure Schedule, the
Acquired Company does not have any accounts receivable or loans receivable
from any Person which is affiliated with it or any of its directors, officers,
employees or stockholders.
(b) All accounts payable and notes payable of the Acquired
Company arose in bona fide arms' length transactions in the ordinary course of
business and no such account payable or note payable is delinquent by more
than 60 days in its payment. Since the date of the Balance Sheet, the Acquired
Company has paid its accounts payable in the ordinary course of its business
and in a manner which is consistent with its past practices. As of the date
hereof and except as described in Section 2.10(b) to the Disclosure Schedule,
the Acquired Company has no
<PAGE> 11
account payable to or lease with any Person which is affiliated with it or any
of its directors, officers, employees or stockholders.
2.11 Transactions with Affiliates. Except as described in Section
2.11 to the Disclosure Schedule, there are no loans, leases, or other
continuing transactions between the Acquired Company and any Founding
Stockholder or any present or former stockholder, director or officer of the
Acquired Company, or any member of such Founding Stockholder's, stockholder's,
officer's or director's immediate family, or any Person controlled by such
Founding Stockholder, stockholder, officer or director. Except as described in
Section 2.11 to the Disclosure Schedule, no stockholder, director or officer
of the Acquired Company, or any of their respective spouses or family members,
owns directly or indirectly, on an individual or joint basis, any interest in,
or serves as an officer or director or in another similar capacity of, any
competitor, customer or supplier of the Acquired Company, or any organization
which has a material contract or arrangement with the Acquired Company.
2.12 Real and Personal Property. Section 2.12 of the Disclosure
Schedule sets forth the addresses and uses of all real property that the
Acquired Company owns, leases or subleases. The Acquired Company has good,
valid and (if applicable) marketable title or valid license to or valid
leasehold interest in all assets material to its business and to those assets
reflected on the Balance Sheet or acquired by it after the date thereof
(except for properties disposed of since that date in the ordinary course of
business), free and clear of all Claims, other than liens for Taxes (as
hereinafter defined) not yet due and payable, minor liens and encumbrances
that do not materially detract from the value of the property subject thereto
or materially impair the operations of the Acquired Company, and liens that
have otherwise arisen in the ordinary course of business. Section 2.12 of the
Disclosure Schedule sets forth a complete and accurate list of all tangible
assets owned or leased by Acquired Company, other than real property,
including, without limitation, computer hardware, office equipment and
furniture and fixtures (the "Equipment") and properly indicates whether each
item of Equipment is owned or leased by the Acquired Company. All Equipment
included in such properties which is necessary to the business of the Acquired
Company is in good condition and repair (ordinary wear and tear excepted), and
all leases of real or personal property to which the Acquired Company is a
party are fully effective and afford the Acquired Company peaceful and
undisturbed possession of the subject matter to the lease. The property and
assets of the Acquired Company are sufficient for the conduct of its business
as presently conducted. To the knowledge of the Founding Stockholders, the
Acquired Company is not in violation of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of its owned or leased properties, which violation could
reasonably be expected to have a Material Adverse Effect, nor has it received
any notice of any such violation. There are no defaults by the Acquired
Company or by any other party which might curtail in any material respect the
present use of the Acquired Company's property. The performance by the
Acquired Company of this Agreement will not result in the termination of, or
in any increase of any amounts payable under, any of its leases.
2.13 Tax Matters.
(a) The Acquired Company has timely and properly filed all
federal, state, local and foreign tax returns required to be filed by it
through the date hereof, and has paid or
<PAGE> 12
caused to be paid all federal, state, local, foreign and other taxes,
including, without limitation, income taxes, estimated taxes, alternative
minimum taxes, excise taxes, sales taxes, franchise taxes, employment and
payroll related taxes, withholding taxes, transfer taxes, and all
deficiencies, or other additions to tax, interest, fines and penalties owed by
it (collectively, "Taxes"), required to be paid by it through the date hereof
whether disputed or not, except Taxes which have not yet accrued or otherwise
become due, where the failure to file or pay has or would be likely to have a
Material Adverse Effect. All material Taxes and other assessments and levies
which the Acquired Company was or is required to withhold or collect have been
withheld and collected and have been paid over to the proper governmental
authorities. The Acquired Company has delivered to the Purchaser correct and
complete copies of all annual tax returns, examination reports, and any
statements of deficiencies filed by, assessed against, or agreed to by the
Acquired Company since the Acquired Company's inception. The Acquired Company
has not waived any statute of limitations in respect of Taxes or agreed to any
extension of time with respect to any Tax payment, assessment, deficiency or
collection. Except as set forth in Section 2.13(a) of the Disclosure Schedule,
(i) the Acquired Company has never received notice of any audit or of any
proposed deficiencies from the Internal Revenue Service (the "IRS") or any
other taxing authority (other than routine audits undertaken in the ordinary
course and which have been resolved on or prior to the date hereof); (ii)
there are in effect no waivers of applicable statutes of limitations with
respect to any Taxes owed by the Acquired Company for any year; (iii) neither
the IRS nor any other taxing authority is now asserting or, to the knowledge
of the Founding Stockholders, threatening to assert against the Acquired
Company any deficiency or claim for additional Taxes or interest thereon or
penalties in connection therewith in respect of the income or sales of the
Acquired Company; (iv) the Acquired Company has never been a member of an
affiliated group of corporations filing a combined federal income Tax return
nor does the Acquired Company have any liability for Taxes of any other Person
under Treasury Regulations Section 1.1502-6 (or any similar provision of
foreign, state or local law) or otherwise; and (v) the Acquired Company has
not filed a consent under Section 341(f) of the Internal Revenue Code of 1986,
as amended (the "Code"), concerning collapsible corporations. The Acquired
Company has never been a United States real property holding corporation
within the meaning of Section 897(c)(1)(A)(ii) of the Code. The Acquired
Company is not a party to any Tax allocation or sharing arrangement. The
Acquired Company is not a party to any contract, agreement, plan or
arrangement covering any employee or former employee thereof, that,
individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. The Acquired Company is not a "foreign person" within the meaning of
Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
(b) The taxable year of the Acquired Company for federal and
state income tax purposes is the fiscal year ended December 31.
(c) The Acquired Company has never been (i) a passive
foreign investment company, (ii) a foreign personal holding company, (iii) a
foreign sales corporation, (iv) a foreign investment company or (v) a person
other than a United States person, each within the meaning of the Code.
2.14 Certain Contracts and Arrangements. Except as set forth in
Section 2.14 of the Disclosure Schedule (with true and correct copies provided
to the Purchaser), the Acquired Company is not a party or subject to or bound
by:
<PAGE> 13
(a) any contract or agreement (i) involving a potential
commitment or payment by the Acquired Company in excess of $50,000 annually or
(ii) which is otherwise material and not entered into in the ordinary course
of business;
(b) any contract, or agreement which is not cancelable by
the Acquired Company without penalty on not less than ninety (90) days notice;
(c) any contract which cannot be assigned, requires consent
to be assigned or requires consent to assign as a result of a change in
control;
(d) any contract or agreement containing covenants directly
or explicitly limiting in any material respect the freedom of the Acquired
Company to compete in any line of business or with any person or entity;
(e) any contract or agreement relating to the licensing,
distribution, development, purchase, sale or servicing of its software and
hardware products except in the ordinary course of business consistent with
past practices;
(f) any indenture, mortgage, promissory note, loan
agreement, guaranty or other agreement or commitment for borrowing or any
pledge or security arrangement;
(g) any employment contracts, noncompetition agreements or
other agreements with present or former officers, directors, employees or
stockholders of the Acquired Company or Persons related to or affiliated with
such persons, other than at will arrangements in the ordinary course of
business that are terminable without severance obligations;
(h) any stock redemption or purchase agreements or other
agreements affecting or relating to the capital stock of the Acquired Company,
including, without limitation, any agreement with any stockholder of the
Acquired Company which includes anti-dilution rights, registration rights,
voting arrangements, operating covenants or similar provisions;
(i) any pension, profit sharing, retirement or stock options
plans;
(j) any royalty, dividend or similar arrangement based on
the revenues or profits of the Acquired Company or any contract or agreement
involving fixed price or fixed volume arrangements;
(k) any joint venture, partnership, manufacturer,
development or supply agreement;
(l) any acquisition, merger or similar agreement;
(m) any contract with any governmental entity; or
(n) any other material contract not executed in the ordinary
course of business.
All contracts, agreements, leases and instruments set forth in Section
2.14 of the Disclosure Schedule are valid and are in full force and effect and
constitute legal, valid and
<PAGE> 14
binding obligations of the Acquired Company and the other parties thereto,
enforceable in accordance with their respective terms, except as
enforceability may be limited by bankruptcy, insolvency, reorganization and
similar laws relating to the enforcement of creditors' remedies generally and
by general principles of equity. The Founding Stockholders have no knowledge
of any notice or threat to terminate any such contracts, agreements, leases or
instruments, which termination could reasonably be expected to have a Material
Adverse Effect. Neither the Acquired Company nor any other party thereto is in
default in complying with any provisions of any such contract, agreement,
lease or instrument, and no condition or event or fact exists which, with
notice, lapse of time or both, would constitute a default thereunder on the
part of the Acquired Company or any other party thereto, except for any such
default, condition, event or fact that, individually or in the aggregate,
could not reasonably be expected to have a Material Adverse Effect.
2.15 Intellectual Property Assets.
(a) Ownership of Intellectual Property Assets. The Acquired
Company is the exclusive owner of, and has good, valid and marketable title
to, all of the Intellectual Property Assets, as defined below, free and clear
of all mortgages, pledges, charges, liens, equities, security interests, or
other encumbrances or agreements, and has the right to use without payment to
a third party all of the Intellectual Property Assets. Except as described in
Section 2.15(c) of the Disclosure Schedule, no claim is pending or threatened
against the Acquired Company and/or its officers, employees, and consultants
to the effect that the Acquired Company's right, title and interest in and to
the Intellectual Property Assets is invalid or unenforceable by the Acquired
Company. No employee of the Acquired Company has entered into any agreement
that restricts or limits in any way the scope or type of work in which the
employee may be engaged or requires the employee to transfer, assign, or
disclose information concerning his work to anyone other than the Acquired
Company. "Intellectual Property Assets" means: (i) the Products (as such term
is defined in Section 2.15(d) below); (ii) all patents, patent applications,
patent rights, and inventions and discoveries and invention disclosures
(whether or not patented) described in Section 2.15(b) of the Disclosure
Schedule (collectively, "Patents"); (iii) the name Expressclose,"
"Expressclose.com," all trade names, trade dress, logos, packaging design,
slogans, Internet domain names, registered and unregistered trademarks and
service marks and applications described in Section 2.15(c) of the Disclosure
Schedule (collectively, "Marks"); (iii) all copyrights in both published and
unpublished works, including, without limitation, all compilations, databases
and computer programs, and all copyright registrations and applications, and
all derivatives, translations, adaptations and combinations of the above
described in Section 2.15(d) of the Disclosure Schedule (collectively,
"Copyrights"); (iv) all know-how, trade secrets, confidential or proprietary
information, research in progress, algorithms, data, designs, processes,
formulae, drawings, schematics, blueprints, flow charts, models, prototypes,
techniques, Beta testing procedures and Beta testing results developed by the
Acquired Company (collectively, "Trade Secrets"); (v) all goodwill,
franchises, licenses, permits, consents, approvals, technical information,
lists of telephone numbers and claims of infringement against third parties
arising out of the operation of the Acquired Company (the "Rights"); and (vi)
all customer lists, lists of telephone numbers, business strategies, outlooks,
forecasts and other similar documents described in Section 2.15(f) of the
Disclosure Schedule (collectively, "Other Intangibles"). Section 2.15 of the
Disclosure Schedule constitutes a true, complete and accurate description of
all Intellectual Property Assets.
<PAGE> 15
(b) Patents. Section 2.15(b) of the Disclosure Schedule sets
forth a complete and accurate list and summary description of all Patents. All
of the issued Patents are currently in compliance in all material respects
with formal legal requirements (including without limitation payment of
filing, examination and maintenance fees and proofs of working or use), are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety (90) days after the date of the Closing. In
each case where a Patent is held by the Acquired Company by assignment, the
assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re-examination or opposition
proceeding. There is no potentially interfering patent or patent application
of any third party. All products made, used or sold under the Patents have
been marked with the proper patent notice.
(c) Trademarks. Section 2.15(c) of the Disclosure Schedule
sets forth a complete and accurate list and summary description of all Marks.
All Marks that have been registered with the United States Patent and
Trademark Office and/or any other jurisdiction are currently in compliance in
all material respects with formal legal requirements (including without
limitation the timely post-registration filing of affidavits of use and
incontestability and renewal applications), are valid and enforceable, and are
not subject to any maintenance fees or taxes or actions falling due within
ninety (90) days after the date of the Closing. In each case where a Mark is
held by the Acquired Company by assignment, the assignment has been duly
recorded with the U.S. Patent and Trademark Office and all other jurisdictions
of registration. Except as described in Section 2.15(c) to the Disclosure
Schedule, no Mark has been or is now involved in any opposition, invalidation
or cancellation proceeding and no such action is threatened with respect to
any of the Marks. All products and materials containing a Mark bear the proper
notice where permitted by law.
(d) Copyrights. Section 2.15(d) of the Disclosure Schedule
sets forth a complete and accurate list and summary description of all
Copyrights material to the operation of the Business. All Copyrights that have
been registered with the United States Copyright Office are identified on such
Schedule. All Copyrights identified in Section 2.15(d) of the Disclosure
Schedule are currently in compliance with formal legal requirements, are valid
and enforceable, and are not subject to any fees or taxes or actions falling
due within ninety (90) days after the date of the Closing. In each case where
a Copyright is held by the Acquired Company by assignment, the assignment has
been duly recorded with the U.S. Copyright Office and all other jurisdictions
of registration. None of the source or object code, algorithms, or structure
included in those computer programs and related documentation used or operated
by the Acquired Company as described in Section 2.15(d) of the Disclosure
Schedule (the "Products") is copied from, based upon, or derived from any
other source or object code, algorithm or structure in violation of the rights
of any third party. A complete list of the Products owned by the Acquired
Company is provided in Section 2.15(d) of the Disclosure Schedule, including,
without limitation, the so-called "ExpressClose.com Solution."
(e) Trade Secrets. Except as set forth in Section 2.15(e) of
the Disclosure Schedule, the Acquired Company has taken all reasonable
security measures (including, without limitation, entering into appropriate
confidentiality and nondisclosure agreements with all officers, directors,
employees, and consultants of the Acquired Company and any other persons with
access to the Trade Secrets) to protect the secrecy, confidentiality and value
of all Trade Secrets. There has not been any breach by any party to any such
confidentiality or non-disclosure
<PAGE> 16
agreement. The Trade Secrets have not been disclosed by the Acquired Company
to any person or entity other than employees or contractors of the Acquired
Company who had a need to know and use the Trade Secrets in the course of
their employment or contract performance, where such disclosure would likely
have a Material Adverse Effect. Except as set forth on Section 2.15(e) of the
Disclosure Schedule, (i) the Acquired Company has not directly or indirectly
granted any rights or interests in the source code of the Products and (ii)
since the Acquired Company developed the source code of the Products, the
Acquired Company has not provided, licensed or disclosed the source code of
the Products to any person or entity. The Acquired Company has the right to
use, free and clear of claims of third parties, all Trade Secrets. No third
party has asserted that the use by the Company of any Trade Secret violates
the rights of such third party.
(f) Other Intangibles. Section 2.15(f) of the Disclosure
Schedule sets forth a complete and accurate list of Other Intangibles that are
material to the business of the Acquired Company.
(g) Exclusivity of Rights. The Acquired Company has the
exclusive right to use, license, distribute, transfer and bring infringement
actions with respect to the Intellectual Property Assets. Except as set forth
on Section 2.15(g) of the Disclosure Schedule, the Acquired Company (i) has
not licensed or granted to anyone rights of any nature to use any of its
Intellectual Property Assets; and (ii) is not obligated to and does not pay
royalties or other fees to anyone for the Acquired Company's ownership, use,
license or transfer of any of its Intellectual Property Assets.
(h) Licenses Received. Except for software licenses granted
to the Acquired Company for off-the-shelf third party software, all licenses
or other agreements under which the Acquired Company is granted rights by
others in Intellectual Property Assets are listed in Section 2.15(h) of the
Disclosure Schedule. All such licenses or other agreements are in full force
and effect, there is no material default by any party thereto and all of the
rights of the Acquired Company thereunder are freely assignable. True and
complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to the Purchaser.
(i) Licenses Granted. All material licenses or other
agreements under which the Acquired Company has granted rights to others in
Intellectual Property Assets are listed in Section 2.15(i) of the Disclosure
Schedule. Except as set forth thereon, all such licenses or other agreements
are in full force and effect, and to the knowledge of the Founding
Stockholders, there is no material default by any party thereto. True and
complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to the Company.
(j) Affirmative Obligations. The Acquired Company has no
obligation to any other person to maintain, modify, improve or upgrade the
Products.
(k) Sufficiency. The Intellectual Property Assets constitute
all of the assets of the Company necessary for the operation of the Acquired
Company's business as currently conducted.
(l) Infringement. None of the Products used or operated, nor
any process or know-how used, by the Acquired Company infringes or is alleged
to infringe any (i) United States patent issued as of the date of this
Agreement, or to the knowledge of the Founding
<PAGE> 17
Stockholders, infringe or is alleged to infringe any patent rights in Canada,
Japan, Australia and any countries which comprise the European Union; (ii)
trademark, service mark or trade name; or (iii) copyright or other proprietary
right or is a derivative work based on the work of any other person; where
such infringement of the intellectual property described in the foregoing
subparagraphs (i), (ii) and (iii) would likely have a Material Adverse Effect.
(m) Nondisclosure Contracts. Each of the nondisclosure
and/or confidentiality agreements entered into between the Acquired Company
and persons in connection with disclosures by the Acquired Company relating to
the Products and the Intellectual Property Assets (the "Nondisclosure
Contracts") is a valid and binding obligation of the Acquired Company
enforceable in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, reorganization and similar laws relating to
the enforcement of creditors' remedies generally and by general principles of
equity. A complete list of all Nondisclosure Contracts is provided on Section
2.15(m) of the Disclosure Schedule.
2.16 Litigation. Except as set forth in Section 2.16 of the
Disclosure Schedule, there is no litigation or governmental or administrative
proceeding or investigation pending or threatened against the Acquired
Company, or affecting the properties, or assets of the Acquired Company, or,
as to matters related to the Acquired Company, against any officer, director,
stockholder or key employee of the Acquired Company in their respective
capacities in such positions, nor has there occurred any event nor does there
exist any condition on the basis of which any such claim may be asserted;
except in each case for litigation, proceedings, investigations or claims
which individually or in the aggregate could not reasonably be expected to
have a Material Adverse Effect or which do not call into question the validity
or hinder the enforceability of this Agreement or any other agreements or
transactions contemplated hereby. Section 2.16 of the Disclosure Schedule
includes a description of all litigation, claims, proceedings or
investigations involving the Acquired Company or any of its officers,
directors, stockholders or key employees in connection with the business of
the Acquired Company occurring, arising or existing since the Acquired
Company's inception.
2.17 Collective Bargaining Agreements and Labor Relations. The
Acquired Company has no collective bargaining agreement with any of its
employees related to the Acquired Company, and except as set forth in Section
2.17 of the Disclosure Schedule, has no contract, agreement or understanding
with any employee which may not be terminated at will. There are no labor
negotiations or labor disputes in process, nor are the Founding Stockholders
aware of any threats or strikes, work stoppages or work slowdowns of any of
the Acquired Company's employees.
2.18 Lists of Certain Employees. Section 2.18 of the Disclosure
Schedule contains a list of all managers, employees, consultants, independent
contractors, brokers and sales persons of the Acquired Company who,
individually, received annual salary and bonus for the year ended December 31,
1999 at an annual rate in excess of $100,000, including the current job title
and aggregate annual salary and bonus of each such individual. The employees
listed in Schedule 4.1(e) are the only employees with respect to whom an
"assignment of inventions" agreement is not required.
2.19 Permits; Compliance with Laws. The Acquired Company has all
franchises, authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations,
<PAGE> 18
qualifications or other rights and privileges (collectively "Permits")
necessary to permit it to own its property and to conduct its business as it
is presently conducted or proposed to be conducted and all such Permits are
valid and in full force and effect, except where the failure to have or obtain
such a Permit could not be reasonably expected to have a Material Adverse
Effect. No Permit is subject to termination as a result of the execution of
this Agreement or consummation of the transactions contemplated hereby. The
Acquired Company is now and has heretofore been in compliance with all
applicable statutes, ordinances, orders, rules and regulations promulgated by
any federal, state, municipal or other governmental authority which apply to
the conduct of its business, except where the failure to so comply could not
have a Material Adverse Effect. The Acquired Company has never entered into or
been subject to any judgment, consent decree, compliance order or
administrative order with respect to any aspect of the business, affairs,
properties or assets of the Acquired Company or received any request for
information, notice, demand letter, administrative inquiry or formal or
informal complaint or claim from any regulatory agency with respect to any
aspect of the business, affairs, properties or assets of the Acquired Company.
2.20 Employee Benefit Programs.
(a) The Acquired Company does not maintain or contribute to
and since its inception has not maintained or contributed to, any employee
benefit, fringe benefit, stock option, equity-based compensation, phantom
stock, bonus or incentive plan, severance pay policy or agreement, retirement,
pension, profit sharing or deferred compensation plan or agreement, or any
similar plan or agreement (an "Employee Benefit Plan") other than the Employee
Benefit Plans identified and described in Section 2.20 of the Disclosure
Schedule attached hereto. A brief description of each Employee Benefit Plan
has been provided to the Purchaser. The terms and operation of each such
Employee Benefit Plan comply and have heretofore complied in all material
respects with all applicable laws and regulations relating to each such
Employee Benefit Plan. There are no unfunded obligations of the Acquired
Company under any retirement, pension, profit-sharing, deferred compensation
plan or similar program. The Acquired Company is not required to make any
payments or contributions to any Employee Benefit Plan pursuant to any
collective bargaining agreement or any applicable labor relations law, and all
Employee Benefit Plans are terminable at the discretion of the Acquired
Company without liability to the Acquired Company upon or following such
termination. Except as described in Section 2.20 of the Disclosure Schedule,
the Acquired Company has never maintained or contributed to any Employee
Benefit Plan providing or promising any health or other nonpension benefits to
terminated employees other than as required by part 6 of subtitle B of title I
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
With respect to any Employee Benefit Plan, there has occurred no "prohibited
transaction," as defined in Section 406 of ERISA or Section 4975 of the Code,
or breach of any duty under ERISA or other applicable law which could result,
directly or indirectly, in any Taxes, penalties or other liability to the
Acquired Company. No litigation, arbitration or governmental administrative
proceeding (or investigation) or other proceeding (other than those relating
to routine claims for benefits) is pending or, to the knowledge of the
Founding Stockholders, threatened with respect to any such Employee Benefit
Plan.
(b) Each Employee Benefit Plan which has ever been
maintained by the Acquired Company and which has been intended to qualify
under Section 401(a) or 501(c)(9) of the Code has received a favorable
determination or approval letter from the IRS regarding its
<PAGE> 19
qualification under such section, or the time period for submitting a
determination letter request and adopting retroactive amendments under Code
Section 410(b) and the corresponding regulations is open as of the Closing
Date, and each such Employee Benefit Plan has, in fact, been qualified under
the applicable section of the Code from the effective date of such Employee
Benefit Plan through and including the Closing Date (or, if earlier, the date
that all of such Employee Benefit Plan's assets were distributed). No event or
omission has occurred which would cause any such Employee Benefit Plan to lose
its qualification under the applicable Code section, and each asset held under
any such Employee Benefit Plan may be liquidated or terminated without the
imposition of any redemption for surrender charge or comparable liability.
Except as set forth in Section 2.20 of the Disclosure Schedule, the Acquired
Company has never maintained any Employee Benefit Plan which has been subject
to title IV of ERISA or Code Section 412, including, but not limited to, any
"multiemployer plan" (as defined in Section 3(37) or Section 4001(a)(3) of
ERISA). Each reference to "Company" in this Section 2.20 also refers to any
other entity which would have ever been considered a single employer with the
Acquired Company under ERISA Section 4001(b) or part of the same "controlled
group" as the Acquired Company for purposes of ERISA Section 302(d)(8)(C).
2.21 Environmental Matters. No hazardous waste, substances or
materials or oil or petroleum products have been generated, transported, used,
disposed, stored or treated by the Acquired Company in such a way as to have a
Material Adverse Effect, and no hazardous wastes, substances or materials or
oil or petroleum products have been released, discharged, disposed,
transported, placed or otherwise caused to enter the soil or water in, under
or upon any real property owned, leased or operated by the Acquired Company in
such a way as to have a Material Adverse Effect.
2.22 Insurance. The physical properties, assets, business,
operations, employees, officers and directors of the Acquired Company are
insured to the extent disclosed in Section 2.22 of the Disclosure Schedule,
with copies of such policies having been provided to the Purchaser. Except as
set forth in Section 2.22 of the Disclosure Schedule and claims for health
care benefits in the ordinary course of business, there is no material claim
by the Acquired Company pending under any such policies. Said insurance
policies and arrangements are in full force and effect, all premiums with
respect thereto are currently paid, and the Acquired Company is in compliance
in all material respects with the terms thereof. To the knowledge of the
Founding Stockholders, there is no threatened termination of any such policies
or arrangements.
2.23 Investment Banking; Brokerage. Except as set forth in Section
2.23 of the Disclosure Schedule, there are no claims for investment banking
fees, brokerage commissions, broker's or finder's fees or similar compensation
(exclusive of professional fees to lawyers and accountants) in connection with
the transactions contemplated by this Agreement payable by the Acquired
Company or based on any arrangement or agreement made by or on behalf of the
Acquired Company or the Founding Stockholders.
2.24 Customers. Section 2.24 of the Disclosure Schedule sets forth
the name of each customer of the Acquired Company who accounted for more than
five percent (5%) of the revenues of the Acquired Company for fiscal year 1999
and for the period ended September 30, 2000 (the "Customers"), together with
the names of any persons or entities with which the Company has a material
strategic partnership or similar relationship ("Partners"). The relationships
of the Acquired Company with its Customers and Partners are good commercial
<PAGE> 20
working relationships. No Customer or Partner of the Acquired Company has
canceled or otherwise terminated its relationship with the Acquired Company,
or has decreased materially its usage or purchases of the services or products
of the Acquired Company. No Customer, or Partner has, to the knowledge of the
Founding Stockholders, any plan or intention to terminate, to cancel or
otherwise materially and adversely modify its relationship with the Acquired
Company or to decrease materially or limit its usage, purchase or distribution
of the services or products of the Acquired Company.
2.25 Suppliers. The Acquired Company's relationships with its major
suppliers are good commercial working relationships, and, within the last
twelve months, no supplier that the Acquired Company has paid or is under
contract to pay at an annual rate of $100,000 or more has canceled, materially
modified, or otherwise terminated its relationship with the Acquired Company,
or materially decreased its services, supplies or materials to the Acquired
Company, nor, to the knowledge of the Founding Stockholders, does any supplier
have any plan or intention to do any of the foregoing in a manner which would
be reasonably likely to have a Material Adverse Effect. Section 2.25 of the
Disclosure Schedule sets forth a list of all suppliers and vendors of the
Acquired Company to whom during the year 2000 the Acquired Company made
payments at an annual rate of $100,000 or more.
2.26 Investment Intent. Each Founding Stockholder is acquiring the
Purchaser Common Stock for its own account, for investment purposes only, and
not with a view to the distribution thereof. Each Founding Stockholder agrees
that he will not, directly or indirectly, offer, transfer, sell, assign,
pledge, hypothecate or otherwise dispose of any such Purchaser Common Stock
(or solicit any offers to buy, purchase, or otherwise acquire or take a pledge
of the Purchaser Common Stock) except in compliance with the 1933 Act and
applicable state securities laws.
2.27 Disclosure. This Agreement, the Disclosure Schedule and the
certificates and statements furnished pursuant to this Agreement by or on
behalf of the Acquired Company or the Founding Stockholders and all other
information provided by the Acquired Company and the Founding Stockholders to
the Purchaser in connection with the transactions contemplated hereby, do not
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein not
misleading in the light of the circumstances under which they were made. There
is no material fact directly relating to the assets, liabilities, business,
operations, condition (financial or other) or prospects of the Acquired
Company (including any competitive developments, other than facts which relate
to general economic or industry trends or conditions) that materially
adversely affects the same that has not been set forth in this Agreement or in
the Disclosure Schedule.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser represents and warrants to the Founding Stockholders the
following:
3.1 Organization and Corporate Power. The Purchaser is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware. The Purchaser has all required corporate power
and authority to carry on its business as presently
<PAGE> 21
conducted, to enter into and perform this Agreement and the agreements
contemplated hereby to which it is a party, and to carry out the transactions
contemplated hereby and thereby.
3.2 Authorization and Non-Contravention. This Agreement and all
documents executed pursuant hereto by the Purchaser are valid and binding
obligations of the Purchaser, enforceable in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization and similar laws relating to the enforcement of creditors'
remedies generally and by general principles of equity. The execution,
delivery and performance by the Purchaser of this Agreement and all
agreements, documents and instruments contemplated hereby, the issuance of the
Payment Shares pursuant to Section 1.2(b), the issuance of the Stock Options
pursuant to Section 1.2(c) and the performance of all other transactions
contemplated by this Agreement and such other agreements, documents and
instruments related hereto do not and will not (i) violate, conflict with or
result in a default (whether after the giving of notice, lapse of time or
both) or loss of benefit under any contract or obligations to which the
Purchaser is a party or by which any of its assets are bound, or any provision
of its Articles of Incorporation or Bylaws, or cause the creation of any Claim
upon any of assets of the Purchaser which would have, or would be reasonably
likely to have a Purchaser Material Adverse Effect (as defined in Section
7.10); (ii) violate or result in a violation of, or constitute a default
(whether after the giving of notice, lapse of time or both) under, any
provision of any law, regulation or rule, or any order of, or any restriction
imposed by, any court or other governmental agency applicable to the
Purchaser, any of which would have a Purchaser Material Adverse Effect; (iii)
require from the Purchaser any notice to, declaration or filing with, or
consent or approval of any governmental authority or any third party (except
that which has been waived or obtained); or (iv) violate or result in a
violation of, or constitute a default (whether after the giving of notice,
lapse of time or both) under, accelerate any obligation under, or give rise to
a right of termination of, any agreement, permit, license or authorizations to
which the Purchaser is a party or by which the Purchaser is bound.
3.3 Issuance of Securities. The Payment Shares to be delivered by
the Purchaser to the Founding Shareholders pursuant to Section 1.2(b) and the
shares of Purchaser Common Stock to be issued upon the exercise of the Stock
Options to be issued by the Purchaser pursuant to Section 1.2(c), are duly
authorized and, when issued in accordance with the terms of this Agreement and
the terms of the Stock Options, will be validly issued, fully paid and
nonassessable and free and clear of all Claims, except for any Claims created
by the Founding Stockholders and restrictions on transferability imposed by
federal and state securities laws. Upon the delivery to the Founding
Stockholders of the certificates evidencing the Payment Shares, the Founding
Stockholders shall acquire valid title to the Payment Shares.
3.4 SEC Filings. The Purchaser has filed with the Securities and
Exchange Commission ("SEC") all material forms, statements, reports and
documents required to be filed by it prior to the date hereof under each of
the Securities Act of 1933, as amended (the "1933 Act"), the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the respective rules
and regulations thereunder, (i) all of which, as amended, if applicable,
complied when filed in all material respects with all applicable requirements
of the applicable Act and the rules and regulations thereunder, and (ii) none
of which, as amended, if applicable, including any financial statements, notes
thereto or schedules included therein, contains any untrue statement of
material fact or omits to state a material fact required to be stated therein
or necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not
<PAGE> 22
misleading. The consolidated statements of financial position and the related
consolidated statements of income, shareholders' equity and cash flows
(including the related notes thereto) of the Purchaser (the "Purchaser
Financial Statements") included in the forms, statements, reports and
documents filed by the Purchaser with the SEC since December 31, 1999 (the
"Purchaser SEC Reports") comply as to form in all material respects with
applicable accounting requirements and the rules and regulations of the SEC
with respect thereto, are in accordance with the books and records of the
Purchaser, have been prepared in accordance with GAAP applied on a basis
consistent with prior periods, and present fairly the consolidated financial
position of the Purchaser and its subsidiaries as of their respective dates,
and the consolidated results of their operations and their cash flows for the
periods presented therein. The authorized capital stock of the Purchaser is as
set forth in the Purchaser SEC Reports.
3.5 No Material Adverse Change. Except as disclosed in the
Purchaser SEC Reports, and except for the transactions contemplated hereby, no
event has occurred that would require the Purchaser to file with the SEC a
Current Report on Form 8-K for which a Current Report on Form 8-K has not been
filed by the Purchaser.
3.6 No Proceedings. There are no legal or governmental proceedings
pending to which the Purchaser or any of its subsidiaries is a party or of
which any property of the Purchaser or any of its subsidiaries is subject,
other than as set forth in the Purchaser SEC Reports and other than litigation
or governmental proceedings incident to the kind of business conducted by the
Purchaser and its subsidiaries which, if determined adversely to the Purchaser
and its subsidiaries, would not individually or in the aggregate result in a
Purchaser Material Adverse Effect; and, to the knowledge of the Purchaser, no
such proceedings are threatened by governmental authorities or others.
3.7 Investment Intention; Legend. The Purchaser is purchasing the
shares of Seller Common Stock for its own account, for investment purposes
only, and not with a view to the distribution thereof. The Purchaser agrees
that it will not, directly or indirectly, offer, transfer, sell, assign,
pledge, hypothecate or otherwise dispose of any such Seller Common Stock (or
solicit any offers to buy, purchase, or otherwise acquire or take a pledge of
the Seller Common Stock) except in compliance with the 1933 Act. The Purchaser
acknowledges and agrees that the following legend shall be typed on each
certificate evidencing the Shares of Seller Common Stock sold hereunder to the
Purchaser:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES OR BLUE SKY LAWS AND MAY NOT BE OFFERED, SOLD,
TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1)
PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO SUCH
SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2) PURSUANT TO
AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
3.8 Investment Banking; Brokerage Fees. The Purchaser has not
incurred or become liable for any investment banking fees, brokerage
commissions, broker's or finder's fees or
<PAGE> 23
similar compensation (exclusive of professional fees to lawyers and
accountants) in connection with the transactions contemplated by this
Agreement.
SECTION 4. CLOSING CONDITIONS AND DELIVERIES.
4.1 Conditions Precedent to the Obligation of the Purchaser to
Close. The obligation of the Purchaser to consummate the Closing shall be
subject to the satisfaction on or prior to the Closing of each of the following
conditions:
(a) Examination and Investigation. (i) The Purchaser shall
have been entitled, through its employees, representatives, agents and
contractors, to make an investigation and examination of the assets,
properties, business and operations of the Acquired Company. Any such
investigation and examination shall have been conducted at reasonable times,
under reasonable circumstances and at the Purchaser's expense. Investigation
by the Purchaser shall not diminish or obviate any of the representations,
warranties, covenants or agreements of the Founding Stockholders under this
Agreement. In order that the Purchaser may have had full opportunity to make
such physical, business, accounting and legal review, examination or
investigation as it may wish of the business and affairs of the Acquired
Company, the Acquired Company shall have made available or shall have caused
to have been made available to the representatives of the Purchaser during
such period all such information and copies of such documents concerning the
affairs of the Acquired Company as such representatives may have reasonably
requested and shall have permitted the agents, contractors and representatives
of the Purchaser reasonable access to the properties of the Acquired Company;
and
(ii) The Purchaser shall have received a Disclosure
Schedule in form and substance reasonably satisfactory to it.
(b) Redemption of Seller Common Stock Owned by Household and
Cancellation of Option. The Acquired Company shall have entered into a Stock
Redemption Agreement, on terms and conditions satisfactory to Purchaser, (the
"Household Agreement") with Household pursuant to which (i) the Acquired
Company shall have agreed to redeem the Household Shares pursuant to the terms
and conditions set forth in the Household Agreement, and (ii) Household shall
have agreed to cancel all of its rights relating to Seller Common Stock
pursuant to (a) its option to acquire 750,000 shares of Common Stock of
ExpressClose.com, (b) that certain Securities Purchase Agreement between the
Acquired Company and Household dated as of January 7, 2000, and (c) all
agreements and documents related thereto. In consideration of the foregoing,
the Acquired Company, Purchaser and Household shall enter the arrangements
described in Exhibit C attached hereto.
(c) Employment Contracts. The Founding Stockholders shall
execute employment agreements in form and substance reasonably acceptable to
Purchaser (including as to the items disclosed in Schedule 10(a)) and
substantially in the form of Exhibit D; and the key employees identified on
Schedule 4.1(c) attached hereto (collectively, the "Key Employees") shall
execute employment agreements in form and substance reasonably acceptable to
Purchaser.
(d) Exchange Agreements. Certain of the employees listed on
Schedule 4.1(d) (as indicated thereon) shall have entered into "Option
Exchange Agreements" with the Acquired Company and Purchaser, in form and
substance reasonably acceptable to Purchaser and
<PAGE> 24
substantially in the form of Exhibit E attached hereto pursuant to which they
shall exchange their outstanding options to purchase Seller Common Stock for
options to acquire that number of shares of Purchaser Common Stock set forth
opposite their respective names in Schedule 4.1(d) hereto. The remaining
employees listed on Schedule 4.1(d) (as indicated thereon) shall have entered
into "Option Receipt Agreements" with the Acquired Company and Purchaser, in
form and substance reasonably satisfactory to Purchaser, pursuant to which
such employees will agree to accept options to acquire that number of shares
of Purchaser Common Stock set forth opposite their respective names in
Schedule 4.1(d) hereto in return for certain agreements on the part of such
employees.
(e) Confidentiality Agreement. The employees of the
Acquired Company identified on Schedule 4.1(e) hereof shall execute and
deliver to the Purchaser a confidentiality agreement substantially in the form
of Exhibit F attached hereto.
(f) Authorization. The Board of Directors and stockholders
of the Acquired Company shall have duly adopted resolutions in form and
substance reasonably satisfactory to the Purchaser and shall have taken all
action necessary for the purpose of authorizing the Acquired Company to
consummate all of the transactions contemplated hereby;
(g) Approvals, Consents and Waivers. The Acquired Company
and the Founding Stockholders shall have made all filings with and
notifications of governmental authorities, regulatory agencies and other
entities required to be made by such parties in connection with the execution
and delivery of this Agreement, the performance of the transactions
contemplated hereby and the continued operation of the business of the
Acquired Company subsequent to the Closing and the Purchaser shall have
received copies of all authorizations, waivers, consents and permits, in form
and substance reasonably satisfactory to the Purchaser, including any and all
notices, consents and waivers required from all third parties, including,
without limitation, applicable governmental authorities, regulatory agencies,
lessors, lenders and contract parties, required to permit the continuation of
the business of the Acquired Company and the consummation of the transactions
contemplated by this Agreement and to avoid a breach, default, termination,
acceleration or modification of any indenture, loan or credit agreement or any
other material agreement, contract, instrument, mortgage, lien, lease, permit,
authorization, order, writ, judgment, injunction, decree, determination or
arbitration award as a result of, or in connection with, the execution and
performance of this Agreement;
(h) Certificates of Good Standing and Qualification. The
Acquired Company and the Founding Stockholders shall deliver certificates
issued by (i) the Secretary of State of Iowa certifying that the Acquired
Company has legal existence and is in good standing; and (ii) the Secretary of
State (or similar authority) of each jurisdiction in which the Acquired
Company has qualified to do business as a foreign corporation (or is required
to be so qualified) as to such foreign qualification;
(i) Secretary's Certificate. The Acquired Company shall
deliver a certificate executed by the Secretary of the Acquired Company
certifying (i) the names of the officers of the Acquired Company authorized to
sign this Agreement and the other agreements, documents and instruments
executed by the Acquired Company pursuant hereto, together with the true
signatures of such officers; (ii) copies of consent actions taken by the Board
of Directors and
<PAGE> 25
stockholders of the Acquired Company authorizing the appropriate officers of
the Acquired Company to execute and deliver this Agreement and all agreements,
documents and instruments executed by the Acquired Company pursuant hereto,
and to consummate the transactions contemplated hereby and thereby;
(j) Bringdown. Each Founding Stockholder shall have
delivered a certificate confirming that (i) the representations of the
Founding Stockholders remain true, complete and accurate as of the Closing
Date and (ii) the Founding Stockholders have performed all of the agreements
and covenants required to be performed by them on or before the Closing Date.
(k) Opinion of Counsel. The Acquired Company and the
Founding Stockholders shall deliver an opinion of Winthrop & Weinstine, P.A.,
counsel for the Acquired Company and each of the Founding Stockholders, dated
as of the Closing Date, substantially in the form of Exhibit G attached
hereto;
(l) Stock Certificates. The Founding Stockholders shall
deliver or cause to be delivered to the Purchaser share certificates
representing the Shares, together with share transfer powers duly endorsed in
blank for transfer;
(m) Other Documents and Certificates. The Acquired Company
and the Founding Stockholders shall deliver such other supporting documents
and certificates as the Purchaser may reasonably request and as may be
required pursuant to this Agreement;
(n) All Proceedings Satisfactory. All corporate and other
proceedings of the Acquired Company taken prior to or at the Closing in
connection with the transactions contemplated by this Agreement, and all
documents and evidences incident thereto, shall be reasonably satisfactory in
form and substance to the Purchaser;
(o) No Litigation. No action or proceeding by or before any
court, administrative body or governmental agency shall have been instituted
or threatened which seeks to enjoin, restrain or prohibit, or might result in
damages in respect of, this Agreement or the complete consummation of the
transactions contemplated by this Agreement. No law or regulation shall be in
effect and no court order shall have been entered in any action or proceeding
instituted by any party which enjoins, restrains or prohibits this Agreement
or the complete consummation of the transactions contemplated in this
Agreement;
(p) No Violation or Injunction. The consummation of the
transactions contemplated by this Agreement shall not be in violation of any
law or regulation, and shall not be subject to any injunction, stay or
restraining order; and
(q) Board Resignation. The directors of the Acquired Company
shall have tendered their resignation from the Board of Directors of the
Acquired Company; provided, however, that one of the Founding Stockholders to
be selected by the Founding Stockholders shall be appointed at Closing to
serve on the Acquired Company's Board of Directors for a period of one (1)
year after Closing, and the remaining two Founding Stockholders shall be
entitled to receive notices of, attend and observe meetings of the Acquired
Company's Board occurring after Closing for a period of one (1) year after
Closing.
<PAGE> 26
4.2 Conditions Precedent to the Obligation of the Acquired Company
and Founding Stockholders to Close. The obligation of the Acquired Company and
the Founding Stockholders to consummate the Closing shall be subject to the
satisfaction on or prior to the Closing of each of the following conditions:
(a) No Litigation. No action or proceeding by or before any
court administrative body or governmental agency shall have been instituted or
threatened which seeks to enjoin, restrain or prohibit, or might result in
damages in respect of, this Agreement or the complete consummation of the
transactions contemplated by this Agreement. No law or regulation shall be in
effect and no court order shall have been entered in any action or proceeding
instituted by any party which enjoins, restrains or prohibits this Agreement
or the complete consummation of the transactions contemplated in this
Agreement;
(b) No Violation or Injunction. The consummation of the
transactions contemplated by this Agreement shall not be in violation of any
law or regulation, and shall not be subject to any injunction, stay or
restraining order;
(c) Reimbursement of Fees. The Purchaser shall have
reimbursed the Acquired Company for reasonable and customary legal expenses
associated with the preparation and review of this Agreement and all
agreements and documents related hereto and the consummation of the
transactions contemplated hereby and thereby.
(d) Payment of the Purchase Price. The Purchaser shall have
paid the Purchase Price pursuant to Section 1.2 hereof.
(e) Issuance of Options. The Purchaser shall have entered
into Option Exchange Agreements with all employees listed on Schedule 4.1(d).
(f) Bringdown. Purchaser shall have delivered a certificate
executed by an officer of Purchaser confirming that (i) the representations of
Purchaser remain true, complete and accurate as of the Closing and (ii)
Purchaser has performed all of the agreements and covenants required to be
performed by it on or before the Closing Date.
(g) Opinion of Counsel. The Purchaser shall deliver an
opinion of Schnader Harrison Segal & Lewis LLP reasonably satisfactory to the
Purchaser, dated as of the Closing Date.
SECTION 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
5.1 Survival of Representations, Warranties and Covenants. All
representations, warranties, covenants, and agreements of the Acquired
Company, the Founding Stockholders and the Purchaser made in this Agreement,
in the Disclosure Schedule delivered to the Purchaser and all agreements,
documents and instruments executed and delivered in connection herewith (a)
shall be deemed to have been relied upon by the party or parties to whom they
are made, and shall survive the Closing regardless of any investigation on the
part of such party or its representatives,
<PAGE> 27
and (b) shall bind the parties' successors and assigns, whether so expressed
or not, and, except as otherwise provided in this Agreement, all such
representations, warranties, covenants and agreements shall inure to the
benefit of the parties and their respective successors and permitted assigns,
whether so expressed or not. Notwithstanding the foregoing, the
representations and warranties contained herein shall expire and terminate and
be of no further force and effect after the date which is three (3) years
following the Closing , except that any written claim for breach thereof made
prior to such expiration date and delivered to the party against whom such
indemnification is sought shall survive thereafter and, as to any such claim,
such applicable expiration will not affect the rights to indemnification of
the party making such claim.
5.2 Indemnification. Each of the Founding Stockholders, on his or
her own behalf and on behalf of the Founding Stockholder's successors,
executors, administrators, estate, heirs and permitted assigns (collectively,
the "Stockholder Indemnifying Parties"), jointly and severally, agrees to
defend, indemnify and hold the Purchaser, its Affiliates, stockholders,
directors, officers, employees and agents and each person who controls any of
them within the meaning of Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(collectively, the "Indemnified Parties" and, individually, an "Indemnified
Party") harmless from and against any and all damages, liabilities, losses,
Taxes, penalties, reasonable costs and expenses (including, without
limitation, reasonable fees of a single counsel representing the Indemnified
Parties), as the same are incurred, of any kind or nature whatsoever (whether
or not arising out of third-party claims and including all amounts paid in
investigation, defense or settlement of the foregoing) which may be sustained
or suffered by any such Indemnified Party( individually, a "Loss" and,
collectively, "Losses") based upon, arising out of, or by reason of (i) any
breach of any representation or warranty made by the Founding Stockholders in
Section 2 of this Agreement (including, without limitation, in the Disclosure
Schedule) or (ii) any breach of any agreement or covenant of the Founding
Stockholders set forth herein.
5.3 Notice; Payment of Losses; Defense of Claims.
(a) An Indemnified Party shall give written notice of a Loss
to the party required to provide such indemnification hereunder (individually
and collectively, an "Indemnifying Party") promptly after becoming aware
thereof , which notice shall specify in reasonable detail the amount, nature
and source of the claim and include therewith copies of any notices or other
documents received from third parties with respect to such claim ; provided,
however, that failure to give such notice shall not limit the right of an
Indemnified Party to recover indemnity or reimbursement except to the extent
that the Indemnifying Party suffers any prejudice or harm with respect to such
claim as a result of such failure. The Indemnified Party shall also provide
the Indemnifying Party with such further information concerning any such
claims as the Indemnifying Party may reasonably request by written notice.
(b) Within thirty (30) calendar days after receiving notice
of a claim for indemnification or reimbursement, the Indemnifying Party shall,
by written notice to the Indemnified Party, either (i) concede or deny
liability for the claim in whole or in part, or (ii) in the case of a claim
asserted by a third party, advise that the matters set forth in the notice
are, or will be, subject to contest or legal proceedings not yet finally
resolved. If the Indemnifying Party concedes liability in whole or in part, it
shall, within twenty (20) business days of such concession, pay the amount of
the claim to the Indemnified Party to the extent of the liability
<PAGE> 28
conceded. Any such payment shall be made in immediately available funds equal
to the amount of such claim so payable. If the Indemnifying Party denies
liability in whole or in part or advises that the matters set forth in the
notice are, or will be, subject to contest or legal proceedings not yet
finally resolved, then the Indemnifying Party shall make no payment (except
for the amount of any conceded liability payable as set forth above) until the
matter is resolved in accordance with this Agreement.
(c) In the case of any third party claim, if within twenty
(20) days after receiving the notice described in the preceding paragraph
5.3(a), the Indemnifying Party (i) gives written notice to the Indemnified
Party stating that the Indemnified Party would be liable under the provisions
hereof for indemnity in the amount of such claim if such claim were valid and
that the Indemnifying Party disputes and intends to defend against such claim,
liability or expense at the Indemnifying Party's own cost and expense and (ii)
provides assurance reasonably acceptable to such Indemnified Party that such
indemnification will be paid fully and promptly if required and such
Indemnified Party will not incur cost or expense during the proceeding, then
counsel for the defense shall be selected by the Indemnifying Party (subject
to the consent of such Indemnified Party, which consent shall not be
unreasonably withheld) and such Indemnifying Party shall not be required to
make any payment with respect to such claim, liability or expense as long as
the Indemnifying Party is conducting a good faith and diligent defense at its
own expense. If the Indemnifying Party assumes such defense in accordance with
the preceding sentence, it shall have the right, with the consent of such
Indemnified Party, which consent shall not be unreasonably withheld, to settle
all indemnifiable matters related to claims by third parties which are
susceptible to being settled provided the Indemnifying Party's obligation to
indemnify such Indemnified Party therefor will be fully satisfied by payment
of money by the Indemnifying Party pursuant to a settlement which includes a
complete release of such Indemnified Party. The Indemnifying Party shall keep
such Indemnified Party apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall
furnish such Indemnified Party with all documents and information that such
Indemnified Party shall reasonably request and shall consult with such
Indemnified Party prior to acting on major matters, including settlement
discussions. Notwithstanding anything herein stated, such Indemnified Party
shall at all times have the right to fully participate in such defense at its
own expense directly or through counsel; provided, however, if the named
parties to the action or proceeding include both the Indemnifying Party and
the Indemnified Party and representation of both parties by the same counsel
would be inappropriate under applicable standards of professional conduct, the
reasonable expense of separate counsel for such Indemnified Party shall be
paid by the Indemnifying Party provided that such Indemnifying Party shall be
obligated to pay for only one counsel for the Indemnified Party in any
jurisdiction. If no such notice of intent to dispute and defend is given by
the Indemnifying Party, or if such diligent good faith defense is not being or
ceases to be conducted, such Indemnified Party may undertake the defense of
(with counsel selected by such Indemnified Party), and shall have the right to
compromise or settle such claim, liability or expense (exercising reasonable
business judgment) with the consent of the Indemnifying Party, which consent
shall not be unreasonably withheld. If such claim, liability or expense is one
that by its nature cannot be defended solely by the Indemnifying Party, then
such Indemnified Party shall make available all information and assistance
that the Indemnifying Party may reasonably request and shall cooperate with
the Indemnifying Party in such defense.
5.4 Limitation on Contribution and Certain Other Rights. Each of
the Founding Stockholders hereby agrees that if, following the Closing, any
payment is made by such
<PAGE> 29
Founding Stockholder, or otherwise becomes due from such Founding Stockholder,
pursuant to Section 5.2 in respect of any Losses (a "Loss Payment"), such
Founding Stockholder shall have no rights against the Acquired Company, or any
director, officer or employee thereof (in their capacity as such), whether by
reason of contribution, indemnification, subrogation or otherwise, in respect
of any such Loss Payment, and shall not take any action against the Acquired
Company or any such person with respect thereto.
5.5 Purchaser's Right to Withhold Earn-Out. Without prejudice to
any other remedies against the Founding Stockholders, if the Purchaser shall
have a claim for a Loss, it shall have the right, until complete and final
resolution of such claim, to withhold any portion of the Earn-Out that remains
due under Section 1.3 hereof, in an amount equal to such Loss. Upon complete
and final resolution of any such claim, and without prejudice to Purchaser's
other remedies, Purchaser shall have the right to offset its Loss against the
Purchase Price previously withheld and the balance, if any, shall be paid to
the Founding Stockholders.
SECTION 6. COVENANTS AND AGREEMENTS.
6.1 Covenants of the Purchaser. The Purchaser agrees that it shall
comply with the following covenants from and after the Closing:
(a) Cash Investment. (i) During the twelve (12) months
following the Closing, the Purchaser shall invest up to Five Million and
00/100 Dollars ($5,000,000.00) in cash (the "Cash Investment") to fund the
operations of the Acquired Company, including therein the amount funded by
Purchaser at Closing pursuant to subparagraph (a)(ii). The officers of the
Acquired Company shall have the right to commit individual expenditures, not
to exceed Two Hundred Thousand and 00/100 Dollars ($200,000.00) per
expenditure, so long as such expenditures, together with the amounts funded
pursuant to Section 6(a)(ii) and any expenditures in excess of $200,000 (for
which approval of the Acquired Company's Board of Directors shall be
required), do not exceed in the aggregate the Cash Investment. The officers
shall promptly report to such Board of Directors any expenditures so
committed.
(ii) Promptly after Closing, Purchaser shall fund the
expenditures of the Acquired Company set forth in Schedule 6 hereto by
transferring the aggregate amount set forth in Schedule 6 to the Acquired
Company's account by paying directly the expenditures identified on Schedule
6, as determined by Purchaser in its discretion.
(b) Automated Valuation Warranty Product. As soon as
practicable after Closing, but no later than December 31, 2000, the Purchaser
shall provide the automated valuation warranty product to the Acquired Company
on terms and conditions reasonably satisfactory to the Purchaser and the
Founding Stockholders, provided that such terms and conditions shall be
reasonably consistent with market terms applicable to comparable products. The
Purchaser understands the importance of its agreement and covenant hereunder
to provide the automated valuation warranty product to the Acquired Company
and that such agreement and covenant is essential to the performance of the
Business.
6.2 Registration Statement on Form S-3.
<PAGE> 30
(a) As soon as reasonably practicable after the Closing, but
in any event on or before December 31, 2000, the Purchaser shall file with the
SEC a Registration Statement on Form S-3, any successor short-form
registration statement promulgated by the SEC, or any other appropriate form
of registration statement ("Registration Statement") to register the resale by
the Founding Stockholders of the "Registrable Securities" under the 1933 Act
(as defined in Paragraph (e) below). After the Registration Statement is
filed, the Purchaser shall use its best efforts to (i) have the Registration
Statement declared effective by the SEC, (ii) thereafter prepare and file, as
the Purchaser shall determine may be required under the 1933 Act and the rules
and regulations thereunder, a prospectus supplement or supplements to the
prospectus contained in the Registration Statement or a post-effective
amendment or amendments to the Registration Statement and, with respect to any
post-effective amendment, cause such post-effective amendment to be declared
effective by the SEC, and (iii) maintain the effectiveness of the Registration
Statement until the earlier of (A) the date two (2) years from the date of
effectiveness of the Registration Statement, or (B) the sale of all of the
Registrable Securities pursuant to the Registration Statement. The Purchaser
further agrees that it will (1) furnish to the Founding Stockholders such
reasonable number of copies of the Registration Statement, preliminary
prospectus and prospectus supplement, final prospectus and prospectus
supplement and such other documents as such Founding Stockholders may
reasonably request in order to facilitate the public offering of the
Registrable Securities, (2) use its best efforts to register or qualify the
Registrable Securities covered by the Registration Statement under such state
securities or blue sky laws of such jurisdictions as the requesting Founding
Stockholder may reasonably request in writing within twenty (20) days
following the original filing of the Registration Statement, except that the
Purchaser shall not for any purpose be required to execute a general consent
to service of process or to qualify to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified, (3) notify the Founding
Stockholders, promptly after it shall receive notice thereof, of the time when
the Registration Statement has become effective or a supplement to any
prospectus forming a part of the Registration Statement has been filed, (4)
notify the Founding Stockholders promptly of any request by the SEC for the
amending or supplementing of the Registration Statement or prospectus or
prospectus supplement or for additional information, (5) prepare and file with
the SEC, promptly upon the request of any Founding Stockholder, any amendments
or supplements to the Registration Statement or prospectus or prospectus
supplement which, in the opinion of counsel for Purchaser, is required under
the 1933 Act or the rules and regulations thereunder in connection with the
distribution and resale of the Registrable Securities by such Founding
Stockholder, (6) prepare and promptly file with the SEC and promptly notify
the Founding Stockholders of the filing of such amendment or supplement to the
Registration Statement or prospectus or prospectus supplement as may be
necessary to correct any statements or omissions if, at the time when a
prospectus relating to such securities is required to be delivered under the
1933 Act, any event shall have occurred as the result of which any such
prospectus or any other prospectus or prospectus supplement as then in effect
would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, and (7) advise the
Founding Stockholders, promptly after Purchaser shall receive notice or obtain
knowledge thereof, of the issuance of any stop order by the SEC suspending the
effectiveness of the Registration Statement or the initiation or threatening
of any proceeding for that purpose and promptly use its best efforts to
prevent the issuance of any stop order or to obtain its withdrawal if such
stop order should be issued. Each Founding Stockholder hereby agrees to
cooperate with all reasonable requests by Purchaser necessary to effectuate
the preparation and filing of the Registration Statement and agrees to
<PAGE> 31
provide the Purchaser with all information required in connection therewith in
a timely manner and to comply with the procedures specified in Section 6.2(b)
below.
(b) Prior to any sales of Registrable Securities under the
Registration Statement by a Founding Stockholder, the Founding Stockholder
contemplating the sales will provide Purchaser with written notice of such
intention, addressed to Purchaser's Chief Financial Officer (a "Sale Notice").
Purchaser will notify such Founding Stockholder within two (2) business days
following receipt of the Sale Notice as to whether sales by the Founding
Stockholder may be made or will be limited as provided below. Upon notice from
Purchaser permitting sales by the Founding Stockholder, for a period beginning
on the date of receipt by the Founding Stockholder of such notice and ending
45 days thereafter (the "Window Period"), the Founding Stockholder may offer
and sell Registrable Securities from time to time pursuant to the Registration
Statement. Anything in this Agreement to the contrary notwithstanding, the
ability of a Founding Stockholder to sell Registrable Securities pursuant to
the Registration Statement and this Agreement shall be suspended in the event
that, upon receiving a Sale Notice or during any Window Period, Purchaser's
Chief Financial Officer certifies to the Founding Stockholders that, in the
good faith judgment of such officer (upon consultation to the extent
practicable with the Board of Directors of Purchaser), (x) the sale would
interfere in any material respect with any financing, acquisition, corporate
reorganization or other similar material transaction under consideration by
Purchaser, or (y) there is some other material development relating to the
condition (financial or otherwise) of Purchaser that has not been generally
publicly disclosed and as to which Purchaser deems advisable upon the advice
of counsel at the time of the Sale Notice not to publicly disclose; provided,
however, that upon any such event specified in (x) or (y) above, Purchaser may
not suspend sales by Founding Stockholders under the Registration Statement
for a period of more than sixty (60) days from the date of such certification
by Purchaser's Chief Financial Officer. If, upon receipt of the Sale Notice,
Purchaser has reasonably determined that it is necessary to file and cause to
be declared effective a post-effective amendment to the Registration Statement
or file a new or amended prospectus supplement or to otherwise cause
disclosure to be made under the 1934 Act and incorporated by reference into
the Registration Statement, and Purchaser determines not to rely on the
preceding sentence in order to delay the making of such disclosure, Purchaser
will take such action within seven (7) business days following receipt of the
applicable Sale Notice.
(c) In connection with the registration of the resale of the
Registrable Securities, Purchaser shall bear the following fees, costs and
expenses: all registration, filing, National Association of Securities
Dealers, Inc. and New York Stock Exchange or other exchange listing fees,
printing expenses, fees and disbursements of counsel and accountants for
Purchaser, all internal Purchaser expenses of the Purchaser and all legal fees
and disbursements and other expenses of complying with state securities or
blue sky laws of any jurisdictions in which the resale of the Registrable
Securities are to be registered or qualified. Fees and disbursements of
counsel and accountants for the Founding Stockholders, any underwriting
discounts and commissions and transfer taxes relating to the resale of the
Registrable Securities included in the offering, and any other expenses
incurred by the Founding Stockholders not expressly included above, shall be
borne by the Founding Stockholders.
(d) With respect to such registration:
<PAGE> 32
(i) Subject to compliance by a holder of Registrable
Securities with Section 6.2(b), Purchaser will indemnify and hold harmless
each holder of Registrable Securities which are included in the Registration
Statement, and any underwriter (as defined in the 1933 Act) for such holder
and each person, if any, who controls such holder or such underwriter within
the meaning of the 1933 Act, from and against, and will reimburse such holder
and each such underwriter and controlling person with respect to, any and all
loss, damage, liability, cost and expense to which such holder or any such
underwriter or controlling person may become subject under the 1933 Act or
otherwise, insofar as such losses, damages, liabilities, costs or expenses are
caused by any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any prospectus or prospectus
supplement contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading; provided, however, that Purchaser will not be liable in any such
case to the extent that any such loss, damage, liability, cost or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in conformity with information
furnished by such holder, such underwriter or such controlling person in
writing specifically for use in the preparation thereof.
(ii) Each holder of Registrable Securities which are
included in the Registration Statement will indemnify and hold harmless
Purchaser, its directors and officers, and any controlling person thereof and
any underwriter from and against, and will reimburse Purchaser, its directors
and officers, and any such controlling person and any underwriter with respect
to, any and all loss, damage, liability, cost or expense to which Purchaser or
any controlling person and any underwriter may become subject under the 1933
Act or otherwise, insofar as such losses, damages, liabilities, costs or
expenses are caused by any untrue or alleged untrue statement of any material
fact contained in the Registration Statement, any prospectus or prospectus
supplement contained therein or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made, not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was so made in reliance upon and in strict conformity with written information
furnished by such holder specifically for use in the preparation thereof.
(e) For the purposes of this Section 6.2, the term
"Registrable Securities" shall mean (i) the Payment Shares and (ii) any
Purchaser Common Stock or other securities of the Purchaser issued or issuable
with respect to such Payment Shares by way of a stock dividend or stock split
or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or a sale of all or substantially all of
Purchaser's assets.
(f) The Founding Stockholders acknowledge and agree that the
following legend shall be typed on each certificate evidencing any of the
shares of Purchaser Common Stock issued hereunder held at any time by the
Founding Stockholders:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR ANY STATE
SECURITIES OR BLUE SKY LAWS AND MAY NOT BE
<PAGE> 33
OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED
EXCEPT (1) PURSUANT TO A REGISTRATION STATEMENT WITH RESPECT TO
SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR (2)
PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE
ACT RELATING TO THE DISPOSITION OF SECURITIES AND (3) IN
ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE SKY LAWS.
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE PROVISIONS
OF A STOCK PURCHASE AGREEMENT DATED AS OF OCTOBER 27, 2000,
INCLUDING THEREIN CERTAIN RESTRICTIONS REQUIRING THE HOLDER TO
NOTIFY THE COMPANY PRIOR TO ANY SALE. A COMPLETE AND CORRECT
COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE
PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON
WRITTEN REQUEST AND WITHOUT CHARGE.
6.3 Rule 144 Reporting; Legal Opinions. With a view to making
available the benefits of certain rules and regulations of the SEC that may
permit the resale of Purchaser Common Stock to the public without
registration, for a period of two (2) years after the Closing, Purchaser
agrees to use its commercially reasonable efforts to make and keep "current
public information" (as contemplated by Rule 144 of the Securities and
Exchange Commission under the Securities Act of 1933 ("Rule 144")) regarding
Purchaser available. In addition, upon the request of any Founding
Stockholder, the Purchaser shall cause a legal opinion or opinions to be
issued as soon as practicable after such request is made (but not more than
five (5) business days after such request is made) to the effect that the
Payment Shares may be sold in a transaction pursuant to Rule 144.
SECTION 7. GENERAL.
7.1 Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be (i) delivered personally, (ii) sent
by facsimile transmission (provided that a confirmation copy shall be sent the
same day for delivery by a reputable overnight international courier service),
(iii) sent by a certified or registered mail, postage prepaid, or (iv) sent by a
reputable overnight or international courier service. Any such notice shall be
deemed given when so delivered personally or sent by facsimile transmission
(provided that a confirmation copy shall be sent the same day for delivery by a
reputable overnight international courier service) or if mailed, five (5)
business days after the date of deposit in the United States mail, or if sent by
overnight courier service, five (5) business days after delivery to such courier
service. Notice of change of address shall also be governed by this Section 7.
Notices and other communications shall be addressed as follows:
(i) If to the Purchaser:
Radian Group, Inc.
1601 Market Street
Philadelphia, PA 19103
<PAGE> 34
Attn: General Counsel
with a copy to
Schnader Harrison Segal and Lewis LLP
1600 Market Street
Philadelphia, PA 19103
Attention: Ronald Karam, Esq.
(ii) If to the Company:
ExpressClose.com, Inc.
935 East 53rd Street
Davenport, IA 52807
Attn: Thomas L. Midkiff, Sr.
with a copy to
Winthrop & Weinstine, P.A.
3000 Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, MN 55402
Attn: Michele D. Vaillancourt, Esq.
(iii) If to the Founding Stockholders:
Mr. Thomas L. Midkiff, Sr.
935 East 53rd Street
Davenport, Iowa 52807
Mr. Dennis C. Conway
7007 Winding Walk, Suite 200
Houston, Texas 77095
Mr. Thomas Lee Midkiff, Jr.
4540 Honeywell Court
Dayton, Ohio 45424
with copies to
Winthrop & Weinstine, P.A.
3000 Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Michele D. Vaillancourt, Esq.
Any party may by notice given in accordance with this Section 7.1 to the other
parties designate another address or person for receipt of notice hereunder.
<PAGE> 35
7.2 Publicity. The Purchaser, the Acquired Company, and the
Founding Stockholders shall not issue any press release or make any public
disclosure regarding this Agreement or the transactions contemplated hereby
unless such press release or public disclosure is approved by all other
parties to this Agreement. Notwithstanding the foregoing, each of the parties
hereto may, in documents required to be filed by it with the SEC or other
regulatory bodies, make such statements with respect to this Agreement or the
transactions contemplated hereby as each may be advised by legal counsel is
legally necessary or advisable.
7.3 Waivers and Amendments.
(a) For the purposes of this Agreement and all agreements,
documents and instruments executed pursuant hereto, no course of dealing
between or among any of the parties hereto and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as
a waiver of the rights hereof and thereof. No covenant or provision hereof may
be waived otherwise than by a written instrument signed by the party or
parties so waiving such covenant or other provision as contemplated herein.
(b) This Agreement may be amended, superseded, canceled,
renewed or extended only by a written instrument signed by all parties hereto.
7.4 Governing Law. This Agreement shall be deemed to be a contract
made under, and shall be construed in accordance with, the laws of the State
of Delaware, without giving effect to conflict of laws principles thereof.
7.5 Section Headings and Gender; Construction. The descriptive
headings in this Agreement have been inserted for convenience only and shall
not be deemed to limit or otherwise affect the construction of any provision
thereof or hereof. The use in this Agreement of the masculine pronoun in
reference to a party hereto shall be deemed to include the feminine or neuter,
and vice versa, as the context may require. The parties have participated
jointly in the negotiation and drafting of this Agreement and the other
agreements, documents and instruments executed and delivered in connection
herewith with counsel sophisticated in investment transactions. In the event
an ambiguity or question of intent or interpretation arises, this Agreement
and the agreements, documents and instruments executed and delivered in
connection herewith shall be construed as if drafted jointly by the parties
and no presumption or burden of proof shall arise favoring or disfavoring any
party by virtue of the authorship of any provisions of this Agreement and the
agreements, documents and instruments executed and delivered in connection
herewith.
7.6 Severability of Provisions. If any provision or any portion of
any provision of this Agreement or the application of any such provision or
any portion thereof to any person or circumstance shall be held invalid or
unenforceable, the remaining portion of such provision and the remaining
provisions of this Agreement, or the application of such provision or portion
of such provision as is held invalid or unenforceable to persons or
circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby.
7.7 Binding Effect; No Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors
and permitted assigns. This
<PAGE> 36
Agreement is not assignable without the prior written consent of the other
party, except that the Purchaser may assign its rights hereunder to any direct
or indirect wholly-owned subsidiary of the Purchaser.
7.8 Counterparts; Signatures. This Agreement may be executed
simultaneously in any number of counterparts, each of which when so executed
and delivered shall be taken to be an original; but such counterparts shall
together constitute but one and the same document. The facsimile signatures of
the parties hereto shall be deemed to be original signatures, provided that
the original signature page is received by the other parties to this Agreement
within five (5) business days of the date of signing.
7.9 Entire Agreement; Integration. This Agreement, including the
exhibits, documents and instruments referred to herein or therein, constitutes
the entire agreement, and supersedes all other prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, including, without limitation, the provisions of the
letter of intent between the parties hereto in respect of the transactions
contemplated herein, which provisions of the letter of intent shall be
completely superseded by the representations, warranties, covenants and
agreements of the Company contained herein.
7.10 Certain Definitions. For purposes of this Agreement, the
following terms shall have the following meanings:
(a) "Affiliate" of a person shall mean (i) with respect to
an individual, any member of such individual's family (including any child,
step-child, parent, step-parent, spouse, sibling, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law);
(ii) with respect to an entity, any executive officer, director, controlling
stockholder, or controlling partner or investor in such entity or in any
affiliate of such entity; and (iii) with respect to a person or entity, any
person or entity which directly or indirectly controls, is controlled by, or
is under common control with such person or entity.
(b) "Business" shall mean the providing of credit reports,
flood certifications, title products, the Lender Master Protection Program,
online property valuations, funding services, recordation and closing services
to the mortgage industry through a web browser-based application.
(c) "Claim" shall mean any lien, security interest, pledge,
mortgage, deed of trust or encumbrance.
(d) "Control" (including the terms "controlled by" and
"under common control with") means the possession, directly or indirectly, of
the power to direct or cause the direction of the management policies of a
Person, whether through the ownership of stock, as trustee or executor, by
contract or credit arrangement or otherwise;
(e) "Market Value" shall mean the closing price of the
Purchaser Common Stock as reported on the New York Stock Exchange on the date
or dates under consideration.
(f) "Material Adverse Effect" means any effect that would
reasonably be expected to be materially adverse to the Business or the assets
of the Business taken as a whole;
<PAGE> 37
provided, however, that any adverse change, circumstance or effect that is
primarily caused by conditions affecting the United States economy as a whole
or the general conditions in the industry in which the Business operates shall
not be taken into account in determining whether there has been or would be a
"Material Adverse Effect."
(g) "Net Income" shall mean net income after tax for the
relevant period calculated in accordance with GAAP.
(h) "Person" means an individual, corporation, partnership,
association, trust or any unincorporated organization;
(i) "Purchaser Material Adverse Effect" means any effect
that would reasonably be expected to be materially adverse to the assets,
liabilities, condition (financial or otherwise), business, results of
operations or prospects of the Purchaser; provided, however, that any adverse
change, circumstance or effect that is primarily caused by conditions
affecting the United States economy as a whole or the general conditions in
the industry in which the Purchaser operates shall not be taken into account
in determining whether there has been or would be a Purchaser Material Adverse
Effect.
(j) "Stock Option Plan" shall mean the CMAC Investment
Corporation Equity Compensation Plan (Amended and Restated as of February 20,
2000).
(k) "Subsidiary" of a person means any corporation more than
fifty percent (50%) of whose outstanding voting securities, or any
partnership, limited liability company joint venture or other entity more than
fifty percent (50%) of whose total equity interest, is directly or indirectly
owned by such person.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE> 38
IN WITNESS WHEREOF, the parties have executed this Agreement or have
caused this Agreement to be duly executed and delivered by their proper and
duly authorized officers as of the day and year first above written.
RADIAN GROUP, INC.
By: /s/ C. Robert Quint
------------------------------------
Name: C. Robert Quint
Title: Chief Financial Officer
EXPRESSCLOSE.COM, INC.
By: /s/ Thomas L. Midkiff, Sr.
------------------------------------
Name: Thomas L. Midkiff, Sr.
Title: Chief Executive Officer
FOUNDING STOCKHOLDERS
/s/ Thomas L. Midkiff, Sr.
----------------------------------------
Thomas L. Midkiff, Sr.
/s/ Thomas Lee Midkiff, Jr.
----------------------------------------
Thomas Lee Midkiff, Jr.
/s/ Dennis C. Conway
----------------------------------------
Dennis C. Conway
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.8
<SEQUENCE>3
<FILENAME>w46732ex10-8.txt
<DESCRIPTION>CHANGE OF CONTROL AGREEMENT DATED 07/19/2000
<TEXT>
<PAGE> 1
AGREEMENT
EXHIBIT 10.8
THIS AGREEMENT made and entered into this 19th day of July, 2000 by and
between RADIAN GROUP INC., a corporation organized and existing under the laws
of the state of Delaware (hereinafter referred to as the "Company") and BRUCE
VAN FLEET (hereinafter referred to as the "Employee").
WHEREAS, the Employee is presently employed by the Company as its EXECUTIVE
VICE PRESIDENT FOR SALES AND FIELD OPERATIONS; and
WHEREAS, the Board of Directors of the Company (the "Board") recognizes that,
as is the case with many publicly-held corporations, the possibility of a
change in control of the Company exists and that such possibility, and the
uncertainty and questions it may raise among management, may result in the
departure or distraction of key management personnel to the detriment of the
Company; and
WHEREAS, the Board has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of key members
of the Company's management to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility
of a change in control of the Company; and
WHEREAS, in order to induce the Employee to remain in the employ of the
Company, the Company agrees that the Employee shall receive the compensation
set forth in this Agreement as a cushion against the financial and career
impact on the Employee in the event that Employee's employment with the
Company is terminated subsequent to a "Change of Control" (as that term is
defined in Section 1 hereof).
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and
agreements hereinafter set forth and intending to be legally bound hereby, the
parties hereto agree as follows:
1. DEFINITIONS. When used in this Agreement, the following terms shall
have the specific meanings shown in this Section unless the context of any
provision of this Agreement clearly requires otherwise:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
(b) "Beneficial Owner" of any securities shall mean:
(i) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to acquire (whether such
right is exercisable immediately or only after the passage of time) pursuant
to any agreement, arrangement or understanding (whether or not in writing) or
upon the exercise of conversion rights, exchange rights, rights, warrants or
options, or otherwise; provided, however, that a Person shall not be deemed
the "Beneficial Owner" of securities tendered pursuant to a tender or exchange
offer made by such Person or any of such Person's Affiliates or Associates
until such tendered securities are accepted for payment, purchase or exchange;
<PAGE> 2
(ii) that such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has the right to vote or dispose of or has
"beneficial ownership" of (as determined pursuant to Rule 13d-3 of the General
Rules and Regulations under the Exchange Act), including without limitation,
pursuant to any agreement, arrangement or understanding (whether or not in
writing); provided, however, that a Person shall not be deemed the "Beneficial
Owner" of any security under this subsection (ii) as a result of an oral or
written agreement, arrangement or understanding to vote such security if such
agreement, arrangement or understanding (A) arises solely from a revocable
proxy given in response to a public proxy or consent solicitation made
pursuant to, an in accordance with, the applicable provisions of the General
Rules and Regulations under the Exchange Act, and (B) is not then reportable
by such Person on Schedule 13D under the Exchange Act (or any comparable
successor report); or
(iii) where voting securities are beneficially owned, directly
or indirectly, by any other Person (or any Affiliate or Associate thereof)
with which such Person (or any of such Person's Affiliates or Associates) has
any agreement, arrangement or understanding (whether or not in writing) for
the purpose of acquiring, holding, voting (except pursuant to a revocable
proxy described in the proviso to subsection (ii) above) or disposing of any
voting securities of the Company;
provided, however, that nothing in this subsection (b) shall cause a Person
engaged in business as an underwriter of securities to be the "Beneficial
Owner" of any securities acquired through such Person's participation in good
faith in a firm commitment underwriting until expiration of forty (40) days
after the date of such acquisition.
(c) "Change of Control" shall be deemed to have taken place if (i)
any Person (except for the Employee or his family, the Company or any employee
benefit plan of the Company or of any Affiliate, any Person or entity
organized, appointed or established by the Company for or pursuant to the
terms of any such employee benefit plan), together with all Affiliates and
Associates of such Person, shall become the Beneficial Owner in the aggregate
of 20% or more of the shares of the Company then outstanding and entitled to
vote for directors generally, (ii) any Person (except the Employee and his
family), together with all Affiliates and Associates of such Person purchases
substantially all of the assets of the Company, or (iii) during any
twenty-four (24) month period, individuals who at the beginning of such period
constituted the Board cease for any reason to constitute a majority thereof,
unless the election, or the nomination for election by the Company's
stockholders, of at least seventy-five percent (75%) of the directors who were
not directors at the beginning of such period was approved by a vote of at
least seventy-five percent (75%) of the directors in office at the time of
such election or nomination who were directors at the beginning of such
period.
(d) "Person" shall mean any individual, firm, corporation,
partnership or other entity.
(e) "Subsidiary" shall have the meaning ascribed to such term in
Rule 12b-2 of the General Rules and Regulations under the Exchange Act.
(f) "Termination Date" shall mean the date of receipt of the Notice
of Termination described in Section 2 hereof or any later date specified
therein, as the case may be.
(g) "Termination of Employment" shall mean the termination of the
Employee's actual employment relationship with the Company.
<PAGE> 3
(h) "Termination following a Change of Control" shall mean a
Termination of Employment within two years after a Change of Control either:
(i) initiated by the Company for any reason other than (a)
the Employee's continuous illness, injury or incapacity for a period of twelve
consecutive months or (b) for "cause", which shall mean misappropriation of
funds, habitual insobriety, substance abuse, conviction of a crime involving
moral turpitude, or gross negligence in the performance of duties, which gross
negligence has had a material adverse effect on the business, operations,
assets, properties or financial condition of the Company and its Subsidiaries
taken as a whole; or
(ii) initiated by the Employee upon the occurrence of one or
more of the following:
(A) any failure of the Company to comply with and
satisfy any of the conditions of this Agreement;
(B) any change resulting in a significant reduction
by the Company of the authority, duties or responsibilities of the Employee;
(C) any removal by the Company of the Employee from
the employment grade, compensation level or officer positions which the
Employee holds as of the effective date hereof, except in connection with
promotions to a higher office;
(D) the requirement that the Employee undertake
business travel (or commuting in excess of fifty miles each way) to an extent
substantially greater than is reasonable and customary for the position the
Employee holds.
2. NOTICE OF TERMINATION. Any Termination following a Change of Control
shall be communicated by a Notice of Termination to the other party hereto
given in accordance with Section 14 hereof. For purposes of this Agreement, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) briefly
summarizes the facts and circumstances deemed to provide a basis for
termination of the Employee's employment under the provision so indicated, and
(iii) if the Termination Date is other than the date of receipt of such
notice, specifies the Termination Date (which date shall not be more than
fifteen days after the giving of such notice).
3. BENEFITS UPON CHANGE OF CONTROL.
(a) In the event of a Change of Control (i) any stock options
previously granted to the Employee under any Company stock option or equity
compensation plan which have not yet vested shall become vested, and (ii) any
restricted stock previously granted to the Employee under any Company equity
compensation plan which has not yet vested or become freely transferable shall
become vested and freely transferable.
(b) In the event of the Employee's Termination following a Change
of Control the Company shall pay to the Employee, within fifteen days after
the Termination Date, an amount in cash equal to 2.0 times (i) the Employee's
then current annual base compensation, plus (ii) the Employee's then current
target bonus eligibility.
(c) In the event of the Employee's Termination following a Change
of Control, the Employee shall be entitled to continued participation in the
Company's life, disability, accident
<PAGE> 4
and health insurance plans for a period not to exceed thirty-six (36) months
following the termination.
4. OTHER PAYMENTS. The payment due under Section 3 hereof shall be in
addition to and not in lieu of any payments or benefits due to the Employee
under any other plan, policy or program of the Company except that no payments
shall be due to the Employee under the Company's then current severance pay
plan for employees, if any.
5. ESTABLISHMENT OF TRUST. The Company has or will establish an
irrevocable trust fund (hereinafter referred to as the "Trust Fund") pursuant
to a trust agreement to hold assets contributed to satisfy its obligations
under this Agreement. Funding of such trust fund shall be subject to the
Company's discretion, as set forth in the trust agreement establishing the
Trust Fund. Notwithstanding the foregoing:
(a) Upon a Change of Control of the Company, the Chief Financial
Officer of the Company, or his authorized representative (hereinafter referred
to collectively as the "Treasurer"), shall immediately remit to the Trustee of
the Trust Fund as a contribution to the applicable trust established as part
of the Trust Fund for the benefit of the Employee the amount due under this
Agreement and not yet contributed to the Trustee as well as an amount
estimated to be sufficient to pay all fees and expenses that may thereafter
become due. The Trustee shall be under no duty to determine the sufficiency,
or to enforce the making, of such contributions.
(b) In the event that the Chairman of the Board determines that a
Change of Control of the Company is imminent, the Treasurer shall make the
payments to the Trustee specified in paragraph (i) above. If a Change of
Control of the Company shall not have occurred within ninety (90) days of the
contribution made pursuant to this Section 5 and the Board adopts a resolution
to the effect that, for purposes of this Agreement, a Change of Control of the
Company is not imminent, any amounts added to the Trust Fund pursuant to this
Section, together with any earnings thereon, shall be paid by the Trustee to
the Company.
6. ENFORCEMENT.
(a) In the event that the Company shall fail or refuse to make
payment of any amounts due the Employee under Sections 3 and 4 hereof within
the respective time periods provided therein, the Company shall pay to the
Employee, in addition to the payment of any other sums provided in this
Agreement, interest, compounded daily, on any amount remaining unpaid from the
date payment is required under Section 3 and 4, as appropriate, until paid to
the Employee, at the rate from time to time announced by PNC Bank, or its
successor, as its "prime rate" plus 2%, each change in such rate to take
effect on the effective date of the change in such prime rate.
(b) It is the intent of the parties that the Employee not be
required to incur any expenses associated with the enforcement of his rights
under this Agreement by arbitration, litigation or other legal action because
the cost and expense thereof would substantially detract from the benefits
intended to be extended to the Employee hereunder. Accordingly, the Company
shall pay the Employee on demand the amount necessary to reimburse the
Employee in full for all expenses (including attorney's fees and legal
expenses) incurred by the Employee in enforcing any of the obligations of the
Company under this Agreement.
7. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking
other employment or otherwise,
<PAGE> 5
nor shall the amount of any payment or benefit provided for herein be reduced
by any compensation earned by other employment or otherwise.
8. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent or
limit the Employee's continuing or future participation in or rights under any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its Subsidiaries or Affiliates and for which the Employee may qualify;
provided, however, that with respect to a Termination following a Change of
Control, the Employee hereby waives the Employee's right to receive any
payments under any severance pay plan or similar program applicable to other
employees of the Company, and agrees to accept the payment provided in Section
3(b) above in lieu of any other severance pay plan or similar program.
9. NO SET-OFF. The Company's obligation to make the payments provided for
in this Agreement and otherwise to perform its obligations hereunder shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Company may have
against the Employee or others.
10. TAXES. Any payment required under this Agreement shall be subject to
all requirements of law with regard to the withholding of taxes, filing,
making of reports and the like, and the Company shall use its best efforts to
satisfy promptly all such requirements.
11. ADJUSTMENT FOR TAXES. In the event that either the Company's
independent public accountants or the Internal Revenue Service determine that
any payment, coverage, benefit or benefit acceleration provided to the
Employee, whether specifically provided for in this Agreement or otherwise, is
subject to the excise tax imposed by Section 4999 (or any successor provision)
("Section 4999") of the Code, the Company, within thirty (30) days thereafter,
shall pay to the Executive, in addition to any other payment, coverage or
benefit due and owing hereunder, an amount determined by multiplying the rate
of excise tax then imposed by Section 4999 by the amount of the "excess
parachute payment" received by the Executive (determined without regard to any
payments made to the Executive pursuant to this paragraph) and dividing the
product so obtained by the amount obtained by subtracting the aggregate local,
estate and Federal income tax rate applicable to the receipt by the Employee
of the "excess parachute payment" (taking into account the deductibility for
Federal income tax purposes of the payment of state and local income taxes
thereon) from the amount obtained by subtracting from 1.00 the rate of excise
tax then imposed by Section 4999 of the Code, it being the Company's intention
that the Employee's net after tax position be identical to that which would
have obtained had Sections 280G and 4999 not been a part of the Code.
12. TERM OF AGREEMENT. The term of this Agreement shall be for 3 years
from the date hereof and shall be automatically renewed for successive
one-year periods unless the Company notifies the Employee in writing that this
Agreement will not be renewed at least sixty (60) days prior to the end of the
current term; provided, however, that (i) after a Change of Control during the
term of this Agreement, this Agreement shall remain in effect until all of the
obligations of the parties hereunder are satisfied or have expired, and (ii)
this Agreement shall terminate if, prior to a Change of Control, the
employment of the Employee with the Company or any of its Subsidiaries, as the
case may be, shall terminate for any reason, or if the Employee shall cease to
be an Employee.
13. SUCCESSOR COMPANY. The Company shall require any successor or
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the
<PAGE> 6
Employee, to acknowledge expressly that this Agreement is binding upon and
enforceable against the Company in accordance with the terms hereof, and to
become jointly and severally obligated with the Company to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession or successions had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement. As used in this
Agreement, the Company shall mean the Company as hereinbefore defined and any
successor or successors to its business and/or assets, jointly and severally.
14. NOTICE. All notices and other communications required or permitted
hereunder or necessary or convenient herewith shall be in writing and shall be
delivered personally or mailed by registered or certified mail, return receipt
requested, or by overnight express courier service, as follows:
If to the Company, to:
Radian Group Inc.
1601 Market Street
Philadelphia, PA 19103
Attention: Corporate Secretary
If to the Employee, to:
Bruce Van Fleet
2203 Magdalene Cove Place
Tampa, FL 33613
or to such other names or addresses as the Company or the Employee, as the
case may be, shall designate by notice to the other party hereto in the manner
specified in this Section 14; provided, however, that if no such notice is
given by the Company following a Change of Control, notice at the last address
of the Company or to any successor pursuant to Section 13 hereof shall be
deemed sufficient for the purposes hereof. Any such notice shall be deemed
delivered and effective when received in the case of personal delivery; five
days after deposit, postage prepaid, with the U.S. Postal Service in the case
of registered or certified mail; or on the next business day in the case of an
overnight express courier service.
15. GOVERNING LAW. This Agreement shall be governed by and construed by
and interpreted under the laws of the Commonwealth of Pennsylvania without
giving effect to any conflict of laws provisions.
16. CONTENTS OF AGREEMENTS, AMENDMENT AND ASSIGNMENT.
(a) This Agreement supersedes all prior agreements and sets forth
the entire understanding between the parties hereto with respect to the
subject matter hereof and cannot be changed, modified, extended or terminated
except upon written amendment executed by the Employee and approved by the
Board and executed on the Company's behalf by a duly authorized officer. The
provisions of this Agreement may provide for payments to the Employee under
certain compensation or bonus plans under circumstances where such plans would
not provide for the payment thereof. It is the specific intention of the
parties that the provisions of this Agreement shall supersede any provisions
to the contrary in such plans, and such plans shall be deemed to
<PAGE> 7
have been amended to correspond with this Agreement without further action by
the Company or the Board.
(b) Nothing in this Agreement shall be construed as giving the
Employee any right to be retained in the employ of the Company.
(c) All of the terms and provisions of this Agreement shall be
binding upon and inure to the benefit of and be enforceable by the respective
heirs, representatives, successors and assigns of the parties hereto, except
that the duties and responsibilities of the Employee and the Company hereunder
shall not be assignable in whole or in part by the Company.
17. SEVERABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances shall be determined to be invalid
or unenforceable, such invalidity or unenforceability shall not affect any
other provisions or applications of this Agreement which can be given effect
without the invalid or unenforceable provision or application.
18. REMEDIES CUMULATIVE; NO WAIVER. No right conferred upon the Employee
by this Agreement is intended to be exclusive of any other right or remedy,
and each and every such right or remedy shall be cumulative and shall be in
addition to any other right or remedy given hereunder or now or hereafter
existing at law or in equity. No delay or omission by the Employee in
exercising any right, remedy or power hereunder or existing at law or in
equity shall be construed as a waiver thereof, including, without limitation,
any delay by the Employee in delivering a Notice of Termination pursuant to
Section 2 hereof after an event has occurred which would, if the Employee had
resigned, have constituted a Termination following a Change of Control
pursuant to this Agreement.
19. MISCELLANEOUS. All section headings are for convenience only. This
Agreement may be executed in several counterparts, each of which is an
original. It shall not be necessary in making proof of this Agreement or any
counterpart hereof to produce or account for any of the other counterparts.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
RADIAN GROUP INC.
By: ___________________________ _________________________________
Frank P. Filipps, President Bruce Van Fleet
Attest: ________________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>4
<FILENAME>w46732ex21-1.txt
<DESCRIPTION>REVISED SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE> 1
SUBSIDIARIES OF RADIAN GROUP INC. AS OF 12/31/00
EXHIBIT 21.1
Radian Group Inc. (Delaware domiciled corporation)
Amerin Guaranty Corporation (Illinois domiciled wholly owned subsidiary)
Amerin Re Corporation (Illinois domiciled wholly owned subsidiary)
Amerin Investor Services Corporation (Illinois domiciled wholly owned
subsidiary)
CMAC Investment Management Corporation (Delaware domiciled wholly owned
subsidiary)
ExpressClose.com (Iowa domiciled wholly owned subsidiary) GOLD
Acquisition Corporation (New York domiciled wholly owned subsidiary)
Radian Reinsurance Company (Vermont domiciled wholly owned subsidiary)
RADIAN GUARANTY INC. (Pennsylvania domiciled wholly owned subsidiary)
Radian Services Inc. (Pennsylvania domiciled wholly owned
subsidiary of Radian Guaranty Inc.)
Commonwealth Mortgage Assurance Company of Texas (Texas domiciled
wholly owned subsidiary Radian Guaranty Inc. )
Commonwealth Mortgage Assurance Company of Arizona (Arizona
domiciled wholly owned subsidiary Radian Guaranty Inc. )
Radian Insurance Inc. (Pennsylvania domiciled wholly owned
subsidiary of Radian Guaranty Inc.)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>5
<FILENAME>w46732ex23-1.txt
<DESCRIPTION>CONSENT OF DELOITTE & TOUCHE LLP
<TEXT>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement Nos.
33-57872, 33-67366, 33-98106, 333-40623 and 333-77957 of Radian Group Inc. on
Form S-8 of our reports dated March 2, 2001, included in and incorporated by
reference in this Annual Report on Form 10-K of Radian Group Inc. for the year
ended December 31, 2000.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 2, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>6
<FILENAME>w46732ex23-2.txt
<DESCRIPTION>CONSENT OF ERNST & YOUNG LLP
<TEXT>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (No. 33-57872, 33-67366, 33-98106, 333-40623 and 333-77957) of Radian
Group, Inc. of our report dated January 21, 1999, with respect to the
consolidated statements of operations, common stockholders' equity and cash
flows of Amerin Corporation and subsidiaries for the year ended December 31,
1998, which report appears in the Annual Report on Form 10-K of Radian Group,
Inc. for the year ended December 31, 2000.
ERNST & YOUNG LLP
Chicago, Illinois
March 28, 2001
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>7
<FILENAME>w46732ex99.txt
<DESCRIPTION>INDEPENDENT AUDITORS REPORT FROM ERNST & YOUNG LLP
<TEXT>
<PAGE> 1
EXHIBIT 99
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Amerin Corporation
We have audited the consolidated statements of operations, common stockholders'
equity, and cash flows of Amerin Corporation and subsidiaries for the year ended
December 31, 1998. In connection with our audit of the consolidated statements
of operations, common stockholders' equity, and cash flows, we have also audited
the financial statement schedules listed (none of which aforementioned
consolidated statements of operations, common stockholders' equity, and cash
flows and financial statement schedules are separately presented herein). These
consolidated statements of operations, common stockholders' equity, and cash
flows and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
statements of operations, common stockholders' equity, and cash flows and
financial statement schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated statements of operations, common stockholders'
equity, and cash flows referred to above present fairly, in all material
respects, the consolidated results of Amerin Corporation and subsidiaries
operations and their cash flows for the year ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic consolidated statements of operations, common
stockholders' equity, and cash flows taken as a whole, present fairly, in all
material respects, the information set forth therein.
ERNST & YOUNG LLP
Chicago, Illinois
January 21, 1999
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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