ZS Fund L.P.
000 X. 00xx Xxxxxx, Xxxxx 0000
Xxx Xxxx, Xxx Xxxx 00000
(000) 000-0000
Fax (000) 000-0000
As of January 5, 2001
Xxxx Group, Inc.
000 Xxxx 00xx Xxxxxx
Xxx Xxxx, XX 00000
Gentlemen:
ZS Fund L.P. ("ZS") is pleased to submit this letter agreement (the "Agreement")
confirming the terms under which ZS will and has served as a financial advisor
to Xxxx Group Inc., its subsidiaries and other affiliated entities thereof
(collectively, "Xxxx" or the "Company") in connection with a potential
transaction described in the term sheet, dated December 23, 2000 and attached
hereto as Exhibit A. (the "Transaction").
In this letter, we have outlined our approach, timing and fees in performing
this work for the Company.
ZS Role
ZS either has or anticipates performing the following financial advisory
services:
o Formulation of transaction structure
o Facilitation of due diligence
o Negotiation of a definitive agreement
o Working with outside advisors
In performing its work, ZS will rely upon the assumption that the information
provided to it by Xxxx or other relevant parties or from publicly available
sources is complete and accurate in all material respects, and ZS will assume
that all such information has been prepared on a reasonable basis. ZS
acknowledges that Xxx Xxxxxxxx, a principal of ZS, may have information
available to him in his capacity as a director of Xxxx and any such information
will be
attributable to ZS. Accordingly, ZS may not rely on information which, to Xx.
Xxxxxxxx'x knowledge or belief, is inaccurate.
ZS Fees
ZS's fees and reimbursement rights (collectively the "Transaction Fee") for
serving as financial advisor to Xxxx with regard to the Transaction will be as
follows:
1) An advisory fee payable at the closing of the Transaction ("Advisory
Fee") based on the aggregate consideration (the "Aggregate
Consideration," as defined in Exhibit B), paid or payable to Xxxx or
its shareholders in connection with the Transaction. Such Advisory Fee
shall be payable if, as and when the closing of the Transaction shall
occur, and shall be equal to 0.8% of the first $25 million of
Aggregate Consideration plus 0.4% of Aggregate Consideration in excess
of $25 million. This Advisory Fee shall be payable only in the event
that Xxx-Xxxx, Xxxxxx Inc. ("Xxx-Xxxx") releases the Company of any
fee due to it as a result of the Xxx-Xxxx engagement letter dated
January 27, 2000, other than for work relating to the preparation of a
fairness opinion which shall not exceed $250,000.
2) Reimbursement for reasonable out-of-pocket expenses and related
charges associated with the Transaction and ZS's work on the Company's
behalf, including, but not limited to, travel expenses, provided that
any such expenses which individually exceed $5,000 shall be approved
in advance by the Company. ZS shall also notify the Company when
expenses aggregate $5,000 and equal increments thereof, at which times
ZS shall request the Company's approval before incurring further
expenses. The Company hereby acknowledges that (1) fees of Xxxxxxxx &
Xxxxx incurred on behalf of the Company and (2) expenses relating to a
business trip to Toronto have been previously approved. These amounts
will be payable to ZS whether or not the Transaction is completed.
Engagement Period
The engagement period (the "Engagement Period") for ZS to serve as financial
advisor began in November 2000 and shall continue until this Agreement is
terminated. The engagement period may be terminated by either party hereto upon
written notice to the other party, provided, however, that termination of ZS
hereunder shall not affect the Company's obligation to (a) pay ZS the Advisory
Fee if the Transaction is consummated within 12 months of the termination of
this Agreement, and (b) reimburse the expenses accruing prior to such
termination to the extent provided herein.
General Matters
Xxxx acknowledges and agrees that (a) ZS has been retained as an independent
contractor to act solely in the capacity described in this Agreement and (b) all
opinions and advice (written and oral) given by ZS to the Board in connection
with this engagement are intended solely for the benefit and use of the Board
(including its attorneys and accountants) and, except when required by law or in
connection with the Company's proxy statement relating to the Transaction, may
not be disclosed to any third party or circulated or referred to publicly
without ZS's prior written consent.
-2-
It is agreed that all information provided to ZS by the Company, unless publicly
available, will be held by ZS in strict confidence and will not be disclosed to
anyone other than ZS's agents and advisors without the Company's prior approval
or used for any purpose other than those referred to in this Agreement. It is
also agreed that ZS is not acting as a fiduciary or agent of the Board and that
no duties associated with such a relationship are created by this engagement,
except that nothing contained herein shall limit or otherwise affect the
fiduciary obligations of Xxx Xxxxxxxx as a director of the Company. The Company
acknowledges and agrees that ZS has been retained to act as financial advisor to
the Company and its engagement hereunder is not on behalf of, nor intended to
create any relationship with or duty to, any other person. This Agreement shall
be binding upon and inure to the benefit of the Company, ZS and their respective
successors and assigns. This Agreement constitutes the sole agreement regarding
the engagement of ZS by Xxxx and may only be amended in writing. This Agreement
will be governed by and construed in accordance with the laws of the State of
New York applicable to contracts executed in and to be performed in that state.
If the foregoing accurately reflects the basis of our understanding, please
countersign and return one of the two signed copies.
Sincerely,
ZS FUND L.P.
By:
---------------------------------------
Name:
Title:
Accepted and agreed on this _____ day of _________________, 2001.
XXXX GROUP INC.
By:
---------------------------------------
Name:
Title:
-3-
Exhibit A
[Term Sheet Attached]
-4-
Exhibit B
Aggregate Consideration
For the purposes of the letter agreement between Xxxx Group Inc. and ZS Fund
L.P. dated January 5, 2000, the term Aggregate Consideration shall mean the
total amount of cash and securities paid to the shareholders of the Company (in
their capacities as such) in connection with the Transaction (including without
limitation amounts paid to holders of any options issued by the Company). The
value of securities that are freely tradable in an established public market
will be determined on the basis of the last market closing price prior to the
consummation of the Transaction unless such securities are valued at a different
price for the purpose of the Transaction, in which case they will be valued at
such price for the purpose of this Exhibit B. The value of securities that are
not freely tradable or have no established public market shall be the fair
market value thereof as determined in good faith by ZS Fund L. P. and the
Company, unless such securities are valued at a particular price for the purpose
of the Transaction, in which case they will be valued at such price for the
purpose of this Exhibit B. Notwithstanding the provisions of the two preceding
sentences, if any securities are given a value by the Xxx-Xxxx fairness opinion,
such securities will be valued at such price for the purpose of this Exhibit B.
-5-
CONFIDENTIAL
HIL'S Acquisition of KGI
Summary of Terms
December 23, 2000
Purchase Price HIL would acquire (the "Transaction") all of the
capital stock of KGI for a purchase price equal to
$14 per share.
Form of Consideration Of the $14 per share amount 66.7% to 100% (or $9.34
to $14.00 per share) will be payable at closing in
cash and 0.0% to 33.3% (or $0.00 to $4.66 per
share) will come in the form of convertible notes
("Notes"). The Notes will have an 8.50% interest
rate and interest will be payable in cash (semi-
annually). The conversion price will be C$17.00.
The Notes will mature 5 years from the date of
closing. The Notes will be callable by HIL if
HIL's stock trades above C$17.00 for [market
provision] consecutive trading days. [The terms of
this note will be dependent on tax and
transferability issues, as discussed with Prem.
Right of first refusal in favor of HIL or FFH on
sale of convertible notes to be discussed].
Sources of Cash Portion
of Purchase Price 1. Possible sale of OLHC to C&F [Discuss timing
issues with Prem regarding Rhode Island approval]
2. Purchase by FFH of convertible notes
("FFH Notes") with same terms as other Notes except
for a six year maturity. [To be discussed]
3. Possible purchase by strategic life insurance
investors of FFH Notes or HIL common stock at a
price no less than C$17.00
Treatment of Options Each of KGI's options will receive consideration
equal to the difference between the exercise price
and $14.00 per share as provided for in KGI's Stock
Option Plan.
Treatment of Restricted
Stock Holders of shares of restricted stock of KGI will
receive $14.00 in cash per restricted share on the
one-year anniversary of the closing of the
transaction.
KGI Management Issues 1. Treatment of BG's approximately 325,000 KGI
shares [To be discussed Prem/GB].
2. Long term restricted stock grants to KGI's key
management [To be discussed Prem/BG].
CONFIDENTIAL
Voting Agreements Shareholders owning at least 51% of KGI's shares
would provide a proxy (or similar arrangement)
to vote in favor of the Transaction.
Break-Up Fee If HIL terminates the transaction because KGI is
acquired by another entity, KGI would pay HIL a
break-up fee equal to 3.0% of the offer value.
[Break-up fee provisions to be discussed by
attorneys]
Due Dilligence
Completion Target Date January 15
Definitive Agreement
First Draft Completion
Target Date January 5 [To be discussed]
/s/ Xxxxxx Xxxxx
___________________________________
Xxx Xxxxxxxx or
Xxxxxx Xxxxx
/s/ Xxxxxx Xxxx
___________________________________
Xxxxxx Xxxx
/s/ V. P. Watsa
___________________________________
V. Xxxx Xxxxx or
Xxxx Xxxxxxxx
