<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period ______ to ______
Commission file number ________
FPIC INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3359111
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
1000 RIVERSIDE AVENUE, SUITE 800 32204
(Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code): (904) 354-5910
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.10 PAR VALUE
(Title of Class)
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 Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The Aggregate market value of the Registrant's Common Stock (its only voting
stock) held by non-affiliates of the Registrant as of March 12, 1999 was
approximately $367,403,823.
As of March 12, 1999, there were 9,796,363 shares of the Registrant's Common
Stock $.10 Par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Shareholders'
Meeting are incorporated by reference into Part III, Items 10, 11, 12 and 13 of
this Report. Such Proxy Statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this Report on Form 10-K.
<PAGE> 2
FPIC INSURANCE GROUP, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
Item 1. Business 1
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for the Registrants' Common Stock and
Related Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplemental Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
ITEM 10. Directors and Executive Officers of the Registrant 26
ITEM 11. Executive Compensation 27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 27
ITEM 13. Certain Relationships and Related Transactions 27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
</TABLE>
<PAGE> 3
PART I
Item 1. Business
Forward-Looking Statements
The statements that are not historical facts contained in this report are
forward-looking statements that involve certain risks and uncertainties. These
forward-looking statements include the plans and objectives of management for
future operations relating to the products and future economic performance of
the Company. These forward-looking statements also address the current views of
management regarding the Company's future acquisitions.
The forward-looking statements are based on assumptions that the Company will
continue to: (i) price and market its insurance products competitively; (ii)
reserve appropriately for losses and LAE; (iii) maintain its successful handling
of claims; and (iv) retain existing agents and key management personnel. The
forward-looking statements are also based upon assumptions that (i) competitive
conditions within the MPL insurance business will not change materially or
adversely; (ii) demand for MPL insurance will remain strong; (iii) the market
will accept the Company's new products and services; and (iv) the Company's
reinsurers will remain solvent. In addition, if the Company does acquire one or
more businesses, management's ability to identify suitable businesses to acquire
and to effectively integrate the combined operations of such businesses with the
Company may cause the Company's actual results to differ materially from the
results anticipated in these forward-looking statements. Assumptions relating to
the foregoing are difficult or impossible to predict accurately and many are
beyond the control of the Company. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.
Overview
FPIC Insurance Group, Inc. (the Company) was formed in 1996. On June 11, 1996,
the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved
the formation of a holding company structure (the Reorganization) that resulted
in FPIC becoming a subsidiary of the Company. In connection with the
Reorganization, FPIC's shareholders became the shareholders of the Company and
received five shares of the Company's common stock for each of their shares of
FPIC's common stock. As of December 31, 1998, the Company's principal
subsidiaries are: FPIC, Anesthesiologists' Professional Assurance Company (APAC)
and McCreary Corporation (McCreary). For developments since 1998, see Item 7,
Management's Discussion and Analysis.
The Company, through FPIC and APAC, is the largest provider of medical
professional liability (MPL) insurance in Florida, based on the number of
physicians and dentists insured. For more than 20 years, the Company has
provided MPL insurance to Florida's medical community. MPL insurance insures the
physician, dentist, hospital or other healthcare providers against liabilities
arising from the rendering of or failure to render professional healthcare
services. Under the typical MPL insurance policy, the insurer also pays the
legal costs of defending the claim. The Company has the exclusive endorsement of
both the Florida Medical Association and the Florida Dental Association.
The MPL premium in Florida accounts for approximately 88% of the Company's total
premiums written in Florida. As of December 31, 1998, the Company was also
licensed in Alabama, Arkansas, Georgia, Kentucky, Michigan, Mississippi, Ohio,
Pennsylvania, Tennessee, Texas,
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Virginia and West Virginia. The Company has begun or will begin marketing in
each of these states when it determines that an opportunity exists to write
profitable business.
The Company's two significant industry segments are insurance and third party
administration services. For financial information relating to the Company's
operations and the Company's significant industry segments, see Management's
Discussion and Analysis and the notes to the Consolidated Financial Statements,
which are incorporated herein by reference.
Insurance
The Company has developed a variety of insurance products for participants in
the healthcare industry. These products include: MPL insurance for medical
professionals, managed care liability insurance, professional and comprehensive
general liability insurance for healthcare facilities, AHCA/OSHA insurance
coverage, provider stop loss insurance, workers' compensation, and group
accident and health coverage. The following table summarizes by product the
direct premium written and assumed for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Medical professional liability for physicians $94,769 $71,056 $58,860
Medical professional liability for dentists 4,238 3,726 3,539
Managed care 141 130 330
Professional and comprehensive general liability 1,226 814 627
AHCA/OSHA 1,104 1,056 936
Workers' compensation 552 0 0
Group accident and health 14,959 989 0
-------- ------- -------
Totals $116,989 $77,771 $64,292
======== ======= =======
</TABLE>
Medical Professional Liability. The principal product offered by the Company is
MPL insurance for physicians and dentists. The Company's MPL insurance is
offered to physicians and dentists in all types of settings, including solo
practices, group practices and hospitals. MPL insurance provides coverage
against the legal liability of an insured for such things as injury caused by or
as a result of treatment of a patient, failure to treat a patient and failure to
diagnose a patient.
The Company's MPL policies are issued on a "claims-made" basis. Coverage is
provided for claims reported to the Company during the policy period arising
from incidents that occurred at any time the insured was covered by the policy.
The Company also offers "tail coverage" for claims reported after the expiration
of the policy for occurrences during the coverage period. The price of tail
coverage is based on the length of time the insured has been covered under the
Company's claims-made form. The Company provides free tail coverage for insured
physicians who die or become disabled during the coverage period of the policy
and those who have been insured by the Company for at least five consecutive
years and retire completely from the practice of medicine. MPL insurance
policies offered by the Company are issued with liability limits up to $5.0
million per incident and $7.0 million in annual aggregate for physicians and
$1.0 million per incident and $3.0 million in annual aggregate for dentists. At
December 31, 1998, the Company had 6,383 physician insureds and 1,843 dentist
insureds. For the year ended December 31, 1998, the Company's $99 million in
direct and assumed premium from MPL insurance represents 85% of the Company's
total premium.
Managed Care. Managed care liability insurance provides coverage for liability
arising from the errors and omissions of a managed care organization, the
vicarious liability of a managed care
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organization for acts or omissions by contracted and employed providers ("E&O")
and the liability of directors and officers of a managed care organization
("D&O"). These policies are issued on a claims-made basis. The typical limits of
coverage offered by the Company for E&O policies are $1.0 million per incident
and $1.0 million in annual aggregate. For D&O policies, the typical limits are
$3.0 million per incident and $3.0 million in annual aggregate.
Professional and Comprehensive General Liability. The Company also offers
professional and comprehensive general liability insurance to healthcare
facilities, such as ambulatory surgery centers and walk-in medical care clinics.
The policies issued to healthcare facilities provide both comprehensive general
liability and protection for professional liability related to the operation of
a healthcare facility and its various staff committees. Professional liability
insurance is offered by the Company to healthcare facilities on a claims-made
basis. Commercial general liability is available on a claims-made or occurrence
basis, although all policies issued as of December 31, 1998 were on a
claims-made basis. The limits of coverage for these policies available to
non-hospital healthcare facilities are $1.0 million per incident and $3.0
million in annual aggregate and to hospitals is $10.0 million per incident and
$10.0 million in annual aggregate. Higher liability limits are placed through
facultative reinsurance arrangements. As of December 31, 1998, the Company had
19 facility insureds.
AHCA/OSHA. The Company also offers defense coverage to physicians and dentists
for costs associated with investigations initiated by Florida's Agency for
Healthcare Administration ("AHCA") as well as the Occupational Safety and Health
Administration ("OSHA"). This coverage is offered to the Company's insureds for
investigations that are not related to an MPL claim; investigations related to
an MPL claim are provided to the Company's insureds as part of their policy
coverage. AHCA/OSHA coverage is also offered to physicians and dentists not
otherwise insured by the Company. Policy limits for this coverage are $25,000
per incident and $75,000 in annual aggregate. For the year ended December 31,
1997, the Company had $1.1 million in direct premium written from AHCA/OSHA
insurance.
Workers' Compensation. The Company began writing workers' compensation insurance
in 1998. Workers' compensation insurance covers the liability of the employer
for work-related injuries to employees, in accordance with the requirements of
law. The Company's workers' compensation insurance is primarily offered to
physicians and dentists, as well as to other professional occupations such as
accountants, architects, engineers, attorneys and insurance agents. The initial
focus has been to write in the state of Florida with a guaranteed cost product.
As the Company expands into other states with medical professional liability
insurance, the intent is to offer workers' compensation coverage to the existing
or potential customer base. The Company is utilizing McCreary for it claims
handling, policy administration and underwriting.
Group Accident and Health. The Company began writing and assuming group accident
and health (A&H) premium in 1997. Through its relationship with the Florida
Dental Association, the Company began underwriting a small employer, limited
risk, accident and health program for dentists. A&H insurance provides
comprehensive coverage for preventive care and medically necessary expenses at
various deductible, co-insurance and stop loss limits. For the year ended
December 31, 1998, the Company has $14.9 million in direct and assumed premium
from group accident and health, representing 13% of the Company's total premium.
Rates
The Company establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and dentist
insureds based on the loss and loss adjustment
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expenses (LAE) experience it has developed over the past 20 years and upon rates
charged by its competitors. The Company uses risk factors, among other things,
based on geographic location, medical specialty and policy limits. The Company
has established its premium rates and rating classifications for healthcare
facilities and managed care organizations utilizing data publicly filed by other
insurers and guidelines provided by its reinsurers. All rates for liability
insurance are subject to review by the relevant insurance regulatory authority.
As part of its pricing strategy, the Company targets medical professionals with
low levels of previous MPL claims. The Company offers such medical professionals
a "claims-free" credit.
Marketing and Policyholder Services
The Company's insurance products are primarily marketed by independent agencies.
In addition, insurance products are sold by the Company directly. As of December
31, 1998, the Company's products were sold through 116 independent agencies.
During 1998, approximately 73% of the Company's MPL direct premium written was
produced by independent agents, five of which accounted for approximately 50% of
such premiums. The Company added 22 new independent agencies in 1998. The
insurance products that are sold by the Company directly are a result of direct
requests from physicians.
An integral part of the Company's marketing strategy is targeting sectors of the
MPL industry that it believes generate above average underwriting profits. The
Company has identified certain medical specialties and "claims-free" physicians
as sectors in which it wishes to increase its market share. This marketing
strategy includes sending targeted physicians personal mail solicitation
packages, encouraging agents to refer targeted physicians and providing an
expedited application process for those physicians. As a result of this
strategy, approximately 67% of the increase in direct premium written in 1998
was received from physicians in the targeted specialties.
The Company has also entered into endorsement and marketing agreements with
local medical associations and other provider-supported organizations that
provide rate credits and certain services for insureds of the programs. These
endorsement and marketing agreements gain the Company access to meetings of
these groups in order to make presentations and provide access to their
respective publications for advertisements. In addition, several local
associations have agreed to assist the Company in developing loss prevention
programs, monitoring proposed legislation and administrative regulations and
providing information on healthcare matters relating primarily to professional
liability.
The Company provides comprehensive risk management services designed to heighten
its insureds' awareness of situations giving rise to potential loss exposures,
to educate its insureds on ways to improve their medical practice procedures and
to assist its insureds in implementing risk modification measures. In addition,
the Company conducts surveys for hospitals and large medical groups to review
their practice procedures. Complete reports that specify areas of the insured's
medical practice that may need attention are provided to the policyholder. The
Company presents and participates in periodic seminars with medical societies
and other groups at which pertinent subjects are presented. These educational
offerings are designed to increase risk awareness and the effectiveness of
various medical professionals.
Underwriting
The underwriting of the Company's MPL insurance is performed internally by five
underwriters with over 40 years of combined experience underwriting MPL
insurance. The Company has
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given its internal underwriting department complete authority for all initial
underwriting decisions. The Company's agents have no binding authority.
As part of the underwriting process, the Company utilizes the State of Florida's
database, which consolidates a record of all MPL claims-paid information that
insurers are required to report to the State. When applications are received
from physicians for MPL insurance, the Company reviews this database to verify
the physician's claims-paid record. If a physician has an excessive claims-paid
history, the application is denied. All other applicants are reviewed on the
basis of the physician's educational background, residency experience, practice
history and the comments received from personal references. Annually, the
Company's underwriting department also reexamines each insured before coverage
is renewed, including verifying that each insured's license is current and that
any reported claims for the insured were within acceptable limits.
The underwriting of the Company's other insurance products is conducted in
conjunction with external underwriters. With respect to these products, the
Company receives applications from prospective insureds. After a review of the
information contained in such applications, the Company forwards them to an
external underwriter. The external underwriter performs its review procedures
for each application and consults with the Company on the amount of premium to
charge each insured.
Claims
The Company's claims department is responsible for the supervision of claims
investigation, the establishment of case reserves, case management, development
of the defense strategy and the coordination and control of attorneys engaged by
the Company. The Company's claims department has 19 employees, including 4
supervisors and 5 field investigators who are located in Orlando, Tampa, Miami
and Jacksonville, Florida in order to provide localized and timely attention to
claims. Employees in the claims department with settlement authority have an
average of 16 years of experience with the Company.
The Company's claims department has complete settlement authority for most
claims filed against the Company's insureds. The Company's policy is and has
been to refuse settlement and to defend aggressively all claims that appear to
have no merit. In those instances where claims may have merit, the claims
department attempts to settle the case as expeditiously as possible. The Company
believes that it has developed relationships with attorneys in Florida who have
significant experience in the defense of MPL claims and who are able to defend
in an aggressive, cost-efficient manner the claims against the Company's
insureds.
Reinsurance
The Company follows customary industry practice by reinsuring a portion of its
risks. The Company cedes to reinsurers a portion of its risks and pays a fee
based upon premiums received on all policies subject to such reinsurance.
Insurance is ceded principally to reduce net liability on individual risks and
to provide protection against large losses. Although reinsurance does not
legally discharge the ceding insurer from its primary liability for the full
amount of the policies reinsured, it does make the reinsurer liable to the
insurer to the extent of risk ceded.
For MPL insurance and professional and comprehensive general liability
insurance, the Company has established a policy of reinsuring risks in excess of
$500,000 per loss. The Company reinsures risks associated with these policies
under treaties pursuant to which
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reinsurers agree to assume those risks insured by the Company in excess of its
individual risk retention level and up to its maximum individual policy limit
offered. For group accident and health insurance the Company has entered into a
separate excess of loss reinsurance treaty. Under this treaty, the reinsurers
bear losses in excess of $100,000 per person.
Reinsurance is placed under reinsurance treaties and agreements with a number of
individual companies and syndicates to mitigate concentration of credit risk.
General Reinsurance Corporation is one of the Company's largest reinsurers of
MPL insurance, with 25% of the ceded risks and 50% of the ceded risks for
professional and comprehensive general liability insurance. The Company relies
on reinsurance brokers and intermediaries to assist in the analysis of the
credit quality of its reinsurers. The Company also requires reinsurers that are
not authorized to do business in Florida to post an evergreen letter of credit
to secure their reinsurance recoverables.
Under Florida law, in the event the Company has the opportunity to settle a
claim within policy limits but fails to do so, and a judgment is rendered
against a policyholder for an amount exceeding the policy limit, the Company may
be charged with bad faith in failing to settle. The Company may be held
responsible for the amount exceeding the policy limit or extra contractual
damages. The Company's primary reinsurance contracts include coverage for
policies with limits equal to or greater than $1 million for which the claim
exceeds policy limits or extra contractual damage. In the past five years, the
Company has not paid a claim, including bad faith claims, in excess of $3.0
million.
Loss and LAE Reserves
The determination of loss reserves is a projection of ultimate losses through an
actuarial analysis of the claims history of the Company and other MPL insurers,
subject to adjustments deemed appropriate to the Company due to changing
circumstances. Included in its claims history are losses and LAE paid by the
Company in prior periods and case reserves for anticipated losses and LAE
developed by the Company's claims department as claims are reported and
investigated. The Company relies primarily on such historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss cost trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss and LAE reserves may be revised. Any increase in the amount of reserves,
including reserves for insured events of prior years, could have an adverse
effect on the Company's results for the period in which the adjustments are
made.
The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance, including
MPL insurance, due primarily to the long-term nature of the resolution of
claims. The Company utilizes both its staff and independent actuaries in
establishing its reserves. The Company's independent actuaries review the
Company's loss and LAE reserves twice each year and prepare a report that
includes a recommended level of reserves. The Company considers this
recommendation as well as other factors, such as known, anticipated or estimated
changes in frequency and severity of losses, loss retention levels and premium
rates, in establishing the amount of its loss and LAE reserves. The Company
continually refines reserve estimates as experience develops and further
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claims are reported and settled. The Company reflects adjustments to reserves in
the results of the periods in which such adjustments are made. MPL insurance is
a long-tail line of business for which the initial loss and LAE estimates may be
adversely impacted by events occurring long after the reporting of the claim,
such as sudden severe inflation or adverse judicial or legislative decisions.
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The following table sets forth the development of loss and LAE reserves of the
Company for the 10-year period ended December 31, 1998:
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Reserves (2) 242,377 188,086 172,738 164,506 152,268 138,745
Reestimated Liability (2)
As Of:
One year later 180,686 154,066 140,322 137,746 128,333
Two years later 127,845 130,137 113,682 111,028
Three years later 107,239 100,141 91,138
Four years later 85,945 82,049
Five years later 73,264
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Paid (2)
As Of:
One year later 47,941 35,382 35,562 28,701 24,794
Two years later 62,928 60,450 52,321 44,882
Three years later 78,593 63,213 56,806
Four years later 73,087 61,825
Five years later 67,563
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Redundancy (Deficiency) (1) 7,400 44,893 57,267 66,323 65,481
% Redundancy (Deficiency) 15.1% 26.0% 34.8% 43.6% 47.2%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
Balance Sheet Reserves (2) 126,651 118,995 119,031 97,302 79,893
Reestimated Liability (2)
As Of:
One year later 98,706 101,844 103,523 104,996 92,801
Two years later 89,182 80,716 86,133 89,427 96,179
Three years later 75,848 71,318 64,124 72,164 80,686
Four years later 67,535 66,276 56,127 56,695 77,714
Five years later 68,472 62,758 54,728 53,007 68,034
Six years later 69,988 61,993 53,826 52,714 66,199
Seven years later 63,156 52,619 52,412 65,894
Eight years later 53,916 51,451 66,776
Nine years later 51,314 65,783
Ten years later 65,042
Cumulative Paid (2)
As Of:
One year later 25,924 26,482 17,500 22,656 28,900
Two years later 42,401 44,542 37,283 34,656 47,038
Three years later 55,278 52,340 47,357 43,754 55,172
Four years later 59,538 56,633 49,655 49,298 61,111
Five years later 62,534 58,183 51,869 49,224 64,669
Six years later 65,860 58,497 51,504 50,407 63,810
Seven years later 60,434 51,593 50,493 64,830
Eight years later 53,224 50,528 64,857
Nine years later 50,622 64,860
Ten years later 64,881
Redundancy (Deficiency) (1) 56,663 55,839 65,115 45,988 14,851
% Redundancy (Deficiency) 44.7% 46.9% 54.7% 47.3% 18.6%
</TABLE>
(1) There may be a difference of 1 (,000) in the redundancies due to rounding.
(2) Due to the adoption of SFAS No. 113 in 1993, amounts in the years 1993
through 1998 are presented on a gross basis. Amounts in the years 1988
through 1992 are presented net of reinsurance recoverables. Prior to the
issuance of SFAS No. 113, the Company maintained its reinsurance records
on a net basis. As detailed records on a gross basis are not available for
years prior to 1993, the Company has not restated these years on a gross
basis.
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The following table sets forth an analysis of the Company's reserves for losses
and LAE and provides a reconciliation of beginning and ending loss and LAE
reserves, net of reinsurance for the periods presented:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Net reserve liability, at beginning of period $173,971 $161,124 $155,318
-------- -------- --------
Reserves of entity acquired 23,406 0 0
Provisions for losses and LAE occurring
in the current period 81,694 69,126 61,617
Decrease in estimated losses and
LAE for claims occurring in prior periods (14,332) (15,115) (14,669)
-------- -------- --------
Total incurred during current period 67,362 54,011 46,948
------ -------- --------
Losses and LAE payments for claims occurring during:
The current period 14,279 8,061 5,253
Prior periods 49,697 33,103 35,889
------ -------- --------
Total paid during current period 63,976 41,164 41,142
------ -------- --------
Net reserve liability, at end of period $200,763 $173,971 $161,124
======= ======== ========
Gross liability at end of period $242,377 $188,086 $172,738
Reinsurance recoverable at end of period 41,614 14,115 11,614
------ -------- --------
Net reserve liability at end of period $200,763 $173,971 $161,124
======== ======== ========
</TABLE>
As shown above, as a result of the Company's review of reserves, which includes
a reevaluation of the adequacy of reserve levels for prior years' claims, the
Company reduced its reserves for claims occurring in prior periods by $14.3
million, $15.1 million and $14.7 million for the years ended December 31, 1998,
1997, and 1996, respectively. There can be no assurance concerning future
adjustments of reserves, positive or negative, for prior years' claims.
Investment Portfolio
The Company's investment strategy for its bond portfolio is to maintain a
diversified investment-grade fixed income portfolio, provide liquidity and
maximize after-tax yield. As of December 31, 1998 the Company's portfolio was
managed internally and the Company had $325.9 million of fixed income securities
at market value. All of the Company's fixed income and equity securities are
classified as available-for-sale.
The Company believes that its focus on income generation rather than capital
appreciation has reduced the portfolio's overall volatility. In addition, the
Company has invested a greater portion of its portfolio in municipal bonds,
which the Company believes generate a greater after-tax return than investments
in taxable fixed income securities of comparable risk, duration, and other
investment characteristics. All of the fixed maturity securities held in the
investment portfolio are publicly traded securities.
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In addition to the fixed income portfolio, the Company invests in other
securities such as investment partnerships and certain strategic equity
investments. Aside from certain strategic investments, the Company's current
policy is to limit such investments to $10 million.
The Company generally does not invest in off-balance sheet derivative financial
investments. However, the Company has invested in one interest rate swap
contract in connection with its revolving credit facility. The contract is an
off-balance sheet instrument and serves to fix the Company's interest expense on
the revolving credit facility.
Competition
The MPL insurance market in Florida is highly competitive. Several companies in
the state offer products at lower premium rates than the Company and more
companies may enter the Florida market in the future. In addition, the Company
believes that the number of healthcare entities that insure their affiliated
physicians through self-insurance may begin to increase. Many of the MPL
insurers are substantially larger and have considerably greater resources than
the Company. Additionally, several of these insurers have received A.M. Best
ratings that are higher than the Company's insurance subsidiaries ratings of "A-
(Excellent)." In addition, because a substantial portion of the Company's
products are marketed through independent insurance agencies, all of which
represent more than one company, the Company faces competition within each
agency in its own agency system. However, the Company's name recognition,
medical society endorsements, physician board of directors, agency force and
program development have all contributed to helping the Company maintain its
number of insureds. The Company has been successful at target marketing groups
and specialties that exhibit above average profitability. The Company believes
that its marketing success has allowed it to improve the quality and
profitability of its overall business.
The Company believes that the principal competitive factors in its business in
Florida are service, name recognition and price, and that it is competitive in
Florida in all of these areas. The Company enjoys strong name recognition in
Florida by virtue of having been organized by, and operated for the principal
benefit of, Florida physicians. The services offered insureds of the Company as
well as the healthcare community in general are intended to promote name
recognition and to maintain and improve loyalty among the insureds of the
Company. MPL insurance offered by FPIC has the exclusive endorsement of both the
Florida Medical Association and the Florida Dental Association, and is also
endorsed by various county medical societies and various state medical specialty
societies.
In general, the MPL market in other states is dominated by local carriers who
have been able to maintain strong customer loyalty. The same targeted specialty
and loss-free approach developed in Florida is being used in these other states.
The Company is recruiting and developing an agency force to expand its market,
provide service and develop name recognition.
Insurance Ratings
FPIC and APAC currently have a financial condition rating from A.M. Best of "A-
(Excellent)". An A.M. Best rating is intended to provide an independent opinion
of an insurer's ability to meet its obligations to policyholders and should not
be considered an investment recommendation. A.M. Best's ratings are based upon a
comprehensive review of a company's financial performance that is supplemented
by certain data, including responses to A.M. Best's questionnaires, quarterly
National Association of Insurance Commissioners (NAIC) filings, state
10
<PAGE> 13
insurance department examination reports, loss reserve reports, annual reports
and reports filed with the Securities and Exchange Commission. A.M. Best
undertakes a quantitative evaluation based upon profitability, leverage and
liquidity and a qualitative evaluation based upon the composition of an
insurer's book of business or spread of risk, the amount, appropriateness and
soundness of reinsurance, the quality, diversification and estimated market
value of its assets, the adequacy of its loss reserves and policyholders'
surplus and the experience and competency of its management.
Regulation
The Company and its insurance subsidiaries are subject to extensive state
regulatory oversight in Florida and in the other jurisdictions in which they
conduct business.
Florida insurance law regulates insurance holding company structures, including
the Company and its subsidiaries. Each insurance company in a holding company
structure is required to register with the Florida Department of Insurance (the
"Department of Insurance") and furnish information concerning the operations of
companies within the holding company structure that may materially affect the
operations, management or financial condition of the insurers within the
structure. Pursuant to these laws, the Department of Insurance may examine the
Company, and/or FPIC and APAC at any time and require disclosure of and/or
approval of material transactions involving any insurance subsidiary of the
Company, such as extraordinary dividends from FPIC and APAC. All transactions
within the holding company structure affecting FPIC and APAC must be fair and
reasonable.
Florida insurance law provides that no person may acquire directly or indirectly
five percent or more of the voting securities of a Florida domiciled insurance
company unless such person has obtained the prior written approval of the
Department of Insurance for such acquisition. Any purchaser of five percent or
more of the Company's insurance subsidiaries, FPIC's and APAC's, outstanding
common stock will generally be presumed to have acquired control of FPIC or
APAC. In lieu of obtaining such prior approval, a purchaser owning less than 10%
of the outstanding shares of the Company or FPIC or APAC may file a disclaimer
of affiliation and control with the Department of Insurance.
Since FPIC and APAC are domiciled in Florida, the Department of Insurance is
their principal supervisor and regulator. However, FPIC and APAC are also
subject to supervision and regulation in the states in which they transact
business in relation to numerous aspects of their business and financial
condition. The primary purpose of such supervision and regulation is to insure
the financial stability of FPIC and APAC for the protection of policyholders.
The laws of the various states establish insurance departments with broad
regulatory powers relative to granting and revoking licenses to transact
business, regulating trade practices, required statutory financial statements
and prescribing the types and amount of investments permitted. Although premium
rate regulations vary among states and lines of insurance, such regulations
generally require approval by each state regulator of the rates and policies to
be used in its state.
Insurance companies are required to file detailed annual reports with the
supervisory agencies in each state in which they do business, and their business
and accounts are subject to examination by such agencies at any time.
The NAIC annually calculates 12 financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a
11
<PAGE> 14
"usual range" of results for each ratio, established by the NAIC. For the year
ended 1998, the Company's results were within the usual range for each of the 12
ratios.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles Project (the Codification) as the NAIC supported basis of accounting.
The Codification was approved with a provision allowing for commissioner
discretion in determining appropriate statutory accounting for insurers.
Accordingly, such discretion will continue to allow prescribed or permitted
accounting practices that may differ from state to state.
The impact of the Codification on the Company's statutory financial statements
has not been determined. Because the Codification represents a new basis of
accounting for statutory financial statements, adoption of the Codification may
have a significant impact on the Company's statutory financial statements.
Although the NAIC has stated that the adoption date for the Codification is
January 1, 2001, the implementation date is dependent upon an insurer's state of
domicile. Accordingly, the Company's adoption date of the Codification is
dependent upon actions of the Insurance Department of the State of Florida and
the Florida State Legislature.
The insurance subsidiaries of the Company are subject to assessment by the
Financial Guaranty Associations in the states in which they conduct business for
the provision of funds necessary for the settlement of covered claims under
certain policies of insolvent insurers. Generally, these associations can assess
member insurers on the basis of written premiums in their particular states.
The insurance industry is under continuous review by Congress, state
legislatures and state and federal regulatory agencies. From time to time
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an effect on insurers or reinsurers. Among
the proposals that have in the past been, or are at present being, considered
are the possible introduction of state and federal limits on certain damages for
MPL as well as federal regulation in addition to, or in lieu of, the current
system of state regulation of insurers. The Company is unable to predict whether
any of these proposals will be adopted, the form in which any such proposals
would be adopted, or the impact, if any, such adoption would have on the
Company, although such impact could be material.
Third Party Services
Through McCreary and its subsidiary, Employers Mutual, Inc. (EMI), the Company
offers third party administration services, and which operates as a separate
industry segment. McCreary specializes in the administration of self insurance
plans for large employers. The lines of insurance that McCreary primarily
administers are group health, workers' compensation, general liability and
property. The main product of EMI is administration for emerging managed care
organizations. The Company intends to offer these services to its existing and
potential customer base of healthcare facilities and managed care organizations
on both a self insured basis and a fully insured basis. For the year ended
December 31, 1998, McCreary contributed $12.2 million to the Company's total
revenue.
Employees
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<PAGE> 15
At December 31, 1998, the Company employed 314 persons. None of these employees
are covered by a collective bargaining agreement. Management considers the
Company's relationships with its employees to be good.
Item 2. Properties
The Company's corporate headquarters are located in Jacksonville, Florida. The
headquarters property is an 8-story, 70,000 sq. ft. office building owned by the
Company where 26,600 sq. ft. of space is occupied for its offices and 12,000 sq.
ft. is occupied by EMI. The Company and its subsidiaries lease additional
facilities that management believes are adequate for the Company's current
needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company or its
subsidiaries other than litigation arising in connection with the settlement of
insurance claims.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of 1998.
PART II
Item 5. Market for the Registrants' Common Equity and Related Stockholder
Matters
The Company's Common Stock has been publicly traded on the Nasdaq National
Market System since August 1, 1996 under the symbol FPIC. The following table
sets forth for the periods indicated the high and low bid quotations as
reported. Such quotations reflect inter-dealer bids and offers, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1998 High Bid Low Bid
- ---- -------- -------
<S> <C> <C>
First quarter $32.37 $26.00
Second quarter $37.25 $31.87
Third quarter $37.25 $24.75
Fourth quarter $47.81 $23.00
</TABLE>
<TABLE>
<CAPTION>
1997 High Bid Low Bid
- ---- -------- -------
<S> <C> <C>
First quarter $19.13 $13.63
Second quarter $22.75 $17.38
Third quarter $29.50 $22.25
Fourth quarter $29.75 $26.50
</TABLE>
As of March 19, 1999, the Company estimated that there were approximately 4,900
beneficial owners of the Company's common stock.
The Company presently intends to retain any future earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.
Item 6. Selected Financial Data
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<PAGE> 16
The selected financial data presented below for the fiscal years ending December
31 should be read in conjunction with the Company's consolidated financial
statements and notes thereto, which are included elsewhere herein. All per share
amounts have been stated giving retroactive effect for the stock split that
occurred as a result of the Reorganization in June 1996.
Income Statement Data:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Direct written premiums $116,989 $77,771 $64,292 $56,641 $52,454
Total revenues 120,321 93,216 76,982 69,531 52,306
Net income 20,693 16,557 13,324 11,686 5,877
Basic earnings per share $2.22 $1.83 $1.57 $1.47 $.76
Diluted earnings per share $2.11 $1.76 $1.53 $1.47 $.76
Cash dividend declared
per share $0 $0 $.10 $.10 $.10
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Total investments $345,004 $268,300 $238,497 $221,604 $192,867
Total assets 479,378 352,849 303,553 276,699 244,266
Loss and LAE reserves 242,377 188,086 172,738 164,506 152,268
Total liabilities 328,448 232,785 207,141 195,143 182,660
Shareholders' equity 150,931 120,064 96,411 81,556 61,606
</TABLE>
Item 7. Management's Discussion & Analysis
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes appearing elsewhere in this
report. The consolidated financial statements include the results of two of the
Company's wholly owned subsidiaries, Anesthesiologists' Professional Assurance
Company and Sy.Med Development, Inc., since July 1, 1998. All amounts have been
rounded to the nearest $100,000.
General
FPIC Insurance Group, Inc. ("FIG" or the "Company") is, through its insurance
subsidiaries, the largest provider of medical professional liability (MPL)
insurance in Florida, based on the total number of physicians and dentists
insured. The Company was formed in 1996 in connection with a reorganization
pursuant to which it became the parent company of Florida Physicians Insurance
Company, Inc. ("FPIC") and McCreary Corporation ("McCreary"), a third party
administrator.
The Company, through its insurance subsidiaries, specializes in liability
insurance products and services for the healthcare community, with MPL insurance
for physicians and dentists as its primary product. The Company's MPL insurance
is written on a "claims-made" basis (as opposed to an "occurrence" basis)
providing protection to the insured only for those claims that arise out of
incidents occurring, and of which notice to the insurer is given, while coverage
is in effect. The advantage of a claims-made policy is that it allows the
insurer to accrue reserves in
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<PAGE> 17
the year that the claim is reported. Consequently, the insurer is able to
measure frequency of claims faster, and therefore estimate reserves, with
greater accuracy.
During 1997, (i) McCreary acquired Employers Mutual, Inc. ("EMI"), a third party
administrator, (ii) the Company acquired a 20% interest in APS Insurance
Services, Inc. ("APS"), a management company for a Texas MPL insurance
reciprocal, and (iii) FPIC acquired renewal rights with respect to Frontier
Insurance Company's Florida book of physician MPL business. On July 1, 1998, the
Company acquired Anesthesiologists' Professional Assurance Company (APAC), a
Florida-based MPL insurer. On January 6, 1999, the Company acquired
Administrators for the Professions, Inc. ("AFP"), the management company for
Physicians' Reciprocal Insurers ("PRI"), a New York MPL insurance reciprocal. On
March 17, 1999, FPIC acquired The Tenere Group, Inc. ("Tenere"), a Missouri
insurance holding company that owns Intermed Insurance Company ("Intermed"), a
Missouri MPL insurer, and Interlex Insurance Company ("Interlex"), a Missouri
legal professional liability insurer.
The Company's primary sources of revenues are dividends from its subsidiaries.
The dividends are derived from earned premiums and investment income generated
from the operations of the Company's insurance subsidiaries and fee and
commission income generated from the operations of the Company's other
subsidiaries.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpected changes in loss trends for
the Company's insurance subsidiaries in any period could have a materially
adverse effect on the Company. In addition, reevaluations of loss and loss
adjustment expense (LAE) reserves for the Company's insurance subsidiaries could
result in an increase or decrease in reserves and a corresponding adjustment to
earnings. LAE are costs associated with the settlement of claims. The Company's
historical results of operations are not necessarily indicative of future
earnings.
Overview
Fiscal year 1998 was the strongest year for growth in the Company's history. Net
premiums earned by the Company's insurance subsidiaries grew 37%, from $65.5
million in 1997 to $89.6 million in 1998. Total revenues increased 29%, from
$93.2 million in 1997 to $120.3 million in 1998. Net income increased 25%, from
$16.6 million in 1997 to $20.7 million, and fully diluted earnings per share
increased 20%, from $1.76 per share in 1997 to $2.11 per share. During 1998, the
portion of the Company's revenues attributable to areas other than its core
physicians MPL market continued to increase. Excluding investment income,
revenues generated from non-core market sources grew to 28% of total revenues at
year end 1998, compared to 24% for 1997.
The 1998 net losses and loss adjustment expenses for the Company's insurance
subsidiaries rose 25%, from $54.0 million in 1997 to $67.4 million in 1998,
primarily due to the increase in premiums earned.
The Company believes that the premiums and earnings growth rates in 1999 should
be comparable to those achieved in 1998 as the result of the acquisitions that
have been completed. This growth could be further enhanced in the event of the
completion of any significant new acquisitions during 1999.
Insurance Operations
With respect to the Company's core MPL business, total insureds increased 25% in
1998, from
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<PAGE> 18
6,831 in 1997 to 8,525. Of this increase, 11% is attributable to APAC and 10%
attributable to the growth in insureds in Texas. Physician insureds grew 31%
during 1998, from 4,872 in 1997 to 6,383. Dental insureds grew 4% in 1998, from
1,772 in 1997 to 1,843. All other MPL insureds grew 60% during 1998, from 187 in
1997 to 299 in 1998. Net premiums earned on the company's MPL business grew 18%
during 1998, from $63.5 million in 1997 to $74.8 million.
Growth was achieved during 1998 in other product areas such as legal defense for
healthcare provider licensure investigations, group accident and health
insurance coverage and errors & omissions and directors & officers liability
insurance for managed care organizations. Net premiums earned for these products
increased from $2.0 million in 1997 to $12.7 million in 1998, primarily as a
result of the increased health premium.
The Company experienced another solid year of underwriting results during 1998,
with the frequency of physician claims reported decreasing by 12% from 1997
levels. The decline in claims frequency over the past several years is a
positive sign for future claims development. The primary risk to future positive
development of the Company's claims expense is unanticipated increases in the
average claims payment, also known as severity. Loss experience on the 1996 and
prior report years is developing as expected and, in some instances, better than
expected. However, report years 1997 and 1998 are not mature enough to
accurately project at this time.
The Company's combined ratio for fiscal year 1998, calculated using generally
accepted accounting principles (GAAP), declined 5%, from 93.3% in 1997 to 89.2%
in 1998. This positive trend was primarily due to the increase in health and
workers' compensation premiums, which carry a lower combined ratio than the core
MPL business.
For 1998 the total return in the Company's fixed-income investment portfolio was
6.63%, equating to an 8.02% taxable equivalent yield when adjusted for the
municipal bond allocation. While the Company invests primarily in high grade
fixed-income securities with an average duration of less than five years, the
return on average investments dropped from 5.8% in 1997 to 5.7% in 1998
primarily due to a higher level of invested assets and a greater allocation to
federally tax-exempt securities. The total amount of the bond portfolio invested
in tax-free securities increased from 50% in 1997 to 58% in 1998. The current
investment policy permits increased allocations to tax-free securities when the
taxable equivalent yield exceeds that of taxable securities of comparable
credit, maturity and structure.
On a consolidated basis, the Company's total investment portfolio grew $76.7
million from $268.3 million in 1997 to $345.0 in 1998. APAC accounted for $33.0
million of the increase and the expiration of the Cologne reinsurance contract
contributed approximately $15.2 million to the increase. The growth in
investments also consisted of a net contribution from the reinvestment of net
interest income of $18.2 million and an increase in equities and other invested
assets of $10.3 million. Net investment income earned increased 9%, from $16.0
million in 1997 to $17.5 million in 1998.
Outlook for Florida MPL Market
The Company's assessment of the current Florida MPL market indicates that
premium growth may be flat for 1999 due to the continuation of intense
competition from both the large numbers of carriers already present and new
carriers entering the state. This competition is likely to keep downward
pressure on rates during 1999.
16
<PAGE> 19
Effective January 1, 1999, FPIC instituted a rate increase averaging 6.2%
overall. Certain diagnostic and primary care specialties received much greater
rate increases. Within these specialties FPIC has continued to realize
deteriorating loss experience with loss ratios reaching levels that, over time,
could negatively impact earnings. The Company's strategy is to increase pricing
on these negatively developing medical specialties to the level where
contribution is being made toward covering related fixed expenses.
1998 Acquisitions and New Products
On July 1, 1998, the Company acquired APAC for $18 million in a combination of
cash, Company common stock and assumption of debt. APAC is a Florida-domiciled
insurer that writes MPL coverage for anesthesiologists. Net premiums earned by
APAC during 1998 totaled $1.5 million, and as of December 31, 1998 APAC had 736
insureds. APAC contributed little to the Company's 1998 operating results due to
preexisting reinsurance arrangements; however, the Company anticipates that APAC
will contribute to 1999 operating results. Also, on July 1, 1998, the Company
acquired a 9.9% equity interest in American Professional Assurance Ltd.
("APAL"), a Cayman Islands reinsurer, for $5.5 million in cash.
The total health business grew from $1.0 million in premium in 1997 to $ 14.9
million in premium in 1998. In November 1997 the Company began writing and
assuming group accident and health. The majority of this business is from the
Florida Dental Association group health plan. The Florida Dental Association
health plan was a unique opportunity for FPIC to enter the fully insured health
insurance market with limited risk through a rate stabilization fund. The rate
stabilization fund of $2.3 million, which acts as free reinsurance, allows the
Company access to funds to cover loss payments in the event combined ratios in
the plan exceed 100%. A benefit to FPIC and McCreary, which administer the plan,
is a 10% administrative fee.
The Florida Medical Association has also entered into agreements with FPIC to
administer its health plan in an arrangement similar to that with the Florida
Dental Association. The plan should begin in the second quarter of 1999.
During 1998, the Company continued its efforts to develop and provide
complementary products and services to its existing businesses and to create
opportunities to more efficiently distribute its products and services. In May
1998, the Company formed a new subsidiary, Professional Strategy Options, Inc.,
to provide consulting assistance to medical practices and organizations with
respect to risk sharing arrangements, developing provider sponsored
organizations and improving practice management. In July 1998 EMI acquired
Sy.Med Development, Inc., a Tennessee-based software development and consulting
company that specializes in developing products designed to reduce the
administrative burden for physician practices created by managed care. In August
1998, FPIC and Coastal Insurance Enterprises, Inc., an Alabama insurer, formed
and obtained equal equity interests in Polaris Insurance Group, Inc., which
markets their insurance products in the state of Georgia. In November 1998,
EMI's subsidiary, FPIC Services, Inc., together with Bexar County Medical
Society Management Holding Company, Inc. and Texas Medical Liability Trust,
formed and obtained equal equity interests in a Texas corporation, Bexar
Credentials Verification, Inc., which offers credential verification and other
related services to physicians.
1999 Acquisitions and Strategy
On January 6, 1999, the Company acquired Administrators for the Professions,
Inc. (AFP), which is the manager and attorney-in-fact for Physicians' Reciprocal
Insurers (PRI), a New York
17
<PAGE> 20
MPL insurance reciprocal. PRI, which is the second largest MPL carrier for
physicians in New York, insures over 7,000 physicians and has direct written
premiums of approximately $125 million and total assets of approximately $870
million. The purchase consideration paid by the Company for AFP consisted of $44
million in cash and 214,286 shares of the Company's common stock. AFP derives
its income from management fees paid by PRI. The Company anticipates that the
acquisition of AFP will positively impact the Company's 1999 operating results.
The amount of such impact will depend on the ability of the Company to implement
on a timely basis certain systems improvements, the streamlining and integration
of operations and cost saving measures for AFP, which are currently being
reviewed.
The Company is currently analyzing the possibility of PRI converting to a stock
insurer and being acquired by the Company. Such a transaction would be subject
to the approval of PRI's Board and policyholders and the New York Department of
Insurance. Such an acquisition would give the Company direct ownership of a
large northeastern MPL insurer and has the potential to further improve the
Company's operating results.
On March 17, 1999, FPIC acquired The Tenere Group, Inc. (Tenere), which is the
holding company for Intermed, a Missouri MPL insurer with approximately 1,700
insureds, and Interlex, a Missouri legal professional liability (LPL) insurer
with approximately 990 insureds. The purchase price for Tenere was approximately
$19.6 million in cash. The Company anticipates that the acquisition of Tenere
will positively impact the Company's 1999 operating results. The acquisition of
Tenere, Intermed and Interlex provides the Company with approximately $9.0
million of additional net premiums earned and increases the Company's presence
in the southern mid-west. The Company contemplates prudently expanding the LPL
business to the Company's other states of operation and to use the Company's
existing relationships with legal defense attorneys to help market this
business.
On July 1, 1997, the Company acquired a 20% equity interest in APS, a management
company for American Physicians Insurance Exchange ("APIE"), a Texas MPL
insurance reciprocal. During 1998, APS had net income of approximately $900,000.
In addition, the Company's equity interest in APS permits FPIC to directly write
MPL business in Texas for insureds of APIE who require an insurer strongly rated
by A.M. Best. During 1998, the Company received $7.3 million of direct written
premiums under this arrangement. In connection with the acquisition of the
initial 20% equity interest in APS, the Company obtained an option to acquire an
additional 35% equity interest in APS during 1999 for a per share purchase price
equal to ten times the average of the annual net earnings per share of APS for
1997 and 1998. The Company currently is awaiting receipt of APS' 1998 audited
financial statements prior to determining whether to exercise this option.
The Company continues to believe that the MPL industry is in a consolidation
phase and will ultimately be dominated by companies with a national presence.
During 1999, the Company will continue to work to implement its strategy of
growing nationally within the MPL industry through a series of geographically
strategic acquisitions. The Company views ideal acquisition candidates as
companies that are as strong or stronger than the Company on a relative basis
and seeks acquisitions that are expected to be immediately accretive to
earnings.
The acquisitions to date provide the Company with infrastructure to expand its
products and services to the southeast, northeast and southern midwest. The
Company's goal over the next few years is to acquire additional companies to
provide management support and operations in the rest of the country.
Accomplishing this goal will provide the Company with the resources to compete
nationally for physicians and healthcare facilities insurance business. The
Company
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<PAGE> 21
views this expansion as the cornerstone of its strategy to meet the growing
needs of the consolidating healthcare marketplace.
A secondary acquisition strategy that the Company considers viable is the
acquisition and consolidation of operations of small to medium sized third party
administrators ("TPAs") for self-insured and fully-insured health plans. The
Company currently owns two TPAs, McCreary and EMI, and has identified a number
of other TPAs that are acquisition candidates. With the focus of the Company's
management and operations on the MPL business, additional management and
operational support would be necessary to implement this TPA acquisition
strategy. The Company currently is considering alternatives to provide this
additional support.
A number of capital sources are available to finance acquisitions, including
internally generated funds, bank credit facilities and newly issued debt and/or
equity securities.
Stock Repurchase Plan
On July 13, 1998, the Company's Board of Directors approved a stock repurchase
plan pursuant to which the Company is authorized to repurchase, at management's
discretion, up to 500,000 of its shares on the open market over a twelve month
period. As of December 31, 1998, 71,000 shares had been repurchased by the
Company pursuant to this plan at a cost of approximately $1,840,000.
Results of Operations - Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
Premiums
Direct premiums written and assumed increased $39.2 million, or 50%, from $77.8
million in 1997 to $117.0 million in 1998. This increase was primarily
attributable to assumed premium of $22 million, of which $16 million was MPL
premium, the purchase of APAC, which added $2.8 million, and an average rate
increase of 5.5% on MPL premiums effective January 1, 1998. In addition, the
Company added direct premium written of $5.2 million in Texas and $8 million in
group accident and health coverage in 1998. Reinsurance premium ceded more than
doubled from $7.5 million in 1997 to $16 million in 1998 due to the increase in
premium written in Texas and the APAC premium. Net premiums earned increased
$24.1 million, or 37%, from $65.5 million in 1997 to $89.6 million in 1998 due
to the increase in direct premiums written and the assumed premium.
Net Investment Income
Net investment income increased $1.5 million, or 9%, from $16.0 million in 1997
to $17.5 million in 1998. The increase was primarily attributable to a higher
level of invested assets and the inclusion of APAC, which added approximately
$0.9 million of investment income. The increase was achieved despite an increase
in the overall allocation to tax-free securities from 50% in 1997 to 58% in
1998. The Company's primary investment objective is to acquire investment grade
fixed-income securities with an average duration of approximately five years.
Though interest rates declined in 1998, the average maturity of the portfolio
was not extended and the duration decreased slightly from 5.0 years in 1997 to
4.9 years in 1998.
Claims Administration Fees and Commission Income
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<PAGE> 22
This income is generated by McCreary and its subsidiary, EMI. Claims
administration fees are revenues generated by McCreary's core business, which is
the administration of self-insured programs for large employers, primarily in
the health and workers compensation areas. Neither McCreary nor the Company
assumes any risk on these products; the risk is assumed by each employer and any
excess coverage desired is placed by McCreary with various insurers and
reinsurers. All the commission income was generated from the placement of this
excess coverage by McCreary.
Claims administration fees and commission income increased $1.4 million, or 14%,
from $10.2 million in 1997 to $11.6 million in 1998. This increase is
attributable to the addition of new contracts.
Losses and LAE
Losses and LAE increased $13.4 million, or 25%, from $54.0 million in 1997 to
$67.4 million in 1998 reflecting, in part, the increase in premiums earned. The
GAAP loss ratios were 75.2% in 1998 and 82.5% in 1997. The lower loss ratio in
1998 reflects a change in the mix of business, particularly the group accident
and health product, which runs a lower loss ratio than the Company's MPL
business. In connection with the Company's bi-annual reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior years'
claims, the Company reduced its reserves for claims occurring in prior periods
by $14.3 million in 1998 and $15.1 million in 1997. There is no assurance that
reserve adequacy reevaluations will produce similar reserve reductions in the
future. Factors that could adversely affect the loss and LAE reserve estimate
and future redundancies include, but are not limited to, inflation, changes in
frequency and severity trends or changes in the judicial or legislative
environment. The Company cannot predict whether similar redundancies will be
experienced in future years.
The Company believes that its favorable loss and LAE reserve development has
primarily resulted from the following factors: (i) tort reform; (ii) the
Company's approach to establishing reserves; (iii) the Company's targeting of
medical specialties in which it believes it has developed substantial knowledge
and experience; and (iv) the Company's targeting of "claims-free" business.
Other Underwriting Expenses
Other underwriting expenses increased $5.4 million, or 76%, from $7.1 million in
1997 to $12.5 million in 1998. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written. In addition, the increase in assumed premium and the expansion into
other product lines, such as group accident and health, have higher acquisition
costs and added $3.8 million.
Claims Administration Expenses
Claims administration expenses increased $1.4 million, or 16%, from $8.5 million
in 1997 to $9.9 million in 1998. This increase was primarily attributed to the
addition of new contracts.
Income Tax
Income taxes increased $1.4 million, or 21%, from $6.8 million in 1997 to $8.2
million in 1998. This increase was due to additional income before tax.
20
<PAGE> 23
Net Income
For the reasons stated above, net income increased $4.1 million, or 25%, from
$16.6 million in 1997 to $20.7 million in 1998.
Results of Operations - Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
Premiums
Direct premiums written and assumed increased $13.5 million, or 21%, from $64.3
million in 1996 to $77.8 million in 1997. This increase was primarily
attributable to growth in the number of insureds and a rate increase of 2.4% on
physician MPL premiums effective January 1, 1997. In addition, the Company added
$2.5 million of direct premium written in Texas and assumed $1.0 million in
group accident and health coverage in 1997. Reinsurance premium ceded increased
$1.8 million, or 32%, from $5.7 million in 1996 to $7.5 million in 1997 due to
the increase in premium written in Texas. Net premiums earned increased $9.4
million, or 17%, from $56.1 million in 1996 to $65.5 million in 1997 due to the
increase in direct premiums written and the assumed premium.
Net Investment Income
Net investment income increased $1.3 million, or 8.8%, from $14.7 million in
1996 to $16.0 million in 1997. The increase was primarily attributable to a
higher level of invested assets. The increase was achieved despite a shift in
the portfolio from 41% of tax free securities in 1996 to 50% of tax-free
securities in 1997. The Company's investment policy is to acquire investment
grade fixed income securities with an average duration of approximately five
years. Due to the falling interest rate environment, maturities in the portfolio
were extended and the average duration of the portfolio was increased from 4.2
years in 1996 to 5.0 years in 1997.
Claims Administration Fees and Commission Income
Claims administration fees and commission income nearly doubled, from $5.2
million in 1996 to $10.2 million in 1997. This increase is attributable to the
addition of new contracts and the inclusion of EMI, which was purchased in 1997
and added revenue of $4.6 million.
Losses and LAE
Losses and LAE increased $7.0 million, or 15%, from $47.0 million in 1996 to
$54.0 million in 1997 reflecting, in part, the increase in insureds. The Company
experienced GAAP loss ratios of 82.5% in 1997 and 83.7% in 1996. In connection
with the Company's bi-annual reserving review, which includes a reevaluation of
the adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $15.1 million in 1997 and
$14.7 million in 1996.
Other Underwriting Expenses
Other underwriting expenses increased $0.7 million, or 11%, from $6.4 million in
1996 to $7.1 million in 1997. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written, and the expansion into other product lines.
21
<PAGE> 24
Claims Administration Expenses
Claims administration expenses more than doubled from $4.1 million in 1996 to
$8.5 million in 1997. These expenses are for McCreary and this increase was
primarily attributed to the inclusion of the EMI operations in the 1997
financial statements.
Income Tax
Income taxes increased $0.8 million, or 13%, from $6.0 million in 1996 to $6.8
million in 1997. This increase was lower than the percentage change in income
before tax, which increased 21% to $23.3 million, due to the shift in the
investment policy from taxable to tax-free securities.
Net Income
For the reasons stated above, net income increased $3.3 million, or 25%, from
$13.3 million in 1996 to $16.6 million in 1997.
Liquidity and Capital Resources
The payment of losses and LAE and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to pay
these items has been provided by operating activities. Cash provided from these
activities was sufficient during 1998 to meet the Company's needs. Management
believes these sources will be sufficient to meet the Company's cash needs for
operating purposes for at least the next twelve months. However, a number of
factors could cause increases in the dollar amount of losses and LAE and may
therefore adversely affect future reserve development and cash flow needs.
Management believes these factors include, among others, inflation, changes in
medical procedures, increasing use of managed care and adverse legislative
changes. In order to compensate for such risk, the Company: (i) maintains what
its management considers to be adequate reinsurance; (ii) conducts regular
actuarial reviews of loss reserves every six months; and (iii) maintains
adequate asset liquidity (by managing its cash flow from operations coupled with
its fixed income maturities).
The Company maintains a revolving credit facility with SunTrust Bank. As of
December 31, 1998, $27,165,000 had been borrowed under this agreement at an
interest rate of approximately 5.9%. In January 1999, the Company increased the
facility from $30,000,000 to $75,000,000. The new credit facility agreement
terminates on January 4, 2002 and bears interest at various rates. The interest
rates range from LIBOR plus 0.75% to Prime plus 0.50%. The Company is not
required to maintain compensating balances in connection with this credit
facility. Under the terms of the credit facility, the Company is required to
meet certain financial covenants. Significant covenants are as follows: a) The
Company's funded debt to total capital plus funded debt ratio cannot exceed
0.3:1 and b) Net premiums written to statutory capital and surplus ratio cannot
exceed 2.0:1. The credit facility is guaranteed by certain subsidiaries and
collateralized by the common stock of certain subsidiaries. On January 6, 1999,
an additional $33,000,000 was borrowed under this agreement at a rate of
approximately 6.1%.
At December 31, 1998, the Company held approximately $11.9 million in
investments scheduled to mature during the next twelve months, which combined
with net cash flows from operating activities, are expected to provide the
Company with sufficient liquidity and working capital. As highlighted in the
accompanying Consolidated Statements of Cash Flows, the Company generated
positive net cash from operations of $30.2 million in 1998.
22
<PAGE> 25
Shareholder dividends payable by the Company's insurance subsidiaries are
subject to certain limitations imposed by Florida law. In 1999, these
subsidiaries are permitted, within insurance regulatory guidelines, to pay
dividends of approximately $18,300,000 without prior regulatory approval.
In recent years the NAIC has developed risk-based capital ("RBC") measurements
for insurers. The measurements provide state regulators with varying levels of
authority based on the adequacy of an insurer's RBC. At December 31, 1998, the
insurance subsidiaries statutory annual statements reported a total adjusted
surplus to policyholders of $117.3 million, which is $99 million more than the
NAIC's authorized RBC control level of $18.3 million. The authorized control
level permits an insurance regulator to take whatever regulatory actions are
considered necessary to protect the best interests of the policyholders and
creditors of the insurer, which may include placing the insurer under regulatory
control (i.e., rehabilitation or liquidation). The Florida Department of
Insurance has adopted the NAIC's RBC standards.
Accounting Pronouncements
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income" requires that all items that meet the definition of
components of comprehensive income be reported in the financial statements for
the period in which they are recognized. The Company adopted the provisions of
SFAS No. 130 for the period ended December 31, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted the provisions of SFAS No. 131 for the
period ended December 31, 1998.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes disclosure requirements for pensions and other post
retirement benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer useful. The Company adopted the provisions of SFAS No. 132 for the period
ended December 31, 1998.
Guaranty Fund Assessments
The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. (FIGA) as well as similar associations in other states where
it is licensed, for the provision of funds necessary for the settlement of
covered claims under certain policies of insolvent insurers. In addition to the
standard FIGA assessments, the Florida Legislature may levy special assessments
to settle claims caused by certain catastrophic losses. The Company would be
assessed on a basis of premium written. No provision for special assessments was
made in the 1998 financial statements. However, damages caused by future
catastrophes, such as hurricanes, could subject the Company to additional
assessments.
Item 7A. Disclosure About Market Risk
23
<PAGE> 26
The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve various risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
Market risk is the risk of loss arising from adverse changes in market rates and
conditions, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.
The fair value of the Company's debt and equity investment portfolio as of
December 31, 1998 was $336,250,549. Approximately 97% of the portfolio was
invested in fixed maturity securities. The primary market risk to the investment
portfolio is interest rate risk associated with investments in fixed maturity
securities. The Company's exposure to equity risk is not significant.
The Company does not believe it has any foreign currency exposure. The Company
does not conduct any operations outside of the United States nor does the
Company own any non-U.S. dollar denominated securities.
Generally, the Company does not invest in derivatives and does not currently use
any hedging strategies in its investment portfolio. However, the Company has
invested in one interest rate swap contract to fix the interest rate in
connection with its revolving credit facility. As of December 31, 1998, the
Company's investments in Collateral Mortgage Obligations and Asset Backed
Securities represented approximately one percent of its investment portfolio.
The Company's investment portfolio is predominately fixed-income with
approximately 58% allocated to the municipal sector. The balance is diversified
through investments in Treasuries, agencies, corporates and mortgage-backed
securities. The three market risks that can most directly affect the investment
portfolio are changes in US interest rates, credit risks and legislative changes
impacting the tax-exempt status of municipal securities.
Adverse impacts to the Company resulting from changes in interest rates is
primarily controlled through limiting the duration, or average maturity, of the
overall portfolio. The Company manages the duration of its portfolio relative to
the duration of the anticipated liabilities of the Company. Credit risks are
controlled through investing in securities with above average credit ratings.
Approximately 68% of the portfolio is AAA, 16% is AA, 6% is A and 10% is BBB
rated. From time to time discussion arises in the United States Congress
relative to changing or modifying the tax-exempt status of municipal securities.
While the Company is diligent in its efforts to stay current on legislative acts
that could adversely impact the tax exempt status of municipal securities, and
while it is uncertain as to whether these changes would ultimately affect
valuation of municipal securities currently held in the portfolio, at present
there are no hedging or other strategies being specifically used to minimize
this risk. If interest rates were to rise 100 basis points, the fair value of
the Company's fixed maturity securities would decrease approximately $6,883,000.
There have been no significant changes to the Company's exposure to financial
market risks during the year nor does the Company anticipate any significant
changes in future reporting periods.
24
<PAGE> 27
Projected Cash Flows
(in thousands)
<TABLE>
<CAPTION>
December 31,
1998
1999 2000 2001 2002 2003 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Fixed maturity securities:
Available for sale $11,826 $9,725 $17,987 $7,166 $5,630 $259,895 $312,229 $325,922
Liabilities:
Credit facility 27,165 21,590
Weighted Average Interest Rate:
Fixed maturity securities 7.03% 6.05% 5.92% 6.64% 6.46% 6.22%
Credit facility 5.91%
</TABLE>
The amounts reported as cash flows in the above table for fixed maturities
represent par values at maturity date. The fair values of fixed maturities as
disclosed in the above table are based upon quoted market prices or dealer
quotes for comparable securities. The fair value of the credit facility is based
on the amount of cash flows discounted over the applicable term at the Company's
borrowing rate at December 31, 1998.
Year 2000
The Year 2000 poses significant issues for organizations across the country and
requires consideration of converting or replacing millions of lines of computer
code. The Year 2000 ("Y2K") issue exists due to program developers creating
databases and programs to store and process a year as a two-digit field.
The Company's Information Systems ("IS") management staff has performed a
thorough review of the Company's operations and the operations of each of its
subsidiaries. These reviews considered the readiness of software systems written
internally and those provided by third parties to process data and perform date
calculations correctly using dates beginning January 1, 2000 and beyond.
Hardware, including servers, PC workstations, network routers, and
communications equipment were reviewed to determine that firmware and operating
system software were Y2K compliant.
An action plan was created to resolve all known Y2K issues by July 1, 1999. The
Company fully expects its mission critical software and hardware systems to be
fully functional on January 1, 2000 and beyond. Third parties who provide
software and/or hardware to the Company have been requested to provide
statements of Y2K compliance. Any problems that may occur regarding Y2K are
expected to be minor in nature and not have an impact on the Company's ability
to provide service and products to customers. With respect to contingency plans
for mission critical systems, the Company believes that there are viable
alternatives if these systems are non-compliant. However, the Company has a
targeted completion of mission critical systems by June 30, 1999. The Company
will continue to reassess the need for formal contingency plans, based on
progress of Year 2000 efforts by the Company and third parties.
A reasonably possible worst case scenario involving Y2K issues would be if one
or more of the Company's policyholder systems was found to be non-compliant. In
such event, the Company could experience an interruption in services, although
no loss of current data is anticipated. In addition, if a third party system is
not Y2K compliant, the Company could experience an interruption in services.
Should the worst case scenario occur, it could, depending on its duration, have
a material impact on the Company's results of operations and financial position.
25
<PAGE> 28
The cost to convert the Company to Y2K compliance is not expected to exceed
$150,000. The Company estimates that it has expended $111,000 through December
31, 1998. Regarding future acquisitions, the Company, as a part of its due
diligence, will determine Y2K compliance and its impact on the dynamics of the
acquisition.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page 38.
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
Information required hereunder with respect to directors and the five highest
compensated officers will appear under the heading "Executive Compensation" in
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
Information regarding the Company's other executive officers is as follows:
<TABLE>
<CAPTION>
Name Age Capacity
---- --- --------
<S> <C> <C>
John R. Byers 44 Executive Vice President/General Counsel
R. Jeannie Whitter 48 Vice President
Charles W. Emanuel 48 Vice President and Secretary
Ray A. Carey 60 Vice President
Kurt F. Driscoll 48 Vice President
Paul T. Luckman 42 Vice President
Donald J. Sabia 40 Vice President and Controller
</TABLE>
John R. Byers has served the Company as Executive Vice President/General Counsel
since January 1999. Mr. Byers is a corporate/securities attorney with over 18
years of experience. For the 10 years prior to 1999, he served as a partner with
the law firm LeBeouf, Lamb, Greene & MacRae, L.L.P.
R. Jeannie Whitter has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1988. She has been
involved in the Company's underwriting since 1976.
Charles W. Emanuel has served as Vice President and Secretary of the Company
since its formation in 1996 and as Vice President and Assistant Secretary of
FPIC since 1988. Since 1982, Mr. Emanuel has been responsible for the Company's
management information systems.
26
<PAGE> 29
Ray A. Carey has served as Vice President of the Company since its formation in
1996 and as Vice President of FPIC since 1992. Since 1978, Mr. Carey has been
involved in the Company's claims administration.
Kurt F. Driscoll has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since 1992 and was responsible for the
Company's risk management since from 1988 to 1998. Mr. Driscoll is currently
responsible for human resources administration and government and regulatory
relations.
Paul T. Luckman has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since March 1996 and is responsible for
the Company's marketing. Mr. Luckman served as Director of Hospitals and Managed
Care programs for MAG Mutual Insurance Company from 1993 to 1996. He served as
Director of Insurance and Risk Management for Crozar-Keytone Health System from
1992 to 1993. Mr. Luckman served as Associate Director of Risk Management for
Franciscan Health System from 1991 to 1992.
Donald J. Sabia has served as Vice President and Controller of the Company since
its formation in 1996 and as Controller of FPIC since 1995 and has been employed
by the Company since 1993. From 1986 to 1993, Mr. Sabia was an audit supervisor
for Coopers & Lybrand. Mr. Sabia is a Certified Public Accountant.
Item 11. Executive Compensation
The information required herein will appear under the heading "Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein will appear under the heading "Principal
Shareholders and Securities Ownership of Management" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required herein will appear under the heading "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for the
1999 Annual Meeting of Shareholders, which information is incorporated herein by
reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements and Schedules
FPIC Insurance Group, Inc.:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996
27
<PAGE> 30
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules
(Schedules other than those listed are omitted for the
reason that they are not required or are not applicable
or the required information is shown in the financial
statements or notes thereto)
I - Summary of Investments - Other than Related Party
Investments
II - Condensed Financial Information of Registrant
III - Supplemental Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
3. Exhibits
Exhibit No.
3.1 Articles of Incorporation of FPIC Insurance Group,
Inc., incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No.
333-02040) first filed on March 7, 1996.
3.2 Bylaws of FPIC Insurance Group, Inc.,
incorporated by reference to the Company's
Registration Statement on Form S-4
(Registration No. 333-02040) first filed on
March 7, 1996.
10(a) Form of Employment Agreements dated December
30, 1992, amended November 4, 1995, and amended
February 28, 1996, between FPIC and William R.
Russell and Steven R. Smith, incorporated by
reference to the Company's Registration
Statement on Form S-4 (Registration No.
333-02040) first filed on March 7, 1996.
10(b) Form of Severance Agreements dated February 28,
1996, between FPIC and William R. Russell,
Steven R. Smith, Steven M. Rosenbloom, and
Robert B. Finch, incorporated by reference to
the Company's Registration Statement on Form
S-4 (Registration No. 333-02040) first filed on
March 7, 1996.
10(c) Form of Indemnity Agreement dated February 28,
1996 between the Registrant and Drs.
Acosta-Rua, Gause, Shapiro, Selander, White,
Bagby, Baratta, Murray, Bridges, Hagen, Van
Eldik, Yonge, Messrs. Russell, Smith,
Rosenbloom, Finch, Sabia, Emanuel, Carey,
Driscoll and Ms. Whitter, incorporated by
reference to the Company's Registration
Statement on Form S-4 (Registration No.
333-02040) first filed on March 7, 1996).
10(d) Omnibus Incentive Plan, incorporated by
reference to the Company's Registration
Statement on Form S-4 (Registration No.
333-02040) first
28
<PAGE> 31
filed on March 7, 1996. First Amendment to the
Omnibus Incentive Plan dated as of March 16, 1996.
Second Amendment to Omnibus Incentive Plan dated
as of September 14, 1997.
10(e) Director Stock Option Plan, incorporated by
reference to the Company's Registration
Statement on Form S-4 (Registration No.
333-02040) first filed on March 7, 1996. First
Amendment to the Director Stock Option plan
dated as of March 16, 1996. Second Amendment to
the Director Stock Option Plan dated as of
September 14, 1997.
10(f) Supplemental Executive Retirement Plan, as
amended, incorporated by reference to the
Company's Third Quarter Statement on Form 10-Q
(Registration No. 0-28730) filed on November
14, 1996.
10(g) Excess Benefit Plan, incorporated by reference
to the Company's Registration Statement on Form
S-4 (Registration No. 333-02040) first filed on
March 7, 1996.
10(h) Deferred Compensation Plan, incorporated by
reference to the Company's Registration
Statement on Form S-1 (Registration No.
333-04585) first filed on May 24, 1996.
10(i) Agreement and Plan of Merger dated as of April
14, 1998 among the Company, Anesthesiologists'
Professional Assurance Association, Inc., the
APAA Liquidating Trust and Anesthesiologists'
Professional Assurance Company.
10(j) Stock Purchase Agreement dated as of November
25, 1998 and First Amendment to Stock Purchase
Agreement dated as of December 23, 1998 among
the Company and the Shareholders of
Administrators For the Professions, Inc.,
incorporated by reference to the Company's
filing on Form 8-K, first filed on January 21,
1999.
10(k) Agreement and Plan of Merger dated as of
October 2, 1998 and First Amendment to
Agreement and Plan of Merger dated as of
January 1999 and Second Amendment to Agreement
and Plan of Merger dated as of March 17, 1999
among Florida Physicians Insurance Company,
Inc., TGI Acquisition Corporation and Tenere
Group, Inc.
21 Subsidiaries of the Registrant.
23 Consent of KPMG since incorporated into Forms S-8.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
1998. On January 21, 1999 the Company filed a Form 8-K with respect to the
acquisition of Administrators For the Professions, Inc. In Item 7 of that Form
8-K, the Company stated that financial information would be filed by amendment
no later than March 23, 1999. The Company subsequently determined that such
financial information is not required to be filed. Consequently, no amendment to
such Form 8-K will be filed.
29
<PAGE> 32
SIGNATURES
Pursuant to the requirements of Sections 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 this the 26th day
of March , 1999.
FPIC Insurance Group, Inc.
By /s/ William R. Russell
------------------------------
William R. Russell, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William R. Russell President, Chief Executive March 26, 1999
------------------------------------ Officer and Director
William R. Russell (Principal Executive Officer)
/s/ Robert B. Finch Senior Vice President March 26, 1999
------------------------------------ and Chief Financial Officer
Robert B. Finch (Principal Financial Officer)
/s/ Donald J. Sabia Vice President and March 26, 1999
------------------------------------ Controller
Donald J. Sabia (Principal Accounting Officer)
/s/ James G. White Chairman of the Board March 26, 1999
------------------------------------
James G. White, M.D.
/s/ Guy T. Selander Vice Chairman March 26, 1999
------------------------------------
Guy T. Selander, M.D.
/s/ Gaston J. Acosta-Rua Director March 26, 1999
------------------------------------
Gaston J. Acosta-Rua, M.D.
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C> <C>
/s/ Richard J. Bagby Director March 26, 1999
------------------------------------
Richard J. Bagby, M.D.
/s/ Robert O. Baratta Director March 26, 1999
------------------------------------
Robert O. Baratta, M.D.
/s/ James W. Bridges Director March 26, 1999
------------------------------------
James W. Bridges, M.D.
/s/ Curtis E. Gause Director March 26, 1999
------------------------------------
Curtis E. Gause, D.D.S.
/s/ J. Stewart Hagen Director March 26, 1999
------------------------------------
J. Stewart Hagen, M.D.
/s/ Frank M. Moya Director March 26, 1999
------------------------------------
Frank M. Moya, M.D.
/s/ Louis C. Murray Director March 26, 1999
------------------------------------
Louis C. Murray, M.D.
/s/ David M. Shapiro Director March 26, 1999
------------------------------------
David M. Shapiro, M.D.
/s/ Dick L. Van Eldik Director March 26, 1999
------------------------------------
Dick L. Van Eldik, M.D.
/s/ Henry M. Yonge Director March 26, 1999
------------------------------------
Henry M. Yonge, M.D.
</TABLE>
31
<PAGE> 34
Independent Auditors' Report
The Board of Directors
FPIC Insurance Group, Inc.
We have audited the consolidated financial statements of FPIC Insurance Group,
Inc. as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FPIC Insurance
Group, Inc. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.
KPMG LLP
Jacksonville, Florida
March 5, 1999
32
<PAGE> 35
FPIC Insurance Group, Inc.
Consolidated Balance Sheets
as of December 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
12/31/98 12/31/97
================= =============
<S> <C> <C>
ASSETS
Bonds and U.S. Government securities:
Available-for-sale, at fair value $325,922,559 $259,574,210
Other invested assets 4,171,771 2,000,000
Equity securities 10,327,990 2,540,735
Real estate investments 4,581,671 4,184,768
----------------- --------------
TOTAL INVESTMENTS 345,003,991 268,299,713
----------------- --------------
Cash and cash equivalents 7,062,695 7,679,822
Premiums receivable, net of allowance for doubtful
accounts of $908,409 in 1998 and $681,175 in 1997 40,296,590 17,924,658
Accrued investment income 4,981,612 3,740,979
Reinsurance recoverable on paid losses 3,190,042 866,149
Due from reinsurers on unpaid losses and advance premiums 41,438,356 14,115,000
Deposits with reinsurers 662,496 18,070,341
Property and equipment, net of accumulated depreciation 2,614,686 2,369,595
Deferred policy acquisition costs 2,001,248 1,411,420
Deferred income taxes 9,348,494 8,937,094
Finance charge receivable 370,875 281,217
Prepaid expenses 644,336 423,328
Intangible assets 16,586,261 7,173,841
Federal income taxes receivable 271,029 0
Other assets 4,905,757 1,556,594
----------------- --------------
TOTAL ASSETS $479,378,468 $352,849,751
================= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense reserves $242,377,000 $188,086,000
Unearned premiums 44,309,691 28,217,537
Paid in advance and unprocessed 5,767,080 4,782,835
Short term debt 27,165,000 2,000,000
Federal income taxes payable 0 2,735,527
Accrued expenses and other liabilities 8,829,169 6,963,432
----------------- --------------
TOTAL LIABILITIES 328,447,940 232,785,331
----------------- --------------
----------------- --------------
Commitments and contingencies (note 16)
SHAREHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized;
9,518,679 and 9,179,581 shares issued and outstanding
in 1998 and 1997, respectively 951,868 917,958
Additional paid-in capital 34,297,994 25,789,144
Unearned compensation (356,528) 0
Accumulated other comprehensive income 5,621,533 3,634,299
Retained earnings 110,415,661 89,723,019
----------------- --------------
TOTAL SHAREHOLDERS' EQUITY 150,930,528 120,064,420
----------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $479,378,468 $352,849,751
================= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE> 36
FPIC Insurance Group, Inc.
Consolidated Statements of Income
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
============== ================ ==============
<S> <C> <C> <C>
REVENUES
Net premiums earned $89,561,578 $65,503,675 $56,074,436
Net investment income 17,549,099 15,978,534 14,704,350
Net realized investment gains (losses) (39,226) 32,065 (71,288)
Claims administration and management fees 9,861,210 8,758,651 4,071,460
Commission income 1,740,005 1,465,282 1,120,455
Finance charge and other income 1,648,144 1,477,824 1,082,102
-------------- ---------------- --------------
TOTAL REVENUES 120,320,810 93,216,031 76,981,515
-------------- ---------------- --------------
EXPENSES
Net losses and loss adjustment expenses 67,361,507 54,010,515 46,947,946
Other underwriting expenses 12,548,943 7,079,238 6,589,743
Claims administration expenses 9,936,558 8,461,264 4,124,404
Other expenses 1,609,586 320,791 0
-------------- ---------------- --------------
TOTAL EXPENSES 91,456,594 69,871,808 57,662,093
-------------- ---------------- --------------
Income before income taxes 28,864,216 23,344,223 19,319,422
Income taxes 8,171,574 6,787,538 5,995,697
-------------- ---------------- --------------
NET INCOME $20,692,642 $16,556,685 $13,323,725
============== ================ ==============
BASIC EARNINGS PER COMMON SHARE $2.22 $1.83 $1.56
============== ================ ==============
DILUTED EARNINGS PER COMMON SHARE $2.11 $1.76 $1.53
============== ================ ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 9,808,664 9,407,093 8,723,967
============== ================ ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE> 37
FPIC Insurance Group, Inc.
Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
=============== =============== ===============
<S> <C> <C> <C>
Net Income $20,692,642 $16,556,685 $13,323,725
--------------- --------------- ---------------
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 3,096,509 5,352,980 (2,269,630)
Less: reclassification adjustment for gains (losses)
included in net income (39,226) 32,065 (71,288)
Income tax expense related to unrealized gains and
losses on securities (1,070,049) (1,830,915) 795,912
--------------- --------------- ---------------
Other comprehensive income 1,987,234 3,554,130 (1,545,006)
--------------- --------------- ---------------
Comprehensive Income $22,679,876 $20,110,815 $11,778,719
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE> 38
FPIC Insurance Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION> ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN UNEARNED COMPREHENSIVE
STOCK CAPITAL COMPENSATION INCOME
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 $813,964 $18,454,709 $0 $1,625,175
Net income
Payment of cash dividend
Payment of prior year dividend
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding
Issuance of shares, net 38,203 (38,203)
Shares issued and net proceeds received from IPO 50,000 4,028,205
---------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 902,167 22,444,711 0 80,169
Net income
Net unrealized gain on debt and equity securities 3,554,130
Retirement of treasury shares (1,957) (180,034)
Issuance of shares, net 17,748 3,524,467
---------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 917,958 25,789,144 0 3,634,299
Net income
Net unrealized gain on debt and equity securities 1,987,234
Unearned compensation (356,528)
Issuance of shares, net 33,910 8,508,850
---------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 $951,868 $34,297,994 ($356,528) $5,621,533
===============================================================
</TABLE>
<TABLE>
<CAPTION>
RETAINED TREASURY
EARNINGS STOCK TOTAL
---------------------------------------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 $60,662,574 $0 $81,556,422
Net income 13,323,725 13,323,725
Payment of cash dividend (813,965) (813,965)
Payment of prior year dividend (6,000) (6,000)
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding (181,991) (181,991)
Issuance of shares, net 0
Shares issued and net proceeds received from IPO 4,078,205
----------------------------------------------
BALANCES, DECEMBER 31, 1996 73,166,334 (181,991) 96,411,390
Net income 16,556,685 16,556,685
Net unrealized gain on debt and equity securities 3,554,130
Retirement of treasury shares 181,991 0
Issuance of shares, net 3,542,215
----------------------------------------------
BALANCES, DECEMBER 31, 1997 89,723,019 0 120,064,420
Net income 20,692,642 20,692,642
Net unrealized gain on debt and equity securities 1,987,234
Unearned compensation (356,528)
Issuance of shares, net 8,542,760
----------------------------------------------
BALANCES, DECEMBER 31, 1998 $110,415,661 $0 $150,930,528
==============================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE> 39
FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
================ =============== ================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $20,692,642 $16,556,685 $13,323,725
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 2,256,019 2,108,350 1,757,526
Realized (gains) losses on investments 39,226 (32,065) 71,288
Realized loss on sale of equipment 10,886 7,275 0
Noncash compensation 20,972 0 0
Bad debt expense 227,234 297,595 147,422
Net earnings in equity investment (300,046) 0 0
Deferred income taxes (361,043) (1,939,499) 1,355,093
Changes in assets and liabilities:
Premiums receivable (19,136,259) (5,670,261) (1,853,407)
Accrued investment income (831,355) (99,588) (576,525)
Reinsurance recoverable on paid losses (2,207,575) (792,276) 735,027
Due from reinsurers on unpaid losses
and advance premiums (11,319,478) (2,094,761) (2,539,962)
Deposits with reinsurers 18,606,551 (1,651,162) (1,576,227)
Deferred policy acquisition costs (589,828) (199,385) (393,723)
Federal income tax receivable (271,029) 0 1,665,764
Other assets (1,620,628) (784,846) 38,465
Prepaid expenses and finance charge receivable (310,666) (64,385) (88,142)
Loss and loss adjustment expense reserves 14,880,897 15,348,000 8,232,000
Unearned premiums 11,372,617 4,758,896 2,510,756
Paid in advance and unprocessed 348,712 (467,920) 1,268,612
FIGA accrual 0 (1,345,244) (1,686,990)
Federal income tax payable (2,735,527) 2,214,942 520,585
Accrued expenses and other liabilities 1,456,300 2,973,378 1,153,818
---------------- --------------- ----------------
Net cash provided by operating activities 30,228,622 29,123,729 24,065,105
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term investments 0 0 500,000
Proceeds from sale or maturity of securities available-for-sale 44,017,742 81,416,058 80,865,600
Purchase of securities available-for-sale (83,056,363) (102,081,907) (101,186,056)
Purchase of intangible assets (11,559,043) (5,407,588) (1,000,000)
Proceeds from sale of real estate investments 0 281,060 0
Purchase of real estate investments (376,833) (864,224) (1,021,392)
Purchase of other invested assets (2,171,771) (2,000,000) 0
Purchase of common stock (6,680,500) (2,331,950) (60,000)
Proceeds from investment in common stock 300,000 0 0
Purchase of preferred stock (1,000,000) 0 0
Purchase of subsidiary's net other assets and stock (2,433,623) (285,726) 0
Purchase of property and equipment, net (1,215,618) (1,174,941) (270,505)
---------------- --------------- ----------------
Net cash used in investing activities (64,176,009) (32,449,218) (22,172,353)
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of short term debt 25,165,000 2,000,000 0
Issuance of common stock 8,165,260 3,542,215 4,078,205
Purchase of common stock-treasury 0 0 (181,991)
Dividends paid on common stock 0 0 (819,965)
---------------- --------------- ----------------
Net cash provided by financing activities 33,330,260 5,542,215 3,076,249
---------------- --------------- ----------------
Net (decrease) increase in cash and cash equivalents (617,127) 2,216,726 4,969,001
Cash and cash equivalents, beginning of year 7,679,822 5,463,096 494,095
---------------- --------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,062,695 $7,679,822 $5,463,096
================ =============== ================
Supplemental disclosure of cash flow information:
Federal income taxes paid $9,816,000 $6,071,204 $2,599,703
Cash paid for interest $844,151 $65,962 $2,212
Exchange of mortgage note for deed on real estate investment $0 $0 $0
Retirement of treasury stock $0 $181,991 $0
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
37
<PAGE> 40
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FPIC Insurance Group, Inc. (the Company) is an insurance holding company. The
Company's principal subsidiaries are: Florida Physicians Insurance Company, Inc.
(FPIC), Anesthesiologists' Professional Assurance Company, Inc. (APAC), FPIC
Insurance Agency, Inc. (the Agency), and McCreary Corporation and its subsidiary
(MCC). The subsidiary of MCC, Employer's Mutual, Inc. (EMI), includes its three
subsidiaries: FPIC Services, Inc., Sy.Med Development, Inc., and Professional
Strategy Options, Inc. FPIC is a licensed casualty insurance carrier and writes
professional liability insurance for physicians, dentists, hospitals and other
healthcare providers. APAC is a licensed casualty insurance carrier and writes
professional liability insurance for anesthesiologists. MCC and EMI are
third-party administrators of various lines of business in the insurance
segment. The subsidiaries of EMI provide various services and software programs
to assist physicians in the managed care environment. The Agency conducts
various insurance agency activities. All of the Company's principal subsidiaries
conduct business primarily in the state of Florida.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). These financial
statements include the accounts of the Company, FPIC, APAC, the Agency, and MCC.
Less than majority-owned entities in which the company has at least a 20%
interest are reported on the equity basis. All significant intercompany
transactions and balances have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company operates in the property and casualty insurance industry, is
licensed to write insurance in several states, and is subject to regulation by
the Departments of Insurance in these states. Following is a description of the
most significant risks facing property and casualty insurers and how the Company
mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will change and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those currently recorded in the
financial statements. This risk is concentrated in Florida, where the Company
writes approximately 75% of its business, but may expand to other states as it
begins writing in those states.
Credit Risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers that owe the Company money, will
not pay. The Company minimizes this risk by adhering to a conservative
investment and reinsurance strategy. Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of
premiums receivable and deposits with reinsurers. The Company has not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. Management believes no additional credit risk beyond amounts provided for
collection losses is inherent in the Company's premiums receivable. The Company
typically requires that deposits with reinsurers be held in trust and, as a
result, has not experienced significant losses related to such deposits.
Market Risk is the risk that a change in interest rates will cause a decrease in
the value of an insurer's investments. The Company mitigates this risk by
following a conservative investment strategy. To the extent that liabilities
come due more quickly than assets mature, an insurer would have to sell assets
prior to maturity and recognize a gain or loss. Given the Company's liquidity
position and prior history, it is unlikely that it would need to liquidate its
investment portfolio prior to its scheduled maturity.
USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses for the period.
Actual results could differ from these estimates.
The estimates most susceptible to change are those used in determining the
reserve for losses and loss adjustment expenses. Although considerable
variability is inherent in these estimates, management believes that these
reserves are adequate. The estimates are continually reviewed and adjusted as
necessary in current operations.
38
<PAGE> 41
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS
The Company accounts for its investments under Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under the provisions of SFAS No. 115, the Company is required to
classify investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading.
Market values for debt and equity securities were based on quoted market prices
or dealer quotations. Where a quoted market price was not available, fair value
was measured utilizing quoted market prices for similar securities or by using
discounted cash flow methods.
Other invested assets include investments in three limited partnerships. Two of
the partnerships invest in stocks and other financial securities of both public
and non-publicly traded companies, primarily in the insurance and financial
services sector. The third partnership is a diversified real estate fund.
Income on investments is net of amortization of premium and accretion of
discount on the yield-to-maturity method relating to debt securities acquired at
other than par value. Realized investment gains and losses were determined on
the specific identification basis. Declines in the fair value of securities
considered to be other than temporary, if any, would be recorded as realized
losses in the consolidated statements of income.
Real estate investments consist of a building, which includes the Company's home
office, various rental units and vacant lots. Depreciation is computed over the
estimated useful lives of the property, using the straight-line method.
Estimated useful lives range from 27.5 to 39 years. Rental income and expenses
are included in net investment income.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all demand deposits, overnight investments and instruments with a maturity of
three months or less to be cash equivalents.
REINSURANCE
The Company records its reinsurance contracts under the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts". In the normal course of business, the Company seeks to
reduce the loss that may arise from events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. The Company retains a maximum of
$500,000 per occurrence. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
The Company evaluates the financial condition of reinsurers since failure of
reinsurers to honor their obligations could result in losses to the Company. The
Company generally obtains collateral in the form of letters of credit for
amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis with estimated
useful lives ranging from five to fifteen years.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs, principally commissions, are amortized over
the term of the insurance contracts.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
39
<PAGE> 42
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
In general, the excess of cost over net assets purchased relating to business
acquisitions and the cost of insurance and renewal rights purchased is being
amortized into income over periods not exceeding forty years using the
straight-line method. The carrying value of the intangible assets is reviewed
regularly by management by determining whether the amortization of the
intangible assets can be recovered through undiscounted future operating cash
flows of the acquired operation.
RECOGNITION OF REVENUES
Premiums are recognized as revenues on a monthly pro rata basis over the terms
of the policies. Policy terms generally do not exceed one year.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As more fully described in Note 10, loss and loss adjustment expense reserves
are based on actuarial projections of the best estimate of ultimate losses and
loss adjustment expenses as interpreted by the Company's independent consulting
actuaries. The estimated liability is continually reviewed and any adjustments
that become necessary are included in current operations.
PER SHARE DATA
Basic and diluted earnings per common share are based upon the weighted average
number of common and common and common equivalent shares, respectively,
outstanding during each year. Earnings per share data for all years have been
stated giving retroactive effect for the stock split that occurred in June 1996
(see Note 15).
ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-based Compensation" requires the fair value
of stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement, or be
disclosed as a pro forma effect on net income and earnings per share in the
footnotes to the Company's financial statements. The Company elected to adopt
SFAS No.123 on a disclosure basis only. Accordingly, SFAS No. 123 does not have
an effect on the Company's consolidated balance sheet or income statement.
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a defined benefit plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during the years of service (maximum 15 years). The cost of this
program is being funded currently.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and penalties, and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment and/or remediation
can be reasonably estimated.
REPORTING COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that all items that meet
the definition of components of comprehensive income be reported in the
financial statements for the period in which they are recognized. The Company
adopted the provisions of SFAS No. 130 for the period ended December 31, 1998.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted the provisions of SFAS No. 131 for the
period ended December 31, 1998 (see Note 19).
PENSION DISCLOSURE
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes disclosure requirements for pensions and other post
retirement benefits to the
40
<PAGE> 43
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted the provisions of SFAS No. 132 for the period ending December
31, 1998.
INTEREST RATE SWAP AGREEMENT
The Company's operations involve managing market risks related to changes in
interest rates. The Company uses a derivative financial instrument, specifically
an interest rate swap, to reduce and manage those risks. The instrument is
off-balance-sheet and therefore has no carrying value. The Company does not
currently hold or issue derivative financial instruments for trading purposes.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment on interest expense related to the debt. The related
amount payable to or receivable from the counterparty in included as an
adjustment to accrued interest.
RECLASSIFICATION
Certain amounts for 1997 and 1996 have been reclassified to conform with the
1998 presentation.
2. BUSINESS ACQUISITIONS
On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a
Florida third party administrator, for $2,000,000 plus certain additional
payments based on earnings. On January 17, 1997, MCC acquired all of the
outstanding common stock of EMI, a Florida third party administrator, for
$1,250,000 plus certain additional payments based upon earnings. The acquisition
agreements specified additional payments, based upon earnings, to be made to the
sellers from the acquisition date through 2001. The remaining contingent
payments and the year of payment for these two acquisitions are as follows:
<TABLE>
<CAPTION>
MCC EMI
--- ---
<S> <C> <C>
1999 $700,000 $250,000
2000 600,000 250,000
2001 0 250,000
</TABLE>
These payments are subject to adjustment in accordance with the agreements based
on attainment of projected annual earnings from the date of acquisition through
2001. No individual annual payment will exceed the annual earnings, and may be
reduced if the projected earnings are not attained for that year. The agreements
allow for additional final payments based on the aggregate earnings compared to
the aggregate projected earnings during the earnout periods. The effect of these
subsequent payments is to increase the original purchase price and the recorded
goodwill provided MCC and EMI meet their earnings targets. The Company made an
$800,000 and a $250,000 payment in 1998 to MCC and EMI, respectively, in
accordance with the acquisition agreements.
On July 1, 1997, the Company purchased 20% of the common stock of APS Insurance
Services, Inc. (APS), a Texas insurance service corporation, for $2,000,000. The
purchase agreement provides an option to purchase an additional 35% of the
common stock of APS in 1999, allowing the Company 55% ownership. This investment
is accounted for under the equity method. The market value of APS approximates
the book value at December 31, 1998.
On September 22, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. (Frontier) pursuant to which, beginning December 1, 1997,
the Company's subsidiary, FPIC, began underwriting Frontier's Florida book of
business. The cost of the transaction was $3,200,000, payable in the Company's
common stock, with a cash adjustment based on actual results. The excess of the
purchase price over tangible assets is included in intangible assets and will be
amortized over the expected life of this book of business, considering the
Company's historical policy renewal rate. Based on the actual results achieved,
the Company is due a cash refund of approximately $1,500,000 from Frontier at
December 31, 1998. The effect is to reduce the original cost of the transaction
and intangible assets by the same amount.
On July 1, 1998, the Company purchased all of the outstanding common stock of
APAC, a medical malpractice insurance company, for $18,000,000. Additionally,
$3,500,000 was paid in non-compete agreements and other fees to certain key
employees. APAC insures over 700 anesthesiologists in over 30 states. The
purchase had the following impact for the six month period ended December 31,
1998, which is included in the consolidated financial statements:
41
<PAGE> 44
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Revenues $2,364,285
Expenses 650,270
Net income 864,143
Earnings Per Share .09
</TABLE>
Had APAC been included in the consolidated results of operations for the Company
for the years ended December 31, 1998 and 1997, the following increases would
have resulted:
<TABLE>
<CAPTION>
1998 1997
---- -----
(unaudited) (unaudited)
<S> <C> <C>
Revenues $8,613,922 $7,707,314
Expenses 6,536,323 5,184,175
Net income 1,346,450 1,810,412
Earnings per share .14 .19
</TABLE>
Concurrent with the purchase of APAC on July 1, 1998, the Company purchased a
9.9% interest in American Professional Assurance Ltd. (APAL), a Cayman Islands
captive reinsurer, for $5,500,000. APAL is being accounted for under the cost
method.
On July 1, 1998, EMI purchased all of the outstanding stock of Sy.Med
Development, Inc. (Sy.Med), a software development and consulting company
located in Nashville, Tennessee, for a cost of $400,000, plus certain additional
payments based upon future earnings. The purchase agreement sets the initial
future earnout amounts at $175,000 for the six month period ended December 31,
1998 and $400,000, $500,000 and $600,000 for the fiscal years ending December
31, 1999 through 2001 and $325,000 for the six month period January 1, 2002
through June 30, 2002. These amounts are subject to adjustment depending on the
actual results attained. The December 31, 1998 earnings amount was not achieved
and therefore no payment was made. The earnings of Sy.Med are not material to
the consolidated results of the Company.
On November 6, 1998, the Company's subsidiary, FPIC Services, Inc. (Services), a
Florida corporation, formed a Texas corporation with one other Texas corporation
and a Texas self insurance trust association. Services' cost for its one-third
ownership was $900,000. The new corporation offers credential verification and
other related services and markets software programs related to those services.
The earnings of Services are not material to the consolidated results of the
Company.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has an interest rate swap agreement to fix interest rates on
variable rate debt and reduce certain exposures to market fluctuations. The
interest rate swap has a notional principal amount of $30,000,000 with a fixed
interest rate of 5.59% at December 31, 1998. The agreement terminates on July 3,
2003. The Company is required to make payments to the counterparty at the
variable rate of LIBOR as stated in the agreement. The Company is exposed to
credit loss in the event the nonperformance by the counterparty to the swap
agreement. However, the Company does not anticipate nonperformance by the
counterparty.
The estimated fair value of the Company's financial instruments for the years
ended December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
Financial Instrument Assets:
Bonds $ 325,922,559 $325,922,559
Preferred stocks 1,000,000 1,000,000
</TABLE>
42
<PAGE> 45
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Common stocks 9,327,990 9,327,990
Real estate investments 4,581,671 4,581,671
Cash and short-term investments 7,062,695 7,062,695
Other invested assets 4,171,771 4,419,789
------------ ------------
Total financial instrument assets $ 352,066,686 $ 352,314,704
============= =============
Financial Instrument Liabilities:
Short term debt $ 27,165,000 $ 21,590,000
----------- ------------
Total financial instrument liabilities $ 27,165,000 $21,590,000
============ ===========
Off-balance-sheet instruments:
Interest rate swap $0 $262,919
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------
Carrying Estimated
Value Fair Value
----- ----------
<S> <C> <C>
Financial Instrument Assets:
Bonds $ 259,574,210 $259,574,210
Common stocks 2,540,735 2,540,735
Real estate investments 4,184,768 4,184,768
Cash and short-term investments 7,679,822 7,679,822
Other invested assets 2,000,000 2,091,538
-------------- --------------
Total financial instrument assets $ 275,979,535 $ 276,071,073
============= =============
Financial Instrument Liabilities:
Short term debt $ 2,000,000 $ 2,000,000
---------- -----------
Total financial instrument liabilities $ 2,000,000 $2,000,000
=========== ==========
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Bonds, Preferred Stocks, and Common Stocks - The fair value was estimated based
on bid prices published in financial newspapers, bid quotations received from
securities dealers, or by using discounted cash flow methods.
Real Estate - The fair value of real estate was estimated using appraised
values.
Cash and Short-term Investments - The carrying value approximates the fair value
because of the short maturity of these instruments.
Other Invested Assets - The fair value was estimated based on audited financial
amounts of the limited partnerships.
Short term debt - The fair value was estimated based on the amount of cash flows
discounted over the applicable term at the Company's borrowing rate at December
31, 1998.
Off-balance-sheet instruments - The fair value of the interest rate swap
agreement is estimated using quotes from brokers and represents the cash
requirement if the existing agreement had been settled at year end.
43
<PAGE> 46
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENTS
The amortized cost and estimated fair value of investments in debt and equity
securities as of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $56,259,581 $2,033,736 $10,277 $58,283,040
Debt securities issued by states
and political subdivisions 148,544,449 4,559,260 34,325 153,069,384
Corporate securities 46,072,483 702,508 684,079 46,090,912
Mortgage-backed securities 66,532,029 2,258,563 311,369 68,479,223
---------- --------- ------- ----------
Total debt securities 317,408,542 9,554,067 1,040,050 325,922,559
----------- --------- --------- -----------
Common stock 9,193,495 134,495 0 9,327,990
Preferred stock 1,000,000 0 0 1,000,000
--------- -------- ------- ---------
Total equity securities 10,193,495 134,495 0 10,327,990
---------- ------- ------- ----------
Total Securities Available-for-Sale $327,602,037 $9,688,562 $1,040,050 $336,250,549
============ ========== ========== ============
</TABLE>
<TABLE>
<CAPTION>
1997
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 56,716,848 $ 997,833 $ 45,395 $ 57,669,286
Debt securities issued by states
and political subdivisions 102,786,576 2,921,699 30,109 105,678,166
Corporate securities 28,830,440 246,408 75,670 29,001,178
Mortgage-backed securities 65,672,904 1,903,177 350,501 67,225,580
------------ ---------- -------- ------------
Total debt securities 254,006,768 6,069,117 501,675 259,574,210
----------- --------- ------- -----------
Common stock 2,516,949 23,786 0 2,540,735
--------- ------ -------- ---------
Total equity securities 2,516,949 23,786 0 2,540,735
--------- ------ ------- ---------
Total Securities Available-for-Sale $ 256,523,717 $ 6,092,903 $501,675 $ 262,114,945
============= ============ ======== =============
</TABLE>
The Company's other invested assets include investments in limited partnerships.
These assets are recorded at a cost of $4,171,771 and $2,000,000 at December 31,
1998 and 1997, respectively. The market value of these assets at December 31,
1998 and 1997 was $4,419,789 and $2,091,538, respectively.
The amortized cost and estimated fair value of debt and equity securities at
December 31, 1998, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities, because borrowers have the right to
call or prepay these obligations with or without call or prepayment penalties.
44
<PAGE> 47
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Securities Available-for-Sale:
Due in one year or less $ 11,929,511 $ 11,991,426
Due after one year through five years 40,827,866 41,762,530
Due after five years through ten years 67,790,750 69,808,061
Due after ten years, primarily U.S. Government
and mortgage-backed securities 196,860,415 202,360,542
Equity securities 10,193,495 10,327,990
------------- ----------
Totals $ 327,602,037 $ 336,250,549
============= =============
</TABLE>
Treasury notes and a political sub-division bond with a carrying value of
$4,808,076 and a market value of $5,032,495 were on deposit with the Insurance
Departments in various states as of December 31, 1998, as required by law.
For the years ended December 31, 1998, 1997, and 1996, net investment income
earned was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Investment income earned:
Bonds and U.S. Government securities $18,131,630 $16,628,612 $ 15,664,261
Real estate investments 452,099 368,270 305,187
Equities 51,112 53,667 0
Other invested assets 551,965 123,210 88,362
Short-term investments 113,050 132,721 161,180
Cash on hand and on deposit 83,206 13,846 9,232
---------- ---------- -----------
Total investment income earned 19,383,062 17,320,326 16,228,222
Investment expenses (1,833,963) (1,341,792) (1,523,872)
---------- ---------- ----------
Net investment income $17,549,099 $15,978,534 $ 14,704,350
=========== =========== ============
</TABLE>
Gross realized gains and gross realized losses on sales of debt and equity
securities and real estate investments based on specific identification, were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross realized gains-available-for-sale $ 10,384 $ 42,643 $ 59,804
Gross realized losses-available-for-sale (49,610) (89,057) (150,265)
Gross realized gains-real estate 0 78,479 19,173
---------- ------------ -------------
Net realized (losses) gains $ (39,226) $ 32,065 $ (71,288)
========== ======== ==========
</TABLE>
The changes in net unrealized gains (losses) on available-for-sale investments
were $3,057,284, $5,469,762, and $(2,340,918), in 1998, 1997, and 1996,
respectively.
5. REAL ESTATE INVESTMENTS
At December 31, 1998 and 1997, real estate investments consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and building $4,670,310 $ 3,934,570
Rental units 461,200 461,200
Other 37,670 37,670
--------- ------------
5,169,180 4,433,440
Accumulated depreciation (587,509) (248,672)
---------- --------
Net real estate investments $4,581,671 $ 4,184,768
========== ============
</TABLE>
45
<PAGE> 48
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total depreciation expense of real estate investments was $338,837, $138,598,
and $54,817, in 1998, 1997, and 1996, respectively.
6. PROPERTY AND EQUIPMENT
At December 31, 1998, and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements $795,933 $ 1,096,737
Data processing equipment, including software 1,835,510 1,074,972
Automobiles 282,577 231,647
Furniture, fixtures and equipment 2,258,917 1,824,844
--------- ---------
5,172,937 4,228,200
Accumulated depreciation (2,558,251) (1,858,605)
---------- ------------
Net property and equipment $2,614,686 $ 2,369,595
========== ============
</TABLE>
Total depreciation expense of property and equipment was $699,646, $605,516, and
$389,495, in 1998, 1997, and 1996, respectively.
7. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the years ended December 31,
1998, 1997, and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $1,411,420 $ 1,212,035 $ 818,312
Additions 5,450,153 4,194,981 3,236,689
Amortization expense (4,860,325) (3,995,596) (2,842,966)
---------- ------------ -----------
Balance, ending $2,001,248 $ 1,411,420 $ 1,212,035
========== ============ ===========
</TABLE>
8. INTANGIBLE ASSETS
Intangible assets include goodwill associated with business acquisitions, and at
December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $7,173,841 $ 1,989,113 $ 1,108,117
Additions at cost 11,559,043 5,407,588 1,000,000
Reductions at cost (see Note 2) (1,500,000) 0 0
Amortization expense (646,623) (222,860) (119,004)
--------- ------------- ------------
Balance, ending $16,586,261 $ 7,173,841 $ 1,989,113
=========== ============ ===========
</TABLE>
These intangible assets are being amortized over periods ranging from five to
twenty-five years.
9. BORROWING ARRANGEMENTS
The Company maintains a $30,000,000 revolving credit facility with SunTrust
Bank. As of December 31, 1998 and 1997, $27,165,000 and $2,000,000,
respectively, had been borrowed under this credit facility at a per annum rate
of approximately 5.9% and 6.3%, respectively. In January 1999, the Company
increased the credit facility to $75,000,000. The new credit facility
terminates on January 4, 2002 and bears interest at various rates. The interest
rates range from LIBOR plus 0.75% to Prime plus 0.50%. The Company is not
required to maintain compensating balances in connection with this credit
facility. Under the terms of the credit facility, the Company is required to
meet certain financial covenants. Significant covenants are as follows: a) The
Company's funded debt to total capital plus funded debt ratio cannot exceed
0.3:1 and b) Net premiums written to statutory capital and surplus ratio cannot
exceed 2.0:1. The credit facility is guaranteed by certain subsidiaries and
collateralized by the common stock of certain subsidiaries. On January 6, 1999,
an additional $33,000,000 was borrowed under this agreement at a per annum rate
of approximately 6.1% (see Note 20).
46
<PAGE> 49
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense (LAE) reserves are generally determined on the
basis of individual claims and actuarially determined estimates of future
claims based upon the Company's actual experience, assumptions and projections
as to claims frequency, severity and inflationary trends and settlement
payments. Such estimates may vary significantly from the eventual outcome. The
ranges of reasonably expected ultimate unpaid losses and LAE are estimated by
the Company's consulting actuaries on an undiscounted basis. The assumptions
used in making such estimates and for establishing the resulting reserves are
continually reviewed and updated based upon current circumstances, and any
adjustments resulting therefrom are reflected in current income.
Activity in the reserves for losses and loss adjustment expenses for the years
ended December 31, 1998, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $188,086,000 $172,738,000 $164,506,000
Less reinsurance recoverables 14,115,000 11,614,000 9,188,000
------------ ------------ ------------
Net balance at January 1 173,971,000 161,124,000 155,318,000
----------- ------------- ------------
Reserves of entity acquired 23,406,000 0 0
----------- ------------ ------------
Incurred related to:
Current year 81,694,000 69,126,000 61,617,000
Prior year (14,332,000) (15,115,000) (14,669,000)
------------ ------------- --------------
Total incurred 67,362,000 54,011,000 46,948,000
---------- ------------ -------------
Paid related to:
Current year 14,279,000 8,061,000 5,253,000
Prior year 49,697,000 33,103,000 35,889,000
---------- ------------- ------------
Total paid 63,976,000 41,164,000 41,142,000
---------- ------------- ------------
Net balance at end of period 200,763,000 173,971,000 161,124,000
Plus reinsurance recoverables 41,614,000 14,115,000 11,614,000
-------------- ------------- ------------
Balance at December 31 $242,377,000 $188,086,000 $172,738,000
============ ============ ============
</TABLE>
The provision for losses and loss adjustment expenses for prior years (net of
reinsurance recoveries of $7,115,000, $5,834,000, and $4,921,000, in 1998, 1997,
and 1996, respectively) decreased because of lower-than-anticipated losses,
caused by the Company's underwriting of certain target specialties and claims
free business.
11. REINSURANCE
The Company presently has excess of loss reinsurance contracts that serve to
limit the Company's maximum loss to $500,000 per occurrence. To the extent that
any reinsuring company might be unable to meet its obligations, the Company
would be liable for such defaulted amounts not already covered by letters of
credit.
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1998, 1997, and 1996 (which includes APAC premiums for the six
months ended December 31, 1998) was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Direct & assumed $116,989,450 $105,616,840 $77,770,733 $73,011,835 $64,292,287 $61,781,531
Ceded (15,512,281) (16,055,262) (7,485,436) (7,508,160) (5,552,785) (5,707,095)
------------ ------------ ----------- ---------- ---------- -----------
Net premiums $101,477,169 $89,561,578 $70,285,297 $65,503,675 $58,739,502 $56,074,436
=========== =========== =========== =========== =========== ===========
</TABLE>
47
<PAGE> 50
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SHAREHOLDERS' EQUITY
The Company has a stock option plan for officers and key employees (the employee
plan) and a plan for non-employee directors (the director plan). Both plans
became effective in 1996. Under the director plan, only nonqualified stock
options may be issued. Under the employee plan, both an incentive stock option
and a nonqualified stock option may be granted to the same individual. The
option price of an incentive stock option may not be less than 100% of the fair
market value of such shares on the grant date. The option price of a
non-qualified option shall not be less than 50% of the fair market value of such
shares on the grant date. Under the terms of the director plan, 5,000 shares are
granted to each director on the date that person becomes a director, and on a
discretionary basis at future dates as approved by the Board, at a price not
less than 100% of the fair market value on the grant date.
During 1998, 116,688 nonqualified stock options and 3,312 incentive stock
options were issued under the employee plan. An additional 70,000 restricted
options, which were not part of either plan, were issued in connection with
acquisitions during the year. During 1997, 120,000 nonqualified stock options
were granted under the director plan, and 265,000 nonqualified stock options
were issued under the employee plan. During 1996, 320,000 incentive stock
options and 335,000 nonqualified stock options were issued under both plans. Of
the 1998 nonqualified stock options issued, 50,000 were issued to an employee
with an exercise price lower than the fair market value on the date of the
grant. This difference in price of $7.55 per option is considered noncash
compensation and is being amortized over the period in which the options vest
and of which $20,972 has been recognized as an expense in the 1998 income
statement. Options granted under the plans are exercisable at such dates as are
determined in connection with their issue, but not later than ten years after
the date of grant.
A summary of the status of the Company's stock option plans as of December 31,
1998 is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ------------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year 991,500 $14.43
Granted 190,000 $30.80
Exercised (86,832) $10.41
--------
Outstanding at end of year 1,094,668
=========
Options exercisable at year-end 581,556 $20.16
=======
</TABLE>
At December 31, 1998, 315,000 shares of the Company's common stock were reserved
for issuance in connection with the stock option plans. The Company maintains an
Employee Stock Purchase Plan that allows employees to purchase the Company's
common stock at 85% of the market value on the first or last day of the offering
period, whichever was lower.
Significant assumptions used to estimate the fair values of options using the
Black-Sholes option-pricing model were as follows:
<TABLE>
<CAPTION>
1998 1998 1998
NONQUALIFIED NONQUALIFIED NONQUALIFIED
STOCK OPTION STOCK OPTION STOCK OPTION
------------ ------------ ------------
<S> <C> <C> <C>
a. current price of underlying stock $34.38 $30.19 $30.19
at the date of grant
b. exercise price of the option $34.38 $30.19 $22.64
c. expected life of the option 5 years 5 years 5 years
d. expected volatility of underlying stock 36.01% 36.01% 36.01%
e. expected dividends on the stock $0 $0 $0
f. risk-free interest rate at the date of grant 5.29% 4.48% 4.48%
</TABLE>
48
<PAGE> 51
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997 1996 1996
NONQUALIFIED NONQUALIFIED INCENTIVE
STOCK OPTION STOCK OPTION STOCK OPTION
------------ ------------ ------------
<S> <C> <C> <C>
a. current price of underlying stock $23.63 $8.22 $10.00
at the date of grant
b. exercise price of the option $23.63 $8.22 $10.00
c. expected life of the option 5 years 5 years 5 years
d. expected volatility of underlying stock 26.74% 26.87% 26.87%
e. expected dividends on the stock $0 $0 $0
f. risk-free interest rate at the date of grant 6.17% 5.37% 6.31%
</TABLE>
Total compensation expense recognized in the income statement was $0. The
weighted average fair value of options granted during the year was $30.80.
The pro forma disclosures required under SFAS No.123 methodology were as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Pro Forma Net Income $17,946,863 $ 16,002,439
Pro Forma Tax Expense $ 6,693,078 $ 6,489,098
Pro Forma Diluted Earnings Per Share $ 1.83 $ 1.70
</TABLE>
13. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal $6,974,016 $ 7,230,181 $ 3,839,423
State 1,558,601 1,496,856 801,181
--------- ----------- -----------
Total 8,532,617 8,727,037 4,640,604
--------- ------------ -----------
Deferred income tax (benefit) expense:
Federal (308,340) (1,695,163) 1,157,033
State (52,703) (244,336) 198,060
-------- ------------ -----------
Total (361,043) (1,939,499) 1,355,093
--------- ------------- -----------
Net income tax expense $8,171,574 $ 6,787,538 $ 5,995,697
========== ============ ===========
</TABLE>
The provision for income taxes differed from the statutory corporate tax rate of
35 percent for 1998 and 1997 and 34 percent for 1996 as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax
expense $10,102,476 $ 8,170,478 $ 6,568,603
Municipal bond interest (2,521,221) (1,834,950) (1,316,743)
State income taxes, net of
federal benefit 978,834 814,138 659,500
Other, net (388,515) (362,128) 84,337
----------- ------------ -----------
Actual expense $8,171,574 $ 6,787,538 $ 5,995,697
========== ============ ===========
</TABLE>
49
<PAGE> 52
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998 and 1997, the significant components of the net deferred
tax asset were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets arising from:
Loss reserve discounting $9,970,448 $ 9,166,279
Unearned premium reserves 3,015,392 2,176,983
Other 777,289 814,250
---------- ------------
Total deferred tax assets 13,763,129 12,157,512
---------- ------------
Deferred tax liabilities arising from:
Unrealized gains on securities 3,026,979 1,956,928
Deferred acquisition costs 506,782 544,455
Other 880,874 719,035
---------- ------------
Total deferred tax liabilities 4,414,635 3,220,418
--------- ------------
Net deferred tax asset $9,348,494 $ 8,937,094
========== ============
</TABLE>
The Company has not recorded a valuation allowance, as the deferred tax assets
were considered by management to be realizable based on the level of anticipated
future taxable income. Net deferred tax assets and federal income tax expense in
future years can be significantly affected by changes in enacted tax rates or by
unexpected adverse events that would impact management's conclusions as to the
ultimate realizability of deferred tax assets.
14. EMPLOYEE BENEFIT PLAN
The Company's employees are covered by a qualified defined benefit plan and a
defined contribution pension plan sponsored by the Company.
SFAS 132 requires restatement of earlier period amounts provided for comparative
purposes unless the information is not readily available. Amounts provided for
1997 and 1996 have not been restated under SFAS 132 as the information is not
readily available.
The benefits of the defined benefit plan are based on years of service and the
employee's compensation. The actuarially computed net periodic pension cost for
December 31, 1998, 1997, and 1996 included the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period $137,691 $ 94,015 $ 88,239
Interest cost on projected benefit obligation 125,482 106,284 95,970
Actual return on plan assets (106,633) (219,877) (75,464)
Net amortization and deferral 26,268 181,770 45,258
------- --------- ---------
Net periodic pension cost $182,808 $ 162,192 $ 154,003
======== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Actuarial present value of benefit obligation: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Accumulated benefit obligation $ (1,584,795) $ (1,156,683) $ (890,071)
Projected benefit obligation for
service rendered to date $ (2,690,664) $ (1,945,621) $ (1,477,290)
Plan assets at fair value 1,219,686 1,139,563 854,139
----------- ------------- ------------
Projected benefit obligation in
excess of plan assets (1,470,978) (806,058) (623,151)
Unrecognized net loss (gain)
from past experience different
from that assumed 746,695 117,581 (21,467)
Prior service cost not yet
recognized in net periodic
pension cost (44,367) (48,679) (52,991)
</TABLE>
50
<PAGE> 53
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Unrecognized net obligation at
inception recognized over
15.29 years 284,092 314,672 345,252
----------- ----------- -------------
Accrued pension cost $ (484,558) $ (422,484) $ (352,357)
============= ============== =============
</TABLE>
The following table sets forth the plan's funded status for the fiscal year
ending December 31, 1998.
<TABLE>
<S> <C>
Change in Benefit Obligation
- ----------------------------
Benefit Obligation at Beginning of Year $1,945,621
Service Cost 137,691
Interest Cost 125,482
Actuarial Loss 504,493
Benefits Paid (22,623)
---------
Benefit Obligation at End of Year $2,690,664
==========
Change in Plan Assets
- ---------------------
Fair Value of Plan Assets at Beginning of Year $1,139,563
Actual Return on Plan Assets (17,988)
Employer Contributions 120,734
Benefits Paid (22,623)
---------
Fair Value of Plan Assets at End of Year $1,219,686
==========
</TABLE>
Assumptions used in the accounting for net periodic pension cost at December 31,
1998, 1997, and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rates 5.50% 6.50% 7.25%
Rate of increase in compensation levels 5.23% 5.23% 5.23%
Expected long-term rate of
return on assets 9.00% 9.00% 7.25%
</TABLE>
The defined contribution plan has two parts. The first part is a profit-sharing
plan. The second part allows employees to contribute, beginning in 1997, up to 5
percent of their annual compensation (2.5 percent in 1996), of which up to 2.5%
is matched 100 percent by the Company. The Company's policy is to fully fund the
liability at the end of each year. At December 31, 1998, the fair market value
of plan assets was $6,198,304. The expense for this plan amounted to $434,783,
$426,291, and $324,376 in 1998, 1997, and 1996, respectively.
The Company also has a supplemental executive retirement plan (SERP) that
provides certain executives with income at retirement equal to 60 percent of
pre-retirement base compensation, less qualified pension plan benefits paid by
the Company and all predecessor plans and Social Security benefits. The plan had
a net periodic pension cost of $92,251 for 1998. The projected benefit
obligation at December 31, 1998 was $481,434 and the accrued pension cost was
$336,912, using a discount rate of 5.5 percent. The plan has no vesting prior to
age 55. The Company accrued $95,000 to cover any liability under this plan in
1998, 1997 and 1996. The total liability included in the financial statements
for this plan amounted to approximately $345,000 and $250,000 as of December 31,
1998 and 1997, respectively.
15. STOCK TRANSACTIONS
As part of a reorganization in June 1996, a stock split was transacted in which
five shares of the Company's $.10 par value common stock were received for each
share of FPIC's $1 par value common stock. The accompanying financial statements
reflect the transaction retroactively in a manner similar to a stock split. In
January 1996, a cash dividend of 10 cents per common share was declared
amounting to $813,964. In addition, the Company paid $6,000 in retroactive
dividends in 1996 to certain shareholders.
51
<PAGE> 54
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES
The future minimum annual rentals under noncancellable leases are as follows:
<TABLE>
<S> <C>
1999 $ 614,201
2000 610,700
2001 461,530
2002 355,290
Thereafter 0
-------
$ 2,041,721
===========
</TABLE>
Total rental expense was $371,038, $386,016, and $332,821 for 1998, 1997, and
1996, respectively.
The Company is involved in numerous legal actions arising primarily from claims
under insurance policies. The legal actions arising from claims under insurance
policies have been considered by the Company in establishing its reserves. While
the outcome of all legal actions is not presently determinable, the Company's
management is of the opinion that the settlement of these actions will not have
a material adverse effect on the Company's financial position or results of
operations.
The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. (FIGA) as well as similar associations in other states where
it is licensed, for the provision of funds necessary for the settlement of
covered claims under certain policies of insolvent insurers.
In addition to the standard FIGA assessments, the Florida Legislature may also
levy special assessments to settle claims caused by certain catastrophic losses.
The Company would be assessed on a basis of premium written. No provision for
special assessments was made in the 1998 financial statements. However, damages
caused by future catastrophic losses, such as a hurricane, could subject the
Company to additional FIGA assessments.
17. STATUTORY ACCOUNTING
FPIC and APAC are required to file statutory financial statements with state
insurance regulatory authorities. Shareholders' equity on a statutory basis was
$117,277,880, $87,875,717 and $76,519,879 at December 31, 1998, 1997, and 1996,
respectively. Statutory net income amounted to $18,325,503, $12,404,838, and
$10,442,464 for the years ended December 31, 1998, 1997, and 1996, respectively.
During 1996 and in connection with the reorganization, FPIC, by way of dividend,
transferred its $2.5 million investment in MCC to the Company. This amount was
charged directly to statutory surplus.
The insurance subsidiaries are restricted under the Florida Insurance Code as to
the amount of dividends they may pay without regulatory consent. In 1999, they
may pay dividends up to approximately $18,300,000 without regulatory consent.
18. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income and income from
continuing operations $20,692,642 $16,556,685 $13,323,725
=========== =========== ===========
Basic weighted average shares outstanding 9,332,206 9,044,984 8,518,211
Common stock equivalents 476,458 362,109 205,756
---------- ----------- -----------
Diluted weighted average shares outstanding 9,808,664 9,407,093 8,723,967
========= =========== ===========
Basic earnings per share $2.22 $1.83 $1.56
===== ===== =====
Diluted earnings per share $2.11 $1.76 $1.53
===== ===== =====
</TABLE>
52
<PAGE> 55
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SEGMENT INFORMATION
Under the provisions of SFAS 131, the Company determined it has two reportable
operating segments, which are insurance and third party administration (TPA).
The insurance segment provides a variety of insurance products for participants
in the healthcare industry including MPL insurance for medical professionals,
managed care liability insurance, professional and comprehensive general
liability insurance for healthcare facilities, provider stop loss insurance,
workers compensation insurance, and group accident and health coverage. The TPA
segment provides third party administration services such as the administration
of self-insurance plans for large employers.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on net income or loss. Intersegment revenues for transactions
between the two segments are based on actual costs incurred and are similar to
services that may have been obtained from an unrelated third party. All segments
are managed separately because each business requires different technology and
marketing strategies.
Information by industry segment follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
REVENUES:
---------
<S> <C> <C> <C>
External customers:
Insurance $107,823 $82,668 $70,974
TPA 12,171 10,484 5,281
--------- -------- -------
119,994 93,152 76,255
Intersegment:
Insurance 996 815 0
TPA 583 0 0
-------- -------- --------
$ 121,573 $ 93,967 $ 76,255
========= ======== ========
INTEREST REVENUE:
- -----------------
Insurance $18,389 $16,708 $15,728
TPA 164 27 88
------- -------- --------
$ 18,553 $ 16,735 $ 15,816
======== ======== ========
NET INCOME:
- -----------
Insurance $17,865 $14,013 $12,535
TPA 994 1,177 730
------- ------- --------
$ 18,859 $ 15,190 $ 13,265
======== ======== ========
INCOME TAXES:
- -------------
Insurance $ 7,584 $ 5,209 $ 5,521
TPA 638 735 445
-------- ------- -------
$ 8,222 $ 5,944 $ 5,966
========= ======= =======
IDENTIFIABLE ASSETS:
- --------------------
Insurance $444,050 $332,131 $295,414
TPA 10,801 7,508 4,264
--------- --------- ---------
$ 454,851 $ 339,639 $ 299,678
========= ========= =========
DEPRECIATION & AMORTIZATION:
- ----------------------------
Insurance $1,289 $1,647 $1,493
TPA 708 429 265
-------- ------- -------
$ 1,997 $ 2,076 $ 1,758
========= ======= =======
</TABLE>
The following table provides reconciliations of reportable operating segment
revenues, net income, and assets to the Company's consolidated totals:
53
<PAGE> 56
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
- ---------
Total revenues for reportable segments $121,573 $93,967 $76,255
Elimination of intersegment revenues (1,579) (815) (0)
Other 327 64 108
-------- -------- --------
Total consolidated revenues $120,321 $ 93,216 $ 76,363
======== ======== ========
NET INCOME:
- -----------
Total income for reportable segments $ 18,859 $ 15,190 $ 13,265
Other 1,834 1,367 59
-------- -------- --------
Total consolidated net income $ 20,693 $ 16,557 $ 13,324
======== ======== ========
ASSETS:
- -------
Total assets for reportable segments $454,851 $339,639 $299,678
Investments in equity method investees (42,670) (23,019) (21,769)
Other 67,925 36,990 25,797
Intercompany receivables (999) (760) (153)
--------- -------- ---------
Total consolidated assets $ 479,107 $ 352,850 $ 303,553
========= ========= =========
</TABLE>
20. SUBSEQUENT EVENTS
On January 6, 1999, the Company purchased all of the outstanding common stock of
Administrators For The Professions, Inc. (AFP), a New York corporation, for
aggregate consideration of $54,000,000, paid in cash of $44,000,000 and of
Company common stock. AFP is the manager and attorney-in-fact for Physicians'
Reciprocal Insurers, the second largest medical professional liability insurer
for physicians in the state of New York.
The Company's subsidiary, FPIC, acquired The Tenere Group, Inc. (Tenere) on
March 17, 1999 for $19,608,000 in cash. Tenere, headquartered in Springfield,
Missouri, is a stock holding company that has two primary insurance
subsidiaries, providing medical and legal professional liability insurance.
21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for 1998
and 1997:
Year Ended December 31, 1998
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums written and assumed $29,851,492 $25,662,544 $27,915,386 $33,560,028
Net investment income 4,339,754 4,372,425 4,259,182 4,577,738
Net income 4,785,108 5,046,487 5,480,735 5,380,312
Basic earnings per share $.52 $.55 $.58 $.57
Diluted earnings per share $.50 $.52 $.55 $.54
</TABLE>
Year Ended December 31, 1997
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums written and assumed $ 27,710,231 $ 17,806,822 $ 18,512,127 $ 13,741,553
Net investment income 3,823,088 3,943,499 4,047,205 4,164,742
Net income 3,790,566 3,910,210 4,278,310 4,577,599
Basic earnings per share $.42 $.43 $.47 $.50
Diluted earnings per share $.41 $.42 $.46 $.48
</TABLE>
54
<PAGE> 57
SCHEDULE I
FPIC INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN IN
COST (1) VALUE BALANCE SHEET
------------- ------------- -------------
<S> <C> <C> <C>
Securities Available-for-Sale
Fixed Maturities:
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies $ 56,231,795 $ 58,283,040 $ 58,283,040
Debt securities issued by states
and political subdivisions 148,544,449 153,069,384 153,069,384
Corporate securities 46,072,483 46,090,912 46,090,912
Mortgage-backed securities 66,532,029 68,479,223 68,479,223
------------- ------------- -------------
Total fixed maturities 317,380,756 325,922,559 325,922,559
Equity Securities:
Industrial, miscellaneous, and other 10,221,281 10,327,990 10,327,990
Real Estate 4,581,671 4,581,671 4,581,671
Other Invested Assets 4,171,771 4,419,789 4,171,771
------------- ------------ --------------
Totals $ 336,355,479 $ 345,252,009 $ 345,003,991
============= ============== ==============
</TABLE>
(1) Original cost of equity securities and real estate adjusted for
any permanent write downs, and, as to fixed maturities, original
cost reduced by repayments, write downs and adjusted for
amortization of premiums or accrual of discounts.
See accompanying auditors' report.
<PAGE> 58
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
FPIC INSURANCE GROUP, INC. (PARENT ONLY)
<TABLE>
<CAPTION>
Years Ended December 31
12/31/98 12/31/97
============== ================
<S> <C> <C>
ASSETS
Investments and cash:
Investments in subsidiaries * $152,945,528 $112,449,713
Common stocks 7,586,136 2,086,090
Other invested assets 4,171,771 2,000,000
--------------- ----------------
Total Investments and Cash 164,703,435 116,535,803
Property and equipment, net 293,764 150,059
Due from subsidiaries * 5,708,229 5,938,784
Intangible assets 5,579,816 3,207,661
Federal income taxes receivable 1,804,225 0
Prepaid expenses 379,856 263,245
Other assets 2,234,210 327,767
--------------- ----------------
TOTAL ASSETS $180,703,535 $126,423,319
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Cash and overdraft 697,173 2,613
Federal income taxes payable $0 $2,620,083
Short term debt 27,165,000 2,000,000
Other liabilities 1,910,834 1,736,203
--------------- ---------------
TOTAL LIABILITIES 29,773,007 6,358,899
---------- ---------
SHAREHOLDERS' EQUITY
Common stock, $.10 par value:
25,000,000 shares authorized;
9,518,679 and 9,179,581 shares issued and
outstanding in 1998 and 1997, respectively 951,868 917,958
Additional paid-in capital 34,297,994 25,789,144
Unearned compensation on stock options (356,528) 0
Other comprehensive income 5,621,533 3,634,299
Retained Earnings 110,415,661 89,723,019
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 150,930,528 120,064,420
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $180,703,535 $126,423,319
--------------- ----------------
</TABLE>
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
See accompanying auditors' report.
<PAGE> 59
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF EARNINGS
FPIC INSURANCE GROUP, INC. (PARENT ONLY)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
================= ================== ===================
<S> <C> <C> <C>
REVENUES
Management fees from subsidiaries * $12,267,004 $11,204,829 $0
Dividends from subsidiaries * 450,000 0 2,500,000
Net investment income 326,788 63,846 107,673
----------------- ------------------ -------------------
TOTAL REVENUES 13,043,792 11,268,675 2,607,673
EXPENSES
Other operating expenses 10,809,689 9,057,547 18,416
----------------- ------------------ -------------------
TOTAL EXPENSES 10,809,689 9,057,547 18,416
Income before income taxes 2,234,103 2,211,128 2,589,257
Income taxes (49,958) 843,660 30,347
----------------- ------------------ -------------------
EARNINGS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 2,284,061 1,367,468 2,558,910
Equity in undistributed earnings of subsidiaries 18,408,581 15,189,217 10,764,815
----------------- ------------------ -------------------
NET EARNINGS $20,692,642 $16,556,685 13,323,725
================ ================== ===================
</TABLE>
* Eliminated in consolidation.
See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.
<PAGE> 60
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FPIC INSURANCE GROUP, INC. (PARENT ONLY)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
====================== ==============================
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $20,692,642 $16,556,685 $13,323,725
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of (18,408,581) (15,189,217) (10,764,815)
subsidiaries
Common stock dividend from subsidiary (450,000) 0 (2,500,000)
Depreciation and amortization 251,367 21,151 0
Noncash compensation 20,972 0 0
Changes in assets and liabilities:
Due from subsidiaries 230,555 (5,938,784) 0
Prepaid expenses (116,611) (263,245) 0
Other assets (406,443) (185,403) (142,364)
Federal income taxes receivable (1,804,225) 0 0
Federal income taxes payable (2,620,083) 2,620,083 0
Other liabilities 174,631 1,663,348 72,855
---------------------- ------------------------------
Net cash (used in) operating activities (2,435,776) (715,382) (10,599)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of goodwill (4,071,107) (3,207,661) 0
Purchase of common stocks (5,500,000) (2,086,090) (19,268,673)
Purchase of other invested assets (2,171,771) (2,000,000) 0
Additional investment in subsidiaries 0 (1,250,100) 0
Proceeds from sale or maturity of securities
available for sale 0 3,881,315 0
Purchase of securities available for sale 0 0 (3,881,315)
Purchase of subsidiary's assets and stock (19,650,000) 0 0
Purchase of property and equipment, net (196,166) (171,210) 0
---------------------- ------------------------------
Net cash (used in) investing activities (31,589,044) (4,833,746) (23,149,988)
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of short term debt 25,165,000 2,000,000 0
Purchase of treasury stock 0 0 (181,991)
Issuance of common stock 8,165,260 3,542,215 23,346,878
---------------------- ------------------------------
Net cash provided by financing activities 33,330,260 5,542,215 23,164,887
Net (decrease) in cash and
cash equivalents (694,560) (6,913) 4,300
Cash and cash equivalents, beginning of year (2,613) 4,300 0
---------------------- ------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR ($697,173) ($2,613) 4,300
===================== ==============================
Supplemental disclosure of cash flow information:
Federal income taxes paid $9,816,000 $6,071,204 $0
Cash paid for interest $884,151 $65,962 $0
</TABLE>
See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.
<PAGE> 61
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
FPIC INSURANCE GROUP, INC. (PARENT ONLY)
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of FPIC
Insurance Group, Inc. and Subsidiaries (see part III Item 8).
1. The Parent Company was formed on June 11, 1996. The shareholders of a
subsidiary company approved the formation of a holding company structure.
The shareholders of the subsidiary company became the shareholders of the
Parent Company in five for one exchange of common stock. Prior to the
approval of the holding company structure, the Parent Company had no
activity.
2. Investments
See Investments in the consolidated financial statements Part II Item 8
and in Note 4 of the Notes to the Consolidated Financial Statements.
3. Intangible assets
See Intangible Assets in the consolidated financial statements Part II
Item 8 and in Note 8 of the Notes of the Consolidated Financial
Statements.
4. Short term debt
See Borrowing Arrangements in Note 9 of the Notes to the Consolidated
Financial Statements.
5. Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S.
Federal Income tax return. Income tax liabilities or benefits are
recorded by each subsidiary based upon separate return calculations, and
any difference between the consolidated provision and the aggregate
amounts recorded by the subsidiaries is reflected in the Parent Company
financial statements.
For further information on income taxes, see Income Taxes in Note 13 of
the Notes to the Consolidated Financial Statements.
6. Other Comprehensive Income
See Other Comprehensive Income in the consolidated financial statements
Part II Item 8.
7. Dividend Restrictions
See Statutory Accounting in Note 17 of the Notes to the Consolidated
Financial Statements.
8. Accounting Changes
For information concerning new accounting standards adopted in 1998 and
1997, see Note 1 of the Notes to the Consolidated Financial Statements.
<PAGE> 62
SCHEDULE III
FPIC INSURANCE GROUP, INC.
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Other
Deferred Future Policy Policy Benefits
Policy Benefits Claims & Net Losses and
Acquisition Losses, Claims Unearned Benefits Premium Investment Loss
Segment Costs Loss Expenses Premiums Payable Revenue Income Expenses
- ------- ----- ------------- -------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Medical professional
and other liabiltiy $2,001 $242,377 $44,310 $0 $89,562 $17,549 $67,362
1997:
Medical professional
and other liabiltiy $1,411 $188,086 $28,218 $0 $65,504 $15,978 $54,011
1996:
Medical professional
and other liability $1,212 $172,738 $23,459 $0 $56,074 $13,611 $46,948
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred
Policy Net
Acquisition Other Premiums
Segment Costs Expenses Written
- ------- ----- -------- -------
<S> <C> <C> <C>
1998
Medical professional
and other liabiltiy $4,860 $9,299 $101,477
1997:
Medical professional
and other liabiltiy $3,996 $3,404 $ 70,285
1996:
Medical professional
and other liability $2,843 $3,747 $ 58,740
</TABLE>
See accompanying auditors' report.
<PAGE> 63
SCHEDULE IV
FPIC INSURANCE GROUP, INC.
REINSURANCE
FOR THE YEARS DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
PROPERTY AND GROSS OTHER FROM OTHER NET ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------- ------ --------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
1998 $91,141,795 $16,055,262 $14,475,045 $89,561,578 16.16%
1997 $71,277,054 $7,508,160 $ 1,734,781 $65,503,675 2.65%
1996 $61,628,450 $5,707,095 $ 153,081 $56,074,436 0.27%
</TABLE>
See accompanying auditors' report.
<PAGE> 64
SCHEDULE V
FPIC INSURANCE GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year-ended December 31, 1998
Allowance for Doubtful
Accounts, net $ 681,175 $ 227,234 $ 0 $ 908,409
Year-ended December 31, 1997
Allowance for Doubtful
Accounts, net $ 383,580 $ 297,595 $ 0 $ 681,175
</TABLE>
See accompanying auditors' report.
<PAGE> 1
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of April 14,
1998, by and among FPIC Insurance Group, Inc., a Florida corporation ("FIG"),
Anesthesiologists Professional Assurance Association, Inc., a Florida
not-for-profit corporation ("APAA"), for itself and on behalf of a Florida for
profit corporation to be formed and named Anesthesiologists Professional
Assurance Association, Inc. ("Newco"), the APAA Liquidating Trust created
pursuant to that certain Liquidating Trust Agreement of even date herewith (the
"Liquidating Trust"), and Anesthesiologists Professional Assurance Company, a
Florida corporation ("APAC") (collectively, APAA, Newco, the Liquidating Trust
and APAC shall be referred to as the "APAA Group" and, each individually, a
member of the APAA Group).
W I T N E S S E T H:
WHEREAS, the Board of Directors of FIG has determined that it is in the
best interest of FIG and its shareholders to effect a merger of FIG and Newco
through the consummation of the business combination transactions provided for
in this Agreement; and
WHEREAS, the Trustees of the Liquidating Trust and the Boards of Directors
of APAA and APAC have determined that it is in the best interests of their
respective members and shareholders to effect a merger of FIG and Newco through
the consummation of the business combination transactions provided for in this
Agreement; and
WHEREAS, it is the intent of the Trustees of the Liquidating Trust and
respective Boards of Directors of APAA and APAC, and of the Board of Directors
of FIG, that FIG and APAC be the surviving corporations in such business
combination transactions; and
WHEREAS, the parties desire to make certain representations, warranties
and agreements in connection with, and to prescribe certain conditions to, such
business combination transactions.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Agreement, and intending to be
legally bound by this Agreement, the parties to this Agreement agree as follows:
<PAGE> 2
ARTICLE 1
THE MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement and in
accordance with the Florida Insurance Code, at the Effective Time, Newco shall
merge with and into FIG (the "Merger"). FIG shall be the surviving corporation
in the Merger, and shall continue its corporate existence under the laws of the
State of Florida. Upon consummation of the Merger, the separate existence
(corporate and otherwise) of Newco shall terminate.
1.2 Effective Time. The Merger shall become effective as set forth in
articles of merger, a form of which is attached as Exhibit A (the "Articles of
Merger"), filed with the appropriate authorities of the State of Florida on the
Closing Date (as defined in Section 9.1 of this Agreement). The effective date
and time of the Merger specified in the Articles of Merger shall be no earlier
than the date and time the Articles of Merger are filed with the appropriate
authorities of the State of Florida and shall be as soon after such filing as is
practicable. The term "Effective Time" shall be the date and time when the
Merger becomes effective, as set forth in the Articles of Merger filed in
accordance with the Florida Insurance Code and the Florida Business Corporation
Act, as amended (the "FBCA").
1.3 Effects of Merger. At and after the Effective Time, the Merger shall
have the effects set forth in this Agreement, the Articles of Merger, the
Florida Insurance Code and the FBCA. At the Effective Time, (i) all rights,
franchises, licenses and interests of Newco in and to every type of property,
real, personal and mixed, and all choses in action of Newco shall continue
unaffected and uninterrupted by the Merger and shall accrue to FIG; (ii) all
obligations and liabilities of Newco then outstanding shall become and be
obligations of FIG and shall continue unaffected and uninterrupted by the
Merger; and (iii) no action or proceeding then pending and to which Newco is a
party shall be abated or discontinued but may be prosecuted to final judgment by
FIG.
1.4 Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any action on the part of any holder of any security of FIG
or Newco:
(1) Conversion of Newco Common Stock. The aggregate issued and
outstanding shares of Newco voting and nonvoting common stock ("Newco Common
Stock"), shall be canceled and converted into the right to receive $4,800,000 in
immediately available funds (the "Cash Consideration") and an aggregate number
of shares of common stock $0.10 par value per share, of FIG ("FIG Common Stock")
determined by dividing $9,000,000 by the average (weighted to reflect daily
trading volume) of the daily closing prices per share of FIG Common Stock on the
NASDAQ National Market as reported in the Southeast edition of the Wall Street
Journal for the period of twenty (20) business days ending on the last business
day prior to the Closing Date (the "Average Price") (the "Stock Consideration");
provided however, (i) that in the event the Average Price is $27.125 or lower,
then the Average Price shall be deemed to be $27.125 (the "Floor Price") and the
Stock Consideration shall be divided by the Floor Price (so that, in such case,
the Stock Consideration would be 331,797 shares of FIG Common Stock), and (ii)
that in the event the Average Price is $37.125 or higher, then the Average Price
shall be deemed to be $37.125 (the "Ceiling Price") and the Stock Consideration
shall be divided by the Ceiling Price (so that, in such case, the Stock
Consideration would be 242,424 shares of FIG Common Stock). At the Closing, FIG
shall deliver to the Liquidating Trust (a) the Cash Consideration and (b)
seven-ninths of the shares of FIG Common Stock comprising the Stock
Consideration, (the "Non-Pledged Stock Consideration"). The remaining shares of
FIG Common Stock comprising the Stock Consideration
<PAGE> 3
(the "Pledged Stock Consideration") shall be issued in the name of the
Liquidating Trust and pledged in favor of FIG as provided in Section 2.9.
(2) Anti-dilution. If, as a result of a reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split, or other similar change in capitalization prior to the Effective Time,
the outstanding shares of FIG Common Stock shall have been increased or
decreased by one (1%) percent or more or changed into or exchanged for a
different number or kind of shares or securities, then an appropriate and
proportionate adjustment shall be made to the Stock Consideration.
(3) No Change to FIG Common Stock. Each issued and outstanding share
of FIG Common Stock shall remain outstanding and shall continue to represent one
fully paid and nonassessable share of FIG Common Stock.
1.5 FIG Articles of Incorporation. Subject to the terms and conditions of
this Agreement, at the Effective Time, the Articles of Incorporation of FIG then
in effect shall be, and shall continue in effect as, the Articles of
Incorporation of FIG, as the surviving corporation in the Merger, until
thereafter amended in accordance with applicable law.
1.6 FIG Bylaws. Subject to the terms and conditions of this Agreement, at
the Effective Time, the Bylaws of FIG then in effect shall be, and shall
continue in effect as, the Bylaws of FIG, as the surviving corporation in the
Merger, until thereafter amended in accordance with applicable law.
1.7 Merger Tax Consequences. It is intended that (i) the Merger shall
constitute a reorganization within the meaning of Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) this Agreement
shall constitute a "plan of reorganization" for the purposes of Section 368(a)
of the Code. The parties intend through the Merger to further their mutual
business objectives by obtaining synergies of operation, concentration of
business, acquisition of expertise, reduction of costs, and pooling of
well-trained and efficient personnel to strengthen the operations of both
parties in view of the increasingly more competitive market for the sale of
professional liability insurance to anesthesiologists and other physicians.
ARTICLE 2
OTHER AGREEMENTS
1.8 Note and Lien. At the Closing, but immediately following the
Effective Time, FIG shall pay American Professional Assurance, Ltd., a Cayman
Islands exempted limited company ("APAL"), $2,700,000 in full repayment of the
Renewal and Consolidated Note dated May 31, 1992, made by APAA to APAL (the
"Note"). APAA shall pay all accrued and unpaid interest owing under the Note
prior to Closing so that no accrued interest is owed on the Closing Date. Upon
the payment of the Note as contemplated herein, the Liquidating Trust and FIG
shall obtain a full release of any and all liens or other interests that APAL
may have in the outstanding shares of APAC common stock.
1.9 Contribution of Surplus Note. Prior to the Closing, APAA shall
contribute to the capital of APAC the Surplus Note, in the outstanding principal
amount as of the date hereof of $1,650,000, issued by APAC in favor of APAA (the
"Surplus Note"). Prior to such contribution, and after the date of this
Agreement, APAC shall make no further payments of principal, interest or other
amounts owing under the
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Surplus Note, except as required to allow APAA to make regularly scheduled
payments of interest under the Note, or except to permit APAA to recontribute
back to APAC the amount so received by APAA in payment of the Surplus Note as a
contribution to the capital APAC.
1.10 Transaction Fee. As of the Closing, but immediately following the
Effective Time, FIG shall pay Consulting Group of APA, Inc., a Florida
corporation ("CGA"), a transaction fee in the amount of $1,150,000 in cash for
its services rendered in connection with the transactions contemplated by this
Agreement.
1.11 Registration Rights. At the Closing, but immediately following the
Effective Time, FIG and the Liquidating Trust shall enter into a Stock
Restriction and Registration Rights Agreement substantially in the form attached
as Exhibit B.
1.12 APAC Board of Directors.
(1) The initial Board of Directors of APAC immediately after the
Closing shall be the same as before the Closing except that two representatives
of FIG shall be appointed to the APAC Board at the Closing. As APAC's sole
shareholder after the Closing, FIG shall have the right, in its discretion, to
elect and replace the directors of APAC, but FIG hereby agrees not to do so as
long as the Management Agreement (as defined in Section 2.7) remains in effect
(provided, however, in the event the Management Agreement is terminated by APAM
in accordance with Section Seventeen (C) thereof, until the date the then
current term of the Management Agreement (excluding any automatic extensions
thereof) would have expired had such termination not occurred).
(2) APAC acknowledges and agrees that the APAC Board will not have
authority to authorize or approve and will not authorize or approve any action
not contemplated by the Management Agreement and that is outside of the ordinary
course of business of APAC, unless at least one of the FIG representatives
consents to such action. APAC acknowledges and agrees that it has furnished FIG
copies of all of APAC's underwriting policies, pricing policies, and claims
handling policies (collectively, the "Management Policies"). FIG acknowledges
and agrees that the Management Policies shall remain in effect after
consummation of the Merger contemplated hereby, subject to the rights of the
APAC Board of Directors to change the same to reflect changed circumstances;
provided, that APAC shall obtain FIG's prior written consent before materially
changing any of the Management Policies.
(3) The provisions of this Section 2.5 shall survive the Closing and
the consummation of the Merger.
1.13 FIG and FPIC Boards of Directors. FIG shall cause Dr. Frank Moya to
be appointed for a three year term to FIG's Board of Directors and for a one
year term to Florida Physicians Insurance Company, Inc.'s ("FPIC") Board of
Directors concurrently with the Closing. Should Dr. Moya cease serving as a
Director for any reason while the Management Agreement remains in effect, then
FIG shall cause a replacement for Dr. Moya designated by APA Management, Inc., a
Florida corporation ("APAM"), to fill that vacancy on the Board of Directors of
FIG and/or FPIC, as the case may be, so that at all times while the Management
Agreement remains in effect Dr. Moya or such other designee of APAM serves on
such Boards of Directors. After the Closing, FIG's Board of Directors and FPIC's
Board of Directors will also consider in good faith the appointment of Dr. Frank
Moya as a member of their respective Executive Committees.
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1.14 Management Agreement. At the Closing, FIG, APAC and APAM shall enter
into a Management Agreement substantially in the form attached as Exhibit C (the
"Management Agreement").
1.15 Investment Management Agreement. At the Closing, FIG, APAM and APAC
shall enter into an Investment Management Agreement substantially in the form
attached as Exhibit D (the "Investment Management Agreement").
1.16 Agreements Regarding the Stock Consideration. At the Closing, FIG and
the Liquidating Trust shall enter into (i) an Indemnification and Stock Pledge
Agreement containing substantially the terms specified in Exhibit E and other
mutually agreeable terms typically included in agreements of such type (the
"Pledge Agreement") and (ii) a Stock Retention Agreement containing
substantially the terms specified in Exhibit F and other mutually agreeable
terms typically included in agreements of such type (the "Stock Retention
Agreement").
1.17 Newco. Prior to the Closing, APAA shall cause Newco to be organized
as a Florida for profit corporation. APAA agrees that (i) Newco shall not have
or incur any liabilities of any nature from the time of its organization through
the Effective Time other than (a) the liabilities of APAA set forth on the
balance sheet of APAA as of December 31, 1997, a copy of which has been provided
to FIG, (b) the Newco Expense Obligation (as defined in Section 9.3), and (c)
liabilities disclosed in Section 4.18 of the Disclosure Schedule which it is
anticipated that APAA will incur from and after January 1, 1998, and (ii) the
assets of Newco as of the Effective Time shall consist of the assets of APAA set
forth on the balance sheet of APAA as of December 31, 1997. Newco and the
Liquidating Trust shall not engage in any activities or operations of any nature
except as provided in this Agreement. APAA and the Liquidating Trust shall cause
Newco, upon its formation, to be bound by and to comply with all of the
obligations and agreements of or pertaining to Newco contained in this
Agreement.
1.18 Assumed Liability. The parties acknowledge that there has been
accrued but not paid an expense of $1,500,000 in respect of compensation due to
approximately 40 of the respective Directors, Officers, consultants, members of
the Board of Medical Advisors and key employees of APAC and APAM (the
"Compensation Accrual"). Notwithstanding any conflicting or inconsistent
provision of this Agreement, the parties acknowledge that the Compensation
Accrual shall not cause or contribute to any extent to the inaccuracy or breach
of any representation, warranty, covenant or agreement in this Agreement and
shall be completely disregarded in determining whether the conditions precedent
to FIG's obligations to close have been satisfied. At the Closing, and
immediately after the Effective Time, FIG shall pay the Compensation Accrual to
a nominee or paying agent designated by APAC for the approximately 40 persons
among whom the Compensation Accrual shall be distributed.
1.19 Cash Payments. All references to cash payments to be made
concurrently with or immediately after the Closing shall require payment by wire
transfer of immediately available US funds to the account designated by the
party receiving such payment, or otherwise in immediately available funds as
directed by the party receiving such payment.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF FIG
Except as disclosed in the FIG disclosure schedule delivered to APAA
concurrently herewith (the "FIG Disclosure Schedule"), FIG hereby represents and
warrants to APAA as follows:
1.20 Corporate Organization.
(1) FIG is incorporated and its status is active under the laws of
the State of Florida. FIG has the corporate power and authority to own or lease
all of its properties and assets and to carry on its business as it is now being
conducted, and is licensed or qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such licensing or
qualification necessary, except where the failure to be so licensed or qualified
would not have a Material Adverse Effect on FIG. As used in this Agreement, the
term "Material Adverse Effect" means, with respect to FIG, APAA, Newco, the
Liquidating Trust, APAC, or the surviving corporation in the Merger, as the case
may be, a material adverse effect on the business, assets, properties, results
of operations, or financial condition of such party and its Subsidiaries taken
as a whole, excluding for this purpose only, however, the payment and/or
incurrence of transactional expenses by FIG, APAA, Newco, or APAC, in connection
with the Merger, as provided in this Agreement, to the extent having or
contributing to any extent to such an effect. As used in this Agreement, the
word "Subsidiary" when used with respect to any party means any corporation,
association, partnership, limited liability company, or other organization,
whether incorporated or unincorporated, more than 50% of the outstanding
securities or other equity ownership interests having ordinary voting power of
which shall be owned or controlled, directly or indirectly, by such party or by
one or more of such party's subsidiaries. True and complete copies of the
Articles of Incorporation and Bylaws of FIG, as in effect as of the date of this
Agreement, have previously been made available by FIG to APAA.
(2) A record of all material corporate action taken by the
shareholders and Board of Directors (including committees thereof) of FIG and
complete and accurate copies of all of its proceedings and actions by written
consent, and all minutes of its meetings, are contained in the minute books of
FIG. The minute books and stock ledgers of FIG contain an accurate and complete
record of all issuances, transfers and cancellations of shares of capital stock
of FIG. APAA has been given access to and an opportunity to review all such
minutes, minute books and stock ledgers.
1.21 Capitalization.
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<PAGE> 7
(1) The authorized capital stock of FIG consists of 50,000,000 shares
of preferred stock and 25,000,000 shares of FIG Common Stock. As of December 31,
1997, no shares of such preferred stock and 9,179,581 shares of FIG Common Stock
were issued and outstanding. All of the issued and outstanding shares of FIG
Common Stock have been authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights with no personal liability attaching
to the ownership thereof. The shares of FIG Common Stock to be issued pursuant
to the Merger will be authorized and validly issued and, at the Effective Time,
all such shares will be fully paid, nonassessable and free of preemptive rights
and with no personal liability attaching to the ownership thereof, and shall be
free and clear of any Liens, restrictions, or adverse claims, except those
arising (a) under applicable securities laws, (b) under this Agreement, or (c)
by, through or under any member of the APAA Group
1.22 Authority; No Violation.
(1) FIG has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement have been approved by the Board
of Directors of FIG, and does not require the consent or approval of the
shareholders of FIG. This Agreement has been executed and delivered by FIG and
(assuming due authorization, execution and delivery by the APAA Group and the
receipt of all Requisite Regulatory Approvals (as defined in Section 7.1(iii) of
this Agreement) constitutes a valid and binding obligation of FIG, enforceable
against FIG in accordance with its terms.
(2) Neither the execution and delivery of this Agreement by FIG nor
the consummation by FIG of the transactions contemplated by this Agreement, nor
compliance by FIG with any of the terms or provisions of this Agreement, will
(i) violate any provision of the Articles of Incorporation or Bylaws of FIG or
(ii) assuming that all Requisite Regulatory Approvals and all of the consents
and approvals referred to in Section 3.4 of this Agreement are duly obtained,
(x) violate any statute, code, ordinance, rule, regulation, judgment, order,
writ, decree or injunction applicable to FIG or any of its properties or assets,
or (y) violate, conflict with, result in a breach of any provision of or the
loss of any benefit under, constitute a default (or an event that, with notice
or lapse of time, or both, would constitute a default) under, result in the
termination of or a right of termination or cancellation under, accelerate the
performance required by, or result in the creation of any lien, charge or
encumbrance of any nature (collectively "Lien") upon any of the properties or
assets of FIG under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which FIG is a party, or by which it or any of its
properties or assets may be bound or affected, except (in the case of clause (y)
above) for such violations, conflicts, breaches or defaults which, either
individually or in the aggregate, will not have or be reasonably likely to have
a Material Adverse Effect on FIG.
1.23 Consents and Approvals. Except for (i) the filing of
applications, notices and forms with, and the obtaining of approvals from, the
Department of Insurance of the State of Florida (the "Florida Insurance
Department") under the Florida Insurance Code, with respect to the transactions
contemplated by this Agreement, (ii) the filing of any other required
applications, notices and forms with, and the obtaining of approvals from, any
other Governmental Entity (as defined in this Section 3.4), (iii) the filing of
the Articles of Merger with the appropriate authorities of the State of Florida
pursuant to the Florida Insurance Code and the FBCA, (iv) the filing of a
notification and report form (the "HSR Act Report") with the Pre-Merger
Notification Office of the
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Federal Trade Commission and with the Antitrust Division of the Department of
Justice (collectively, the "Pre-Merger Notification Agencies") pursuant to the
Hart-Scott- Rodino Anti-Trust Improvements Act, as amended, and the rules and
regulations thereunder (collectively, the "HSR Act"), (v) any consents,
authorizations, orders and approvals required under the Florida Insurance Code
and the HSR Act, (vi) any consents, authorizations, approvals, filings or
exemptions in connection with compliance with FIG's listing on the Nasdaq
National Market, and (vii) such filings and approvals as are required to be made
or obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of the shares of FIG Common Stock pursuant to this
Agreement, no consents or approvals of or filings or registrations with any
court, administrative agency or commission or other governmental authority or
instrumentality (together with the SEC, the Pre-Merger Notification Agencies,
and the Florida Insurance Department, a "Governmental Entity") or, except as set
forth in the FIG Disclosure Schedule, with any third party are necessary in
connection with the execution and delivery by FIG of this Agreement or the
consummation by FIG of the transactions contemplated by this Agreement.
1.24 Financial Statements. FIG has previously made available to APAA
copies of the consolidated balance sheets of FIG and its Subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for the fiscal years 1997 and
1996, inclusive, as reported in FIG's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed with the SEC under the Securities Exchange
Act of 1934, as amended and the rules and regulations thereunder (collectively,
the "Exchange Act"), in each case accompanied by the audit reports of KPMG Peat
Marwick LLP (with respect to the years ended December 31, 1997 and 1996),
independent public accountants with respect to FIG. Prior to the Closing, FIG
will deliver to APAA copies of the unaudited consolidated balance sheet of FIG
and its Subsidiaries and the related unaudited consolidated statements of income
and cash flows as reported in FIG's Quarterly Report on Form 10-Q for each
quarter period ended at least 45 days prior to the Closing. The consolidated
balance sheets of FIG as of December 31, 1997 and 1996 (including the related
notes, where applicable) fairly present the consolidated financial position of
FIG and its Subsidiaries as of the dates thereof, and the other financial
statements referred to in this Section 3.5 (including the related notes, where
applicable) fairly present or will fairly present (subject, in the case of the
unaudited statements, to recurring year end and audit adjustments normal in
nature and amount) the results of the consolidated operations and changes in
shareholders' equity and consolidated financial position of FIG and its
Subsidiaries for the respective fiscal periods or as of the respective dates
therein set forth; each of such statements (including the related notes, where
applicable) comply (or will comply) in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto; and each of such statements (including the related notes,
where applicable) has been (or will be) prepared in all material respects in
accordance with generally accepted accounting principles consistently applied
("GAAP") during the periods involved, except, in each case, as indicated in such
statements or in the notes thereto (or, in the case of unaudited statements, as
permitted by Form 10-Q). The books and records of FIG and its Subsidiaries have
been, and are being, maintained in all material respects in accordance with GAAP
and any other applicable legal and accounting requirements and reflect only
actual transactions.
1.25 Broker's Fees. Except as described in Section 2.3, neither FIG
nor any Subsidiary of FIG nor any of their respective officers or directors has
employed any broker or finder
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or incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
1.26 Absence of Certain Changes or Events.
(1) Except as disclosed in the FIG Reports (as defined in Section 3.9
of this Agreement) filed prior to the date of this Agreement, since December 31,
1997, (i) FIG and its Subsidiaries taken as a whole have not incurred any
material indebtedness or other liability or obligation (whether absolute,
accrued, contingent or otherwise), other than in the ordinary course of their
business; (ii) FIG has not declared or paid any dividend or other distribution
in respect of the capital stock of FIG, or any direct or indirect redemption,
purchase or other acquisition by FIG of any such stock; and (iii) no event has
occurred which has had, or is likely to have, individually or in the aggregate,
a Material Adverse Effect on FIG.
(2) Except as disclosed in the FIG Reports filed prior to the date of
this Agreement, and except as disclosed in the FIG Disclosure Schedule, since
December 31, 1997, FIG and its Subsidiaries have carried on their respective
businesses in all material respects in the ordinary and usual course theretofore
conducted.
1.27 Legal Proceedings.
(1) Neither FIG nor any of its Subsidiaries is a party to any, and
there are no pending or, to the best of their knowledge, threatened, material
legal, administrative, arbitral or other proceedings, claims, actions or
governmental or regulatory investigations of any nature (including
noncontractual claims, bad faith claims and claims against any directors or
officers of FIG or any Subsidiary of FIG, but excluding coverage and other
claims not alleging bad faith made with respect to insurance policies issued by
any FIG Subsidiary) against FIG or any of its Subsidiaries or challenging the
validity or propriety of the transactions contemplated by this Agreement as to
which there is a reasonable likelihood of an adverse determination and which, if
adversely determined, either individually or in the aggregate, would have a
Material Adverse Effect on FIG.
(2) There is no injunction, order, judgment, decree, or regulatory
restriction (including noncontractual claims, bad faith claims and claims
against any directors or officers of FIG or any Subsidiary of FIG, but excluding
coverage and other claims not alleging bad faith made with respect to insurance
policies issued by any FIG Subsidiary) imposed upon FIG, any of its Subsidiaries
or the assets of FIG or any of its Subsidiaries which has had, or might
reasonably be expected to have, a Material Adverse Effect on FIG.
1.28 SEC Reports. FIG has previously made available to APAA a
complete copy of each (a) final registration statement, prospectus, report
(including but not limited to reports on Forms 10-K, 8-K and 10-Q), schedule and
definitive proxy statement filed since June 11, 1996 and prior to the date of
this Agreement by FIG with the SEC pursuant to the Securities Act of 1933, as
amended and the rules and regulations thereunder (collectively, the "Securities
Act"), or the Exchange Act (collectively, the "FIG Reports") and (b)
communication mailed by FIG to its shareholders since June 11, 1996 and prior to
the date of this Agreement, and no such registration statement, prospectus,
report, schedule, proxy statement or communication contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances in which they were made, not misleading, except that
information as of a later date shall be deemed to modify
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information as of an earlier date. Since June 11, 1996, FIG has timely filed all
FIG Reports and other documents required to be filed by it under the Securities
Act and the Exchange Act, and, as of their respective dates, all FIG Reports
complied in all material respects with respect to form, content and otherwise
with the published rules and regulations of the SEC with respect thereto.
1.29 Compliance with Applicable Law. FIG and each of its Subsidiaries
hold all material licenses, franchises, permits and authorizations necessary for
the lawful conduct of their respective businesses under and pursuant to, and
have complied in all material respects with and are not in default in any
material respect under any, and have maintained and conducted their respective
businesses in all material respects in compliance with, all applicable laws,
statutes, orders, rules, regulations, policies and/or guidelines of each
Governmental Entity relating to FIG or any of its Subsidiaries, except where the
failure to hold such license, franchise, permit or authorization or such
noncompliance or default would not, either individually or in the aggregate,
have a Material Adverse Effect on FIG. Neither FIG nor any of its Subsidiaries
engages in any activity prohibited by applicable law.
1.30 Agreements with Regulatory Agencies. Neither FIG nor any of its
Subsidiaries is subject to any cease-and-desist or other order issued by, or is
a party to any written agreement, consent agreement or memorandum of
understanding with, or is a party to any commitment letter or similar
undertaking to, or is subject to any order or directive by, or has been since
January 1, 1994, a recipient of any supervisory letter from, or since January 1,
1994, has adopted any board resolutions at the request of any Governmental
Entity that currently restricts in any material respect the conduct of its
business or that in any material manner relates to its capital adequacy, its
credit policies, its management or its business (each, whether or not set forth
in the FIG Disclosure Schedule, a "FIG Regulatory Agreement"), nor has FIG or
any of its Subsidiaries been advised since January 1, 1994, by any Governmental
Entity that it is considering issuing or requesting any such FIG Regulatory
Agreement.
1.31 Undisclosed Liabilities. Except for (i) those liabilities that are
fully reflected or reserved against on the consolidated balance sheet of FIG
included in the FIG December 31, 1997 Form 10-K, (ii) those liabilities incurred
in the ordinary course of business consistent with past practice since December
31, 1997, and (iii) coverage and other claims (other than bad faith claims) made
with respect to insurance policies issued by any FIG Subsidiary, neither FIG nor
any of its Subsidiaries has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due) that, either alone or when combined with all similar liabilities, has had,
or could reasonably be expected to have, a Material Adverse Effect on FIG.
1.32 State Takeover Laws. The Board of Directors of FIG has approved the
transactions contemplated by this Agreement and taken such action such that the
provisions of any state or local "takeover" law applicable to FIG will not apply
to this Agreement or any of the transactions contemplated by this Agreement.
1.33 No Investment Company. Neither FIG nor any Subsidiary of FIG is an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of either the Investment Company Act of 1940, as amended, or
Sections 368(a)(2)(F)(iii) and (iv) of the Code.
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1.34 Full Disclosure. No representation or warranty by FIG in this
Agreement, nor in any certificate, schedule, statement, document or instrument
furnished by FIG to APAA Group pursuant to this Agreement contains or will
contain any untrue statement of a material fact or, taking into account the
scope of such representations and warranties and the context in which they are
made, omits or will omit to state a material fact required to be stated herein
or therein or necessary to make any statement herein or therein not misleading.
1.35 Legal Compliance. Neither FIG nor, to the best knowledge of FIG, any
director, officer, agent, employee or other person associated with or acting on
behalf of FIG has, directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback or other unlawful payment, using corporate funds.
1.36 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of FIG set
forth in this Agreement, as updated by any written disclosure schedule delivered
pursuant to Section 6.6 of this Agreement, shall be deemed to be made on and as
of the date of this Agreement, as of the Closing Date, and as of the Effective
Time.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE APAA GROUP
Except as disclosed in the APAA Group disclosure schedule delivered to FIG
concurrently herewith (the "APAA Group Disclosure Schedule"), the APAA Group
(provided that references to Newco in this Section shall be deemed applicable
only from and after the formation of Newco) hereby jointly and severally
represents and warrants to FIG as follows:
1.37 Organization.
(1) APAA is incorporated as a not-for-profit corporation and its
status is active under the laws of the State of Florida. APAA has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is registered, licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such registration, licensing or qualification
necessary, except where the failure to be so registered, licensed or qualified
would not have a Material Adverse Effect on APAA. True and complete copies of
the Articles of Incorporation and Bylaws of APAA, as in effect as of the date of
this Agreement, have previously been made available by APAA to FIG.
(2) As of the Closing, (a) Newco will be incorporated and its status
will be active under the laws of the State of Florida, (b) Newco will have the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is then being conducted, and (c) Newco will
be registered, licensed or qualified to do business in each jurisdiction in
which the nature of the business conducted by it or the character or location of
the properties and assets owned or leased by it makes such registration,
licensing or qualification necessary, except
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where the failure to be so registered, licensed or qualified would not have a
Material Adverse Effect on Newco. True and complete copies of the Articles of
Incorporation and Bylaws of Newco, as in effect as of the Closing, will be made
available to FIG upon Newco's organization. As of the Closing, Newco will be a
wholly owned subsidiary of the Liquidating Trust.
(3) The Liquidating Trust has been formed and organized and its
status is active under the laws of the State of Florida. The Liquidating Trust
has the legal power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted, and is
registered, licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties and assets owned or leased by it makes such registration, licensing
or qualification necessary, except where the failure to be so registered,
licensed or qualified would not have a Material Adverse Effect on the
Liquidating Trust. True and complete copies of the organizational documents of
the Liquidating Trust, as currently in effect, have previously been made
available by the Liquidating Trust to FIG.
(4) APAC is incorporated and its status is active under the laws of
the State of Florida. APAC has the corporate power and authority to own or lease
all of its properties and assets and to carry on its business as it is now being
conducted, and is registered, licensed or qualified to do business in each
jurisdiction in which the nature of the business conducted by it or the
character or location of the properties and assets owned or leased by it makes
such registration, licensing or qualification necessary, except where the
failure to be so registered, licensed or qualified would not have a Material
Adverse Effect on APAC. True and complete copies of the Articles of
Incorporation and Bylaws of APAC, as in effect as of the date of this Agreement,
have previously been made available by APAC to FIG.
(5) A record of all material action taken by the Trustees of the
Liquidating Trust and the Boards of Directors of APAA and APAC (including
committees thereof), and a record of all corporate action taken by the
shareholders of APAC, and complete and accurate copies of all of their
respective proceedings and actions by written consent, and all minutes of their
respective meetings, are contained in the respective minute books of the APAA
Group. The records of APAA and the Liquidating Trust contain an accurate and
complete record of all members of APAA and their membership rights (to the
extent required to be reflected therein). The minute books and stock ledgers of
APAC contain an accurate and complete record of all issuances, transfers and
cancellations of shares of capital stock of APAC. FIG has been given access to
and an opportunity to review all such minutes, minute books, membership records
and stock ledgers.
1.38 Capitalization.
(1) The authorized capital stock of Newco will consist of 900 shares
of nonvoting common stock and 100 shares of voting common stock. All of the
Newco Common Stock, as of the Closing, will have been authorized and validly
issued and will be fully paid, nonassessable and free of preemptive rights with
no personal liability attaching to the ownership thereof. As of the time
immediately prior to the Merger and except as contemplated by this Agreement,
Newco will not have and will not be bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of Newco capital stock or any
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other equity securities of Newco or any securities representing the right to
purchase or otherwise receive any shares of Newco capital stock or any other
equity securities of Newco, and no shares of Newco capital stock will be
reserved for issuance, nor will Newco have issued any shares of Newco capital
stock or other equity securities of Newco, or any securities convertible into or
exercisable for any shares of Newco capital stock or other equity securities of
Newco, other than as contemplated by this Agreement.
(2) The authorized capital stock of APAC consists of 600,000 shares
of common stock, $1.00 par value ("APAC Common Stock"). As of December 31, 1997,
all of the authorized shares of APAC Common Stock were issued and outstanding.
All of the issued and outstanding shares of APAC Common Stock have been
authorized and validly issued and are fully paid, nonassessable and free of
preemptive rights with no personal liability attaching to the ownership thereof.
As of the date of this Agreement, and except as contemplated by this Agreement,
APAC does not have and is not bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any character calling for the
purchase or issuance of any shares of APAC Common Stock or any other equity
securities of APAC or any securities representing the right to purchase or
otherwise receive any shares of APAC Common Stock or any other equity securities
of APAC, except with respect to the pledge encumbering the APAC Common Stock and
securing the Note. No shares of APAC Common Stock are reserved for issuance.
Since December 31, 1997, APAC has not issued any shares of APAC Common Stock or
other equity securities of APAC, or any securities convertible into or
exercisable for any shares of APAC Common Stock or other equity securities of
APAC, other than as contemplated by this Agreement.
(3) The APAA Group Disclosure Schedule sets forth a complete list of
the officers and directors of APAA and APAC. The APAA Group does not have any
direct or indirect equity or ownership interest in any other business or entity,
other than (upon formation thereof) Newco and APAC, and does not have any direct
or indirect obligation or any commitment to invest any funds in any corporation
or other business or entity, other than for investment purposes in the ordinary
course of business.
1.39 Authority; No Violation.
(1) Each member of the APAA Group has full power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated by this Agreement. The execution and delivery of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly and validly approved by all of the members of APAA who have the right to
vote thereon and have been, or prior to the Closing will be, duly and validly
approved by the Board of Directors of APAA, Newco and APAC, the Trustees of the
Liquidating Trust and the shareholder of APAC. No other corporate proceedings on
the part of the members of the APAA Group are necessary to approve this
Agreement and to consummate the transactions contemplated by this Agreement.
This Agreement has been validly executed and delivered by APAA, the Liquidating
Trust and APAC and (assuming due authorization, execution and delivery by FIG
and the receipt of all Requisite Regulatory Approvals) constitutes a valid and
binding obligation of each member of the APAA Group, enforceable against each
member of the APAA Group in accordance with its terms. Except for the approval
of the voting members of APAA, which has been obtained, no member of APAA and no
beneficiary of the Liquidating Trust has or will have any right to vote upon or
approve or any other rights to affect the consummation of the transactions
contemplated by this Agreement.
(2) Neither the execution and delivery of this Agreement by APAA, the
Liquidating Trust and APAC nor the consummation by APAA, the Liquidating Trust,
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Newco and APAC of the transactions contemplated by this Agreement, nor
compliance by APAA, the Liquidating Trust, Newco and APAC with any of the terms
or provisions of this Agreement, will (i) violate or will violate any provision
of the organizational documents of any member of the APAA Group or (ii) assuming
that the consents and approvals referred to in Section 4.4 of this Agreement are
duly obtained, (x) violate or will violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable or that will
be applicable to any member of the APAA Group or any of their properties or
assets, or (y) violate, conflict with, result in a breach of any provision of or
the loss of any benefit under, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, or result in the creation of any Lien upon any of
the properties or assets of any member of the APAA Group under, any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, deed of
trust, license, lease, agreement or other instrument or obligation to which any
member of the APAA Group is a party, or by which it or any of its properties or
assets may be bound or affected.
1.40 Consents and Approvals. Except for (i) the filing of
applications, notices and forms with, and the obtaining of approvals from, the
Florida Insurance Department under the Florida Insurance Code, with respect to
the transactions contemplated by this Agreement, (ii) the filing of any other
required applications, notices and forms with, and the obtaining of approvals
from any other Governmental Entity, (iii) the filing of the Articles of Merger
with the appropriate authorities of the State of Florida pursuant to the Florida
Insurance Code and the FBCA, (iv) the filing of the HSR Act Report with the
Pre-Merger Notification Agencies pursuant to the HSR Act, and (v) any consents,
authorizations, orders and approvals required under the Florida Insurance Code
and the HSR Act, no consents or approvals of or filings or registrations with
any Governmental Entity or with any third party are necessary in connection with
the execution and delivery by the APAA Group of this Agreement or the
consummation by the APAA Group of the transactions contemplated by this
Agreement.
1.41 Reports. Each member of the APAA Group, as applicable (i) has
timely filed all annual and quarterly statements (including the financial
statements contained therein), reports, registrations and statements, together
with all amendments required to be made with respect thereto, it was required to
file since January 1, 1993 with each Governmental Entity having jurisdiction,
(ii) has timely filed all other reports and statements, together with all
amendments required to be made with respect thereto, that it was required to
file since January 1, 1998 under all applicable laws, rules or regulations
(including any report or statement required to be filed pursuant to the laws,
rules or regulations of the United States, any state, or any other Governmental
Entity), and (iii) has paid all fees and assessments due and payable in
connection therewith, except in each case for such delinquencies and defects in
such filings as did not have any Material Adverse Effect upon any member of the
APAA Group. All such reports, registrations and statements, together with all
such amendments, were in substantial compliance with applicable law when filed
and, as of their respective dates, did not contain any false statements or
material misstatements of fact or (when taken as a whole) omit to state any
material facts required to be disclosed therein and necessary to make the
statements set forth therein not materially misleading in light of the
circumstances in which such statements were made. No deficiencies have been
asserted by any Governmental Entity with
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respect to such reports, registrations and statements or any such amendments
thereto, that have any Material Adverse Effect on any member of the APAA Group.
The APAA Group has delivered to FIG complete and accurate copies of all annual
and quarterly statements (including the financial statements contained therein)
required to be filed by APAC under applicable law since January 1, 1993. Except
for normal examinations conducted by a Governmental Entity in the regular course
of the business of APAA and APAC, no Governmental Entity has given any member of
the APAA Group notice of the initiation of any proceeding or investigations into
the business or operations of any member of the APAA Group since January 1,
1993. No member of the APAA Group has knowledge of or has received any notice of
any unresolved violation, criticism, or exception by any Governmental Entity
with respect to any report or statement relating to any examinations of any
member of the APAA Group which, either individually or in the aggregate, has had
or is likely to have a Material Adverse Effect on any member of the APAA Group.
1.42 Financial Statements.
(1) The APAA Group has previously made available to FIG copies of the
balance sheets of the consolidated APAA Group as of December 31, for the fiscal
years 1997 and 1996, and the related statements of income, changes in capital
and surplus and cash flows for the fiscal years 1997, 1996 and 1995, in each
case accompanied by the audit reports of KPMG Peat Marwick LLP, independent
public accountants with respect to the consolidated APAA Group. Prior to the
Closing, APAA will deliver to FIG copies of the unaudited balance sheet of the
consolidated APAA Group and the related unaudited statements of income and cash
flows for each quarter period ended at least 45 days prior to the Closing. The
balance sheets of the consolidated APAA Group as of December 31, 1997 and 1996
(including the related notes, where applicable) fairly present in all material
respects the financial position of the consolidated APAA Group as of the dates
thereof, and the other financial statements referred to in this Section 4.6(i)
(including the related notes, where applicable) fairly present in all material
respects (subject, in the case of the unaudited statements, to recurring year
end and audit adjustments normal in nature and amount) the results of the
operations and changes in capital and surplus and financial position of the
consolidated APAA Group for the respective fiscal periods or as of the
respective dates therein set forth; each of such statements (including the
related notes, where applicable) comply in all material respects with applicable
accounting requirements; and each of such statements (including the related
notes, where applicable) has been prepared in all material respects in
accordance with GAAP during the periods involved, except, in each case, as
indicated in such statements or in the notes thereto. For purposes of the
consolidated financial statements of the APAA Group referred to in this Section
4.6(i), the APAA Group shall be deemed not to include Newco. The books and
records of the consolidated APAA Group have been, and are being, maintained in
accordance with GAAP and any other applicable legal and accounting requirements
and reflect only actual transactions.
(2) APAC has previously made available to FIG copies of the annual
Statutory Financial Statements for APAC for the years ended December 31, 1997
and 1996 (collectively, the "APAC Statutory Statements"). Prior to the Closing,
APAC will deliver to FIG copies of its quarterly Statutory Financial Statements
for each quarter period ended at least 45 days prior to the Closing
(collectively, the "APAC Quarterly Statements"). The APAC Statutory Statements
(i) complied in all material respects with all applicable laws when filed, (ii)
are true and complete in all material respects and (iii) present fairly in all
material respects the financial position of APAC at the end of each of the years
then ended and the results of APAC's operations and changes in capital and
surplus and in cash flow for each such year, in conformity with accounting
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practices prescribed or permitted by the applicable state insurance laws and
regulations applied on a consistent basis as and to the extent described in such
annual statements and related statutory financial statements. The APAC Quarterly
Statements (i) will comply in all material respects with all applicable laws
when filed, (ii) will be true and complete in all material respects and (iii)
will present fairly in all material respects the financial position of APAC at
the end of each of the quarters then ended and the results of APAC's operations
and changes in capital and surplus and in cash flow for each such quarter, in
conformity with accounting practices prescribed or permitted by the applicable
state insurance laws and regulations applied on a consistent basis as and to the
extent described in such quarterly statements and related statutory financial
statements. APAC is not aware of and has not received any notice of the
assertion of any deficiency by any insurance regulatory authority with respect
to the APAC Statutory Statements or the APAC Quarterly Statements that has had
or is reasonably likely to have a Material Adverse Effect on APAC.
1.43 Broker's, Financial Advisory and Transaction Fees. Neither APAA
nor APAC nor any of their respective officers or trustees or directors has
employed any broker or finder or incurred any liability for any broker's fees,
financial advisory or transaction, commissions or finder's fees in connection
with the transactions contemplated by this Agreement, other than the $1,150,000
transaction fee payable to CGA, which shall be paid by FIG at the Closing as
provided in Section 2.3, and the financial advisory fees payable to Metis
Financial, LLC, which shall be paid by APAA (subject to FIG's agreement to pay
the Newco Expense Obligation).
1.44 Absence of Certain Changes or Events. Except for matters
provided for in this Agreement, matters disclosed in the APAA Group Disclosure
Schedule and legal, accounting, actuarial and financial advisory fees incurred
by APAA in connection with the transactions contemplated by this Agreement,
since December 31, 1997 there has not been:
(1) any material adverse change in the financial condition,
business, assets, properties, liabilities, operations, results of operations or
prospects of any member of the APAA Group;
(2) any declaration, setting aside or payment of any dividend,
or other distribution, in respect of any of the capital stock of any member of
the APAA Group or any direct or indirect redemption, purchase or other
acquisition by any member of the APAA Group of any of its capital stock;
(3) any entry into or amendment of any employment or deferred
compensation agreement between any member of the APAA Group and any of their
officers, directors, employees, agents or consultants;
(4) any issuance or sale by any member of the APAA Group of any
of its capital stock, debentures, bonds, notes or other corporate securities, or
any modification or amendment of the rights of the holders of any of their
outstanding capital stock, debentures, bonds, notes or other securities;
(5) any creation of any lien of any kind (other than deposits
with state insurance departments and liens for current taxes not yet due),
including, without limitation, any deposit for security made of, created on or
in any asset or property of any member of the APAA Group, or assumed by any
member of the APAA Group with respect to any such asset or property;
(6) any material indebtedness or other liability or obligation
(whether absolute, accrued, contingent or otherwise) incurred or forgiven, or
other material transaction
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engaged in by any member of the APAA Group, except in the ordinary course of
business and consistent with past practices;
(7) any sale, transfer or other disposition of any assets or
properties of any member of the APAA Group, or any acquisition by any member of
the APAA Group of any assets or properties, or any agreement to do any of the
foregoing, except in the ordinary course of business;
(8) any amendment, termination or waiver of any material right
of any member of the APAA Group under any contract, agreement or governmental
license or permit, except for amendments to reinsurance agreements and other
contractual amendments in the ordinary course of business;
(9) any material change in the policies customarily followed by
any member of the APAA Group (including, without limitation, any underwriting,
actuarial, pricing, financial or accounting practices or policies);
(10) any material increase in APAC's policy lapse ratio, or any
material decrease in the amount of APAC's in-force business or the premium rates
charged by APAC;
(11) any actual or threatened labor trouble, strike, loss of
employees or agents of any member of the APAA Group;
(12) any increase in salaries or other compensation of, or
advances (other than travel and other advances in the ordinary course of
business) to, any employees of any member of the APAA Group, other than
increases to non-executive employees in the ordinary course of business and
consistent with past practices;
(13) any loss of agents of APAC that has had or could reasonably
be expected to have a Material Adverse Effect on APAC;
(14) any transaction between APAC on the one hand, and APAA or
any person or company, corporation or other entity controlled by, controlling or
under common control with APAA, on the other hand, except for 1998 servicing and
claims handling agreements with APAM, which shall be terminated as of the
Closing without liability to APAC or APAM;
(15) any rights or licenses granted under any of the trade names
of any member of the APAA Group or any general agency arrangements entered into
by any member of the APAA Group.
(16) any agreement regarding reinsurance, surplus relief
obligations, excess insurance, ceding of insurance, assumption of insurance or
indemnification entered into with respect to insurance or management of
business;
(17) any materially adverse change in the operations, results of
operations, business, assets, properties, financial condition, income or
liabilities of any member of the APAA Group;
(18) any materially adverse damage, destruction or loss, whether
or not covered by insurance or reinsurance, suffered by any member of the APAA
Group, other than casualties covered by insurance policies issued by APAC;
(19) any strike, picketing, boycott or other labor trouble
adversely affecting the business, operations or prospects of any member of the
APAA Group; or
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(20) any transaction that was not in the ordinary course of
business and consistent with past practices.
1.45 Legal Proceedings.
(1) No member of the APAA Group is a party to any, and there are
no pending or, to the best of their knowledge, threatened, legal,
administrative, arbitral or other proceedings, claims, actions or governmental
or regulatory investigations of any nature (including noncontractual claims, bad
faith claims and claims against any directors or officers of any member of the
APAA Group, but excluding coverage and other claims not alleging bad faith made
with respect to insurance policies issued by APAC) against any member of the
APAA Group or challenging the validity or propriety of the transactions
contemplated by this Agreement.
(2) There is no injunction, order, judgment, decree, or
regulatory restriction (including noncontractual claims, bad faith claims and
claims against any directors or officers of any member of the APAA Group, but
excluding coverage and other claims not alleging bad faith made with respect to
insurance policies issued by APAC) imposed upon any member of the APAA Group or
the assets of any member of the APAA Group.
1.46 Taxes and Tax Returns. None of the Tax matters described
below, individually or in the aggregate, will have or are reasonably likely to
have a Material Adverse Effect on any member of the APAA Group.
(1) Each member of the APAA Group has filed all Tax Returns
required to be filed by it under applicable law, giving effect to permissible
extensions under applicable law. All Tax Returns were in all material respects
(and, as to Tax Returns not filed as of the date hereof, will be) true, complete
and correct and filed on a timely basis.
(2) Each member of the APAA Group has, within the time and in
the manner described by law, paid (and until the Effective Time will pay within
a time and in the manner prescribed by law) all Taxes that are currently due and
payable except for Taxes for which adequate reserves have been made on the
financial statements described in Section 4.6(i) of this Agreement.
(3) Since 1993, no tax returns of any member of the APAA Group
have been examined by the Internal Revenue Service (the "IRS") or any state,
local or foreign Tax authority for state, county, local and foreign Taxes.
(4) No audits or other administrative proceedings or court
proceedings are presently pending against any member of the APAA Group nor has
any member of the APAA Group given any currently effective waivers extending the
statutory period of limitation applicable to any Tax Return for any period.
(5) Proper and accurate amounts have been withheld by each
member of the APAA Group, as applicable, from its employees, if any, for all
prior periods in compliance in all material respects with the tax withholding
provisions of applicable federal, state and local laws. Except for APAA's and
APAC's 1997 Tax Return, as to which APAA and APAC are subject to a filing
extension in accordance with applicable law, Tax Returns that are accurate and
complete in all material respects have been filed by each member of the APAA
Group for all periods for which returns were due with respect to income tax
withholding, Social Security and unemployment taxes. The amounts shown on such
Tax Returns (and the amounts that will be shown on APAA's and
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APAC's 1997 Tax Return) to be due and payable have been paid in full or adequate
provision therefor has been included by each of APAC and APAA in its
consolidated financial statements as of December 31, 1997,
(6) There are no Tax Liens upon any property or assets of any
member of the APAA Group except Liens for current Taxes not yet due.
(7) No member of the APAA Group has been required to include in
income any adjustment pursuant to Section 481 of the Code by reason of a
voluntary change in accounting method initiated by such entity, and the IRS has
not initiated or proposed any such adjustment or change in accounting method.
(8) No member of the APAA Group has entered into a transaction
which is being accounted for as an installment obligation under Section 453 of
the Code.
(9) No member of the APAA Group is a party to or bound by any
tax indemnity, tax sharing or tax allocation agreement, except with other
members of the APAA Group (excluding the Liquidating Trust) and except for the
Pledge Agreement. APAC and its parent entity, APAA, file consolidated income tax
returns and are each liable for the taxes of the other pursuant to the
provisions of Treasury Regulation Section 1.1502-6.
(10) No member of the APAA Group has any liability for Taxes of
any person other than such entity (i) under Treasury Regulation Section 1.1502-6
(or any similar provision of state, local or foreign law) as a transferee or
successor, (ii) by contract or (iii) otherwise.
(11) No member of the APAA Group is a party to any joint
venture, partnership or other arrangement or contract that could be treated as a
partnership for federal income tax purposes.
(12) Each member of the APAA Group has or had substantial
authority (within the meaning of Section 6661 of the Code for Tax Returns filed
on or before December 31, 1990, and within the meaning of Section 6662 of the
Code for Tax Returns filed after December 31, 1990) for all transactions that
could give rise to any understatement of federal income tax (within the meaning
of Section 6661 of the Code for Tax Returns filed on or before December 31,
1990, and within the meaning of Section 6662 of the Code for Tax Returns filed
after December 31, 1990).
(13) No election under Code Section 338 (or any predecessor
provision) has been made by or with respect to any member of the APAA Group or
any of their respective assets or properties.
(14) No member of the APAA Group has engaged in any intercompany
transactions within the meaning of Treasury Regulations Section 1.1502-13 for
which any income or gain will remain unrecognized as of the close of the last
taxable year prior to the Effective Time.
(15) No power of attorney currently in force has been granted by
any member of the APAA Group concerning any Tax matter.
(16) No member of the APAA Group has received a Tax Ruling or entered
into a Closing Agreement with any taxing authority that would have a continuing
effect after the Effective Time.
(17) There has been no disallowance of a deduction under Section
162(m) of the Code by any member of the APAA Group for employee remuneration of
any amount paid or payable
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by any member of the APAA Group under any contract, plan, program, arrangement
or understanding.
(18) As used in this Agreement, (i) the term "Tax" or "Taxes"
means all taxes, charges, fees, levies and other governmental assessments and
impositions of any kind payable to any governmental authority or agency
(including all federal, state, county, local, and foreign income, excise, gross
receipts, gross income, ad valorem, profits, gains, property, capital, sales,
transfer, use, payroll, employment, severance, withholding, duties, intangibles,
franchise, backup withholding, and other taxes, charges, levies or like
assessments together with all penalties and additions to tax and interest
thereon); and (ii) the term "Tax Return" or "Tax Returns" means any and all
returns, reports, information returns and information statements with respect to
Taxes required to be filed by any member of the APAA Group with the IRS or any
other Governmental Entity or tax authority or agency, whether domestic or
foreign (including consolidated, combined and unitary tax returns). "Tax
Ruling," as used in this Agreement, shall mean a written ruling of a Taxing
authority relating to Taxes imposed on or incurred by any member of the APAA
Group. "Closing Agreement," as used in this Agreement, shall mean a written and
legally binding agreement with a Tax authority relating to Taxes imposed on or
incurred by any member of the APAA Group.
1.47 Employee Benefit Plans; Labor Matters. Except as
contemplated by this Agreement and with respect to the allocation and
distribution of the Cash Consideration and/or Stock Consideration to and by the
Liquidating Trust and otherwise:
(1) No member of the APAA Group now has or has ever had any
employees. APAC has contracted with APAM for the furnishing of all
administrative services since the inception of APAC in 1987. No member of the
APAA Group has any employee benefit plans (as that term is defined in ERISA
Section 3(3)), agreements, or arrangements that are maintained by any Affiliate
or any other person which might be deemed a 'single employer' within the meaning
of Section 4001 of ERISA.
(2) No individuals are or would be considered leased employees
(as that term is defined in Code Section 414(n)) of any member of the APAA Group
or their affiliates, except that no such representation is made with respect to
the employees of APAM that are engaged in managing APAC under the management
agreements in effect prior to and after the Effective Time.
(3) Intentionally Omitted
(4) Intentionally Omitted.
(5) No person treated as an independent contractor by any member
of the APAA Group is an employee as defined in Section 3401(c) of the Code, nor
has any employee been otherwise improperly classified, as exempt, nonexempt or
otherwise, for purposes of federal or state income tax withholding or overtime
laws, rules, or regulations.
(6) Except as provided in Item 4.8 (xx) of the Disclosure
Schedule, no member of the APAA Group has any commitment to (i) create any
compensation or benefit plan or (ii) enter into any contract to provide
compensation or benefits to any individual.
1.48 Compliance with Applicable Law. Each member of the APAA
Group holds all licenses, franchises, permits and authorizations necessary for
the lawful conduct of its business under and pursuant to, and has complied in
all respects with and is not in default in any respect under any, and has
maintained and, conducted its business in all respects in compliance with, all
applicable
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laws, statutes, orders, rules, regulations, policies and/or guidelines of each
Governmental Entity relating to such entity except where the failure to have
such licenses, franchises, permits and authorizations or where the failure to so
conduct its business would not have a Material Adverse Effect on such entity.
1.49 Certain Contracts. The APAA Group Disclosure Schedule contains a
list, as of the date hereof, of each contract, agreement, understanding or other
commitment, other than insurance policies issued by APAC in the ordinary course
of its business, whether written or oral (including any and all amendments
thereto), to which any member of the APAA Group is a party or by which any
member of the APAA Group is bound relating to the business of any member of the
APAA Group (collectively, the "APAA Group Contracts"), of a nature described
below:
(1) any contract with any employee, former employee, consultant
or labor union;
(2) any contract for the future purchase of, or payment for,
supplies or products or services in any single instance exceeding $20,000, or in
the aggregate $50,000, that is not terminable without penalty upon advance
notice of 30 days or less;
(3) any representative or sales agency contract;
(4) any contract limiting or restraining any member of the APAA
Group or any of their current or future affiliates from engaging or competing in
any lines of business with any person or entity;
(5) any contract with any customer providing for a retrospective
price adjustment or future premium guarantee;
(6) any commitment to guarantee the obligations of others or
commitments by others to guarantee the obligations of any member of the APAA
Group;
(7) any real or personal property lease;
(8) any mortgage, indenture, note, debenture, bond, letter of
credit agreement, line of credit agreement, surety agreement, loan or other
financing agreement or other commitment for the borrowing or lending of money
relating to any member of the APAA Group;
(9) any license, franchise, distributorship or other agreement,
including those that relate in whole or in part to any software, technical
assistance or other know-how, to which any member of the APAA Group is a party
or relating to any member of the APAA Group or their businesses or operations;
(10) any commitment or agreement for any capital expenditure or
leasehold improvement in excess of $10,000;
(11) any contract regarding reinsurance, excess insurance,
ceding of insurance, assumption of insurance, or indemnification with respect to
insurance currently being provided directly or indirectly by any member of the
APAA Group or regarding the management of any portion of its business or
regarding the sale of any of its products through any other entity or the sale
by any other entity of its products through it;
(12) any investment in or agreement to invest in derivative
securities;
(13) any contracts for the provision of data processing services;
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(14) any finder's, franchise, distribution, sales or brokerage
agreements;
(15) any contracts or options to purchase or sell real property;
or
(16) any other material contract, agreement or commitment of any
nature not otherwise disclosed herein as to which any member of the APAA Group
has Knowledge.
True and complete copies of the APAA Group Contracts have been delivered to FIG.
Each APAA Group Contract is a valid and binding obligation and is in full force
and effect. Except as disclosed in the APAA Group Disclosure Schedule, no member
of the APAA Group is in default under any of the APAA Group Contracts; and, to
the best knowledge of the APAA Group, no third party is in default under any of
the APAA Group Contracts. The APAA Group Disclosure Schedule identifies each
APAA Group Contract that requires consent or approval of or notice to any party
in order to consummate the transactions contemplated by this Agreement or action
on behalf of a third party to give FIG all rights under such APAA Group Contract
following the consummation of the transactions contemplated by this Agreement.
Except as set forth in the APAA Group Disclosure Schedule, no member of the APAA
Group has any outstanding powers of attorney.
1.50 Agreements with Regulatory Agencies. No member of the APAA Group
is subject to any cease-and-desist or other order issued by, or is a party to
any written agreement, consent agreement or memorandum of understanding with, or
is a party to any commitment letter or similar undertaking to, or is subject to
any order or directive by, or has been since January 1, 1993, a recipient of any
supervisory letter from, or since January 1, 1993, has adopted any board
resolutions at the request of any Governmental Entity that currently restricts
in any material respect the conduct of its business or that in any material
manner relates to its capital adequacy, its credit policies, its management or
its business (each, whether or not set forth in the APAA Group Disclosure
Schedule, an "APAA Group Regulatory Agreement"), nor has any member of the APAA
Group been advised since January 1, 1993, by any Governmental Entity that it is
considering issuing or requesting any such APAA Group Regulatory Agreement.
1.51 Other Activities of APAA, Newco and APAC. No member of the APAA
Group, directly or indirectly, engages in any activity prohibited by applicable
law.
1.52 Investment Securities. Each member of the APAA Group has good
and marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except (a) to the extent such securities are pledged in the
ordinary course of business consistent with prudent business practices to secure
obligations of such member of the APAA Group, and (b) with respect to the Lien
encumbering the securities of APAC to secure the Note owing to APAL. Such
securities are permissible investments under all applicable laws, such
securities are valued on the books of the applicable member of the APAA Group in
accordance with GAAP, and none of such securities is in default in the payment
of principal, interest, dividends or otherwise.
1.53 Interest Rate Risk Management Instruments. All interest rate
swaps, caps, floors and option agreements and other interest rate risk
management arrangements, whether entered into for the account of any member of
the APAA Group, were entered into in the ordinary course of business and, in
accordance with prudent business practice and applicable rules, regulations and
policies of any Governmental Entity and with counter parties believed to be
financially responsible at the time and are legal, valid and binding obligations
of the applicable member of the APAA Group
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enforceable in accordance with their terms (except as may be limited by
bankruptcy, insolvency, moratorium, reorganization or similar laws affecting the
rights of creditors generally and the availability of equitable remedies), and
are in full force and effect. The applicable member of the APAA Group has
performed in all material respects all of its material obligations thereunder to
the extent that such obligations to perform have accrued; and, to the best
knowledge of the APAA Group, there are no material breaches, violations or
defaults or allegations or assertions of such by any party thereunder.
1.54 Undisclosed Liabilities. Except for (i) those liabilities that
are fully reflected or reserved against on the balance sheets of the APAA Group
at December 31, 1997, which have been provided to FIG, (ii) those liabilities
incurred in the ordinary course of business consistent with past practice since
December 31, 1997 or provided for in this Agreement, (iii) coverage and other
claims (other than bad faith claims) made with respect to insurance policies
issued by APAC, (iv) liabilities disclosed in the APAA Group Disclosure Schedule
and (v) legal, accounting, actuarial and financial advisory fees incurred by
APAA in connection with the transactions contemplated by this Agreement, no
member of the APAA Group has not incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due) that, either alone or when combined with all similar liabilities, has had,
or could reasonably be expected to have, a Material Adverse Effect on such
member of the APAA Group.
1.55 Intellectual Property.
(1) Each member of the APAA Group owns or has the right to use
pursuant to license, sublicense, agreement or permission all intellectual
property necessary for the operation of its business as presently conducted and
as presently proposed to be conducted.
(2) To the best of the APAA Group's knowledge, no member of the
APAA Group has interfered with, infringed upon, misappropriated or otherwise
come into conflict with any intellectual property rights of third parties and
such member of the APAA Group, nor any of the directors or officers (and
employees with responsibility for intellectual property matters) of any member
of the APAA Group have ever received any charge, complaint, claim or notice
alleging any such interference, infringement, misappropriation or violation. To
the best of the APAA Group's knowledge, no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of any member of the APAA Group.
(3) The APAA Group Disclosure Schedule identifies each item of
intellectual property that any third party owns and that any member of the APAA
Group uses pursuant to license, sublicense, agreement, or permission. The APAA
Group has made correct and complete copies of all such licenses, sublicenses,
agreements and permissions (as amended to date) available to FIG. To the best of
the APAA Group's knowledge, with respect to each such item of such intellectual
property: (i) the license, sublicense, agreement or permission covering the item
is legal, valid, binding, enforceable and in full force and effect; (ii) the
license, sublicense, agreement or permission will continue to be legal, valid,
binding and enforceable and in full force and effect on identical terms on and
after the Closing Date; (iii) no party to the license, sublicense, agreement or
permission is in material breach or default, and no event of default has
occurred which with notice or lapse of time, or both, would constitute a
material breach or default or permit termination, modification or acceleration
thereunder; (iv) no party to the license, sublicense, agreement or permission
has repudiated any provision thereof; (v) with respect to each such sublicense,
the representations and warranties set forth in (i) through (iv) above are true
and correct with respect to
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the underlying license; and (vi) no member of the APAA Group has granted any
sublicense or similar right with respect to the license, sublicense, agreement
or permission other than to APAM.
1.56 Real Property; Environmental Liability.
(1) No member of the APAA Group owns any right, title or
interest in any real property. The APAA Group Disclosure Schedule sets forth a
complete and accurate list and general description of all leases for real
property ("APAA Group Real Property Leases") to which any member of the APAA
Group is a party or by which any of them is bound. Each member of the APAA Group
has valid leasehold interests in each of the APAA Group Real Property Leases
held by any of them, free and clear of all mortgages, options to purchase,
covenants, conditions, restrictions, easements, liens, security interests,
charges, claims, assessments and encumbrances, except for (i) rights of lessors,
co-lessees or sublessees that are reflected in each APAA Group Real Property
Lease, (ii) current taxes not yet due and payable; (iii) Liens or other
instruments of public record; and (iv) such nonmonetary imperfections of title
and encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property. The activities of
each member of the APAA Group with respect to all APAA Group Real Property
Leases held by each of them for use in connection with their respective
operations are in all material respects permitted and authorized by applicable
zoning laws, ordinances and regulations and all laws, rules and regulations of
any court, administrative agency or commission or other governmental authority
or instrumentality affecting such properties. Each member of the APAA Group
enjoys peaceful and undisturbed possession under all APAA Group Real Property
Leases to which they are parties, and all of such APAC Real Property Leases are
valid and in full force and effect.
(2) There are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature seeking to impose on any member of the APAA Group any liability or
obligation arising under common law relating to environmental matters or under
any local, state or federal environmental statute, regulation or ordinance
(including, CERCLA), pending or threatened against any member of the APAA Group
which liability or obligation will or could reasonably be expected to have a
Material Adverse Effect on any member of the APAA Group. To the best knowledge
of the APAA Group, there is no reasonable basis for any such proceeding, claim,
action or governmental investigation that would impose any material liability or
obligation that will or could reasonably be expected to have a Material Adverse
Effect on any member of the APAA Group. No member of the APAA Group is subject
to any agreement, order, judgment, decree, letter or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
material liability or obligation relating to environmental matters that will or
could reasonably be expected to have a Material Adverse Effect on any member of
the APAA Group.
1.57 State Takeover Laws. The Boards of Directors of APAA and APAC
have approved the transactions contemplated by this Agreement and taken such
action such that the provisions of FBCA and any other provisions of any state or
local "takeover" law applicable to any member of the APAA Group will not apply
to this Agreement or any of the transactions contemplated by this Agreement.
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1.58 Insurance Matters.
(1) Each form of insurance policy, policy endorsement or
amendment, reinsurance contract, annuity contract, application form, sales
material and service contract now in use by APAC in any jurisdiction has, where
required, received interim or final approvals from the appropriate Governmental
Entity of such jurisdiction.
(2) APAC has not issued any participating policies or any
retrospectively rated policies of insurance.
(3) All premium rates required to be filed with or approved by
any Governmental Entity have been so filed and have received interim or final
approval from each such Governmental Entity, and all premiums charged by APAC
conform with such approvals.
(4) The APAC Statutory Statements and the APAC Quarterly
Statements set forth all of the reserves of APAC as of the dates of such
statements (collectively, the "APAC Reserves"). The APAC Reserves, gross and net
of the reinsurance thereof, (i) were determined in accordance with commonly
accepted actuarial assumptions consistently applied, (ii) were fairly stated in
all material respects in accordance with sound actuarial principles, (iii) were
based on actuarial assumptions that are in accordance with or stronger than
those specified in the related insurance and the related reinsurance,
coinsurance, and other similar contracts, (iv) met in all material respects the
requirements of the applicable insurance laws and regulations of each applicable
jurisdiction, (v) were computed on the basis of assumptions consistent with
those used in computing the corresponding items in APAC's Statutory Statements
for the immediately preceding comparable period, and (vi) to the best of APAC's
knowledge, made good and sufficient provisions for the total amount of all
matured and actuarially anticipated unmatured benefits, dividends, losses,
claims, expenses, and other obligations and liabilities (whether absolute,
accrued, contingent, or otherwise) of APAC under all outstanding insurance and
reinsurance, coinsurance, and other similar contracts pursuant to which APAC has
or reasonably could have any obligation or liability (whether absolute, accrued,
contingent, or otherwise) as of the date of APAC's Statutory Statements.
Outstanding claims and claims expenses have been opined upon as reasonable and
adequate as of December 31, 1997, by Tillinghast-Towers Perrin, a duly qualified
actuary that is a member in good standing in the American Academy of Actuaries.
APAC has assets that qualify as admitted assets under the insurance laws of the
applicable jurisdictions in an amount at least equal to the sum of all such
reserves and liability amounts and its minimum statutory capital and surplus as
required by such insurance laws.
(5) The APAA Group Disclosure Schedule sets forth a list and
description of all reinsurance agreements or treaties to which APAC is a party.
The consummation of the transactions contemplated by this Agreement will not
result in the termination of any such reinsurance agreements or treaties, except
as expressly provided for herein. APAC has provided FIG true and correct copies
of all such reinsurance agreements or treaties. The reserve for unpaid losses,
loss adjustment expenses and unearned premiums at each of December 31, 1997 and
December 31, 1996, as reflected in the balance sheets in the financial
statements of APAC identified in Section 4.6 of this Agreement, are stated net
of reinsurance ceded amounts. APAC has no knowledge of and has received no
notice of any facts that would reasonably cause it to believe that the
reinsurance recoverable amounts reflected in said balance sheets are not
collectible, and APAC has no knowledge of and has received no notice of any
material adverse change in the financial condition of its reinsurers wherein it
has been stated that they will not be able or are likely not to be able to
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honor their reinsurance commitments, and no party to any of such reinsurance
agreements or treaties has given notice to APAC that such party intends to
terminate or cancel any of such reinsurance agreements or treaties as a result
of or following consummation of the Merger. Each reinsurance agreement or treaty
to which APAC is a party is valid and binding on APAC, and to the best knowledge
of APAC, each other party thereto and is in full force and effect in accordance
with its terms except as enforceability may be limited by bankruptcy, insolvency
or other similar laws affecting the enforcement of creditors rights generally
and except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which the
enforcement of any proceeding therefor may be brought. APAC is not in default in
any material respect with respect to any such reinsurance agreement or treaty
and, other than as contemplated herein, no such reinsurance agreement or treaty
contains any provision providing that the other party thereto may terminate the
same by reason of the transactions contemplated by this Agreement, or contains
any other provision that would be altered or otherwise become applicable by
reason of such transactions.
(6) The APAC Reserves, gross and net of reinsurance thereof, as
set forth in the APAC Statutory Statements and the APAC Quarterly Statements
pertaining to the property and casualty insurance businesses (including medical
malpractice) of APAC have been determined on a consistent basis in accordance
with past practices.
(7) The APAA Disclosure Schedule lists all written contracts
between APAC and each of its agents, managing general agents, and brokers. To
the best of the APAA Group's knowledge, (a) each insurance agent, at the time
such agent offered, wrote, sold or produced business for APAC, was duly licensed
in the relevant jurisdiction as an insurance agent for such business and (b) no
such insurance agent violated any term or provision of any law or any writ,
judgment, decree, injunction or similar order applicable to, or engaged in any
misrepresentation with respect to, the writing, sale or production of business
for APAC.
(8) No member of the APAA Group owns, beneficially or of record,
any shares of FIG Common Stock or other equity securities of FIG, or any
securities convertible into or exercisable for any shares of FIG Common Stock or
other equity securities of FIG.
(9) APAC is fully qualified, licensed, registered or otherwise
approved as a risk retention group in each jurisdiction in which it has issued
policies.
1.59 No Investment Company. No member of the APAA Group is an
"investment company," or a company "controlled" by an "investment company,"
within the meaning of either the Investment Company Act of 1940, as amended, or
Sections 368(a)(2)(F)(iii) and (iv) of the Code.
1.60 Legal Compliance. No member of the APAA Group nor, to the best
knowledge of the APAA Group, any director, officer, agent, employee or other
person associated with or acting on behalf of any member of the APAA Group has,
directly or indirectly, used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; violated any provision of the Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback
or other unlawful payment, using corporate funds.
1.61 Year 2000. The APAA Group's hardware and software systems
include design, performance and functionality so that the APAA Group does not
reasonably expect to experience
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invalid or incorrect results or abnormal hardware or software operation related
to calendar year 2000. The APAA Group's hardware and software systems include
calendar year 2000 date conversion and compatibility capabilities, including but
not limited to, date data century recognition, same century and multiple century
formula and date value calculations, and user interface date data values that
reflect the century. No representation or warranty, express or implied, is made
hereunder with respect to the interface between the APAA Group's hardware and
software systems and those of any party with whom any member of the APAA Group
or APAM deals from time to time, with respect to the extent of Year 2000
compliance that any such party's software or hardware systems might have.
1.62 Full Disclosure. No representation or warranty by any member of
the APAA Group in this Agreement, nor in any certificate, schedule, statement,
document or instrument furnished to FIG pursuant to this Agreement contains or
will contain any untrue statement of a material fact or, taking into account the
scope of such representations and warranties and the context in which they are
made, omits or will omit to state a material fact required to be stated herein
or therein or necessary to make any statement herein or therein not misleading.
1.63 Activities, Assets and Liabilities of Newco and the Liquidating
Trust. Newco and the Liquidating Trust have engaged in no activities or
operations of any nature except as provided in this Agreement. Newco shall not
have or incur any liabilities of any nature other than (i) the liabilities of
APAA set forth on the balance sheet of APAA as of December 31, 1997, a copy of
which has been provided to FIG, and (ii) the Newco Expense Obligation, and (iii)
liabilities disclosed in Section 4.18 of the Disclosure Schedule which it is
anticipated that APAA will incur from and after January 1, 1998 . The assets of
Newco as of the Effective Time shall consist of the assets of APAA set forth on
the balance sheet of APAA as of December 31, 1997.
1.64 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of the APAA
Group set forth in this Agreement, as updated by any written disclosure schedule
delivered pursuant to Section 6.6 of this Agreement, shall be deemed to be made
on and as of the date of this Agreement, as of the Closing Date, and as of the
Effective Time.
ARTICLE 5
COVENANTS RELATING TO CONDUCT OF BUSINESS
1.65 Conduct of Businesses Prior to the Effective Time. During the
period from the date of this Agreement to the Effective Time, except as
expressly contemplated or permitted by this Agreement (including the APAA Group
Disclosure Schedule), each member of the APAA Group shall, and shall cause each
of its respective Subsidiaries to, (a) conduct its business in the usual,
regular and ordinary course consistent with past practice, (b) use reasonable
best efforts to maintain and preserve intact its business organization and
advantageous business relationships and retain the services of its key officers
and (c) take no action which would materially adversely affect or materially
delay the ability of any party to this Agreement to obtain any Requisite
Regulatory Approval for the transactions contemplated by this Agreement or to
perform its covenants and agreements under this Agreement.
1.66 APAA Group Forbearances. During the period from the date of this
Agreement to the Effective Time, except as set forth in the APAA Group
Disclosure Schedule, as the case may
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be, and, except as expressly contemplated or permitted by this Agreement, no
member of the APAA Group shall, and no member of the APAA Group shall permit any
of their respective Subsidiaries to, without the prior written consent of FIG,
not to be unreasonably withheld or delayed:
(1) other than in the ordinary course of business consistent with
past practice, incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity, or make any loan or
advance (it being understood and agreed that incurrence of indebtedness in the
ordinary course of business shall include, without limitation, entering into
repurchase agreements and reverse repurchase agreements);
(2) redeem, repay, discharge or defease any surplus note;
(3) (a) adjust, split, combine or reclassify any capital stock; (b)
make, declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock, (c) grant any stock appreciation rights or grant
any individual, corporation or other entity any right to acquire any shares of
its capital stock;
(4) sell, transfer, mortgage, encumber or otherwise dispose of any of
its material properties or assets to any individual, corporation or other
entity, or cancel, release or assign any material indebtedness to any such
person or any claims held by any such person, except in the ordinary course of
business or pursuant to contracts or agreements in force at the date of this
Agreement;
(5) except for transactions in the ordinary course of business
consistent with past practice, or as expressly contemplated or permitted by this
Agreement, make any material investment either by purchase of stock or
securities, contributions to capital, property transfers, or purchase of any
property or assets of any other individual, corporation or other entity other
than a Subsidiary thereof;
(6) except for transactions in the ordinary course of business, enter
into or terminate any material contract or agreement, or make any change in any
of its material leases or contracts, other than renewals of contracts and leases
without material adverse changes of terms;
(7) hire any employees or become a party to, or commit itself to any
pension, retirement, profit-sharing or welfare benefit plan or agreement or
employment agreement with or for the benefit of any person;
(8) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business;
(9) take any action that would prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368 of the Code;
(10) amend their Articles of Incorporation, or their Bylaws or other
organizational documents, except as contemplated by or for purposes of
effectuating this Agreement;
(11) other than in accordance with its present investment guidelines,
materially restructure or materially change its investment securities portfolio
through purchases, sales or otherwise, or the manner in which the portfolio is
classified or reported;
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(12) agree to, or make any commitment to, take any of the
actions prohibited by this Section 5.2.
1.67 FIG Forebearances. During the period from the date of this
Agreement to the Effective Time, except as set forth in the FIG Disclosure
Schedule, as the case may be, and, except as expressly contemplated or permitted
by this Agreement, FIG shall not, and FIG shall not permit any of its
Subsidiaries to (i) insure any of APAC's existing insureds, without the written
consent of APAC or (ii) take any action that would prevent or impede the Merger
from qualifying as a reorganization within the meaning of Section 368 of the
Code.
ARTICLE 6
ADDITIONAL AGREEMENTS
1.68 Regulatory Matters.
(1) FIG will prepare and file, and the APAA Group will cooperate
with and assist FIG in preparing and filing, all statements, applications,
correspondence or forms required to be filed with appropriate state securities
law regulatory authorities to register or qualify the shares of FIG Common Stock
to be issued upon consummation of the Merger or to establish an exemption for
such registration or qualification (the "Blue Sky Filings").
(2) FIG and the APAA Group will promptly prepare and file, or
cause to be filed, the HSR Act Report with the Pre-Merger Notification Agencies
in respect of the transactions contemplated by this Agreement, which filing
shall comply as to form with all requirements applicable thereto and all of the
data and information reported therein shall be accurate and complete in all
material respects. Each of FIG and the APAA Group will promptly comply with all
requests, if any, of the Pre-Merger Notification Agencies for additional
information or documentation in connection with the HSR Act Report forms filed
by or on behalf of each of such parties pursuant to the HSR Act, and all such
additional information or documentation shall comply as to form with all
requirements applicable thereto and shall be accurate and complete in all
material respects. Each of FIG and APAA will pay one-half (1/2) of the HSR
filing fee.
(3) Each of FIG and the APAA Group shall make all other
regulatory filings required to be made by each in respect of this Agreement or
the transactions contemplated by this Agreement. Each party shall use all
reasonable efforts to obtain all material permits, approvals and consents
required to be obtained prior to the consummation of the Merger or necessary to
carry out the transactions contemplated by this Agreement under applicable
federal, state, local and foreign laws, rules and regulations, including any
approvals required under applicable state insurance laws. A representative of
each party shall participate in all substantive discussions with the Pre-Merger
Notification Agencies and any other Governmental Entity, unless such right to
participate is waived by such party.
(4) Each party will furnish all information, including
certificates, consents and opinions of counsel concerning it and its
Subsidiaries reasonably deemed necessary by the other party for the filing or
preparation for filing of the Blue Sky Filings, the HSR Act Report and the
applications for all Requisite Regulatory Approvals. Each party covenants and
agrees that all information furnished by it for inclusion in Blue Sky Filings
and all other documents filed to obtain the Requisite Regulatory Approvals will
comply in all material respects with the provisions of applicable law, including
the Securities Act and the Exchange Act, and will not contain any untrue
statement of material fact or omit to state any material fact required to be
stated therein or necessary
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to make the statements contained therein, in light of the circumstances under
which they were made, not misleading.
(5) Each party shall provide to the other, (i) promptly after
filing thereof, copies of all statements, applications, correspondence or forms
filed by such party prior to the Closing Date with state securities law
regulatory authorities, the Pre-Merger Notification Agencies and any other
Governmental Entity in connection with the transactions contemplated by this
Agreement; and (ii) promptly after delivery to, or receipt from, such regulatory
authorities, all written communications, letters, reports or other documents
relating to the transactions contemplated by this Agreement.
(6) The parties hereto shall cooperate with each other and use
their best efforts to promptly prepare and file all necessary documentation, to
effect all applications, notices, petitions and filings, to obtain as promptly
as practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including the Merger), and to
comply with the terms and conditions of all such permits, consents, approvals
and authorizations of all such Governmental Entities. FIG and APAA Group shall
have the right to review in advance, and, to the extent practicable, each will
consult the other on, in each case subject to applicable laws relating to the
exchange of information, all the information relating to FIG or APAA Group, as
the case may be, and any of their respective Subsidiaries, which appear in any
filing made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties hereto agree that
they will consult with each other with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and Governmental
Entities necessary or advisable to consummate the transactions contemplated by
this Agreement and each party will keep the other apprised of the status of
matters relating to completion of the transactions contemplated by this
Agreement.
(7) FIG and APAA Group shall, upon request, furnish each other
with all information concerning themselves, their Subsidiaries, directors,
officers and shareholders and such other matters as may be reasonably necessary
or advisable in connection with any statement, filing, notice or application
made by or on behalf of FIG, APAA Group or any of their respective Subsidiaries
to any Governmental Entity in connection with the Merger and the other
transactions contemplated by this Agreement.
(8) FIG and APAA Group shall promptly advise each other upon
receiving any communication from any Governmental Entity whose consent or
approval is required for consummation of the transactions contemplated by this
Agreement which causes such party to believe that there is a reasonable
likelihood that any Requisite Regulatory Approval will not be obtained or that
the receipt of any such approval will be materially delayed.
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1.69 Access to Information.
(1) Upon reasonable notice and subject to applicable laws
relating to the exchange of information and to the Confidentiality Agreement
dated December 1, 1997 as amended (the "Confidentiality Agreement"), among the
parties to this Agreement, each of FIG and APAA Group shall, and shall cause
each of their respective Subsidiaries to, afford to the officers, employees,
accountants, counsel and other representatives of the other party, access,
during normal business hours during the period prior to the Effective Time, to
all its properties, books, contracts, commitments and records and, during such
period, each of FIG and APAA Group shall, and shall cause their respective
Subsidiaries to, make available to the other party (i) a copy of each report,
schedule, registration statement and other document filed or received by it
during such period pursuant to the requirements of federal securities laws or
state insurance laws (other than reports or documents which FIG or APAA Group,
as the case may be, is not permitted to disclose under applicable law or by
agreement) and (ii) all other information concerning its business, properties
and personnel as such party may reasonably request. Neither FIG nor APAA Group
nor any of their respective Subsidiaries shall be required to provide access to
or to disclose information where such access or disclosure would violate or
prejudice the rights of FIG's or APAA Group's, as the case may be, customers,
jeopardize the attorney-client and work product privileges of the entity in
possession or control of such information or contravene any law, rule,
regulation, order, judgment, decree, fiduciary duty or binding agreement entered
into prior to the date of this Agreement. The parties hereto will make
appropriate substitute disclosure arrangements under circumstances in which the
restrictions of the preceding sentence apply.
(2) Each of FIG and APAA Group agrees to keep confidential, and
not divulge to any other party or person (other than employees of, and
attorneys, accountants, financial advisors and other representatives for, any
said party who agree to be bound by the Confidentiality Agreement), all
non-public documents, information, records and financial statements received
from the other and, in addition, any and all reports, information and financial
information obtained through audits or other reviews conducted pursuant to this
Agreement (unless readily ascertainable from public or published information, or
trade sources, or already known or subsequently developed by a party
independently of any investigation or received from a third party not under an
obligation to the other party to keep such information confidential), and to use
the same only in connection with the transactions contemplated by this
Agreement; and if the transactions contemplated by this Agreement are not
consummated for any reason, each party agrees to promptly return to the other
party all written materials furnished by the other party, and all copies
thereof, in connection with such investigation, and to destroy all documents and
records in its possession containing extracts or summaries of any such
non-public information.
(3) No investigation by either of the parties or their
respective representatives shall affect the representations, warranties,
covenants, indemnity obligations or conditions of the other set forth in this
Agreement, provided that if either party has actual knowledge of a matter which
is contrary to a representation or warranty made by the other party, then such
matter shall be deemed to have been included on the other party's Disclosure
Schedule.
(4) The parties acknowledge that FIG may, as a result of its due
diligence investigations, propose that APAC's loss reserves be increased prior
to the Effective Time. The APAA Group agrees to make any such increase in loss
reserves that FIG may reasonably request, subject to the approval of APAC's
actuaries and accountants (the "Reserve Increase"), provided that:
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(A) The Reserve Increase shall not be deemed to cause or contribute
to any extent to the inaccuracy or breach of any representation,
warranty, covenant or agreement in this Agreement; and
(B) The Reserve Increase shall be completely disregarded in
determining whether the conditions precedent to FIG's obligations to
close have been satisfied.
1.70 Legal Conditions to Merger. Each of FIG and APAA Group shall,
and shall cause its Subsidiaries to, use their best reasonable efforts (a) to
take, or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed on such party or its
Subsidiaries with respect to the Merger and, subject to the conditions set forth
in Article VII of this Agreement, to consummate the transactions contemplated by
this Agreement and (b) to obtain (and to cooperate with the other party to
obtain) any consent, authorization, order or approval of, or any exemption by,
any Governmental Entity and any other third party which is required to be
obtained by FIG or APAA Group or any of their respective Subsidiaries in
connection with the Merger and the other transactions contemplated by this
Agreement.
1.71 Nasdaq National Market Listing. FIG shall cause the shares of
FIG Common Stock to be issued in the Merger to be approved for trading and
reporting on the Nasdaq National Market subject to official notice of issuance,
prior to the Effective Time.
1.72 Additional Agreements.
(1) In case at any time prior to the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement
(including obtaining authorization for APAC to transact business under the laws
of any state in which the parties hereto mutually agree that APAC should obtain
authorization) or the Merger, the proper officers and directors of each party to
this Agreement and their respective Subsidiaries shall take all such necessary
action as may be reasonably requested by FIG.
(2) In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement or
to vest FIG or any of its Subsidiaries with full title to all properties,
assets, rights, approvals, immunities and franchises of any of the parties to
this Agreement or the Merger, the proper officers and directors of each party to
this Agreement and their respective Subsidiaries shall take all such necessary
action, at the expense of FIG, as may be reasonably requested by FIG.
(3) Prior to the Effective Time, no member of the APAA Group
shall acquire, directly or indirectly, beneficial or record ownership of any
shares of FIG Common Stock or other equity securities of FIG, or any securities
convertible into or exercisable for any shares of FIG Common Stock or other
equity securities of FIG.
(4) APAC and FIG shall insure that the officers and directors of
APAC retain their rights to indemnity for corporate liabilities after the
Closing, to the same extent as such rights existed prior thereto; and shall
further assure that such officers and directors become covered and insured under
the Directors and Officers insurance policies maintained by FIG.
1.73 Advice of Changes. FIG and APAA Group shall give prompt notice
to the other party as soon as practicable after it has actual knowledge of (i)
the occurrence, or failure to occur, of any event which would or would be likely
to cause any party's representations or
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warranties contained in this Agreement to be untrue or incorrect in any material
respect at any time from the date of this Agreement to the Effective Time, or
(ii) any failure on its part or on the part of any of its or its Subsidiaries'
officers, directors, employees, representatives or agents (other than persons or
entities who are such employees, representatives or agents only because they are
appointed insurance agents of such parties) to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by such party under this Agreement. Each party shall have the right to
deliver to the other party a written disclosure schedule as to any matter of
which it becomes aware following execution of this Agreement which would
constitute a breach of any representation, warranty or covenant of this
Agreement by such party, identifying on such disclosure schedule the
representation, warranty or covenant which would be so breached, provided that
each such disclosure schedule shall be delivered as soon as practicable after
such party becomes aware of the matter disclosed therein. If and only if any
such new disclosure schedule discloses a matter which has or is reasonably
likely to have a Material Adverse Effect on the disclosing party, the
nondisclosing party shall have five (5) business days from receipt of such
disclosure schedule to notify the disclosing party that (x) it will close
notwithstanding the new disclosure, (y) it will not close based on such new
disclosure, or (z) further investigation or negotiation is required for it to
reach a determination whether or not to close based on such new disclosure,
which determination shall in any event be made within fifteen (15) business days
after delivery of such disclosure schedule. If the parties thereafter are unable
to reach agreement on a mutually satisfactory means of resolving the matter so
disclosed, the nondisclosing party shall have the right in its discretion, to
terminate this Agreement pursuant to Article 8 of this Agreement. FIG shall
update the FIG Disclosure Schedule (the "Closing Date FIG Disclosure Schedule")
to a date that is no earlier than ten (10) business days prior to the Closing
Date and no later than seven (7) business days prior to the Closing Date and
shall deliver the Closing Date FIG Disclosure Schedule to APAA Group no earlier
than six (6) business days prior to the Closing Date. APAA Group shall update
the APAA Group Disclosure Schedule (the "Closing Date APAA Group Disclosure
Schedule") to a date that is no earlier than ten (10) business days prior to the
Closing Date and no later than seven (7) business days prior to the Closing Date
and shall deliver the Closing Date APAA Group Disclosure Schedule to FIG no
earlier than six (6) business days prior to the Closing Date.
1.74 No Solicitations.
(1) So long as this Agreement remains in effect and no notice of
termination has been given under this Agreement APAA Group shall not authorize
or knowingly permit any of its representatives, directly or indirectly, to
initiate, solicit, encourage, engage in, or participate in, negotiations with
any person or entity or any group of persons or entities other than FIG or any
of its affiliates (a "Potential Acquiror") concerning any Acquisition Proposal
(as defined in this Section 6.7) other than pursuant to this Agreement. APAA
Group will promptly inform FIG of any serious, bona fide inquiry it may receive
with respect to any Acquisition Proposal and shall furnish FIG a copy thereof,
if in writing, or a written summary thereof, if oral. The APAA Group shall
immediately cease and cause to be terminated all existing discussions and
negotiations, if any, with any parties conducted heretofore with respect to any
Acquisition Proposal.
(2) Nothing contained in this Agreement shall prohibit the Board
of Directors of APAA from furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes an unsolicited
Acquisition Proposal if: (A) the Board of Directors of APAA, after consultation
with and receiving the advice of its legal counsel, determines in good faith
that such action is necessary or required for the Board of Directors of APAA to
comply with its
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fiduciary duties to its members under applicable law or its organizational
documents, (B) prior to furnishing such information to, or entering into
discussions or negotiations with, such person or entity, APAA Group discloses to
FIG that it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, which notice shall describe the terms
thereof, (C) prior to furnishing such information to such person or entity, APAA
Group receives from such person or entity an executed confidentiality agreement
with terms not materially more favorable to such person than the terms contained
in the Confidentiality Agreement, (D) APAA Group keeps FIG informed promptly of
the status (including the terms) of any such discussions or negotiations
(provided that, APAA Group shall not be required to disclose to FIG confidential
information concerning the business or operations of the person or entity making
the expression of interest) and (E) the APAA Group shall give FIG prior notice
of at least three (3) business days before entering into any agreement, other
than a confidentiality agreement, with such person.
(3) As used in this Agreement, "Acquisition Proposal" means any
(i) proposal pursuant to which any corporation, partnership, person or other
entity or group, other than FIG, would acquire or participate in a merger or
other business combination involving any member of the APAA Group, directly or
indirectly; (ii) proposal by which any corporation, partnership, person or other
entity or group, other than FIG, would acquire the right to vote 10% or more of
the capital stock of any member of the APAA Group, entitled to vote thereon for
the election of directors; (iii) acquisition of 10% or more of the assets of any
member of the APAA Group, other than in the ordinary course of business; or (iv)
acquisition in excess of 10% of the outstanding capital stock of or equity
interest in any member of the APAA Group, other than as contemplated by this
Agreement.
1.75 Tax Consistency. The parties hereto mutually agree that
each of the parties shall make and file for the year of the Merger, and for all
other relevant taxable years, federal, state, local and, if relevant, foreign
income tax returns and information returns, and other tax notifications that
reflect the Merger in a manner in all respects consistent with the opinions of
counsel referred to in Section 7.3(vi) hereof and acknowledge that in the event
of failure to comply, damages will include the amount of all reasonable legal,
accounting and expert witness, court and other compliance costs incurred as a
result of any challenge to the income tax-free status of the Merger.
1.76 Termination of Agreements. Prior to the Closing, the APAA Group shall
cause to be terminated the APAA Group agreements marked with an asterisk on the
APAA Group Disclosure Schedule.
1.77 Trust Continuance. From the date of this Agreement and throughout the
effective term of the Pledge Agreement, (a) the Liquidating Trust shall remain
in existence, and (b) the Liquidating Trust's organizational documents shall not
be amended or revised in any manner that has (or is reasonably likely to have) a
material adverse effect on FIG's rights under the Pledge Agreement or the Stock
Retention Agreement.
1.78 Continuation. (a) From and after the Effective Time, FIG will retain
a sufficient amount of APAC stock and APAC will retain a sufficient amount of
its assets and business operations such that FIG and APAC will continue the
historic business of Newco and APAC or use a significant portion of Newco's and
APAC's historic business assets in a business, as provided in Treasury
Regulation Section 1.368-1 (d).
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(b) As of the date hereof and the Effective Time, neither FIG nor any of
its affiliates has or will have a plan or intention to acquire any FIG Common
Stock issued in connection with the Merger, except for acquisitions made in the
ordinary course of business, acquisitions effected pursuant to any stock
buy-back or similar plans in effect on the date of this Agreement, or pursuant
to the terms of the Stock Retention Agreement and/or the Pledge Agreement.
ARTICLE 7
CONDITIONS PRECEDENT
1.79 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(1) The shares of FIG Common Stock which shall be issued to the
Liquidating Trust upon consummation of the Merger shall have been authorized for
trading and reporting on the Nasdaq National Market, subject to official notice
of issuance.
(2) The Articles of Merger shall have been filed with the
appropriate Governmental Entities immediately prior to the Closing.
(3) All approvals of Governmental Entities required to
consummate the transactions contemplated by this Agreement shall have been
obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired, without the imposition of any
condition which in the reasonable judgment of FIG or APAC is materially
burdensome upon FIG or its Subsidiaries or APAC, as the case may be (all such
approvals and the expiration of all such waiting periods being referred to in
this Agreement as the "Requisite Regulatory Approvals"). Without limiting the
generality of the foregoing: (i) all Blue Sky Filings shall have been made, and
the sale of FIG Stock resulting from the Merger shall have been qualified or
registered with the appropriate state securities law regulatory authorities of
all states in which qualification or registration is required under applicable
state securities laws, and such qualifications or registrations shall not have
been suspended or revoked, or shall be exempt from such qualification or
registration; (ii) the HSR Act Report shall have been submitted to the
Pre-Merger Notification Agencies, and the waiting period under the HSR Act shall
have expired or notice of early termination of the waiting period shall have
been received; and (iii) the Merger shall have been approved by the Florida
Insurance Department and the insurance departments of all states in which APAC,
FIG and any Subsidiaries of either of them conduct material business, to the
extent such approvals are legally required.
(4) No order, injunction or decree issued by any Governmental
Entity of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger or any of the other transactions
contemplated by this Agreement shall be in effect. No statute, rule, regulation,
order, injunction or decree shall have been enacted, entered, promulgated or
enforced by any Governmental Entity which prohibits, materially restricts or
makes illegal consummation of the Merger.
(5) Immediately prior to the Effective Time, FIG shall acquire a
9.9% interest in APAL pursuant to a separate agreement between FIG and APAL
being executed and delivered concurrently herewith (the "APAL Stock Purchase
Agreement").
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At the Closing (as defined in Section 9.1), APAC shall enter into a reinsurance
agreement with APAL, which will become effective as of 12:01 A.M. on January 1,
1999, in the form attached to the APAL Stock Purchase Agreement. At the Closing,
APAC shall issue and cause to be delivered, as required under the applicable
agreements, to the respective reinsurers involved, notices of cancellations of
all reinsurance agreements or treaties to which APAC is a party (exclusive of
the new reinsurance agreement with APAL as provided above), which shall provide
for cancellation effective at 12:01 A.M. on January 1, 1999.
(6) FIG, APAC and APAM shall have entered into the Management
Agreement.
(7) The Consulting Agreement dated the date of this Agreement
between APAC and CGA shall be in full force and effect.
(8) The Non-Competition Agreements each dated the date of this
Agreement among FPIC and APAC and each of APAM, CGA, Dr. Frank Moya, Joan
McNulty, Elizabeth Moya, Dr. Monte Lichtiger and Gene Witherspoon shall be in
full force and effect.
1.80 Conditions to Obligation of FIG. The obligation of FIG to effect
the Merger is also subject to the satisfaction or waiver by FIG at or prior to
the Effective Time of the following conditions:
(1) The representations and warranties of APAA Group to the
extent that the same are not qualified by a materiality standard set forth in
this Agreement shall be true and correct in all material respects as of the date
of this Agreement and (except (a) to the extent such representations and
warranties speak as of an earlier date and (b) for any changes to the APAC
Disclosure Schedule that are disclosed to FIG by the APAA Group in the Closing
Date APAC Disclosure Schedule) as of the Closing Date as though made on and as
of the Closing Date. The representations and warranties of APAA Group to the
extent that the same are qualified by a materiality standard set forth in this
Agreement shall be true and correct in all respects as of the date of this
Agreement and (except (a) to the extent such representations and warranties
speak as of an earlier date and (b) for any changes to the APAC Disclosure
Schedule that are disclosed to FIG by the APAA Group in the Closing Date APAC
Disclosure Schedule) as of the Closing Date as though made on and as of the
Closing Date. FIG shall have received a certificate signed on behalf of APAA
Group by the Chairman of the Board and the Chief Executive Officer of APAA and
the Chief Executive Officers and the Chief Financial Officers of Newco and APAC
to the foregoing effect, and to which any Closing Date APAA Group Disclosure
Schedule shall be appended.
(2) APAA Group shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and FIG shall have received a certificate signed on behalf of
APAA Group by the Chairman of the Board and the Chief Executive Officer of APAA
and the Chief Executive Officers and the Chief Financial Officers of Newco and
APAC to such effect.
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(3) No member of the APAA Group shall have suffered a material
adverse change in its business, assets, properties, results of operations or
condition (financial or otherwise); and no event or circumstance shall have
occurred which has, or is likely to have, a Material Adverse Effect on any
member of the APAA Group, or upon the right of any member of the APAA Group to
conduct its respective businesses as presently conducted.
(4) APAA Group shall have delivered to FIG an opinion, dated the
Closing Date, of counsel for APAA Group, reasonably satisfactory to FIG and its
counsel as to such matters as FIG may reasonably request (which shall not
include tax matters). In rendering their opinion, counsel to APAA Group may rely
on certificates of officers of APAA Group, opinions of other counsel reasonably
acceptable to FIG, the authenticity of all signatures on documents believed to
be genuine and such other evidence as they may deem necessary or desirable. Such
opinion may contain such assumptions, limitations and qualifications as are
normally included in similar opinions.
(5) APAL shall have released any and all liens and interest that
APAL may have in the outstanding shares of APAC Common Stock.
(6) FIG and APAC shall have entered into the Investment
Management Agreement.
(7) Intentionally Omitted.
(8) FIG, the Liquidating Trust and a collateral agent mutually
acceptable to FIG and the Liquidating Trust shall have entered into the Pledge
Agreement and FIG and the Liquidating Trust shall have entered into the Stock
Retention Agreement.
(9) As of and immediately following the Effective Time, APAC
shall continue as a Florida domiciled insurance company, duly licensed in
Florida to write the lines of insurance that it is currently writing.
(10) FIG shall have reasonably determined, based on advice of its tax
counsel, that the formation of Newco, the transfer of the assets and liabilities
of APAA to Newco, the dissolution of APAA and the related transactions and the
Merger will constitute and qualify as tax free reorganizations under Sections
368(a)(1) of the Code and no gain or loss will be recognized and no taxes will
be incurred by APAC, FIG or any affiliate of FIG as the result thereof.
(11) The APAA Group shall have provided to FIG a letter from
KPMG Peat Marwick LLP, in form and content reasonably acceptable to FIG, or
other evidence that is reasonably satisfactory to FIG, certifying that (A) as of
December 31, 1997, APAA's tax basis in the APAC stock owned by APAA (the " APAA
Basis") was not materially less than $10,987,000, and (B) as of December 31,
1997, the pro forma APAA Basis as adjusted to reflect APAA's contribution of the
Surplus Note to the capital of APAC (or, alternatively, as adjusted to reflect
the repayment of the Surplus Note by APAC to APAA and APAA's contribution of the
amount so repaid to the capital of APAC) was not materially less than
$12,637,000.
(12) APAA Group shall have delivered to FIG such other
certificates and instruments as FIG and its counsel may reasonably request. The
form and substance of all certificates, instruments, opinions and other
documentation delivered to FIG under this Agreement shall be reasonably
satisfactory to FIG and its counsel.
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1.81 Conditions to Obligation of APAA Group. The obligation of
APAA Group to effect the Merger is also subject to the satisfaction or waiver by
APAA Group at or prior to the Effective Time of the following conditions:
(1) The representations and warranties of FIG set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and (except (i) to the extent such representations and warranties
speak as of an earlier date and (ii) for any changes to the FIG Disclosure
Schedule that are disclosed by FIG to APAA Group in the Closing Date FIG
Disclosure Schedule) as of the Closing Date as though made on and as of the
Closing Date. APAA Group shall have received a certificate signed on behalf of
FIG by the President and Chief Executive Officer and the Senior Vice President
and Chief Financial Officer of FIG to the foregoing effect, and to which any
Closing Date FIG Disclosure Schedule shall be appended.
(2) FIG shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and APAA Group shall have received a certificate signed on
behalf of FIG by the President and Chief Executive Officer and the Senior Vice
President and Chief Financial Officer of FIG to such effect.
(3) FIG and its Subsidiaries, taken as a whole, shall not have
suffered a material adverse change in their financial condition, operations or
assets and no event or circumstance shall have occurred which has a Material
Adverse Effect on FIG or upon the right of FIG or any of the FIG Subsidiaries to
conduct their respective businesses as presently conducted.
(4) FIG shall have delivered to APAA Group an opinion, dated the
Closing Date, of counsel for FIG, reasonably satisfactory to APAA Group and its
counsel as to such matters as APAA may reasonably request (which shall not
include tax matters). In rendering their opinion, counsel to FIG may rely on
certificates of officers of FIG, opinions of other counsel reasonably acceptable
to APAA Group, the authenticity of all signatures on documents believed to be
genuine and such other evidence as they may deem necessary or desirable. Such
opinion may contain such assumptions, limitations and qualifications as are
normally included in similar opinions.
(5) APAA Group shall have received the favorable opinion from
Metis Financial LLC, in form and substance reasonably satisfactory to the APAA
Group, that consummation of the Merger and the other transactions contemplated
by this Agreement upon the terms and conditions provided in this Agreement and
in the other agreements referred to in this Agreement is fair to APAA Group and
the members of APAA from a financial point of view.
(6) APAA Group shall have received an opinion of their tax
counsel, addressed to APAA Group, in form and substance reasonably satisfactory
to APAA Group, dated as of the Effective Time, substantially to the effect that,
on the basis of facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing at the Effective Time:
The Merger should constitute a tax free reorganization under
Section 368(a)(1)(A) of the Code and FIG and Newco will each be a
party to the reorganization;
No gain or loss should be recognized by FIG or Newco as a result
of the Merger; and
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No gain or loss should be recognized by the Liquidating Trust
(except with respect to cash received from FIG).
In rendering such opinion, counsel may require and rely upon representations
contained in certificates of officers of FIG, APAA Group and others.
(7) FIG shall have delivered to APAA Group such other
certificates and instruments as APAA Group and its counsel may reasonably
request. The form and substance of all certificates, instruments and other
documentation delivered to APAA Group under this Agreement shall be reasonably
satisfactory to APAA Group and its counsel.
(8) FIG shall not have experienced a Change of Control as defined
herein. For the purpose of this Agreement, a "Change of Control" shall mean (a)
the acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 33 1/3% or more of the then
outstanding shares of FIG Common Stock; provided, however, that the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from FIG, (ii) any acquisition by FIG, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by FIG or any
corporation controlled by FIG or (iv) any acquisition by any corporation
pursuant to a reorganization, merger or consolidation, if, following such
reorganization, merger or consolidation, (a) more than 33 1/3% of, respectively,
the then outstanding shares of common stock of the corporation resulting from
such reorganization, merger or consolidation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, of the outstanding FIG Common Stock immediately prior to
such reorganization, merger or consolidation in substantially the same
proportions as their ownership, immediately prior to such reorganization, merger
or consolidation, of the outstanding FIG Common Stock, or (b) no Person
(excluding FIG, any employee benefit plan (or related trust) of FIG or such
corporation resulting from such reorganization, merger or consolidation and any
Person beneficially owning, immediately prior to such reorganization, merger or
consolidation, directly or indirectly, 33 1/3% or more of the outstanding FIG
Common Stock) beneficially owns, directly or indirectly 33 1/3% or more of, the
then outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation.
(9) The payment due under the Non-Competition Agreement with CGA in
the amount of $2,000,000 shall have been paid.
ARTICLE 8
TERMINATION AND AMENDMENT
1.82 Termination. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the matters presented
in connection with the Merger by the Boards of Directors of FIG, APAA or Newco:
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(1) by mutual consent of FIG and APAA Group in a written instrument,
if the Boards of Directors of FIG, APAA and Newco so determine, in each case by
an affirmative vote of a majority of the members of their respective entire
Boards;
(2) by either FIG or APAA Group if (i) any Governmental Entity that
must grant a Requisite Regulatory Approval has denied approval of the Merger and
such denial has become final and nonappealable or any Governmental Entity of
competent jurisdiction shall have issued a final nonappealable order permanently
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement, and (ii) the Board of Directors of FIG or the
Boards of Directors of APAA or Newco, as the case may be, so determines by an
affirmative vote of a majority of the members of its entire Board;
(3) by either FIG or APAA Group if (i) the Merger shall not have been
consummated on or before October 1, 1998, unless the failure of the Merger to be
consummated by such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements of
such party set forth in this Agreement, and (ii) the Board of Directors of FIG
or the Boards of Directors of APAA or Newco, as the case may be, so determines
by an affirmative vote of a majority of the members of its entire Board;
(4) by either FIG or APAA Group (provided that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained in this Agreement) if there shall have been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the other party;
(5) by either FIG or APAA Group (providing that the terminating party
is not then in material breach of any representation, warranty, covenant or
other agreement contained in this Agreement) if (i) any representation or
warranty of the other party contained in this Agreement that is not qualified by
a materiality standard shall be inaccurate in any material respect or any
representation or warranty of the other party contained in this Agreement that
is qualified by a materiality standard shall be inaccurate in any respect, and
such inaccuracy is not cured within forty-five days following written notice to
the party making the representation or warranty, or such inaccuracy, by its
nature or timing, cannot be cured prior to the Closing Date, and (ii) the Board
or Boards of Directors of the non-breaching party so determines by an
affirmative vote of a majority of the members of its entire Board;
(6) by FIG upon written notice to APAA or Newco if any members of the
APAA Group shall have authorized, recommended, publicly proposed or publicly
announced an intention to authorize, recommend or propose, or entered into an
agreement with any person or entity other than FIG to effect an Acquisition
Proposal; provided, however, that notwithstanding anything in this Section
8.1(vi) to the contrary, FIG and APAA Group intend this Agreement to be an
exclusive agreement and, accordingly, nothing in this Agreement is intended to
constitute a solicitation of an Acquisition Proposal, it being acknowledged and
agreed that any such proposal would interfere with the strategic advantages and
benefits that FIG and APAA Group expect to derive from this Agreement and the
transactions contemplated hereby; or
(7) by FIG if the Closing Date APAA Group Disclosure Schedule
discloses any change from the APAA Group Disclosure Schedule which has, or is
reasonably likely to have, a Material Adverse Effect on any member of the APAA
Group; or by APAA or Newco if the
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Closing Date FIG Disclosure Schedule discloses any change from the FIG
Disclosure Schedule which has, or is reasonably likely to have, a Material
Adverse Effect on FIG.
1.83 Effect of Termination. In the event of termination of this
Agreement by either FIG or APAA or Newco as provided in Section 8.1 of this
Agreement, (i) this Agreement shall forthwith become void and have no effect,
except that Sections 6.2(ii), 8.2, 8.5, 9.3, 9.4, 9.5, 9.6, 9.13, 9.14, 9.16 and
9.18 of this Agreement shall survive any termination of this Agreement, and (ii)
none of FIG, APAA, Newco or APAC, any of their respective Subsidiaries or any of
the officers or directors of any of them shall have any liability of any nature
whatsoever under this Agreement, or in connection with the transactions
contemplated by this Agreement, except as otherwise provided in Section 8.5 of
this Agreement; provided, however, that notwithstanding anything to the contrary
contained in this Agreement, neither FIG nor APAA or Newco or APAC shall be
relieved or released from any liabilities or damages arising out of the
inaccuracy or breach of any representation, warranty, covenant or other
provision of this Agreement.
1.84 Amendment. Subject to compliance with applicable law, this
Agreement may be amended by the parties hereto, by action taken or authorized by
the Board of Directors of FIG and the Boards of Directors of APAA or Newco, at
any time before the Merger. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
1.85 Extension; Waiver. At any time prior to the Effective Time, the
parties to this Agreement may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the other
parties to this Agreement, (b) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant
hereto and (c) waive compliance with any of the agreements or conditions
contained in this Agreement. Any agreement on the part of a party to this
Agreement to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
1.86 Liquidated Damages; Termination Fee. Notwithstanding anything to
the contrary contained in this Agreement, in the event that any of the following
events or circumstances shall occur, APAA Group shall, within ten (10) days
after notice of the occurrence thereof by FIG, pay to FIG the sum equal to
$600,000 plus all reasonable out-of-pocket expenses for outside legal counsel
and outside consultants and professionals of FIG, which the parties agree and
stipulate as reasonable and full liquidated damages and reasonable compensation
for the involvement of FIG in the transactions contemplated in this Agreement,
is not a penalty or forfeiture, and will not affect the provisions of this
Section 8.5: (i) at any time prior to termination of this Agreement an APAC
Acquisition Event (as defined in this Section 8.5) shall occur; or (ii) FIG
shall terminate this Agreement pursuant to Section 8.1(vi). For purposes of this
Agreement an "APAC Acquisition Event" shall mean that any member of APAA Group
or an authorized representative thereof shall have authorized, recommended,
publicly proposed or publicly announced an intention to authorize, recommend or
propose, or entered into an agreement with any person (other than FIG or an
affiliate of FIG) to effect an Acquisition Proposal. Upon the making and receipt
of such payment under this Section 8.5, APAA Group shall have no further
obligation of any kind under this Agreement and FIG shall not have any further
obligation of any kind under this Agreement, except in each case
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<PAGE> 42
under Section 8.2 of this Agreement, and no party shall have any liability for
any breach or alleged breach by such party of any provision of this Agreement.
ARTICLE 9
GENERAL PROVISIONS
1.87 Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") will take place at 10:00 a.m. on a
date and at a place to be specified by the parties, which shall be on the later
of June 30, 1998 or five (5) business days after the satisfaction or waiver
(subject to applicable law) of the latest to occur of the conditions set forth
in Article 7 of this Agreement, unless extended or changed by mutual agreement
of the parties (the "Closing Date").
1.88 Survival of Representations and Warranties. All statements of
fact contained in any schedule, certificate or other instrument delivered by or
on behalf of FIG, APAA, Newco or APAC pursuant hereto, as well as the warranties
and representations contained herein, shall be deemed representations and
warranties by such party. The representations and warranties made by the parties
herein with regard to any and all tax matters, employee benefit plans or labor
matters and the right to make claims for the breach thereof, shall survive until
all applicable statutes of limitations expire. All other representations and
warranties made by the parties herein, and the right to make claims for the
breach thereof, including but not limited to claims for indemnification under
Section 9.4, below shall survive the Closing for 12 months following the
Closing. Any claim for indemnification for which notice has been given within
the prescribed period (which notice shall be given to the party against which
indemnity is being sought, and shall describe in reasonable detail the basis for
the claim that has arisen and is being asserted) may be prosecuted to conclusion
notwithstanding the subsequent expiration of the period.
1.89 Expenses. Except as otherwise expressly provided in this
Agreement, all costs and expenses incurred in connection with this Agreement and
the transactions contemplated by this Agreement shall be paid by FIG, to the
extent FIG incurs such costs or expenses, or the Liquidating Trust, to the
extent any member of the APAA Group incurs such costs or expenses; provided,
however, at the Closing, by virtue of the merger of Newco into FIG, FIG will
assume and become obligated to pay the lesser of (i) $200,000, or (ii) 50% of
all expenses of the transaction incurred by APAA, including legal, accounting,
financial advisory and other transaction fees, but excluding fees for a fairness
opinion and the CGA transaction fee (such amount to which FIG will become
obligated to pay being herein referred to as the "Newco Expense Obligation").
Payment of the Newco Expense Obligation by Newco, APAA or APAC shall be deemed
the payment thereof by FIG. To the extent that any member of the APAA Group pays
(other than from the proceeds of the Cash Consideration) legal, accounting,
financial advisory or other costs or expenses attributable to the transactions
contemplated by this Agreement which is in excess of the Newco Expense
Obligation, the Liquidating Trust shall reimburse at Closing such excess expense
payments to the party that paid the same. All costs and expenses associated with
obtaining for APAC "admitted carrier" status in any State shall be an APAC
expense, which shall be borne by APAC. The parties acknowledge, consent and
agree that APAA and/or APAC have paid, and shall continue to pay through the
Closing ( including but not limited to payment from the proceeds of the Cash
Consideration) legal, actuarial, accounting, financial advisory and other
transaction fees, costs and expenses incurred by the members of the APAA Group,
42
<PAGE> 43
including without limitation, fees, costs and expenses for a fairness opinion.
Notwithstanding any conflicting provisions of this Agreement, the incurrence,
accrual and payment of the foregoing fees, costs and expenses shall not
constitute or contribute to the inaccuracy, violation or breach of any
representation, warranty, covenant or agreement herein.
1.90 Indemnification and Reimbursement.
(1) APAA's and the Liquidating Trust's Indemnification. APAA and
the Liquidating Trust agree to indemnify FIG, Newco and APAC and to hold FIG,
Newco and APAC harmless from and against all losses, claims, damages,
liabilities, penalties, judgments, awards, or other costs or expenses of any
nature (including reasonable attorneys' fees and costs) (collectively, "Losses")
incurred or sustained by FIG, Newco or APAC resulting from or arising out of (i)
any material breach or material inaccuracy of any representation or warranty to
that is not qualified by a materiality standard made by any member of the APAA
Group contained in this Agreement or in any schedule, certificate, or exhibit
delivered by the APAA Group pursuant to this Agreement, (ii) any breach or
inaccuracy of any representation or warranty that is qualified by a materiality
standard made by any member of the APAA Group contained in this Agreement or in
any schedule, certificate or exhibit delivered by the APAA Group pursuant to
this Agreement or (iii) any failure by any member of the APAA Group to perform
or otherwise fulfill in any material respect any of their agreements, covenants
or obligations hereunder or any material breach by the APAA Group of any of
their agreements, covenants or obligations hereunder. Notwithstanding any
conflicting or inconsistent provisions in this Agreement, APAA and the
Liquidating Trust shall not be obligated to provide indemnification, and shall
not otherwise be liable in damages, until aggregate Losses for which indemnity
or damages would otherwise be available hereunder exceed $153,000, at which time
APAA and the Liquidating Trust shall then be obligated to provide
indemnification for all Losses from the first dollar thereof.
(2) FIG's Indemnification. FIG agrees to indemnify APAA and the
Liquidating Trust and hold APAA and the Liquidating Trust harmless from and
against any Losses incurred or sustained by APAA resulting from or arising out
of (i) any breach or inaccuracy of any representation or warranty made by FIG
contained in this Agreement or in any schedule, certificate or exhibit delivered
by FIG pursuant to this Agreement or (ii) any failure of FIG to perform or
otherwise fulfill in any material respect any of its covenants, agreements or
obligations hereunder or any material breach by FIG of any of its agreements,
covenants or obligations hereunder. Notwithstanding any conflicting or
inconsistent provisions in this Agreement, FIG shall not be obligated to provide
indemnification, and shall not otherwise be liable in damages, until Losses for
which indemnity or damages would otherwise be available hereunder exceed
$153,000, at which time FIG shall then be obligated to provide indemnification
for all Losses from the first dollar thereof.
(3) Indemnification Procedures.
In the event that any claim is asserted against any party hereto, or any party
hereto is made a party defendant in any action or proceeding, and such claim,
action or proceeding involves a matter which is the subject of this
indemnification, then such party (an "Indemnified Party") shall give written
notice to the other party hereto (the "Indemnifying Party") of such claim,
action or proceeding, and such Indemnifying
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<PAGE> 44
Party shall have the right to join in and (prior to the time an answer is filed
in a litigated proceeding) control the defense and settlement of such claim,
action or proceeding at such Indemnifying Party's own cost and expense and
through counsel reasonably acceptable to the Indemnified Party (the parties
agree that any law firm identified in the notice section of this Agreement shall
be acceptable for such purposes), except that, in such case, the Indemnified
Party shall have the right to join in the defense of said claim, action or
proceeding at its own cost and expense.
1.91 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied or by facsimile transmission (with confirmation), mailed by
registered or certified mail (return receipt requested) or delivered by an
express courier (with confirmation) to the parties at the following addresses
(or at such other address for a party as shall be specified by like notice):
(1) if to FIG:
FPIC Insurance Group Inc.
1000 Riverside Avenue, Suite 800
Jacksonville, Florida 32204
Attention: William R. Russell
Fax: (904) 350-1049
with copies to:
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
50 N. Laura Street, Suite 2800
Jacksonville, Florida 32202
Attention: John R. Byers, Esq.
Fax: (904) 353-1673
and
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<PAGE> 45
(2) if to APAA, Newco or APAC, to:
Anesthesiologists Professional Assurance
Association, Inc.
801 Arthur Godfrey Road, Suite 400
Miami Beach, Florida 33140
Attention: Gene Witherspoon
Fax: (305) 672-7344
with copies to:
Daniel Lampert, Esq.
Berger Davis & Singerman
100 NE Third Avenue, Suite 400
Fort Lauderdale, Florida 33301
Fax: (954) 523-2872
and
Karp & Genauer, P.A.
2 Alhambra Plaza, Suite 1202
Coral Gables, Florida 33134
Attention: Joel J. Karp, Esq.
Fax: (305) 461-3545
Daniel Lampert, Esq.
1.92 Jurisdiction; Service of Process. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the
jurisdiction in which the defendant's principal place of business is located
(i.e., the State of Florida, County of Duval or the United States District Court
for the Middle District of Florida for FIG, and the State of Florida, County of
Dade or the United States District Court for the Southern District of Florida
for APAA Group), and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served on any party
anywhere in the world.
1.93 Further Assurances. At the request of any party to this
Agreement, the other parties shall execute, acknowledge and deliver such other
documents and/or instruments as may be reasonably required by the requesting
party to carry out the purposes of this Agreement. In the event any party to
this Agreement shall be involved in litigation, threatened litigation or
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<PAGE> 46
government inquiries with respect to a matter covered by this Agreement, every
other party to this Agreement shall also make available to such party, at
reasonable times and subject to the reasonable requirements of its own
businesses, such of its personnel as may have information relevant to such
matters, provided that such party shall reimburse the providing party for its
reasonable costs for employee time incurred in connection therewith if more than
one business day is required. Following the Closing, the parties will cooperate
with each other in connection with tax audits and in the defense of any legal
proceedings.
1.94 Remedies Cumulative. Unless expressly made the exclusive
remedy by the terms of this Agreement, all remedies provided for in this
Agreement are cumulative and shall be in addition to any and all other rights
and remedies provided by law and by any other agreements between the parties.
1.95 Presumptions. It is expressly acknowledged and agreed that
all parties have been represented by counsel and have participated in the
negotiation and drafting of this Agreement, and that there shall be no
presumption against any party on the ground that such party was responsible for
preparing this Agreement or any part of it.
1.96 Exhibits and Schedules. Each of the exhibits and schedules
referred to in, and/or attached to, this Agreement is an integral part of this
Agreement and is incorporated in this Agreement by this reference.
1.97 Interpretation. When a reference is made in this Agreement
to Articles, Sections, Exhibits or Schedules, such reference shall be to an
Article of, a Section of or Exhibit or Schedule to this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation". No provision of this Agreement shall be construed to require FIG,
APAA Group or any of their respective Subsidiaries or affiliates to take any
action which would violate any applicable law, rule or regulation.
1.98 Counterparts. This Agreement may be executed in
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart. This Agreement may be executed by facsimile with
the same force and effect as an original.
1.99 Entire Agreement. This Agreement (including the documents
and the instruments referred to in this Agreement) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter of this
Agreement.
1.100 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Florida, without regard to
any applicable conflicts of law principles.
1.101 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this agreement or affecting the validity or enforceability of
any of the terms or
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<PAGE> 47
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
1.102 Publicity. Except as otherwise required by applicable law
or the rules of the NASD and the Nasdaq National Market, neither FIG nor APAA
Group shall, or shall permit any of its Subsidiaries to, issue or cause the
publication of any press release or other public announcement with respect to,
or otherwise make any public statement concerning, the transactions contemplated
by this Agreement without the consent of the other party, which consent shall
not be unreasonably withheld.
1.103 Assignment; Third Party Beneficiaries. Neither this
Agreement nor any of the rights, interests or obligations shall be assigned by
any of the parties to this Agreement (whether by operation of law or otherwise)
without the prior written consent of the other parties to this Agreement.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns. This Agreement (including the documents and instruments referred to
in this Agreement) is not intended to confer upon any person other than the
parties to this Agreement any rights or remedies under this Agreement.
1.104 Attorney Fees. If litigation is brought concerning this
Agreement, the prevailing party shall be entitled to receive from the
non-prevailing party, and the non-prevailing party shall upon final judgment and
expiration of all appeals immediately pay upon demand all reasonable attorneys'
fees and expenses of the prevailing party.
1.105 Single Disclosure Sufficient; "Knowledge" Defined.
Notwithstanding any conflicting or inconsistent provisions of this Agreement,
disclosure of any matter by a party on any one of the Exhibits or Schedules to
this Agreement shall be sufficient to qualify (to the extent of the disclosure)
all representations and warranties made in any relevant provisions of this
Agreement. References in this Agreement to "Knowledge" (whether or not such term
is capitalized) (i) of FIG shall mean the actual (and not the constructive)
knowledge after due inquiry of William R. Russell, Steven R. Smith or Robert B.
Finch and (ii) of any member of the APAA Group shall mean the actual (and not
the constructive) knowledge after due inquiry of Dr. Frank Moya, Joan McNulty,
Elizabeth Moya, Dr. Monte Lichtiger or Gene Witherspoon.
1.106 . Domicile of Newco; Subsidiary Merger. Notwithstanding
any conflicting or inconsistent provisions of this Agreement, in the event that
the parties shall mutually agree: (a) the domicile of Newco may be changed from
Florida (as contemplated herein) to Delaware; and/or (b) Newco may be merged
into a subsidiary of FIG rather than into FIG (as contemplated herein), provided
that in such event FIG shall guaranty or remain liable for all of the
obligations of such subsidiary hereunder. In either such event as described in
this Section, the parties shall negotiate, execute and deliver such documents
and instruments as are necessary to include the foregoing and such additional
non-substantive revisions to the terms hereof as may be required to reflect the
applicable changes.
1.107 No Personal Liability. The persons executing and delivering
this Agreement do so only in a representative or corporate capacity, and no
individual liability shall attach to any
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<PAGE> 48
such person thereby.
IN WITNESS WHEREOF, FIG, APAA, the Liquidating Trust and APAC have caused
this Agreement to be executed by their respective officers thereunto duly
authorized as of the date first above written.
FPIC INSURANCE GROUP, INC.,
a Florida corporation
By:
---------------------------------------
William R. Russell
President and Chief Executive Officer
ANESTHESIOLOGISTS PROFESSIONAL
ASSURANCE ASSOCIATION, INC.,
a Florida not-for-profit corporation
By:
---------------------------------------
Frank Moya, M.D.
Chairman
ANESTHESIOLOGISTS PROFESSIONAL
ASSURANCE COMPANY,
a Florida corporation
By:
---------------------------------------
Frank Moya, M.D., Chairman
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APAA Liquidating Trust
a Florida Trust
By:
---------------------------------------
Frank Moya, M.D., Chairman
49
<PAGE> 50
SCHEDULE OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A - Articles of Merger
Exhibit B - Form of Stock Restriction and Registration Rights Agreement
Exhibit C - Form of Management Agreement
Exhibit D - Form of Investment Management Agreement
Exhibit E -Terms of Pledge Agreement
Exhibit F -Terms of Stock Retention Agreement
</TABLE>
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<PAGE> 1
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- ------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
THE TENERE GROUP, INC.
and
FLORIDA PHYSICIANS INSURANCE COMPANY, INC.
and
TGI ACQUISITION CORPORATION
-----------------
October 2, 1998
-----------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is made this 2nd day of October,
1998, among FLORIDA PHYSICIANS INSURANCE COMPANY, INC., a Florida corporation
("FPIC"), TGI ACQUISITION CORPORATION, a Florida corporation ("Acquisition
Corporation"), and THE TENERE GROUP, INC., a Missouri corporation ("Tenere").
P R E A M B L E
The Board of Directors of FPIC, Acquisition Corporation and Tenere
deem it in the best interests of each corporation, and in the best interest of
their respective shareholders that FPIC acquire all of the outstanding stock of
Tenere through the merger of Acquisition Corporation into Tenere in accordance
with the terms and conditions hereinafter set forth (the "Merger").
ACCORDINGLY, FPIC, Acquisition Corporation and Tenere hereby agree as
follows:
ARTICLE 1
THE MERGER
Section 1.1 Surviving Corporation. In accordance with the provisions
of this Agreement, the General and Business Corporation Law of Missouri (the
"GBCLM") and the Florida Business Corporation Act (the "FBCA"), at the
Effective Time (as defined in Section 1.6), Acquisition Corporation shall be
merged with and into Tenere, and Tenere shall be the surviving corporation
(hereinafter sometimes referred to as the "Surviving Corporation") and shall
continue its corporate existence under the laws of the State of Missouri. The
name of the Surviving Corporation shall be "The Tenere Group, Inc." At the
Effective Time, the separate existence of Acquisition Corporation shall cease.
Section 1.2 Articles of Incorporation. The Articles of Incorporation
of Tenere, as in effect immediately prior to the Effective Time, shall be the
Articles of Incorporation of the Surviving Corporation until thereafter amended
as provided by law.
Section 1.3 Bylaws. The Bylaws of Tenere, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
until thereafter amended as provided by law.
Section 1.4 Directors. The persons who are serving as directors of
Tenere immediately prior to the Effective Time shall be the directors of the
Surviving Corporation and shall hold office from the Effective Time until their
resignation or their respective successors are duly elected or appointed and
qualify in the manner provided in the Articles of Incorporation and Bylaws of
the Surviving Corporation, or as otherwise provided by law.
<PAGE> 3
Section 1.5 Officers. The persons who are serving as officers of
Acquisition Corporation immediately prior to the Effective Time shall continue
in their respective offices as the officers of the Surviving Corporation and
shall hold such offices from the Effective Time until their respective
successors are duly elected or appointed and qualify in the manner provided in
the Articles of Incorporation and Bylaws of the Surviving Corporation, or as
otherwise provided by law.
Section 1.6 Effective Time. The Merger shall become effective at the
time of filing of Articles of Merger (substantially in the form of Exhibit 1.6
hereto) (the "Articles of Merger") with the Secretary of State of Missouri and
the Department of State of the State of Florida, in accordance with the
provisions of Section 351.440 of the GBCLM and Section 607.1105 of the FBCA,
respectively, or at the time specified as the effective time in the Articles of
Merger. The date and time when the Merger becomes effective are herein
referred to as the "Effective Time".
ARTICLE 2
EFFECT OF THE MERGER ON SHAREHOLDERS AND OPTION HOLDERS
Section 2.1 Conversion of Tenere's Common Stock and Options and
Acquisition Corporation's Common Stock.
(a) Tenere's Common Stock. At the Effective Time, each
share of common stock, $.01 par value per share, of Tenere ("Tenere's Stock")
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive and be exchangeable for the Per Share
Amount in cash. For purposes of this Agreement, the "Per Share Amount" shall
mean the quotient, rounded to four decimal places, obtained by dividing (i)
$20,600,000 by (ii) the sum of the aggregate number of shares of Tenere's Stock
outstanding immediately prior to the Effective Time and the aggregate number of
shares of Tenere's Stock underlying all Options (as defined in Section 2.1(c)
hereof) outstanding immediately prior to the cancellation of Options
contemplated by Section 2.1(c) hereof.
(b) Acquisition Corporation's Common Stock. At the
Effective Time, each share of common stock, $.01 par value per share, of
Acquisition Corporation ("Acquisition Corporation's Stock") issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and exchangeable for one share of issued, outstanding, fully paid and
nonassessable share of common stock, $.01 par value per share, of the Surviving
Corporation. All certificates that immediately prior to the Effective Time
represented the outstanding common stock of Acquisition Corporation shall be
deemed for all purposes to represent the number of shares of common stock of
the Surviving Corporation into which such common stock of Acquisition
Corporation has been converted pursuant to this Section 2.1(b).
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<PAGE> 4
(c) Tenere Options. Prior to the Closing, Tenere shall
cause each outstanding option to purchase shares of Tenere's Stock (an
"Option"), whether or not then exercisable, to be canceled and converted into
the right to receive an amount in cash equal to the product, rounded to four
decimal places, of (i) the amount by which the Per Share Amount exceeds the
exercise price per share subject to the Option and (ii) the number of shares
subject to the Option.
Section 2.2 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shares of Tenere's Stock that are issued and
outstanding immediately prior to the Effective Time and that are held by a
Tenere shareholder who (i) does not vote such shares in favor of the Merger and
(ii) files with Tenere a written objection to the Merger pursuant to the rights
granted a dissenting shareholder under the GBCLM (the "Dissenting Shares")
shall not be converted into the Per Share Amount as provided for in Section 2.1
(a) hereof but, rather, shall be converted into the right to receive such
consideration as may be determined to be due with respect to such Dissenting
Shares in accordance with the GBCLM; provided however, that if any holder of
Dissenting Shares shall subsequently be deemed to not be entitled to
dissenter's rights, any of the Dissenting Shares held by such shareholder shall
thereupon be deemed to have been converted into the Per Share Amount as
provided for in Section 2.1(a) hereof.
Section 2.3 Exchange of Shares and Options.
(a) Exchange Agent. At or before the Effective Time, FPIC
shall, or FPIC shall cause Acquisition Corporation to, deposit in immediately
available funds with an exchange agent for Tenere's Stock and the Options,
which exchange agent shall be selected by FPIC and shall be reasonably
satisfactory to Tenere (the "Exchange Agent"), an amount (the "Exchange Fund")
to be distributed to the Shareholders and the Optionees (as such terms are
defined in Section 2.3(b)) that shall equal and be divided for payment with
respect to Tenere's Stock and the Options as follows: (i) an aggregate amount
for Tenere's Stock that is equal to the product of (x) the number of shares of
Tenere's Stock issued and outstanding at the Effective Time (the "Tenere Stock
Outstanding") multiplied by (y) the Per Share Amount, plus (ii) an aggregate
amount for the Options that is equal to (x) the product of the Per Share Amount
and the aggregate number of shares of Tenere's Stock underlying all of the
Options, minus (y) the sum of the amounts obtained for each Option by
multiplying the exercise price per share of each Option by the number of shares
of Tenere's Stock underlying each Option (the "Aggregate Option Exercise
Price"). The parties shall use the information and amounts designated on
Schedule 4.1(e) (as revised pursuant to Section 3.9) as in effect at the
Closing Date to determine the Shareholders, the Optionees, the Tenere Stock
Outstanding, the Options and the Aggregate Option Exercise Price. The exchange
agreement to be entered into by FPIC or Acquisition Corporation with the
Exchange Agent shall provide that out of the Exchange Fund, the Exchange Agent
shall, pursuant to irrevocable instructions, make the payments referred to in
Sections 2.1(a) and 2.2 and 2.3 to each Shareholder and Optionee listed on
Schedule 4.1(e), as such Schedule may be revised in accordance with Section
3.9. Any amount remaining in the Exchange Fund after one year after the
Effective Time may be transferred to the Surviving Corporation at its option;
provided, however, that the
3
<PAGE> 5
Surviving Corporation shall thereafter be liable for the cash payments required
by Sections 2.1(a), 2.2 and 2.3. FPIC shall, or shall cause the Exchange Agent
or the Surviving Corporation, as the case may be, to, make the payments required
by Sections 2.1(a), 2.2 and 2.3 solely to the Shareholders and the Optionees
listed on Schedule 4.1(e) (as revised pursuant to Section 3.9) as in effect at
the Effective Time.
(b) Payment Procedure. As promptly as practicable, but
not later than five business days, after the Effective Time, the Exchange Agent
shall mail and make available to each holder of record ("Shareholder") of a
certificate or certificates that immediately prior to the Effective Time
represented outstanding shares of Tenere's Stock (a "Certificate") and to each
holder of record of an Option (an "Optionee"), a letter of transmittal that
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates and Options shall pass, only upon delivery of the Certificates
and the Options. Upon surrender to the Exchange Agent of a Certificate for
cancellation together with such letter of transmittal, duly executed, the
Exchange Agent shall promptly pay out to the persons entitled thereto the
amount, rounded to the nearest cent, determined by multiplying (x) the number
of shares of Tenere's Stock represented by the Certificate by (y) the Per Share
Amount. Upon surrender to the Exchange Agent of an Option together with such
letter of transmittal, duly executed, the Exchange Agent shall promptly pay out
to the Optionee the amount, rounded to the nearest cent, determined by
multiplying (x) the amount by which the Per Share Amount exceeds the exercise
price per share subject to such Option and (y) the number of shares subject to
such Option. No interest shall be paid or accrued on the cash payable upon
the surrender of a Certificate or an Option. If a Shareholder or an Optionee
requests that payment be made to a person other than the one in whose name the
Certificate or Option surrendered, as the case may be, is registered, it shall
be a condition of payment that the Certificate or Option so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Certificate
or Option surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 2.3(b), (i) each Certificate
shall represent for all purposes only the right to receive, upon such surrender,
an amount in cash rounded to the nearest cent, equal to the Per Share Amount per
share of Tenere's Stock being converted and (ii) each Option shall represent for
all purposes only the right to receive, upon such surrender, an amount equal to
the product, rounded to the nearest cent, of (x) the amount by which the Per
Share Amount exceeds the exercise price per share subject to the Option and (y)
the number of shares subject to the Option.
(c) Lost, Stolen or Destroyed Certificates or Options.
In the event any Certificate or Option shall have been lost, stolen or
destroyed, upon delivery to the Surviving Corporation of an affidavit of that
fact by the person claiming such Certificate or Option to be lost, stolen or
destroyed and the delivery of such other documents as the Surviving Corporation
may reasonably request, the Surviving Corporation shall deliver or cause to be
delivered the amount of money deliverable in respect of such lost, stolen or
destroyed Certificate or Option as determined in accordance with this Article
2; provided, however, that the Board of Directors of
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the Surviving Corporation may, as a condition precedent to the delivery thereof,
require the owner of such lost, stolen or destroyed Certificate or Option to
provide to the Surviving Corporation a bond in favor of the Surviving
Corporation, from an issuer satisfactory to the Surviving Corporation and in an
amount equal to the value of the shares of Tenere's Stock represented by such
Certificate or the value of such Option, as the case may be, at the Effective
Time or such other security as the Surviving Corporation shall reasonably deem
necessary, as indemnity against any claim that may be made against the Surviving
Corporation with respect to the Certificate or Option alleged to have been lost,
stolen or destroyed.
Section 2.4 No Further Rights. From and after the Effective
Time, the holders of Certificates shall cease to have any rights as
shareholders of the Surviving Corporation, except as provided herein or by law.
Section 2.5 Closing of Tenere's Stock Transfer Books. After the
Effective Time, there shall be no transfers on the stock transfer books of the
Surviving Corporation of any shares of Tenere's Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the consideration payable pursuant to this Article 2.
ARTICLE 3
CERTAIN AGREEMENTS
Section 3.1 Due Diligence. FPIC shall have the right from the
date hereof and continuing until the Closing Date to inspect the books and
records and assets of Tenere and the Subsidiaries, and Tenere shall cooperate,
and cause the Subsidiaries to cooperate, with such investigation in accordance
with Section 5.1(a) hereof.
Section 3.2 Communications With Agents, Employees or
Policyholders. Tenere shall not, and shall cause the Subsidiaries and any
other Affiliates (as defined in Section 3.4(a)) not to, communicate with any
insurance agents or policyholders of Intermed, Interlex or any employees of ISI
regarding this Agreement or the transactions contemplated herein, other than
communications that are approved by FPIC or oral responses to unsolicited
inquiries and, with respect to communications with employees, those
communications necessary in connection with the consummation of the
transactions contemplated by this Agreement. FPIC shall have the right to
participate in the communications permitted by this Section.
Section 3.3 Shareholder Approval. As soon as reasonably
practicable, Tenere shall send notice to the Shareholders and conduct a
Shareholders meeting or otherwise obtain Shareholder approval for this Agreement
and the Merger in accordance with the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder (collectively, the "Exchange
Act"), the GBCLM and any other applicable laws. Tenere shall permit FPIC to
review all materials to be sent to the Shareholders in connection with obtaining
such Shareholder approval. All such
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materials and the methods of solicitation shall be submitted to FPIC for
approval, which approval shall not be unreasonably withheld. Subject to Section
3.4, Tenere shall recommend to the Shareholders that the Shareholders approve
this Agreement and the Merger. Tenere shall from time to time notify FPIC of the
percentage of the outstanding shares of Tenere's Stock as to which Shareholders
have delivered to Tenere written objection to the Merger pursuant to their
dissenters' rights under Section 351.455 of the GBCLM and shall immediately
notify FPIC if Shareholders holding more than ten percent of the outstanding
shares of Tenere's Stock deliver such written objection.
Section 3.4 No Solicitation.
(a) No Solicitation by Tenere. Subject to Section 3.4(c)
hereof, Tenere shall not, nor shall it permit any of the Subsidiaries or its
other Affiliates to, nor shall it authorize or permit any officer, director,
employee, investment banker, attorney or other advisor, agent or representative
of Tenere or any of the Subsidiaries to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Tenere Takeover Proposal (as
hereinafter defined), (ii) enter into any agreement with respect to any Tenere
Takeover Proposal, (iii) initiate any discussions or negotiations regarding any
proposal that constitutes, or may reasonably be expected to lead to, any Tenere
Takeover Proposal or (iv) furnish any information with respect to the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Tenere Takeover Proposal. For purposes of this Agreement, a "Tenere Takeover
Proposal" means (i) any proposal or offer, other than a proposal or offer by
FPIC or any of its Affiliates (as defined below), for a merger or other
business combination involving Tenere or any of the Subsidiaries, directly or
indirectly, (ii) any proposal or offer, other than a proposal or offer by FPIC
or any of its Affiliates, to acquire from Tenere or any of its Affiliates in
any manner, directly or indirectly, any of the capital stock of Tenere or any
of the Subsidiaries or 10% or more of the assets of Tenere or any of the
Subsidiaries, (iii) any proposal or offer, other than a proposal or offer by
FPIC or any of its Affiliates, to acquire from the shareholders of Tenere by
tender offer, exchange offer or otherwise any of Tenere's Stock or (iv) any
proposal or offer, other than a proposal or offer by FPIC or any of its
Affiliates, to acquire the right to vote 50% or more of the capital stock of
Tenere or any of the Subsidiaries. For purposes of this Agreement, an
"Affiliate" of any person or entity means any other person or entity that
directly or indirectly controls, is controlled by or is under common control
with such person or entity, whether through equity ownership, voting rights or
otherwise.
(b) No Change of Approval. Subject to Section 3.4(c)
hereof, neither Tenere, the Board of Directors of Tenere nor any committee
thereof shall (i) withdraw or modify, or propose to withdraw or modify, the
approval or recommendation by Tenere, the Board of Directors of Tenere or any
committee thereof of this Agreement or the Merger or take any action having
such effect or (ii) announce, approve or recommend any Tenere Takeover
Proposal.
(c) Tenere Superior Proposal. Notwithstanding the
foregoing, nothing contained in this Agreement shall prohibit the Board of
Directors of Tenere from furnishing
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information to, or entering into discussions or negotiations with, any person or
entity that makes an unsolicited Tenere Takeover Proposal if: (A) the Board of
Directors of Tenere, after consultation with and receiving the advice of its
outside legal counsel, determines in good faith that such action is necessary or
required for the Board of Directors of Tenere to comply with its fiduciary
duties to the Shareholders under applicable law, (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Tenere discloses to FPIC that it is furnishing information to, or
entering into discussions or negotiations with, such person or entity, which
notice shall describe the terms thereof, (C) prior to furnishing such
information to such person or entity, Tenere receives from such person or entity
an executed confidentiality agreement with terms not more favorable to such
person than the terms contained in the Confidentiality Agreement between FPIC
Insurance Group, Inc. and Tenere and (D) Tenere keeps FPIC informed promptly of
the status (including the terms) of any such discussions or negotiations. In
addition, notwithstanding the foregoing, if the Board of Directors of Tenere
receives an unsolicited Tenere Takeover Proposal that, in the exercise of its
fiduciary obligations (as determined in good faith after consultation with
outside legal counsel), it determines to be a Tenere Superior Proposal (as
hereinafter defined), the Board of Directors of Tenere may withdraw or modify
its approval or recommendation of this Agreement or the Merger and may (subject
to the following sentence) terminate this Agreement, in each case at any time
after the fifth business day following FPIC's receipt of written notice (a
"Tenere Notice of Superior Proposal") advising FPIC that the Board of Directors
of Tenere has received a Tenere Takeover Proposal that it has determined to be a
Tenere Superior Proposal, specifying the principal terms and conditions of such
Tenere Superior Proposal and identifying the person making such Tenere Superior
Proposal. For purposes of this Agreement, a "Tenere Superior Proposal" means any
bona fide Tenere Takeover Proposal to merge or combine with Tenere or to
acquire, directly or indirectly, more than 50% of Tenere's Stock or of
Intermed's and Interlex' voting stock then outstanding or a material amount of
the assets of Tenere and the Subsidiaries, taken as a whole, on terms that the
Board of Directors of Tenere determines in its good faith reasonable judgment
(based on the written advice of a financial advisor of nationally recognized
reputation) to be materially more favorable to the Shareholders than the Merger.
(d) Termination Upon Change. If Tenere, the Board of
Directors of Tenere or any committee thereof shall (i) withdraw or modify the
approval or recommendation by Tenere, the Board of Directors of Tenere or any
such committee of this Agreement or the Merger or take any action having such
effect, or (ii) announce, approve or recommend any Tenere Takeover Proposal,
FPIC may terminate this Agreement.
(e) Notification by Tenere. In addition to the other
obligations of Tenere set forth in this Section 3.4, Tenere shall promptly
advise FPIC orally and in writing of the receipt of any Tenere Takeover
Proposal or any proposal, discussion or overture that might lead to a Tenere
Takeover Proposal.
(f) Breakup Fee. In the event Tenere, its Board of
Directors or a committee thereof or any representative or Affiliate of Tenere
shall (i) withdraw or modify the approval or
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recommendation of approval of this Agreement or the Merger by Tenere or its
Board of Directors, or a committee thereof, or take any action having such
effect, or (ii) approve or recommend, or propose to approve, recommend, present
or otherwise disclose in any manner to the Tenere shareholders (including any
recommendation, presentation, disclosure or approval contemplated by Rule
14e-2(a) of the Exchange Act), any Tenere Takeover Proposal, and either (i) the
shareholders of Tenere do not approve the Merger or (ii) Tenere or FPIC
terminates this Agreement pursuant to this Section 3.4, then Tenere shall
immediately thereafter pay FPIC a fee of $600,000 in cash.
Section 3.5 Employee Matters. Prior to the Closing, Tenere shall (i)
terminate or cause to be terminated the employment of such of the Companies'
employees as FPIC shall specify to Tenere and (ii) (a) pay or cause to be paid
to any such terminated employees who have Employment Agreements with a Company
(as specified in Schedule 4.1(ff) to this Agreement) the amounts required to be
paid to such employees arising from such terminations under such Employment
Agreements or the Companies' existing benefit plans or arrangements or
otherwise required by applicable law and (b) pay or cause to be paid to any
such terminated employees who do not have employment agreements with a Company
the amounts, if any, required to be paid to such employees arising from such
terminations under the Companies' existing policies, benefit plans or
arrangements or otherwise required by applicable law. All amounts required to
be paid pursuant to the immediately preceding sentence shall be reflected on
the Companies' books prior to the Closing. Tenere shall use commercially
reasonable efforts to cause each employee of a Company who FPIC desires to
remain employed by that Company following the Closing to agree prior to the
Closing (which agreement shall be pursuant to a written agreement if FPIC so
elects) to remain so employed subsequent to the Closing.
Section 3.6 Certain Adjustments. Prior to the Closing, Tenere
shall cause Intermed and Interlex to make such conforming adjustments to their
loss reserves and shall make or cause to be made such other adjustments to its
and the Subsidiaries books and financial statements as FPIC and its advisors
deem appropriate; provided, that such adjustments shall not violate generally
accepted accounting principles ("GAAP").
Section 3.7 Reinsurance Agreements. FPIC and Tenere shall in good
faith attempt to agree upon terms pursuant to which Intermed's and Interlex'
existing reinsurance agreements shall be terminated as of the Closing Date and
replaced with mutually acceptable alternative reinsurance arrangements. In the
event FPIC and Tenere so mutually agree, they shall cooperate in good faith to
effect such termination of Intermed's and Interlex' existing reinsurance
agreements and the implementation of such alternative arrangements as of the
Closing Date.
Section 3.8 List of Shareholders and Optionees. At the
Closing, Tenere shall cause its transfer agent to provide to FPIC a certified
list of the Shareholders and the Optionees as of the Closing.
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Section 3.9 Directors' and Officers' Indemnification. From and after
the Effective Time, FPIC shall cause to be maintained all duties and
obligations of indemnification of Tenere and the Subsidiaries pertaining to the
period prior to the Effective Time in favor of employees, agents, directors or
officers of Tenere and each of the Subsidiaries arising by virtue of its
Articles of Incorporation or Bylaws or arising by operation of applicable law,
and shall cause such duties and obligations to continue in full force and
effect for so long as they would (but for the Merger) otherwise survive and
continue in full force and effect.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Tenere. Tenere
represents, warrants and, to the extent that an item relates to a future time
period, covenants to FPIC and Acquisition Corporation as follows:
(a) Tenere Organization and Good Standing; Authority to
Conduct Business. Tenere is a corporation duly organized, validly existing and
in good standing under the laws of the State of Missouri. Tenere has all
requisite corporate power and authority to carry on its businesses as presently
conducted and to own or lease and to operate its properties as currently
operated. The copies of the Articles of Incorporation and all amendments
thereto and the Bylaws and all amendments thereto of Tenere, which have
heretofore been delivered to FPIC, are true and complete. Tenere is not in
violation of any term of its Articles of Incorporation or Bylaws.
(b) Power and Authority. Tenere has all requisite power
and authority to execute, deliver and, subject to the approval of this
Agreement by the Shareholders, perform this Agreement, the Articles of Merger
and any other agreements or instruments contemplated hereby to be executed by
it. The execution, delivery and performance by Tenere of this Agreement, the
Articles of Merger and any other agreements or instruments contemplated hereby
to be executed by it have been duly authorized by all requisite corporate
action on behalf of Tenere and except for obtaining the approval of this
Agreement by the Shareholders, no other authorizations or approvals by the
Board of Directors or Shareholders are necessary to authorize this Agreement or
to consummate the transactions contemplated hereby. This Agreement
constitutes, and each of any other agreements or instruments contemplated
hereby to be executed by Tenere will constitute when executed and delivered,
valid and legally binding obligations of Tenere enforceable against it in
accordance with its terms, except as enforceability may be limited by
bankruptcy, reorganization, insolvency, moratorium or other laws affecting
creditors rights generally and general principles of equity.
(c) No Conflicts. The execution and delivery of this
Agreement and any other agreements and instruments contemplated hereby and the
consummation of the transactions contemplated hereby and thereby by Tenere in
accordance with the terms hereof and thereof, upon receipt of the consents and
approvals contemplated by Section 4.1(d), will not violate any existing
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provision of the Articles of Incorporation, Bylaws or any other organizational
documents of Tenere, Intermed, Interlex, ISI or any other Subsidiary or of any
law or violate any existing term or provision of any order, writ, judgment,
injunction or decree of any court or any other governmental department,
commission, board, bureau, agency or instrumentality applicable to Tenere,
Intermed, Interlex, ISI or any other Subsidiary or conflict with or result in a
breach of any of the terms, conditions or provisions of any agreement to which
Tenere, Intermed, Interlex, ISI or any other Subsidiary is a party, or by
which any of their respective properties are bound, or constitute an event that
might permit an early termination of or otherwise materially affect any such
agreement.
(d) Consents and Approvals. Except as set forth on
Schedule 4.1(d), no consent, license, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority, agency,
bureau or commission, or any third party is required to be obtained or made by
Tenere, Intermed, Interlex, ISI or any other Subsidiary in connection with the
execution, delivery, performance, validity and enforceability of this Agreement
or any other agreements and instruments contemplated hereby or the conversion
of the shares of Tenere's Stock.
(e) Capital Structure of Tenere. The authorized capital
stock of Tenere consists solely of 7,000,000 shares of Common Stock, par value
$.01 per share, of which 1,999,774 shares are issued and outstanding (the
"Outstanding Tenere Shares"), and 500,000 shares of Preferred Stock, par value
$.01 per share, none of which shares are issued and outstanding. The
Outstanding Tenere Shares constitute the only issued and outstanding capital
stock of Tenere. All of the Outstanding Tenere Shares are owned of record as
of the date of this Agreement by the shareholders listed on Schedule 4.1(e) to
this Agreement. All of the Outstanding Tenere Shares have been duly authorized
and are validly issued, fully paid and nonassessable, and, except as listed on
Schedule 4.1(e), there are no existing or outstanding securities convertible
into capital stock of Tenere, or options, warrants, calls, commitments, or
agreements, other than this Agreement, of any character that relate to the
authorization, issuance, delivery, sale, purchase or redemption by Tenere of
shares of capital stock of Tenere or that require any payments in any manner
indexed or otherwise pertaining to capital stock of Tenere.
(f) Subsidiaries. Each corporation, partnership, joint
venture or other entity in which Tenere owns directly or indirectly a voting or
other equity interest (each a "Subsidiary") is set forth on Schedule 4.1(f),
and except as set forth therein, Tenere has no Subsidiaries. Tenere owns
beneficially and of record all of the outstanding capital stock of each
Subsidiary. The authorized capital stock of Intermed consists solely of
800,000 shares of Common Stock, par value $1.00 per share, all of which shares
are issued and outstanding and owned beneficially and of record by Tenere. The
authorized capital stock of Interlex consists solely of 800,000 shares of
Common Stock, par value $1.00 per share, all of which shares are issued and
outstanding and owned beneficially and of record by Intermed. The authorized
capital stock of ISI consists solely of 300 shares of Common Stock, par value
$100.00 per share, of which Five shares are issued and outstanding and owned
beneficially and of record by Intermed. There are no outstanding rights or
options to acquire, nor any outstanding securities convertible into capital
stock of any class of
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any Subsidiary. The authorized capital stock of Trout Insurance Services, Inc.
("Trout") consists solely of 30,000 shares of common stock, par value $1.00 per
share, of which 500 shares are issued and outstanding and all of which 500
shares are owned beneficially and of record by Intermed. All of the issued and
outstanding shares of capital stock of each Subsidiary have been duly authorized
and validly issued and are fully paid and nonassessable. All such shares are
free and clear of any and all liens, charges, security interests and other
encumbrances and claims and none of such shares is the subject of any agreement
under which any such lien, charge, security interest or other encumbrance or
claim might arise. The copies of the Articles of Incorporation and all
amendments thereto and of the Bylaws and all amendments thereto of each
Subsidiary, which have heretofore been delivered to FPIC, are true and complete.
No Subsidiary is in violation of any term of its Articles of Incorporation or
Bylaws.
(g) Organization and Good Standing of ISI; Authority to
Conduct Business. ISI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Missouri. ISI has all requisite
corporate power and authority to carry on its business as presently conducted
and to own or lease and to operate its properties as currently operated.
(h) Organization and Good Standing of Intermed; Authority
to Conduct Business. Intermed is a stock insurance company, duly organized,
validly existing and in good standing under the laws of the State of Missouri.
Intermed has all requisite corporate power and authority to carry on its
business as presently conducted and to own or lease and to operate its
properties as currently operated. Intermed is duly licensed and in good standing
to write the lines of insurance and otherwise to do business in the states and
jurisdictions as set forth in Schedule 4.1(h) hereto. Tenere has delivered to
FPIC correct and complete copies of all of the insurance licenses of Interlex
certified by the Secretary of Intermed, all of which are in full force and
effect. Intermed has full power and authority to write all the lines of
insurance shown on the insurance licenses of Intermed. Intermed is not
transacting any insurance or reinsurance or other business in any state
requiring a license therefor in which it is not so licensed.
(i) Organization and Good Standing of Interlex; Authority
to Conduct Business. Interlex is a stock insurance company, duly organized,
validly existing and in good standing under the laws of the State of Missouri.
Interlex has all requisite corporate power and authority to carry on its
business as presently conducted and to own or lease and to operate its
properties as currently operated. Interlex is duly licensed and in good
standing to write the lines of insurance and otherwise to do business in the
states and jurisdictions as set forth in Schedule 4.1(i) hereto. Tenere has
delivered to FPIC correct and complete copies of all of the insurance licenses
of Intermed certified by the Secretary of Interlex, all of which are in full
force and effect. Interlex has full power and authority to write all the lines
of insurance shown on the insurance licenses of Interlex. Interlex is not
transacting any insurance or reinsurance or other business in any state
requiring a license therefor in which it is not so licensed.
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(j) Organization and Good Standing of Trout. Trout is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Missouri. Trout has no assets, no liabilities, and
conducts no business in Missouri or elsewhere.
(k) Tenere Financial Statements. Tenere has delivered to
FPIC complete and correct copies of (i) the audited consolidated balance sheets
of Tenere and the Subsidiaries as of December 31, 1997 and 1996, and the
related audited consolidated statements of income, changes in shareholders'
equity and cash flows for the fiscal years 1997 and 1996, inclusive, together
with the notes thereto, as reported in Tenere's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997 filed with the Securities and Exchange
Commission (the "SEC") under the Exchange Act, in each case accompanied by the
audit reports of KPMG Peat Marwick LLP, independent public accountants with
respect to Tenere (the "Audited Financial Statements"), and (ii) the unaudited
consolidated balance sheet of Tenere and the Subsidiaries and the related
unaudited consolidated statements of income and cash flows as reported in
Tenere's Quarterly Reports on Form 10-Q for the quarters ended March 31 and
June 30, 1998 (the "Quarterly Financial Statements" and collectively with the
Audited Financial Statements, the "Tenere Financial Statements"). Prior to the
Closing, Tenere will deliver to FPIC complete and correct copies of the
unaudited consolidated balance sheet of Tenere and the Subsidiaries and the
related unaudited consolidated statements of income and cash flows as reported
in Tenere's Quarterly Report on Form 10-Q for each subsequent quarter ended at
least 45 days prior to the Closing (the "Additional Financial Statements").
The Tenere Financial Statements (including the notes thereto) have been (and
all Additional Financial Statements delivered to FPIC pursuant to this
Agreement will be), in each such case, prepared in accordance with GAAP applied
on a consistent basis throughout the periods involved (except in the case of
the Quarterly Financial Statements and the Additional Financial Statements, as
permitted by Form 10-Q). The Tenere Financial Statements (including the notes
thereto) present fairly in all material respects (and the Additional Financial
Statements will present fairly in all material respects) the financial
position, the assets and the liabilities (whether absolute, accrued,
contingent, or otherwise) of Tenere and the Subsidiaries as of the respective
dates thereof and the results of operations and changes in shareholders' equity
and cash flows for the respective periods then ended, all in accordance with
GAAP (except in the case of the Quarterly Financial Statements and the
Additional Financial Statements, as permitted by Form 10-Q). The Tenere
Financial Statements (including the notes thereto) comply in all material
respects (and the Additional Financial Statements will comply in all material
respects) with applicable accounting requirements and, with respect to form,
with the rules, regulations and requirements of the SEC with respect thereto.
The books and records of Tenere and the Subsidiaries have been, and are being,
maintained in all material respects in accordance with GAAP and any other
applicable legal and accounting requirements and reflect only actual
transactions. Except as disclosed in the Tenere Financial Statements and
reports delivered pursuant to this Section, neither Tenere nor any of the
Subsidiaries has any debts, obligations or liabilities, contingent or
otherwise, that could result in a Material Adverse Effect with respect to
Tenere or any of the Subsidiaries. As used in this Agreement, the term
"Material Adverse Effect" means with respect to any person, any circumstance,
event, change or occurrence that (i) is
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material and adverse to the assets, liabilities, operations, financial
condition, results of operations or business of such person, or (ii) materially
impairs the ability of such person to perform its obligations under this
Agreement; provided, however, that Material Adverse Effect shall not be deemed
to include the impact of (a) changes in generally accepted accounting
principles, (b) changes directly resulting from actions required by this
Agreement or (c) any additional amounts of loss reserves recorded by Tenere or
its Subsidiaries prior to the Closing.
(l) Tenere Undisclosed Liabilities. Neither Tenere nor
any Subsidiary has any liabilities, whether absolute, accrued, contingent,
matured, unmatured, or otherwise, except (a) as and to the extent reflected or
reserved against on the Quarterly Financial Statements dated as of June 30,
1998, and (b) liabilities of a nature similar to those currently reflected on
such financial statements incurred by Tenere solely in the ordinary course of
business and consistent with prior practices that in the aggregate would not
result in a Material Adverse Effect with respect to Tenere or any of the
Subsidiaries, since the date of such financial statements.
(m) Intermed Financial Statements. Tenere has delivered
to FPIC complete and correct copies of (i) the Quarterly Statements of Intermed
filed with the Missouri Department of Insurance (the "Missouri Department") for
the quarters ended March 31 and June 30, 1998 (the "Intermed Quarterly
Statements"), (ii) the Annual Statements of Intermed filed with the Missouri
Department for the years ended December 31, 1995, 1996 and 1997, together with
the exhibits and schedules thereto (the "Intermed Annual Statements"), and
(iii) the audited statutory financial statements of Intermed for the years
ended December 31, 1995, 1996 and 1997, together with the notes thereto (the
"Intermed Audited Statutory Statements"). Tenere will promptly deliver to FPIC
all additional quarterly or annual statements of Intermed filed with the
Missouri Department prior to the Closing.
The (i) statutory financial statements (the "Intermed
Statutory Statements") of Intermed contained in the Intermed Annual Statements
and the Intermed Quarterly Statements and any additional quarterly or annual
Statements of Intermed filed with the Missouri Department and (ii) Intermed
Audited Statutory Statements, and any additional audited financial statements
of Intermed delivered to FPIC, have been (or, if not yet delivered, will be),
in each such case, prepared in accordance with statutory accounting practices
prescribed or permitted by the National Association of Insurance Commissioners,
the Missouri Department and any other applicable regulatory authorities
("SAP"), and such accounting practices have been applied on a consistent basis
throughout the periods involved. The Intermed Audited Statutory Statements and
each of the Intermed Statutory Statements present (or if not yet delivered,
will present) fairly in all material respects the financial position, the
assets and the liabilities (whether absolute, accrued, contingent, or
otherwise) of Intermed as of the respective dates thereof and the results of
operations and changes in capital and surplus and in cash flows for the
respective periods then ended, all in accordance with SAP.
Since June 30, 1998, there has been no material adverse
change in the composition, nature or risk characteristics (credit quality or
otherwise) of Intermed's investment
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portfolio. Except as disclosed in the financial statements and reports delivered
pursuant to this Section, Intermed has no debts, obligations or liabilities,
contingent or otherwise, that could result in a Material Adverse Effect with
respect to Intermed.
All reserves, due and uncollected premiums and other
related items with respect to insurance and annuity contracts as established or
reflected in the Intermed Statutory Statements (i) were determined in
accordance with commonly accepted actuarial standards consistently applied,
(ii) were fairly stated in accordance with sound actuarial principles, (iii)
were based on actuarial assumptions which produce reserves as great as those
called for in any contract provision as to reserve basis and method, and are in
accordance with all other contract provisions and the related reinsurance,
coinsurance, and other similar contracts, (iv) met the requirements of the
insurance laws and regulations of each applicable jurisdiction, and of the
National Association of Insurance Commissioners model regulations and actuarial
guidelines, and all appropriate standards of practice as promulgated by the
Actuarial Standards Board, (v) were computed on the basis of assumptions
consistent with those used in computing the corresponding items in the Intermed
Statutory Statements for the immediately preceding comparable period, and (vi)
made good and sufficient provisions for the total amount of all matured and
actuarially anticipated unmatured benefits, dividends, losses, claims, expenses
and any other obligations and liabilities (whether absolute, accrued,
contingent, or otherwise) of Intermed under all outstanding insurance and
annuity contracts and reinsurance, coinsurance, and other similar contracts
pursuant to which Intermed has or could have any obligation or liability
(whether absolute, accrued, contingent or otherwise) as of the date of such
Intermed Statutory Statements. Intermed owns assets that qualify as legal
reserve assets under the insurance laws and regulations of each applicable
jurisdiction in an amount at least equal to all such required reserves and
other similar amounts.
(n) Intermed Undisclosed Liabilities. Intermed does not
have, and as of the Closing Date will not have, any liabilities, whether
absolute, accrued, contingent, matured, unmatured or otherwise, except (a) as
and to the extent reflected or reserved against on the Intermed Quarterly
Statement for the quarter ended June 30, 1998 and (b) liabilities of a nature
similar to those currently reflected on such Intermed Quarterly Statement
incurred by Intermed solely in the ordinary course of business and consistent
with prior practices that except for liabilities incurred in connection with
insurance polices, would not result in a Material Adverse Effect with respect
to Intermed, since the date of such Intermed Quarterly Statement.
(o) Interlex Financial Statements. Tenere has delivered
to FPIC complete and correct copies of (i) the Quarterly Statements of Interlex
filed with the Missouri Department for the quarters ended March 31 and June 30,
1998 (the "Interlex Quarterly Statements"), (ii) the Annual Statements of
Interlex filed with the Missouri Department for the years ended December 31,
1995, 1996 and 1997, together with the exhibits and schedules thereto (the
"Interlex Annual Statements"), and (iii) the audited statutory financial
statements of Interlex for the years ended December 31, 1995, 1996 and 1997,
together with the notes thereto (the "Interlex Audited Statutory Statements").
Tenere will promptly deliver to FPIC all additional quarterly or annual
statements of Interlex filed with the Missouri Department prior to the Closing.
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The (i) statutory financial statements (the "Interlex
Statutory Statements") of Interlex contained in the Interlex Annual Statements
and the Interlex Quarterly Statements and any additional quarterly or annual
Statements of Interlex filed with the Missouri Department and (ii) Interlex
Audited Statutory Statements any additional audited financial statements of
Intermed delivered to FPIC, have been (or, if not yet delivered, will be), in
each such case, prepared in accordance with SAP, and such accounting practices
have been applied on a consistent basis throughout the periods involved. The
Interlex Audited Statutory Statements and each of the Interlex Statutory
Statements present (or if not yet delivered, will present) fairly in all
material respects the financial position, the assets, and the liabilities
(whether absolute, accrued, contingent, or otherwise) of Interlex as of the
respective dates thereof and the results of operations and changes in capital
and surplus and in cash flows for the respective periods then ended, all in
accordance with SAP.
Since June 30, 1998, there has been no material adverse
change in the composition, nature or risk characteristics (credit quality or
otherwise) of Interlex' investment portfolio. Except as disclosed in the
financial statements and reports delivered pursuant to this Section, Interlex
has no debts, obligations or liabilities, contingent or otherwise, that could
result in a Material Adverse Effect with respect to Interlex.
All reserves, due and uncollected premiums and other
related items with respect to insurance and annuity contracts as established or
reflected in the Interlex Statutory Statements (i) were determined in
accordance with commonly accepted actuarial standards consistently applied,
(ii) were fairly stated in accordance with sound actuarial principles, (iii)
were based on actuarial assumptions that produce reserves as great as those
called for in any contract provision as to reserve basis and method, and are in
accordance with all other contract provisions and the related reinsurance,
coinsurance, and other similar contracts, (iv) met the requirements of the
insurance laws and regulations of each applicable jurisdiction, and of the
National Association of Insurance Commissioners model regulations and actuarial
guidelines, and all appropriate standards of practice as promulgated by the
Actuarial Standards Board, (v) were computed on the basis of assumptions
consistent with those used in computing the corresponding items in the Interlex
Statutory Statements for the immediately preceding comparable period, and (vi)
made good and sufficient provisions for the total amount of all matured and
actuarially anticipated unmatured benefits, dividends, losses, claims, expenses
and any other obligations and liabilities (whether absolute, accrued,
contingent, or otherwise) of Interlex under all outstanding insurance and
annuity contracts and reinsurance, coinsurance, and other similar contracts
pursuant to which Interlex has or could have any obligation or liability
(whether absolute, accrued, contingent or otherwise) as of the date of such
Interlex Statutory Statements. Interlex owns assets that qualify as legal
reserve assets under the insurance laws and regulations of each applicable
jurisdiction in an amount at least equal to all such required reserves and
other similar amounts.
(p) Interlex Undisclosed Liabilities. Interlex does not
have, and as of the Closing Date will not have, any liabilities, whether
absolute, accrued, contingent, matured,
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unmatured or otherwise, except (a) as and to the extent reflected or reserved
against on the Interlex Quarterly Statement for the quarter ended June 30, 1998,
and (b) liabilities of a nature similar to those currently reflected on such
Interlex Quarterly Statement and incurred by Interlex solely in the ordinary
course of business and consistent with prior practices that, except for
liabilities incurred in connection with insurance polices, would not result in a
Material Adverse Effect with respect to Interlex, since the date of such
Interlex Quarterly Statement.
(q) SEC Reports. Tenere has delivered to FPIC a complete
copy of each (i) registration statement, prospectus, report (including but not
limited to reports on Forms 10-K, 8-K and 10-Q), schedule and definitive proxy
statement filed since March 1995 by Tenere with the SEC pursuant to the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "Securities Act"), or the Exchange Act (collectively, the
"Tenere Reports") and (b) communication mailed by Tenere to its shareholders
since March 1995 ("Shareholder Communication"). Tenere will promptly deliver
to FPIC a complete copy of each registration statement, prospectus, report,
schedule and definitive proxy statement filed by Tenere with the SEC pursuant
to the Securities Act or the Exchange Act prior to the Closing and each
communication mailed by Tenere to its shareholders prior to the Closing
(collectively, the "Additional Documents"). No such Tenere Report, Shareholder
Communication or Additional Document contained (or will contain) any untrue
statement of a material fact or omitted (or will omit) to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were (or are) made, not
misleading. Tenere has timely filed all Tenere Reports and other documents
required to be filed by it under the Securities Act or the Exchange Act and
through the Closing Date will timely file all Additional Documents required to
be filed by it under the Securities Act or the Exchange Act. As of their
respective dates, all Tenere Reports complied (and all Additional Documents
will comply) in all material respects with the rules, regulations and
requirements of the SEC with respect thereto.
(r) Intercompany Accounts. Set forth in Schedule 4.1(r)
is a complete and correct list and summary description of all intercompany
accounts payable and receivable ("Intercompany Accounts") as June 30, 1998,
between or among Tenere, Intermed, Interlex, ISI or any Affiliate thereof.
(s) Litigation. Except as set forth in Schedule 4.1(s)
hereto, there is no judicial, administrative or regulatory action, proceeding,
investigation or inquiry or administrative charge or complaint pending or, to
the best of the knowledge of Tenere, threatened, that might have a Material
Adverse Effect (as defined below) on Tenere or any Subsidiary (Tenere and the
Subsidiaries each being sometimes individually referred to herein as a
"Company" and sometimes collectively referred to herein as the "Companies"), or
that might materially adversely affect any registration or insurance license,
or the value or marketability of any of the insurance products of Intermed or
Interlex, or that questions the validity of this Agreement or any action taken
or to be taken by any party pursuant hereto or in connection with the
transactions contemplated hereby.
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(t) Real and Personal Property. Tenere has provided to
FPIC a list and summary description of all real and, as June 30, 1998, tangible
personal property owned by each of the Companies, whether or not used or
proposed to be used in any of the Companies' business (which together with the
additions and deletions thereto in the ordinary course of business as permitted
by this Agreement are hereinafter called the "Assets"). Each Company has, or
prior to the Closing Date will have, good and indefeasible title to the Assets
owned by such Company, free and clear of all liens, security interests and
other encumbrances and claims, except for inchoate liens, liens for taxes not
yet due and statutory liens as to which to the best knowledge of Tenere no
dispute exists. None of the Companies uses or proposes to use any real or
tangible personal property except as set forth in Schedule 4.1(t) or covered by
a lease set forth in Schedule 4.1(u). All of the Assets are or will be, as the
case may be, suitable for their intended use and are in good condition and
repair, subject to ordinary wear and tear. The Assets constitute all of the
real and tangible personal property necessary to conduct the business of each
of the Companies as presently conducted. No real property owned or leased by
any of the Companies is now, nor to Tenere's best knowledge has such property
ever been, used for the generation, storage or disposal of hazardous wastes,
hazardous substances, toxic wastes, petroleum products or other pollutants.
(u) Leases and Rental Contracts. Set forth in Schedule
4.1(u) hereto is a list and summary description of all leases and contracts
under which any of the Companies leases, as lessor or lessee, or rents, any
real or personal property. All such leases and contracts are in full force and
effect without any existing default or breach thereunder.
(v) Contracts. Set forth in Schedule 4.1(v) hereto (with
Section references corresponding to those set forth below) is a complete and
correct list as of the date hereof of all written or oral agreements, contracts
and commitments, with an annual cost or benefit to any of the Companies of,
unless otherwise indicated, $10,000 or more (the "Contracts"), to which any of
the Companies is a party or by which any of the Companies is bound or otherwise
affected as of the date hereof (other than insurance contracts sold by Intermed
or Interlex in the ordinary course of business), including: (i) mortgages,
indentures, security agreements, loan and credit agreements and other
agreements and instruments relating to the borrowing of money or evidence of
credit where any of the Companies is debtor, (ii) agreements or other
arrangements with insurance agents and agencies and third party administrators
pursuant to which Intermed or Interlex or an Affiliate thereof has paid $10,000
or more in commissions or other consideration during the calendar year 1996,
1997 or 1998, (iii) contracts for the provision of data-processing services,
(iv) finder's, franchise, distribution, sales or brokerage agreements, (v)
contracts or options to purchase or sell real property, (vi) contracts for the
purchase of materials, supplies or equipment, or for providing services, (vii)
contracts, arrangements or treaties with any party regarding reinsurance,
excess insurance, ceding of insurance, assumption of insurance, or
indemnification with respect to insurance currently being provided directly or
indirectly by Intermed or Interlex or regarding the management of any portion
of Intermed's or Interlex' business or regarding the sale by Intermed or
Interlex of its products through any other company or the sale by any other
company of its products through it, (viii) contracts with any entity that is an
Affiliate of the Companies or with any officer or director of any of the
Companies or any
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officer or director of any other entity that is an Affiliate of the Companies,
or to the best knowledge of Tenere any corporation controlled by such officer or
director, (ix) agreements and instruments representing loans or commitments to
loan to officers, directors, employees or agents (other than insurance agents)
of any of the Companies or of any entity that is an Affiliate of any of the
Companies, (x) contracts of any kind to which the United States government or
any of its agencies is a party, or under any federal, state or local law,
regulation or executive order, (xi) partnership, joint venture or strategic
alliance agreements of any kind and (xii) other agreements, contracts and
commitments. Tenere has delivered or made available to FPIC complete and correct
copies of all written Contracts together with all amendments thereto and waivers
and consents with respect thereto. In addition, Tenere has made available to
FPIC complete and correct copies of (i) all insurance policy forms used for
products currently marketed by either Intermed or Interlex in its business and
that are currently in force, and (ii) all forms of agreements or other
arrangements with insurance agents and agencies and third party administrators
used by either Intermed or Interlex in its business. All of such Contracts are
in full force and effect and each party thereto has performed in all material
respects all of the obligations required to be performed by it to date and is
not in default thereunder in any material respect. Except as specified on
Schedule 4.1(v), all of such Contracts may be terminated by a Company on thirty
days' or less notice with no penalty to any of the Companies. No Contract to
which any of the Companies is a party, or by which any of the Companies or any
of its respective properties is bound, specifically limits any of the Companies'
freedom to compete in any line of business or with any person or entity. None of
the Companies has outstanding any power of attorney. All contracts, arrangements
or treaties to which either Intermed or Interlex is a party regarding
reinsurance, excess insurance, ceding of insurance, assumption of insurance or
indemnification with respect to insurance are set forth on Schedule 4.1(v)
hereto.
(w) Compliance with Other Instruments and Laws. None of
the Companies is in violation of any term of its charter, articles of
incorporation or bylaws, or of any statute, law, ordinance, rule or regulation
applicable to it or any of its respective properties or of any material
regulatory filing or undertaking of or affecting it or of any judgment, decree
or order in which any such Company is named, or in any violation of any
mortgage, indenture, instrument or agreement relating to indebtedness for
borrowed money or other material instrument, agreement, contract, permit,
concession, grant, franchise, license or other governmental authorization or
approval applicable to it or any of its respective properties. All insurance
licenses referred to in Schedule 4.1(h) and Schedule 4.1(i) hereto and all
material permits, concessions, grants, franchises, other licenses and other
governmental authorizations and approvals necessary for the conduct of the
business of each of the Companies have been duly obtained and are in full force
and effect, and, there are no proceedings pending or, to the best knowledge of
Tenere, threatened, that may result in the revocation, cancellation, or
suspension, or any adverse modification, of any thereof. The execution,
delivery and performance of, and compliance with, this Agreement, and the
consummation of the transactions contemplated hereby by Tenere in accordance
with the terms hereof, will not result in any such violation or be in conflict
with or result in any default under any of the foregoing referred to in this
Section 4.1(w), or result in the creation of any mortgage, pledge, lien, charge
or encumbrance upon any of the properties or assets of any of the Companies
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or the loss, revocation, cancellation, suspension or modification of any
insurance license listed in Schedule 4.1(h) and Schedule 4.1(i) hereto, other
licenses or material contractual rights held by any of the Companies pursuant to
any of the foregoing or result in any such revocation, cancellation, suspension
or modification.
(x) Regulatory Filings. The Companies have filed or
otherwise provided all reports, data, other information and applications
required to be filed with or otherwise provided to the Missouri Department, the
SEC and all other federal, state or local governmental authorities (including,
without limitation, insurance departments) with jurisdiction over any of the
Companies and all required regulatory approvals in respect thereof are in full
force and effect on the date hereof. Tenere has furnished or made available to
FPIC complete and correct copies of (i) the most recent reports of examination
issued by state insurance regulatory authorities in respect of Intermed and
Interlex, (ii) the most recent insurance holding company registrations and
annual reports filed with respect to Intermed and Interlex, (iii) all other
regulatory filings by or undertakings of any of the Companies and (iv) all
complaints filed by any regulatory agency and other regulatory proceedings
initiated or pending with respect to any of the Companies at any time within the
preceding five years. Since December 31, 1992, no deficiencies material to the
financial condition or operations of Intermed or Interlex or any of the other
Companies have been asserted by any state regulatory authorities with respect to
any reports or filings made by or with respect to any of the Companies. Tenere
has furnished to FPIC copies of all written responses submitted by each of
Intermed and Interlex (i) in respect of the most recent examination report of
such Company made by a state insurance regulatory authority and (ii) to the
National Association of Insurance Commissioners regarding such Company's
Insurance Regulatory Information System (IRIS) ratings. Each of the Companies on
the Closing Date will have substantially completed, in the ordinary course of
its business, consistent with its past practices and to the extent practicable,
the preparation of all reports, data, other information and applications that it
will be required to file with any federal, state or local governmental authority
(including, without limitation, insurance departments) within 60 days following
the Closing Date and such unmade filings will be in form and substance
sufficient to enable the Companies to complete and make such filings on a timely
basis following the Closing Date.
(y) Absence of Certain Changes. Since June 30, 1998,
none of the Companies has (i) issued, sold or delivered or agreed to issue,
sell or deliver any additional shares of its capital stock or any options,
warrants or rights to acquire any such capital stock, or securities convertible
into or exchangeable for such capital stock, (ii) incurred any obligations or
liabilities, whether absolute, accrued, contingent or otherwise (including,
without limitation, liabilities as guarantor or otherwise with respect to
obligations of others), other than obligations and liabilities relating to the
issuance of insurance policies in the ordinary course of Intermed's and
Interlex' business, or incurred in the ordinary course of Tenere's business, or
obligations and liabilities otherwise reflected on financial statements
delivered by Tenere to FPIC, (iii) mortgaged, pledged or subjected to any lien,
lease, security interest or other charge or encumbrance, any of its assets,
tangible or intangible, (iv) acquired or disposed of any assets or properties,
or entered into any agreement or other arrangements for any such acquisition or
disposition, except for assets acquired or disposed of in the ordinary course
of business, (v) declared, made, paid or set apart any sums
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for any dividend or other distribution to its shareholders or any other
Affiliate or purchased or redeemed any shares of its capital stock or granted
any option, warrant or right to purchase any such capital stock, or reclassified
such capital stock, (vi) except as set forth on a schedule hereto, paid or
become obligated to pay any service fees or other sums to Tenere or any of its
Affiliates, (vii) forgiven or canceled any debts or claims or waived any
statutory, contractual or common law rights of material value, (viii) entered
into any transaction other than in the ordinary course of business, (ix) granted
any rights or licenses under any of their respective trade names or entered into
general agency arrangements, (x) entered into any agreement regarding
reinsurance, surplus relief obligations, excess insurance, ceding of insurance,
assumption of insurance or indemnification with respect to insurance or
management of business, (xi) suffered any adverse change in their respective
operations, financial condition, income, assets or liabilities, (xii) suffered
any damage, destruction or loss, whether or not covered by insurance or
reinsurance, materially adversely affecting, in any case or in the aggregate,
their respective businesses, financial condition, properties or assets or (xiii)
suffered any strike, picketing, boycott or other labor trouble materially
adversely affecting their respective businesses, financial condition or
operations.
(z) Taxes. All Tax returns and information returns,
reports, statements, and forms (including estimated Tax and information
returns, reports, statements, and forms) (collectively, the "Returns") of each
of the Companies and of any member of any affiliated group of corporations
(within the meaning of section 1504 of the Internal Revenue Code of 1986, as
amended (the "Code"), as in effect at the time of the due date for the filing
of such Returns) of which any of the Companies is or was a member that are
required by law to be filed with any Taxing Authority have been timely filed
and are accurate, true and complete in all material respects. Except as set
forth on Schedule 4.1(z), all Returns filed with respect to Tax years of the
Companies through the Tax year ended December 31, 1994 have been examined and
closed or are Returns with respect to which the applicable period for
assessment under applicable law has expired. None of the Returns filed by or
on behalf of any of the Companies is currently being audited by any Taxing
Authority. All Taxes upon each of the Companies or for which any of the
Companies may be liable, or in respect of any of the assets, income or
franchises of any of the Companies, have been paid by such Company or have been
paid on such Company's behalf, or adequate accruals, reserves and provisions
have been established on the books of the Companies for the payment of such
Taxes. There are no requests for rulings or determinations in respect of any
Tax or Tax Asset pending between any of the Companies and any Taxing Authority.
There are no Tax liens upon any of the properties or assets of any of the
Companies. No Taxing Authority has provided any of the Companies or any member
of any affiliated group of corporations of which any of the Companies is or was
a member with any notice of any audit, investigation, proceeding or claim with
respect to any Taxes for which any of the Companies may be liable. None of the
Companies nor any member of any affiliated group of corporations (as defined
above) of which any of the Companies is or was a member has granted or been
requested to grant any waiver of any statute of limitations applicable to any
claim for Taxes or has agreed to any extension of time with respect to any Tax
assessment or deficiency for Taxes for which any
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of the Companies may be liable. All information set forth in the notes to the
Tenere Financial Statements relating to Tax matters is true and complete in all
material respects. The accruals and reserves for Taxes (A) reflected in the
Tenere Financial Statements, as to Tenere and the Subsidiaries, in the Intermed
Quarterly Statement for the quarter ended June 30, 1998 as to Intermed, and in
the Interlex Quarterly Statement for the quarter ended June 30, 1998 as to
Interlex, are adequate to cover all liabilities for all accrued or unpaid Taxes
for which each of the respective Companies has any liability or, as to
contested claims, any reasonably estimated liability for Taxes relating to such
claims with respect to the periods covered thereby, and (B) established or to
be established on the books of each of the Companies for the period beginning
June 30, 1998, through the Effective Time will be adequate to cover all such
liabilities and reasonably estimated liabilities with respect to such period,
all in accordance with (i) GAAP applied on a basis consistent with prior
periods as to Tenere and the Subsidiaries and (ii) SAP on a basis consistent
with prior periods as to Intermed and Interlex. All ceding commissions paid or
accrued by either Intermed or Interlex (for any period as to which any
applicable statute of limitations remains open) in connection with any
reinsurance, coinsurance, or other similar contract have been capitalized and
amortized over the respective life of each such contract in accordance with all
applicable Tax laws. Except as set forth on Schedule 4.1(z), none of the
Companies is a party to or bound by any contractual obligation to pay any Tax,
including any Tax indemnity, Tax sharing, Tax allocation or similar agreement,
arrangement, contract, or plan. All elections with respect to Taxes affecting
each of the Companies are set forth in Schedule 4.1(z). Since January 1, 1993,
none of the Companies nor any Affiliate of any of them has made or changed any
Tax election, changed any annual Tax accounting period, or adopted or changed
any method of Tax accounting (to the extent that any such action may materially
affect any of the Companies). None of the Companies is a party to any
agreement, contract, arrangement or plan that has resulted or could result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code. None of the Companies
owns any material property subject to a lease that is not a "true" lease for
federal income Tax purposes. Each of the Companies has withheld and paid in a
timely manner to the proper Taxing Authority all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, Shareholder, or other third party, and has
complied with all information reporting and backup withholding requirements.
None of the Companies has nor has had a permanent establishment in any foreign
country, as defined in any applicable Tax treaty or convention between the
United States and such foreign country. For purposes of this Agreement, the
term "Tax" means (i) any tax, or other like assessment or charge of any kind
whatsoever (including, but not limited to, withholding on amounts paid to or by
any person or entity and premium taxes), together with any interest, penalty,
addition to tax or additional amount imposed by any federal, state, local,
foreign or other governmental authority (a "Taxing Authority") responsible for
the imposition of any such Tax, (ii) liability of any Company for the payment
of any amount described in (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group, or being a party to any agreement or
arrangement as a result of which liability of any of the Companies to a Taxing
Authority is determined or taken into account with reference to the liability
of any other Person, and (iii) liability of any of the Companies for the
payment of any amount as a result of being party to any tax sharing, allotment,
allocation or similar
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agreement or with respect to the payment of any amount of the type described in
(i) or (ii) as a result of any express or implied obligation (including, but not
limited to, an indemnification obligation). For purposes of this Agreement, the
term "Tax Asset" means any operating loss, net capital loss, investment tax
credit, foreign tax credit, charitable deduction or any other credit or tax
attribute that could reduce Taxes (including, without limitation, deductions and
credits related to alternative minimum Taxes).
(aa) Insurance Policies. Set forth in Schedule
4.1(aa) hereto is a complete and correct list as of the date hereof of the
insurance policies maintained by or for the benefit of any of the Companies or
their Affiliates or other officers or directors. Such policies are in full
force and effect, all premiums due thereon have been paid and the insured has
complied in all material respects with the provisions of such policies.
(bb) Transactions with Interested Persons. Except
as set forth on Schedule 4.1(bb), no officer or director, or to the best of
Tenere's knowledge any employee, agent or broker (or spouse or any child of any
thereof) of any of the Companies, or of any corporation that is an Affiliate of
any of the Companies, owns, directly or indirectly, on an individual or joint
basis, any material interest in, or serves as an officer, employee or director
of, any customer, insurance agency, competitor or supplier of any of the
Companies or any person or entity that has a material contract or arrangement
with any of the Companies.
(cc) Bank and Brokerage Accounts. Tenere has
provided FPIC with a complete and accurate list of each bank or trust company,
other financial institution, mutual fund or stock brokerage firm in which each
of the Companies has an account or safe deposit box and each custodial account
maintained by each of the Companies and, in each case, the names of such
accounts, the account numbers and the names of all persons authorized to draw
thereon or to have access thereto. Tenere has provided FPIC with a complete
and accurate list of all credit cards issued to any present or past officer,
employee or agent of any of the Companies under which any of the Companies has
any current or potential future liability.
(dd) Disclosure. Neither this Agreement nor any
written document, statement, list, schedule, exhibit, certificate or other
instrument furnished or to be furnished to FPIC or Acquisition Corporation by
or on behalf of any of the Companies in connection with the transactions
contemplated hereby contains or will contain when made or delivered any untrue
statement of a material fact, or fails to state or will fail to state when made
or delivered a material fact necessary to make the statements contained herein
and therein not misleading. There is no fact known to Tenere that materially
adversely affects, or in the future may materially adversely affect, the
condition (financial or otherwise), properties, assets, liabilities,
capitalization, ownership, business or operations of any of the Companies.
(ee) Employee Benefit Plans.
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(i) All plans, funds and programs as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), any deferred compensation agreements, employment contracts,
severance pay agreements and any other agreements, plans or programs relating
to employment whether written or oral ("Benefit Plans") currently maintained,
or to which contributions are made, by any of the Companies, or previously
maintained, or to which contributions have been made, by any of the Companies
for which any of the Companies may be subject to current or potential future
liability, are listed and described in Schedule 4.1(ee) hereto. None of the
Companies has any obligation to establish, maintain or contribute to any
Benefit Plan other than as listed on Schedule 4.1(ee).
(ii) Each of the Companies has provided to FPIC
complete and correct copies of all plan documents of the Benefit Plans listed
in Schedule 4.1(ee), including but not limited to, trust agreements, insurance
contracts, advance determination letters from the IRS, summary plan
descriptions, employee oral communications, the last five years' Form 5500s and
the most recent actuarial statements and financial statements.
(iii) All assets of the Benefit Plans listed in
Schedule 4.1(ee) are held in trust or under an insurance contract.
(iv) Other than as set forth in Schedule 4.1(ee),
none of the Companies nor any other corporation, trade or business under common
control with any of the Companies (as determined under Code '' 414(b) and (c))
(the "Control Group") has established, maintained or contributed to any
employee benefit plan subject to Title IV of ERISA or the funding requirements
of Section 412 of the Code.
(v) Each of the Companies and each of the Benefit
Plans has been and presently is in compliance, both in form and operation, with
the applicable provisions of ERISA, the Code and all other applicable laws and
the regulations issued thereunder. Each of the Benefit Plans listed in
Schedule 4.1(ee) hereto that is intended to be a qualified plan pursuant to
Code ' 401(a) is so qualified and has received a favorable determination letter
to such effect within the last two years and no action or amendment has been
taken or made to adversely effect such determination letter. Each such
determination letter is attached hereto as Exhibit 4.1(ee). All reports
required by any governmental agency and disclosures required to be made to
participants and beneficiaries with respect to the Benefit Plans listed in
Schedule 4.1(ee) have been timely filed or made.
(vi No litigation is pending or, to the best of the
knowledge of Tenere, threatened with respect to any of the Benefit Plans listed
in Schedule 4.1(ee) hereto. There is no outstanding request for information
concerning any of the Benefit Plans listed in Schedule 4.1(ee) hereto by
participants, beneficiaries or governmental agencies. None of the Companies nor
any Benefit Plan fiduciary (as defined in ERISA ' 3(21)) has engaged in any
transaction in violation of ERISA ' 406(a) or (b) (for which no exemption
exists under ERISA ' 408) or any "prohibited transaction" (as defined in
' 4975(c)(2) or ' 4975(d) of the Code).
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(vii All contributions, premiums or other payments
for the Benefit Plans listed in Schedule 4.1(ee) hereto attributable to all
periods prior to the Closing Date have been made. Each of the Benefit Plans
listed in Schedule 4.1(ee) is fully funded or reserves are established and
listed therefor on the most recent financial statements of the Companies,
respectively. If any Benefit Plan listed in Schedule 4.1(ee) were to be
terminated the day following the Closing Date, the assets of such Benefit Plan
are, and would be, sufficient to provide all promised benefits including, if
necessary, to pay for the purchase of annuities from an A++ (Superior) Best
rated insurance company at the then prevailing annuity purchase rates.
(viii None of the Companies nor any member of the
Control Group has contributed to, has been obligated to contribute to, or
otherwise participated in any multiemployer plan, as defined in Section
4001(a)(3) of ERISA nor in any multiemployer plan as defined in Section 413(c)
of the Code.
(ix None of the Companies has provided, nor has any
obligation to provide, any medical, life of similar benefits to employees
following termination of employment except as required in ERISA ' 601. Each of
the Companies has complied with ERISA ' 601. None of the Companies has
contributed to a nonconforming group health plan (as defined in Code Section
5000(c) and no member of the Control Group has incurred a tax under Code
Section 5000(a) that is or could be a liability of the Companies.
(x All Benefit Plans listed in Schedule 4.1(ee)
hereto and related Contracts, trusts and agreements are legally valid and
binding and in full force and effect.
(xi No individual shall accrue or receive
additional benefits, service or accelerated vesting or rights to the payment as
a direct result of the transactions contemplated by this Agreement. No payment
or benefit accrued under any Benefit Plan or other agreement or arrangement
will be subject to Code ' 280G.
(ff Employees. Set forth in Schedule 4.1(ff)
hereto is a list of all employees, agents (other than insurance agents),
consultants and similar persons retained by each of the Companies together with
their present rate of compensation (including bonuses) and a description of any
existing or proposed written or oral agreements with any of them regarding such
employment or engagement. None of the Companies is a party to any collective
bargaining or other labor union contract applicable to persons employed by such
Company. No Company has breached or otherwise failed to comply in any material
respect with any provision of any such agreement or contract and there are no
formally filed grievances outstanding against any Company or, to Tenere's
knowledge, threatened, against any Company, under any such agreement or
contract. There are no unfair labor practice complaints pending or, to the
best knowledge of Tenere, threatened, against any of the Companies nor any
judicial or regulatory proceeding, investigation or inquiry or employee
complaint currently pending or, to the best knowledge of Tenere, threatened,
against any of the Companies relating to union representation or otherwise.
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Tenere is not aware of any current activities or proceedings of any labor union
(or representatives thereof) to organize any unorganized employees of any of
the Companies, nor of any strikes, slowdowns, work stoppages, lockouts or
written threats thereof, by or with respect to any employees of any of the
Companies. During the past five years, there have not been any formally filed
grievances involving employees of any of the Companies.
(gg Intellectual Property. There are no United
States or foreign patents or patent applications needed by any of the Companies
to operate their respective businesses. Set forth in Schedule 4.1(gg) hereto
is a complete list and summary description of all trademarks, trade names,
service marks, copyrights (whether registered or as to which registration has
been applied for in any jurisdiction) and fictitious names relating to the
business of each of the Companies and all common law trademarks, trade names,
service marks and other intellectual property used by each of the Companies,
none of which is owned by or licensed to anyone other than the Companies.
There is no existing or, to the best knowledge of Tenere, threatened
infringement, misuse or misappropriation by others or pending or threatened
claims by any of the Companies against others for infringement, misuse or
misappropriation of any patent, trademark, trade name, service mark, fictitious
name, copyright, trade secret, know-how or other intellectual property relating
to the business of any of the Companies.
(hh Brokers. All activities of the Companies
relating to this Agreement and the transactions contemplated hereunder have
been carried on by the Companies in such manner so as not to give rise to any
valid claim by any person for a finder's fee, brokerage commission or other
like payment other than the fee payable to ABN AMRO Incorporated in connection
with the fairness opinion to be issued as contemplated in Section 6.1(k) of
this Agreement.
(ii Surplus Relief. At December 31, 1997,
neither Intermed or Interlex was, currently is, or on the Closing Date will be,
subject to any surplus relief obligations or reinsurance contracts or
arrangements involving financings or otherwise.
(jj Insurance Issued by Intermed and Interlex.
(i All insurance or annuity contract
benefits payable by Intermed and Interlex and, to the knowledge of Tenere, by
any other person that is a party to or bound by any reinsurance, coinsurance,
or other similar contract with Intermed or Interlex have been paid in
accordance with the terms of the insurance and other contracts under which they
arose.
(ii No outstanding insurance issued,
reinsured, or underwritten by Intermed or Interlex entitles the holder thereof
or any other person to receive dividends, distributions, or other benefits
based on the revenues or earnings of any company or any other person.
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(iii All insurance and annuity contracts
offered, issued, reinsured or underwritten by Intermed and Interlex have been
duly approved under all applicable insurance laws and regulations and have been
fully reserved for as prescribed under such laws and regulations.
(iv The respective underwriting
standards utilized and ratings applied by Intermed and Interlex and, to the
best knowledge of Tenere, by any other person that is a party to or bound by
any reinsurance, coinsurance or other similar contracts with Intermed or
Interlex conform in all material respects to industry-accepted practices and to
the standards and ratings required pursuant to the terms of the respective
reinsurance, coinsurance, or other similar contracts.
(v All amounts (including without
limitation amounts based on paid and unpaid losses) to which each of Intermed
and Interlex is entitled under reinsurance, coinsurance, assumption fronting or
other similar contracts by which Intermed or Interlex insures, or is insured
by, a third person against loss or liability from risks assumed, are fully
collectible.
(vi Each insurance agent or general
agent employed by any of the Companies, and to the best knowledge of Tenere,
each other insurance agent or general agent, at the time such agent offered,
wrote, sold or produced business for Intermed or Interlex, was duly licensed as
an insurance agent for the business offered, written, sold or produced by such
agent in the particular jurisdiction in which such agent offered, wrote, sold
or produced such business for Intermed or Interlex. Except as set forth on
Schedule 4.1(jj), no such insurance agent, general agent or any group of
affiliated agents has written 5% or more of Intermed's or Interlex' total
in-force premium.
(vii To the best of Tenere's knowledge,
no insurance agent or general agent of Intermed or Interlex has violated (or
with or without notice or lapse of time or both, will or would have violated)
any term or provision of any law or any writ, judgment, decree, injunction or
similar order applicable to, or engaged in any misrepresentation with respect
to, the writing, sale or production of business for Intermed or Interlex.
(viii Neither Intermed nor Interlex has
ever issued any individual retirement annuity (within the meaning of section
408(b) of the Code) or any annuity contract intended to satisfy the
requirements of section 403(b) of the Code. Neither Intermed nor Interlex
serves or has sponsored or maintained any master, prototype, volume submitter,
mass submitter or similar type of retirement plan intended to qualify under
section 401(a) of the Code for the benefit of employees of another employer.
Neither Intermed nor Interlex serves or has served as plan administrator or
plan recordkeeper for any employee benefit program for the benefit of employees
of another employer.
(ix The tax treatment under the Code of
all Products (as hereinafter defined) is and at all times has been the same or
more favorable to the purchaser, policyholder or intended beneficiaries thereof
as the tax treatment under the Code for which such
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Products qualify or purported to qualify at the time of their offer, issuance or
purchase. Neither Intermed nor Interlex has ever issued any ERISA Product (as
hereinafter defined). For purposes of this Agreement, (i) the term "Products"
means all insurance, annuity or investment contracts, financial products,
employee benefit plans, individual retirement accounts or annuities or any
similar or related contracts or products, whether individual, group or
otherwise, at any time offered, issued or underwritten by Intermed or Interlex
and (ii) the term "ERISA Product" means any Product that constitutes an
arrangement that is intended to satisfy the requirements of section 79, 105,
401(a), 403(a), 403(b) or 408 of the Code.
(x None of the Products constitute
"life insurance" contracts as that term is defined in Code Section 7702(a).
(xi All reinsurance agreements between
either Intermed or Interlex and any non-licensed or non-approved insurer are
secured by letters of credit or other security meeting applicable statutory
requirements sufficient to allow Intermed or Interlex, as the case may be, to
take full credit in its accounting and financial statements for such
reinsurance.
(kk No Threatened Cancellation. Since January 1,
1997, no policyholder, group of policyholder Affiliates or persons writing,
selling or producing insurance business that individually or in the aggregate
accounted for 5% or more of the premium or annuity income determined in
accordance with SAP of either Intermed or Interlex for the year ended December
31, 1996, has terminated or, to the best knowledge of Tenere, threatened to
terminate, its relationship with Intermed or Interlex.
(ll Computer Software. Set forth on Schedule
4.1(ll) hereto is a complete and correct list and summary description of all
computer hardware, software and programs owned by or licensed to each of the
Companies or being utilized in connection with the business, operations or
affairs of any of the Companies. The computer hardware, software, programs and
similar systems set forth on Schedule 4.1(ll) hereto are all of the computer
hardware, software, programs and similar systems necessary to enable each of
the Companies to conduct their respective businesses as presently conducted.
Each of the Companies has, and at all times after Closing will have, the right
to use, free and clear of any royalty or other payment obligations (except as
disclosed in Schedule 4.1(ll)), to the best knowledge of the Companies claims
of infringement or alleged infringement or other liens all computer hardware,
software, programs and similar systems disclosed in Schedule 4.1(ll) hereto.
To the best knowledge of the Companies, none of the Companies is in conflict
with or in violation or infringement of, nor has any of the Companies received
any notice of any conflict with or violation or infringement of or any claimed
conflict with, any asserted rights of any other person with respect to any
computer hardware, software or programs, including without limitation any such
item disclosed on Schedule 4.1(ll) hereto. The hardware, software and all
related systems and applications (collectively, the "Computer Systems") of each
Company include design, performance and functionality so that the Companies do
not reasonably expect to experience invalid or incorrect results or abnormal
hardware or software operation related to calendar year 2000.
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(mm Books and Records. The minute books and
other similar records of each of the Companies contain a complete and correct
record, in all material respects, of all actions taken at all meetings and by
all written consents in lieu of meetings of the shareholders and board of
directors of each of the Companies, respectively and of each committee thereof.
The books and records of each of the Companies accurately reflect in all
material respects the business or condition of each of the Companies,
respectively, and have been maintained in all material respects in accordance
with good business and bookkeeping practices.
(nn No Investment Company. None of the Companies
is, and none of the Companies has registered as, an investment company within
the meaning of the Investment Company Act of 1940, as amended. None of the
Companies maintains any separate account or similar fund for the benefit of any
policyholder or annuitant.
(oo Investment Portfolio. Tenere has provided
FPIC with a complete and correct list as of June 30, 1998, of all stocks,
notes, debentures, bonds, mortgage loans, policy loans and other securities and
investments owned of record or beneficially by each of Intermed and Interlex,
which as of such date constituted the entire investment portfolio of each of
Intermed and Interlex (which portfolio with additions and deletions thereto in
the ordinary course of business as permitted by this Agreement is hereafter
called the "Investment Assets"). Each of Intermed and Interlex has good and
indefeasible title to its Investment Assets, and all of its Investment Assets
are in compliance with the requirements of all applicable laws and insurance
regulations. As of the Closing, the investment portfolios of Intermed and
Interlex shall consist of the Investment Assets, and each of Intermed and
Interlex shall own and have good and indefeasible title to its Investment
Assets.
(pp Discussions with Regulators. No employee,
agent or representative of any of the Companies has had any discussions or
communications with any regulators regarding an adverse change in Intermed's or
Interlex' or any of the other Companies' condition (financial or otherwise) or
regarding a material breach of market conduct requirements of Intermed or
Interlex or any of the other Companies.
(qq Regulatory Matters. No Company or any
Affiliate thereof has taken or agreed to take any action, and Tenere does not
have any knowledge of any fact or circumstance, that is reasonably likely to
materially impede or delay receipt of any consents of regulatory authorities
referred to in Section 4.1(d).
(rr State Takeover Laws. Each Company has taken
all necessary actions to exempt the transactions contemplated by this Agreement
from any applicable "moratorium", "fair price", "business combination",
"control share" or other anti-takeover laws, including, without limitation,
Sections 351.410 through 351.464 of the GBCLM.
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Section 4.2 Representations and Warranties of FPIC and Acquisition
Corporation. Each of FPIC and Acquisition Corporation represents, warrants and,
to the extent that an item relates to a future time period, covenants to Tenere
as follows:
(a Organization and Good Standing. Each of FPIC and
Acquisition Corporation is a Florida corporation, validly existing and in good
standing under the laws of the State of Florida.
(b Power and Authority. Each of FPIC and Acquisition
Corporation has all requisite power and authority to execute, deliver and
perform this Agreement and any other agreements or instruments contemplated
hereby to be executed by it. The execution, delivery and performance by FPIC
and Acquisition Corporation of this Agreement and any other agreements or
instruments contemplated hereby to be executed by FPIC and Acquisition
Corporation have been duly authorized by all requisite action on behalf of FPIC
and Acquisition Corporation and, except for obtaining the approval of this
Agreement by FPIC (as the sole shareholder of Acquisition Corporation) (which
approval FPIC shall give prior to the Closing Date), no other authorization or
approval by the Board of Directors or shareholder of FPIC or Acquisition
Corporation or any other Affiliate of FPIC is necessary to consummate the
transactions contemplated hereby. This Agreement constitutes, and each other
agreement contemplated hereby to be executed by FPIC or Acquisition Corporation
will constitute when executed and delivered, a valid and legally binding
obligation of FPIC and Acquisition Corporation enforceable against it in
accordance with their respective terms, except as enforceability may be limited
by bankruptcy, reorganization, insolvency, moratorium or other laws affecting
creditors rights generally and general principles of equity.
(c No Conflicts. The execution and delivery of this
Agreement and any other agreements and instruments contemplated hereby by FPIC
and Acquisition Corporation and the consummation of the transactions
contemplated hereby, in accordance with the terms hereof and thereof, upon
receipt of the consents and approvals contemplated by Section 4.2(d), will not
violate any existing provision of the Articles of Incorporation, Bylaws or
other organizational documents of FPIC or Acquisition Corporation or of any law
or violate any existing term or provision of any order, writ, judgment,
injunction or decree of any court or any other governmental department,
commission, board, bureau, agency or instrumentality applicable to either FPIC
or Acquisition Corporation or conflict with or result in a breach of any of the
terms, conditions or provisions of any agreement to which FPIC or Acquisition
Corporation is a party, or by which any of their respective properties are
bound, or constitute an event that might permit an early termination of or
otherwise materially affect any such agreement.
(d Consents and Approvals. No consent, license,
approval, order or authorization of, or registration, declaration or filing
with, any governmental authority, agency, bureau or commission or any third
party is required to be obtained or made by FPIC or Acquisition Corporation in
connection with the execution, delivery, performance, validity, and
enforceability of this Agreement, except for (i) filings to be made with, and
approvals to be
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obtained from, the Missouri Department and the insurance departments of other
states or jurisdictions, (ii) filings under the pre-merger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR")
and (iii) registrations, declarations or filings required to be made subsequent
to the Closing Date with any governmental entity or third party not entailing
any requirement of consent, license, approval, order or authorization on the
part of such governmental entity or third party.
(e Disclosure. Neither this Agreement nor any written
document, statement, list, schedule, exhibit, certificate or other instrument
furnished or to be furnished to Tenere by or on behalf of FPIC or Acquisition
Corporation in connection with the transactions contemplated hereby contains or
will contain when made or delivered any untrue statement of a material fact, or
fails to state or will fail to state when made or delivered a material fact
necessary to make the statements contained herein and therein not misleading.
There is no fact known to FPIC or Acquisition Corporation that materially
adversely affects, or in the future may materially adversely affect, the
condition (financial or otherwise), properties, assets, liabilities,
capitalization, ownership, business or operations of FPIC or Acquisition
Corporation.
(f Brokers. All activities of FPIC and Acquisition
Corporation relating to this Agreement and the transactions contemplated
hereunder have been carried on by FPIC and Acquisition Corporation in such
manner so as not to give rise to any valid claim by any person against Tenere
for a finder's fee, brokerage commission or other like payment.
ARTICLE 5
COVENANTS
Section 5.1 Covenants of Tenere. From the date hereof through the
Closing Date, Tenere will and will cause the Subsidiaries to:
(a Access to Information. Upon reasonable notice, give
FPIC and its attorneys, accountants, agents and representatives full access to
all the properties, books, records, contracts, commitments, employee benefit
plans, documents, instruments and other records of or pertaining to each of the
respective Companies and permit FPIC and its attorneys, accountants, agents and
representatives to consult with and ask questions of the officers and employees
of each Company; deliver to FPIC all audited or unaudited quarterly or annual
financial statements of each such Company prepared subsequent to the date of
this Agreement; and cooperate with and assist FPIC in discussions with
insurance regulators regarding each of the Companies' financial condition and
compliance with insurance laws and regulations.
(b Conduct of Business. Keep the books and records of
each Company consistent in all material respects with prior periods and, with
respect to Intermed and Interlex, in accordance with SAP and, with respect to
the consolidated group consisting of Tenere and the
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Subsidiaries, in accordance with GAAP, and conduct their respective businesses
and corporate affairs in the ordinary course consistent in all material respects
with past practices, and will not:
(i issue or sell any of their respective
capital stock, or any options, warrants, calls or securities convertible into
such capital stock, or enter into any agreement to do any of the foregoing, or
make any change in its capital structure either by way of stock split, stock
dividend or otherwise;
(ii) declare or pay any dividends or make
any distribution in respect of capital stock, or purchase, redeem or otherwise
acquire or retire any capital stock;
(iii) other than in the ordinary course of
business, without the prior written consent of FPIC enter into or assume any
contract or commitment, or terminate or amend any existing contract or
commitment, or incur or prepay any indebtedness for borrowed money;
(iv) make any loans or advance any funds
to anyone or extend credit;
(v) except as contemplated in this
Agreement, enter into, amend or accelerate any payment or contribution under any
employment, agency or consulting agreement or Benefit Plan;
(vi) other than in the ordinary course of
business, without the prior consent of FPIC, which consent shall not be
unreasonably withheld, hire any new employees or make any changes affecting the
rates of compensation of, or pay any bonuses to (other than accrued bonuses
under current Benefit Plans), or grant any other benefit to, their respective
current directors, officers, agents or employees;
(vii) other than in the ordinary course of
business, create or assume any mortgage or other lien or encumbrance on, or
dispose of, any of their respective assets or properties;
(viii) other than in the ordinary course of
business, acquire any assets or any properties or make any investments, or
enter into any agreements to acquire any assets or properties or to make any
investments;
(ix) except as permitted under Section
3.4, merge or consolidate with any other corporation, or acquire or agree to
acquire any stock (except investments in the ordinary course of business) of
any person, firm, association, corporation or other business organization;
(x) make any change in their respective
Articles of Incorporation or Bylaws;
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(xi) without the prior written consent of FPIC,
enter into any arrangement with any person with respect to any United States or
foreign patents, patent applications, trademarks, service marks, applications
for registration of trademarks or service marks, trade names, fictitious names,
copyrights, know-how or trade secrets owned by any of them, or in any way
relating to their respective businesses;
(xii) without the prior written consent of FPIC,
make any election with respect to the computation of taxes or take any position
in any tax return that could have an adverse effect on any of the Companies;
(xiii) other than in the ordinary course of business,
without the prior written consent of FPIC make any other change in their
businesses, business practices or operations; or
(xiv) enter into any agreement to do any of the
foregoing.
(c Consultation with FPIC Pending Closing. Confer and
consult with FPIC on all material business decisions affecting the future
performance of each of the Companies, other than decisions made in the ordinary
course of business consistent in all material respects with past practices,
including in particular with respect to Intermed and Interlex on all material
business decisions involving (i) increases or decreases in the credited rate of
insurance products issued by Intermed or Interlex and (ii) Intermed's and
Interlex' investment policy.
(d Disposition of Shares. With respect to Tenere, not
dispose of, encumber or grant any rights regarding any of the capital stock of
any Subsidiary.
(e Intercompany Accounts. At least five days before the
Closing, deliver to FPIC a complete and correct list and summary description of
all intercompany accounts between Tenere, Intermed, Interlex and/or ISI, or any
Affiliate of Tenere.
(f Preservation of Business. Use all reasonable efforts
to (i) preserve intact each of the Companies' present business organization,
reputation, employees, agents, customers and suppliers, and with respect to
Intermed and Interlex, relations with policyholders, (ii) maintain all licenses
of each of the Companies to do business in each jurisdiction in which they are
so licensed, (iii) maintain in full force and effect all agreements of each
Company (except as otherwise contemplated by this Agreement) and (iv) maintain
all assets and properties of each Company in good working order and condition,
ordinary wear and tear excepted.
(g Investment Portfolio Requirements. Notify and obtain
the written approval of FPIC, which approval shall not be unreasonably
withheld, prior to making any changes to Intermed's or Interlex' investment
portfolio or the Investment Assets that are not in the ordinary course of
business or that are inconsistent in any material respect with Intermed's or
Interlex' present or past investment practices and policies.
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(h Surplus Items. Take no actions other than in the
ordinary course of business as contemplated by this Agreement or as required by
law, without the prior written consent of FPIC, that could cause or result in a
reduction in the amount of Intermed's or Interlex' aggregate statutory capital,
surplus, asset valuation reserve and interest maintenance reserve, as set forth
in the Intermed's Interlex' Quarterly Statements for the quarter ended June 30,
1998.
(i Notice and Cure. Notify FPIC promptly in writing of,
and contemporaneously provide FPIC with complete and correct copies of any and
all information or documents relating to, and use all reasonable efforts to
cure before the Closing, any event, development, transaction or circumstance
occurring after the date of this Agreement that causes or could cause any
covenant or agreement of Tenere under this Agreement to be breached, or that
renders or could render untrue any representation or warranty of Tenere
contained in this Agreement as if the same were made on or as of the date of
such event, development, transaction or circumstance; and use all reasonable
efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by Tenere in this
Agreement, whether occurring or arising before or after the date of this
Agreement.
(j Further Actions. Execute, acknowledge and deliver
any further documents, including, but not limited to, any financial statements
of Intermed and Interlex filed with the Missouri Department after the date
hereof, reasonably requested by FPIC consistent with the terms of this
Agreement.
(k Reasonable Efforts. Use its reasonable efforts to
fulfill, as soon as practicable, all of the conditions contained in Section 6.1
hereof.
(l Fund Plan Deficits. If requested by FPIC fund any
and all actuarial deficits existing in any Benefit Plan listed on Schedule
4.1(ee ) of this Agreement except to the extent that such funding could (i)
cause the Benefit Plan to fail to qualify under section 401(a) of the Code with
respect to some or all persons with beneficial interests in the Benefit Plan
(determined without regard to any modification to the Benefit Plan's benefit
formula that could be made to prevent such disqualification) or (ii) cause the
imposition of an excise tax under section 4972 of the Code.
Section 5.2 Covenants of FPIC and Acquisition Corporation. From the
date hereof through the Closing Date, FPIC and Acquisition Corporation will
each:
(a Further Actions. Execute, acknowledge and deliver
any further documents reasonably requested by Tenere consistent with the terms
of this Agreement.
(b) Reasonable Efforts. Use their reasonable efforts to
fulfill, as soon as practicable, all of the conditions contained in Section 6.2
hereof.
(c) Notice and Cure. Notify Tenere promptly in writing
of, and contemporaneously provide Tenere with complete and correct copies of,
any and all information
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or documents relating to, and use all reasonable efforts to cure before the
Closing, any event, development, transaction or circumstance occurring after the
date of this Agreement that causes or could cause any covenant or agreement of
FPIC or Acquisition Corporation under this Agreement to be breached, or that
renders or could render untrue any representation or warranty of FPIC or
Acquisition Corporation contained in this Agreement as if the same were made on
or as of the date of such event, development, transaction or circumstance; and
use all reasonable efforts to cure, before the Closing, any violation or breach
of any representation, warranty, covenant or agreement made by FPIC or
Acquisition Corporation in this Agreement, whether occurring or arising before
or after the date of this Agreement.
ARTICLE 6
CONDITIONS PRECEDENT
Section 6.1 FPIC and Acquisition Corporation. The obligations of
FPIC and Acquisition Corporation to consummate the transactions provided for in
this Agreement shall be subject to the fulfillment, on or prior to the Closing
Date, of the following conditions:
(a Representations and Warranties. The representations
and warranties of Tenere set forth in this Agreement shall, (i) to the extent
such representations and warranties are not qualified by a materiality
standard, be true and correct in all material respects on the Closing Date as
if made on and as of the Closing Date and (ii) to the extent such
representations and warranties are qualified by a materiality standard, be true
and correct in all respects on the Closing Date as if made on and as of the
Closing Date, and FPIC shall have received a certificate to such effect
executed on behalf of Tenere by its Chief Executive Officer and Chief Financial
Officer and dated as of the Closing Date.
(b Performance of Obligations. Tenere and the
Subsidiaries shall have performed in all material respects all of their
obligations contained in this Agreement to be performed on or prior to the
Closing Date, and FPIC shall have received a certificate to such effect,
executed on behalf of Tenere by its Chief Executive Officer and Chief Financial
Officer and dated as of the Closing Date.
(c Authorization. All corporate action necessary to
authorize the execution, delivery and performance by Tenere of this Agreement,
and the consummation of the transactions contemplated hereby, shall have been
duly and validly taken by Tenere and Tenere shall have furnished FPIC with
copies of all applicable resolutions adopted by the Board of Directors and
shareholders of Tenere certified by the Secretary or Assistant Secretary of
Tenere.
(d Threatened or Pending Proceedings. No proceedings
shall have been threatened or initiated by any person to enjoin or restrain the
consummation of the transactions contemplated hereby or seeking damages or
other relief as a result thereof.
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(e Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired without objection or been terminated and any
necessary approval of the Missouri Department and the insurance departments of
other states and jurisdictions, and all other consents of any person required
to permit the consummation of the transactions contemplated by this Agreement
without any violation by FPIC, Acquisition Corporation, Tenere or the
Subsidiaries of any law or obligation shall have been obtained and such
approvals and consents shall not contain any materially burdensome conditions
or requirements on or applicable to FPIC, Acquisition Corporation, Tenere or
any Subsidiary.
(f Legal Opinions. FPIC shall have received the opinion
of Thompson Coburn, substantially in the form attached hereto as of Exhibit
6.1(f).
(g No Adverse Change. Since June 30, 1998, there shall
not have been, occurred or arisen any event, development, transaction,
condition or state of facts of any character (including without limitation any
damage, destruction or loss whether or not covered by insurance or reinsurance)
that individually or in the aggregate has or could have a Material Adverse
Effect on or with respect to any Company.
(h Secretary's Certificates. FPIC shall have received
from Tenere (i) a certificate dated the Closing Date from Tenere's Secretary
attaching (A) a copy of Tenere's Articles of Incorporation certified by the
Secretary of State of Missouri, which certification shall be dated not more
than ten days prior to the Closing Date, (B) a copy of Tenere's Bylaws, and (C)
a Good Standing Certificate for Tenere from the Secretary of State of Missouri,
which Certificate shall be dated no more than ten days prior to the Closing
Date, (ii) a certificate dated the Closing Date from Intermed's Secretary
attaching (A) a copy of Intermed's Articles of Incorporation, certified by the
Missouri Secretary of State, which certification shall be dated not more than
ten days prior to the Closing Date, (B) a copy of Intermed's Bylaws, (C) a Good
Standing Certificate for Intermed from the Missouri Secretary of State, which
Certificate shall be dated not more than ten days prior to the Closing Date, and
(D) Certificates of Status and Authority for Intermed from the Missouri
Department and the Kansas Department of Insurance, (iii) a certificate dated the
Closing Date from Interlex' Secretary attaching (A) a copy of Interlex' Articles
of Incorporation, certified by the Missouri Secretary of State, which
certification shall be dated not more than ten days prior to the Closing Date,
(B) a copy of Interlex' Bylaws, (C) a Good Standing Certificate for Interlex
from the Missouri Secretary of State, which Certificate shall be dated not more
than ten days prior to the Closing Date and (D) Certificates of Status and
Authority for Interlex from the Missouri Department and the Kansas Department,
(iv) a certificate dated the Closing Date from ISI's Secretary attaching (A) a
copy of ISI's Certificate of Incorporation, certified by the Missouri Secretary
of State, which certification shall be dated not more than ten days prior to the
Closing Date, (B) a copy of ISI's Bylaws and (C) a Good Standing Certificate for
ISI from the Missouri Secretary of State, which Certificate shall be dated not
more than ten days prior to the Closing Date, and (v) a certificate dated the
Closing Date from Trout's Secretary attaching (A) a copy of Trout's Articles of
Incorporation, certified by the Missouri
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Secretary of State, which certification shall be dated not more than ten days
prior to the Closing Date, (B) a copy of Trout's bylaws, and (C) a Good Standing
Certificate for Trout from the Missouri Secretary of State, which Certificate
shall be dated not more than ten days prior to the Closing Date.
(i Shareholder Approval. Tenere's shareholders shall
have approved this Agreement and the Merger and Tenere shareholders holding
more than ten percent of the outstanding Tenere's Stock shall not have
delivered to Tenere a written objection to the Merger pursuant Section 351.455
of the GBCLM.
(j Fairness Opinion. Tenere shall have received from
ABN AMRO Incorporated, as of the date of the mailing of the proxy statement of
Tenere to its shareholders with respect to the Merger, its opinion that the
terms of the Merger are fair to the shareholders of Tenere from a financial
point of view, and such opinion shall not have been withdrawn between the date
of its delivery and the Effective Time.
(k Resignation of Directors. Each member of Tenere's
Board of Directors shall have executed and delivered a resignation from such
Board, effective immediately following the Effective Time.
Section 6.2 Conditions to the Obligations of Tenere. The obligation
of Tenere to consummate the transactions provided for in this Agreement shall
be subject to the fulfillment, on or prior to the Closing Date, of the
following conditions:
(a Representations and Warranties. The representations
and warranties of FPIC and Acquisition Corporation set forth in this Agreement
shall, to the extent such representations and warranties are not qualified by a
materiality standard, be true and correct in all material respects on the
Closing Date as if made on and as of the Closing Date, and the representations
and warranties of FPIC and Acquisition Corporation set forth in this Agreement
shall, to the extent such representations and warranties are qualified by a
materiality standard, be true and correct in all respects on the Closing Date
as if made on and as of the Closing Date, and Tenere shall have received
certificates to such effect, executed on behalf of FPIC and Acquisition
Corporation by their respective Chief Executive Officers and Chief Financial
Officers, and dated as of the Closing Date.
(b Performance of Obligations. FPIC and Acquisition
Corporation shall have performed in all material respects all of their
respective obligations contained in this Agreement to be performed on or prior
to the Closing Date, and Tenere shall have received certificates to such
effect, executed on behalf of FPIC and Acquisition Corporation by their
respective Chief Executive Officers and Chief Financial Officers, and dated as
of the Closing Date.
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(c Threatened or Pending Proceedings. No proceedings
shall have been threatened or initiated by any person to enjoin or restrain the
consummation of the transactions contemplated hereby or seeking damages or
other relief as a result thereof.
(d Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired without objection or been terminated and any
necessary approvals of the Missouri Department and the insurance departments of
other states or jurisdictions and all other consents listed on Schedule 4.1(d)
required to permit consummation of the transactions contemplated by this
Agreement without any violation by Tenere or the Subsidiaries of any law or
obligation shall have been obtained.
(e Legal Opinion. Tenere shall have received the
opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P., substantially in the form
attached hereto as Exhibit 6.2(e).
(f Shareholder Approval. The Tenere shareholders shall
have approved the Merger.
(g Authorization. All corporate action necessary to
authorize the execution, delivery and performance by FPIC and Acquisition
Corporation of this Agreement, and the consummation of the transactions
contemplated hereby, shall have been duly and validly taken by FPIC and
Acquisition Corporation, and FPIC and Acquisition Corporation shall have
furnished Tenere with copies of all applicable resolutions adopted by their
respective Boards of Directors, certified in each case by a Secretary or
Assistant Secretary of FPIC and Acquisition Corporation, respectively.
(h Deposit with Exchange Agent. There shall have been
deposited with the Exchange Agent the Exchange Fund in accordance with Section
2.3(a).
(i Fairness Opinion. Tenere shall have received from
ABN AMRO Incorporated, as of the date of the mailing of the proxy statement of
Tenere to its shareholders with respect to the Merger, its opinion that the
terms of the Merger are fair to the shareholders of Tenere from a financial
point of view, and such opinion shall not have been withdrawn between the date
of its delivery and the Effective Time.
ARTICLE 7
CLOSING
Section 7.1 Closing. A closing (the "Closing") for the consummation
of the transactions contemplated herein shall be held at the offices of
LeBoeuf, Lamb, Greene & MacRae, L.L.P., Jacksonville, Florida, at 10:00 A.M.,
local time, on the second business day following the date on which all of the
conditions set forth in Article 6 have been (or can be at the Closing)
satisfied or have been waived by the party permitted to do so (the "Closing
Date").
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Section 7.2 Filings at the Closing. Subject to the provisions of
Article 6 hereof, FPIC and Tenere shall at the Closing cause the Articles of
Merger to be filed and recorded in accordance with the provisions of Section
607.1105 of the FBCA and Sections 351.410 and 351.458 of the GBCLM and shall
take any and all other lawful actions and do any and all other lawful things
necessary to cause the Merger to become effective.
ARTICLE 8
TERMINATION
Section 8.1 Termination. This Agreement, other than the obligations
contained in Section 3.5(f), Article 9 and Section 10.2, which shall survive
any termination of this Agreement, may be terminated as to all parties hereto
and the transactions contemplated herein abandoned prior to the Closing:
(a by the mutual consent of the parties hereto;
(b by FPIC at any time after February 15, 1999, if at
such time the conditions set forth in Section 6.1 hereof have not been
satisfied through no fault of FPIC or Acquisition Corporation and FPIC gives
Tenere notice of such termination;
(c by FPIC at any time after holders of greater than ten
percent of the outstanding Tenere's Stock have delivered to Tenere a written
objection to the Merger pursuant to the provisions for dissenters' rights
provided by the GBCLM;
(d by Tenere at any time after February 15, 1999, if at
such time the conditions set forth in Section 6.2 hereof have not been
satisfied through no fault of Tenere or any other party and Tenere gives FPIC
notice of such termination;
(e by Tenere in accordance with the provisions of Section
3.4; and
(f by FPIC and Acquisition Corporation in accordance with
the provisions of Section 3.4.
Termination of this Agreement as provided in this
Agreement shall not affect any other rights or remedies any party may have at
law, in equity or otherwise for breach of this Agreement or otherwise,
including, but not limited to, any right FPIC and Acquisition Corporation may
have to receive the fee specified in Section 3.4(e) hereof.
ARTICLE 9
CONFIDENTIALITY
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Section 9.1 Confidentiality. From and after the date hereof, unless
otherwise agreed to by the parties, each of the parties shall keep, and shall
ensure that its directors, officers, employees, contractors, consultants and
agents keep, confidential all information acquired from another party pursuant
to this Agreement or otherwise, including the contents of this Agreement and any
document delivered pursuant thereto or in connection therewith, except that the
foregoing restriction shall not apply to any information that: (i) is or
hereafter becomes generally available to the public other than by reason of any
default with respect to a confidentiality obligation under this Agreement, (ii)
was already known to the recipient party as evidenced by prior written documents
in its possession (unless the information is covered by a prior confidentiality
agreement between the parties), (iii) is disclosed to the recipient party by a
third party who is not in default of any confidentiality obligation to the
disclosing party hereunder, (iv) is developed by or on behalf of the receiving
party, without reliance on confidential information received hereunder, (v) is
submitted by the recipient party to governmental authorities or regulatory
bodies to facilitate the issuance of approvals necessary or appropriate for the
operation of their businesses, provided that reasonable measures shall be taken
to assure confidential treatment of such information, (vi) is provided by the
recipient party to third parties under appropriate terms and conditions,
including confidentiality provisions substantially equivalent to those in this
Agreement and with the consent of the other party or (vii) is otherwise required
to be disclosed in compliance with applicable laws or regulations or order by a
court or other government authority or regulatory body having competent
jurisdiction. Without limiting the generality of the foregoing, no press release
or similar public announcement or disclosure concerning this Agreement or the
transactions contemplated herein shall be made by any party hereto without the
prior consent of the other parties unless the party making the announcement or
disclosure is informed by such party's counsel that such information is required
to be disclosed in compliance with applicable laws or regulations or order by a
court or other government authority or regulatory body having competent
jurisdiction. Any party shall be entitled, in addition to any other right or
remedy it may have, at law or in equity, to an injunction, without the posting
of any bond or other security, enjoining or restraining the other parties from
any violation or threatened violation of this Section.
ARTICLE 10
MISCELLANEOUS
Section 10.1 Consent to Jurisdiction and Service of Process. Any
legal action, suit or proceeding arising out of or relating to this Agreement
or the transactions contemplated hereby may be instituted in any state or
federal court sitting in Duval County, Florida or Greene County, Missouri, and
each party agrees not to assert as a defense in any such action, suit or
proceeding, any claim that it is not subject personally to the jurisdiction of
such court, that the action, suit or proceeding is brought in an inconvenient
forum, that the venue of the action, suit or proceeding is improper or that
this Agreement or the subject matter hereof may not be enforced in or by such
court. Any and all service of process and any other notice in any such action,
suit or proceeding shall be effective against a party if given properly
pursuant to the United States Federal Rules of Civil Procedure or other
applicable rules.
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<PAGE> 41
Section 10.2 Expenses. Each party shall bear its respective legal
and other costs and expenses incurred in connection with the preparation,
execution, delivery and performance of this Agreement and the transactions
contemplated hereby without right of reimbursement from any other party.
Section 10.3 Notices. All notices and other communications
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed (with appropriate answerback received), sent by facsimile transmission
(with immediate confirmation thereafter) or sent by registered, certified or
express mail, postage prepaid, return receipt requested, or sent by a
nationally recognized overnight courier service, marked for overnight delivery.
Any such notice shall be deemed given when so delivered personally,
telegraphed, telexed (provided the correct answerback is received) or sent by
facsimile transmission (provided confirmation is received immediately
thereafter); or if mailed, upon receipt or rejection by the addressee; or if
sent by overnight courier, one business day after the date of delivery to the
courier service marked for overnight delivery; in each case addressed as
follows:
(a) If to FPIC or Acquisition Corporation, to:
Florida Physicians Insurance Company, Inc.
1000 Riverside Avenue, Suite 800
Jacksonville, Florida 32204
Attention: William R. Russell
Telephone: (904)354-5910
Facsimile: (904)350-1049
with a copy to:
John R. Byers, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
50 North Laura Street, Suite 2800
Jacksonville, FL 32202-3650
Telephone: 904/354-8000
Facsimile: 904/353-1673
40
<PAGE> 42
(b) If to Tenere, to:
The Tenere Group, Inc.
1903 E. Battlefield
Springfield, Missouri 65804-3801
Attention: Raymond A. Christy, M.D.
Telephone: (417) 889-1010
Facsimile: (417) 889-1099
with a copy to:
Robert M. LaRose, Esq.
Thompson Coburn
One Mercantile Center
St. Louis, Missouri 63101
Telephone: 314/552-6000
Facsimile: (314) 552-7000
or to such other address as the parties hereto may specify from time to time by
notice given as provided herein.
Section 10.4 Amendment. This Agreement may be amended only by an
instrument in writing executed by each of the parties hereto.
Section 10.5 Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
Section 10.6 Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of Florida, without
regard to principles of conflicts of laws.
Section 10.7 Entire Agreement. This Agreement, together with the
Exhibits and Schedules hereto, sets forth the entire agreement and
understanding among the parties hereto with respect to the subject matter
hereof and supersedes any prior negotiations, agreements, understandings or
arrangements between the parties hereto with respect to the subject matter
hereof.
Section 10.8 Waivers. The provisions of this Agreement may only
be waived by an instrument in writing executed by the party granting the
waiver. The failure of a party at any time or times to require performance of
any provision hereof in any instance shall in no manner affect the right of
such party at a later time to enforce the same or any other provision of this
Agreement in respect of any subsequent instance. No waiver of any condition or
of the breach of any term contained in this Agreement in one or more instances
shall be deemed to be or construed as a
41
<PAGE> 43
further or continuing waiver of such condition in respect of any subsequent
instance or breach or a waiver of any other condition or of the breach of any
other term of this Agreement. Without limiting the generality of the foregoing,
no action taken pursuant to this Agreement, other than proceeding with the
consummation of the transactions contemplated herein, shall be deemed to
constitute a waiver by the party taking such action or of compliance with any
representations, warranties, covenants or agreements contained in this
Agreement.
Section 10.9 Interpretation. When a reference is made in this
Agreement to Articles, Sections, Exhibits or Schedules, such reference shall be
to an Article, Section, Exhibit or Schedule, respectively, of this Agreement
unless otherwise indicated. The table of contents and the headings contained
in this Agreement are for reference purposes only and shall not affect the
meaning or interpretation hereof.
Section 10.10 No Assignment. This Agreement and the rights,
interests and obligations hereunder may not be assigned by any party hereto, by
operation of law or otherwise, without the prior written consent of the other
parties, except that FPIC may assign all of its rights, interests and
obligations hereunder to FPIC Insurance Group, Inc., provided that FPIC
Insurance Group, Inc. agrees in writing to be bound by all of the terms,
conditions and provisions contained herein.
Section 10.11 No Survival of Representations and Warranties. The
respective representations and warranties, obligations, covenants and
agreements contained in this Agreement or in any Schedule, certificate or
letter delivered pursuant hereto shall expire and be terminated and
extinguished at the Effective Time.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE TENERE GROUP, INC.
By
--------------------------------------------------------
Raymond A. Christy, M.D., President
and Chief Executive Officer
FLORIDA PHYSICIANS INSURANCE
COMPANY, INC.
By
--------------------------------------------------------
TGI ACQUISITION CORPORATION
42
<PAGE> 44
By
-------------------------------------------------------
43
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.3 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.5 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.6 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE 2 EFFECT OF THE MERGER ON SHAREHOLDERS AND OPTION HOLDERS . . . . . . . . . . . . . . . . . . . . . 2
Section 2.1 Conversion of Tenere's Common Stock and
Options and Acquisition Corporation's Common Stock . . . . . . . . . . . . . . . . . . 2
Section 2.2 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.3 Exchange of Shares and Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2.4 No Further Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 2.5 Closing of Tenere's Stock Transfer Books. . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE 3 CERTAIN AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.1 Due Diligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 3.2 Communications With Agents, Employees or Policyholders . . . . . . . . . . . . . . . 5
Section 3.3 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.4 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 3.5 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.6 Certain Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
i
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<TABLE>
<S> <C>
Section 3.7 Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.8 List of Shareholders and Optionees . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.9 Directors' and Officers' Indemnification . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.1 Representations and Warranties of Tenere . . . . . . . . . . . . . . . . . . . . . . 9
Section 4.2 Representations and Warranties of FPIC
and Acquisition Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE 5 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.1 Covenants of Tenere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Section 5.2 Covenants of FPIC and Acquisition Corporation . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 6 CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 6.1 FPIC and Acquisition Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 7 CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 37
Section 7.1 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Section 7.2 Filings at the Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE 8 TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 9 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 9.1 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 10 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 10.1 Consent to Jurisdiction and Service of Process . . . . . . . . . . . . . . . . . . . 39
Section 10.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 10.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 10.4 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.8 Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.9 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 10.10 No Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 10.11 No Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . 42
</TABLE>
ii
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AMENDMENT NO. 1
TO
AGREEMENT AND PLAN OF MERGER
The AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment No.
1") is entered into as of this ____ day of January, 1999 by and among FLORIDA
PHYSICIANS INSURANCE COMPANY, INC., a Florida corporation ("FPIC"), TGI
ACQUISITION CORPORATION, a Florida corporation (the "Acquisition Corporation"),
and THE TENERE GROUP, INC., a Missouri corporation ("Tenere").
RECITALS
WHEREAS, on October 2, 1998, each of FPIC, Acquisition Corporation and
Tenere executed and delivered an Agreement and Plan of Merger (the "Merger
Agreement"), pursuant to which FPIC would acquire all of the outstanding stock
of Tenere through the merger of Acquisition Corporation with and into Tenere in
accordance with the Merger Agreement, and
WHEREAS, FPIC, Acquisition Corporation and Tenere now desire to modify
and amend the Merger Agreement as set forth herein.
NOW, THEREFORE, in consideration of the Merger Agreement and the mutual
covenants and agreements herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto covenant and agree as follows:
1. Capitalized Terms. Unless otherwise defined herein, all capitalized
terms used herein shall have the meanings ascribed thereto in the Merger
Agreement.
2. Amendment. Article 8 of the Merger Agreement shall be deleted in its
entirety and replaced with the following:
ARTICLE 8
TERMINATION
Section 8.1 Termination. This Agreement, other than the
obligations contained in Section 3.4(f), Article 8 and Section 10.2,
which shall survive any termination of this Agreement, may be terminated
as to all parties hereto and the transactions contemplated herein
abandoned prior to the Closing:
(a) by the mutual consent of the parties hereto;
<PAGE> 48
(b) by FPIC at any time after March 31, 1999. If at such time
the conditions set forth in Section 5.1 hereof have not been satisfied
through no fault of FPIC or Acquisition Corporation and FPIC gives Tenere
notice of such termination;
(c) by FPIC at any time after holders of greater than ten
percent of the outstanding Tenere's Stock have delivered to Tenere a
written objection to the Merger pursuant to the provisions for
dissenters' rights provided by the GBCLM;
(d) by Tenere at any time after March 31, 1999, if at such time
the conditions set forth in Section 6.2 hereof have not been satisfied
through no fault of Tenere or any other party and Tenere gives FPIC
notice of such termination;
(e) by Tenere in accordance with the provisions of Section 3.4;
and
(f) by FPIC and Acquisition Corporation in accordance with the
provisions of Section 3.4.
Termination of this Agreement as provided in this Agreement shall
not affect any other rights or remedies any party may have at law, in
equity or otherwise for breach of this Agreement or otherwise, including,
but not limited to, any right FPIC and Acquisition Corporation may have
to receive the fee specified in Section 3.4(a) hereof.
3. Ratification of Merger Agreement. Except as specifically provided
herein, the Merger Agreement shall remain in full force and effect and is
expressly ratified hereby.
4. Counterparts. This Amendment No. 1 may be executed in any number of
counterparts each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5. Governing Law. This Amendment No. 1 shall be governed by and
construed in accordance with the laws of the State of Florida, without regard to
principles of conflicts of laws.
<PAGE> 49
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.
FLORIDA PHYSICIANS INSURANCE COMPANY, INC.
By:
------------------------------------------------------
Name: Robert B. Finch
Title: Senior Vice President and
Chief Financial Officer
TGI ACQUISITION CORPORATION
By:
------------------------------------------------------
Name: Robert B. Finch
Title: Vice President and Secretary
THE TENERE GROUP, INC.
By:
------------------------------------------------------
Name:
Title: President/CEO
<PAGE> 50
AMENDMENT NO. 2 TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 2 to Agreement and Plan of Merger (this "Amendment")
is made as of March ___, 1999, among FLORIDA PHYSICIANS INSURANCE COMPANY, INC.,
a Florida corporation ("FPIC"), TGI ACQUISITION CORPORATION, a Florida
corporation ("Acquisition Corporation"), and THE TENERE GROUP, INC., a Missouri
corporation ("Tenere").
RECITALS:
WHEREAS, FPIC, Acquisition Corporation and Tenere have previously entered
into an Agreement and Plan of Merger, dated October 2, 1998 (the "Merger
Agreement"), as amended by Amendment No. 1 dated January __, 1999 pursuant to
which FPIC would acquire all of the outstanding stock of Tenere through the
merger of Acquisition Corporation into Tenere in accordance with the terms and
conditions of the Merger Agreement; and
WHEREAS, certain amendments to the Merger Agreement have now become
necessary;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, FPIC, Acquisition Corporation, and Tenere
hereby agree as follows:
1. The references in Section 2.3 "Exchange of Shares and Options" to
"Schedule 4.1(e) (as revised pursuant to Section 3.9)" are hereby amended to
read "Schedule 4.1(e) (as revised pursuant to Section 3.8)."
2. The reference in Section 4.1(hh) "Brokers" to "the fairness opinion to
be issued as contemplated in Section 6.1(k) . . ." is hereby amended to read
"the fairness opinion to be issued as contemplated in Section 6.1(i)."
3. The reference in the first paragraph of Section 8.1 "Termination" to
"obligations contained in Section 3.5(f). . ." is hereby amended to read
"obligations contained in Section 3.4(f) . . .," and the reference in the last
paragraph of Section 8.1 to the "fee specified in Section 3.4(e)" is hereby
amended to read "fee specified in Section 3.4(f) . . . ."
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2
to Agreement and Plan of Merger as of the day and year first above written.
<PAGE> 51
THE TENERE GROUP, INC.
----------------------------------------------------
Raymond A. Christy, M.D., President and Chief
Executive Officer
FLORIDA PHYSICIANS INSURANCE
COMPANY, INC.
----------------------------------------------------
By:
Its:
TGI ACQUISITION CORPORATION
----------------------------------------------------
By:
Its:
<PAGE> 1
Exhibit 21
The following is a list of wholly-owned subsidiaries, unless otherwise noted, of
FPIC Insurance Group, Inc. as of December 31, 1998:
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------- -----------------------
<S> <C>
Florida Physicians Insurance Company, Inc. (FPIC) Florida
Anesthesiologists' Professional Assurance Company Florida
FPIC Insurance Agency, Inc. Florida
McCreary Corporation Florida
Employers Mutual, Inc. Florida
FPIC Services, Inc. Florida
SyMed Development, Inc. Tennessee
PSOptions, Inc. Florida
Polaris Insurance Group, Inc. Florida
(50% owned by FPIC)
FPIC Publishing, Inc. Florida
</TABLE>
<PAGE> 1
Exhibit 23.
The Board of Directors
FPIC Insurance Group, Inc.
We consent to the use of our report dated March 5, 1999 relating to the
consolidated balance sheets of FPIC Insurance Group, Inc. as of December 31,
1998 and 1997 and the related consolidated statements of income, comprehensive
income, changes in shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998 incorporated herein by
reference in the registration statement on Forms S-8 of FPIC Insurance Group,
Inc.'s Director Stock Option Plan (333-72601), and Omnibus Incentive Plan
(333-72599), and Florida Physicians Insurance Company's Employee Stock Purchase
Plan (333-09365) and Defined Contribution Plan (333-09375).
KPMG LLP
Jacksonville, Florida
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FPIC Insurance Group, Inc. for the twelve months ended
December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 325,923
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 10,328
<MORTGAGE> 0
<REAL-ESTATE> 4,582
<TOTAL-INVEST> 345,004
<CASH> 7,063
<RECOVER-REINSURE> 3,190
<DEFERRED-ACQUISITION> 2,001
<TOTAL-ASSETS> 479,378
<POLICY-LOSSES> 242,377
<UNEARNED-PREMIUMS> 44,310
<POLICY-OTHER> 5,767
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 27,165
0
0
<COMMON> 952
<OTHER-SE> 144,357
<TOTAL-LIABILITY-AND-EQUITY> 479,378
89,562
<INVESTMENT-INCOME> 17,549
<INVESTMENT-GAINS> (39)
<OTHER-INCOME> 13,249
<BENEFITS> 67,362
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 12,549
<INCOME-PRETAX> 28,864
<INCOME-TAX> 8,172
<INCOME-CONTINUING> 20,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,693
<EPS-PRIMARY> 2.22
<EPS-DILUTED> 2.11
<RESERVE-OPEN> 188,086
<PROVISION-CURRENT> 81,694
<PROVISION-PRIOR> (14,333)
<PAYMENTS-CURRENT> 14,279
<PAYMENTS-PRIOR> 49,697
<RESERVE-CLOSE> 242,377
<CUMULATIVE-DEFICIENCY> 13,325
</TABLE>
