<PAGE> 1
REGISTRATION NO. 333-9129
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SYMONS INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
INDIANA 6331 35-1707115
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
4720 KINGSWAY DRIVE ALAN G. SYMONS
INDIANAPOLIS, INDIANA 46205 4720 KINGSWAY DRIVE
(317) 259-6300 INDIANAPOLIS, INDIANA 46205
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE (317) 259-6300
NUMBER, INCLUDING (NAME, ADDRESS, INCLUDING ZIP CODE, AND
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE TELEPHONE NUMBER,
OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
COPY TO:
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<S> <C>
CATHERINE L. BRIDGE, ESQ. LARS BANG-JENSEN, ESQ.
BARNES & THORNBURG ROBERT S. RACHOFSKY, ESQ.
1313 MERCHANTS BANK BUILDING LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.
11 S. MERIDIAN STREET 125 WEST 55TH STREET
INDIANAPOLIS, INDIANA 46204 NEW YORK, NEW YORK 10019-5389
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS PROMPTLY AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
SYMONS INTERNATIONAL GROUP, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
FOR REGISTRATION STATEMENTS ON FORM S-1
AND FORM OF PROSPECTUS
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ITEM IN FORM S-1 CAPTION IN PROSPECTUS
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<S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................. Forepart of Registration
Statement; Outside Front Cover
Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................. Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information, Risk Factors, and Ratio of
Earnings to Fixed Charges............................ "Prospectus Summary;" "Risk
Factors"
4. Use of Proceeds...................................... "Prospectus Summary;" "Use of
Proceeds"
5. Determination of Offering Price...................... Front Cover Page of Prospectus;
"Underwriting" "Dilution"
6. Dilution............................................. "Dilution"
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover of
Prospectus; "Prospectus Summary;"
"Underwriting"
9. Description of Securities to be Registered........... "Prospectus Summary;"
"Description of Capital Stock;"
"Shares Eligible for Future Sale"
10. Interests of Named Experts and Counsel............... "Experts"
11. Information with Respect to the Registrant........... "Organization Structure of SIG
and Its Principal Subsidiaries;"
"Prospectus Summary;" "The
Company;" "Dividend Policy;"
"Capitalization;" "Unaudited Pro
Forma Consolidated Financial
Statements of Operations;"
"Selected Consolidated Historical
Financial Data of Symons
International Group, Inc.;"
"Management's Discussion and
Analysis of Financial Condition
and Results of Operations of the
Company;" "Selected Consolidated
Historical Financial Data of
Superior Insurance Company;"
"Management's Discussion and
Analysis of Financial Condition
and Results of Operations of
Superior;" "Business;"
"Management;" "Certain
Relationships and Related
Transactions;" "Securities
Ownership of Management and
Goran;" "Shares Eligible for
Future Sale;" Index to Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 31, 1996
PROSPECTUS
- -----------
3,000,000 SHARES
SYMONS INTERNATIONAL GROUP, INC.
[SYMONS LOGO] COMMON STOCK
-------------------------------
All 3,000,000 shares of Common Stock, no par value (the "Common Stock"),
are being offered by Symons International Group, Inc. ("SIG" or the "Company").
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock. It is currently anticipated that the initial public
offering price will be between $10.00 and $12.00 per share of Common Stock. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
After giving effect to the Offering, Goran Capital Inc. ("Goran"), a
Canadian federally chartered corporation and presently the sole shareholder of
the Company, will own approximately 70% of the outstanding shares of Common
Stock, assuming no exercise of the Underwriters' over-allotment option. A
portion of the proceeds of the Offering will be used to repay certain
indebtedness to Goran and to pay a dividend to Goran. See "Use of Proceeds."
The Common Stock has been approved for listing on The Nasdaq Stock Market's
National Market ("Nasdaq National Market") under the symbol "SIGC," subject to
official notice of issuance. There can be no assurance that an active public
market for the Common Stock will develop or be maintained after the Offering.
-------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE
COMMON STOCK.
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-MISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
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Per Share......................... $ $ $
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Total (3)......................... $ $ $
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</TABLE>
(1) The Company, Goran and IGF Holdings, Inc., a subsidiary of the Company,
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ , including a non-accountable expense allowance payable to the
Underwriters. See "Underwriting."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock from the Company at the Price to
Public less Underwriting Discounts and Commissions solely to cover over-
allotments, if any. If the Underwriters exercise such option in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively. See
"Underwriting."
-------------------------------
The Common Stock is being offered severally by the Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain other conditions. It is expected that
delivery of the certificates representing the Common Stock will be made to the
Underwriters on or about , 1996.
-------------------------------
ADVEST, INC. MESIROW FINANCIAL, INC.
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 4
ORGANIZATIONAL STRUCTURE OF SIG AND ITS PRINCIPAL SUBSIDIARIES
CORPORATE CHART
- -------------------------
(1) Symons International Group, Inc. is a wholly-owned subsidiary of Goran
Capital Inc., a Canadian federally chartered corporation. Goran's common
stock is traded on the Toronto Stock Exchange under the symbol "GNC" and on
the Nasdaq National Market under the symbol "GNCNF."
(2) The ownership percentages of the funds affiliated with Goldman, Sachs & Co.
in GGS Management Holdings, Inc. are as follows: 30.1% by GS Capital
Partners II, L.P., a Delaware limited partnership, 12.0% by GS Capital
Partners II Offshore, L.P., a Cayman Islands limited partnership and 5.9%
collectively by the following investors: Stone Street Funds L.P., Bridge
Street Funds L.P., and Goldman, Sachs & Co. Verwaltungs GmbH. These funds
are collectively referred to in this Prospectus as the "GS Funds."
------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------------
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA
(THE "NORTH CAROLINA INSURANCE COMMISSIONER") NOR HAS THE NORTH CAROLINA
INSURANCE COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
------------------------------
THE INDIANA AND FLORIDA INSURANCE LAWS PROVIDE THAT NO PERSON MAY ACQUIRE
CONTROL (AS DEFINED) OF THE COMPANY, AND THUS INDIRECT CONTROL OF PAFCO,
SUPERIOR OR IGF, UNLESS SUCH PERSON HAS GIVEN PRIOR WRITTEN NOTICE TO SUCH
INSURANCE COMPANIES AND RECEIVED THE PRIOR APPROVAL OF THE COMMISSIONER OF
INSURANCE OF THE STATES OF INDIANA AND FLORIDA. SEE "BUSINESS -- REGULATION."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and consolidated financial statements, and
the notes thereto, appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, (i) the "Company" or "SIG" refers to Symons International
Group, Inc., an Indiana corporation, and its subsidiaries, (ii) the
"Subsidiaries" refer to the direct and indirect subsidiaries of the Company,
(iii) the "Insurers" refer to IGF Insurance Company, an Indiana property and
casualty insurance company and a wholly-owned subsidiary of the Company ("IGF"),
and, through the Company's 52% ownership interest in GGS Management Holdings,
Inc. ("GGS Holdings"), Pafco General Insurance Company, an Indiana property and
casualty insurance company ("Pafco"), and Superior Insurance Company, a Florida
property and casualty insurance company, together with its subsidiaries
("Superior") and (iv) "Goran" refers to Goran Capital Inc. and its subsidiaries,
other than the Company and the Subsidiaries. See "Glossary of Selected Insurance
and Certain Defined Terms" for the definitions of certain insurance and other
terms used herein.
Unless otherwise indicated, (i) all data in this Prospectus (a) takes into
effect the 7,000-for-1 stock split of the Company's Common Stock that has
recently been completed, and (b) assumes that the Underwriters' over-allotment
option is not exercised; and (ii) all financial information and operating
statistics applicable to the Company and Superior set forth in this Prospectus
are based on generally accepted accounting principles ("GAAP") and not statutory
accounting practices ("SAP"). In conformity with industry practice, data derived
from A.M. Best Company, Inc. ("A.M. Best") and the National Association of
Insurance Commissioners ("NAIC") sources, generally used herein for industry
comparisons, are based on prescribed SAP.
THE COMPANY
Symons International Group, Inc., a specialty property and casualty
insurer, underwrites and markets nonstandard private passenger automobile
insurance and crop insurance. The Company believes that it has demonstrated an
ability to acquire under-performing niche insurance businesses and develop them
toward their full potential. Through its Subsidiaries, the Company writes
business in the U.S. exclusively through independent agencies and seeks to
distinguish itself by offering high quality, technology based services for its
agents and policyholders. For the twelve months ended June 30, 1996, the Company
had consolidated gross premiums written of approximately $175.8 million
(including gross premiums written of $25.2 million for Superior for two months
of 1996).
The Company writes nonstandard automobile insurance through approximately
4,500 independent agencies in 18 states and writes crop insurance through
approximately 1,200 independent agencies in 31 states. Based on a Company
analysis of gross premiums written in 1995 as reported by A.M. Best, the Company
believes that the combination of Pafco and Superior makes the Company's
nonstandard automobile group the sixteenth largest underwriter of nonstandard
automobile insurance in the United States. Based on premium information compiled
in 1995 by the Federal Crop Insurance Corporation ("FCIC") and National Crop
Insurance Services, Inc. ("NCIS"), the Company believes that IGF is the fifth
largest underwriter of Multi-Peril Crop Insurance ("MPCI") in the United States.
Nonstandard automobile insurance products are designed for drivers who are
unable to obtain coverage from standard market carriers. These drivers are
normally charged higher premium rates than the rates charged for preferred or
standard risk drivers and generally purchase lower liability limits than
preferred or standard risk policyholders. According to statistical information
derived from insurer annual statements compiled by A.M. Best, the nonstandard
automobile market accounted for $17.4 billion in annual premium volume for 1995.
In June, 1995, the Company entered into a letter of intent to acquire
Superior from Fortis, Inc. ("Fortis") and, in January, 1996, obtained a
commitment from the GS Funds to invest the equity capital needed to finance the
acquisition of Superior (the "Acquisition"). GGS Holdings, which is 52% owned by
the Company and 48% owned by the GS Funds, was formed (the "Formation
Transaction") to focus on the growth and development of the nonstandard
automobile insurance business. As part of this strategy, the
3
<PAGE> 6
Company contributed Pafco and its right to acquire Superior to GGS Holdings,
which completed the Acquisition on April 30, 1996. The Acquisition has allowed
the Company to expand its nonstandard automobile business through wider
geographic distribution and a broader range of products. Pafco writes business
primarily in the Midwest and Colorado, and Superior writes business primarily in
the Southeast (particularly Florida) and in California. GGS Holdings plans to
pursue additional acquisition opportunities to take advantage of a consolidation
trend in the nonstandard automobile insurance industry. There can be no
assurance that any suitable acquisition opportunities will arise.
IGF Insurance Company ("IGF") is a wholly-owned subsidiary of the Company
located in Des Moines, Iowa. IGF underwrites MPCI, crop hail insurance and other
named peril crop insurance. MPCI is a federally-subsidized program administered
by the FCIC, which is a federally chartered corporation operated through the
United States Department of Agriculture ("USDA"). MPCI is designed to provide
farmers who suffer an insured crop loss due to the weather or other natural
perils with the funds needed to continue operations and plant crops for the next
growing season. For the year ended December 31, 1995, the Company wrote
approximately $53.4 million in MPCI Premiums (as defined herein) and $17.0
million in crop hail gross premiums. In addition to premium revenues, for the
same period, the Company received from the FCIC: (i) CAT Coverage Fees (as
defined herein) in the amount of $1.3 million, (ii) Buy-up Expense Reimbursement
Payments (as defined herein) in the amount of $16.4 million and (iii) CAT LAE
Reimbursement Payments (as defined herein) and MPCI Excess LAE Reimbursement
Payments (as defined herein) in the aggregate amount of $3.4 million. IGF uses
proprietary software to write and service policies. The Company uses employee
claims adjusters rather than relying solely on part-time, independent contractor
adjusters as do many of its competitors. Management believes that the approaches
adopted by IGF's management team in the information technology, claims handling
and underwriting aspects of its business are innovations which provide IGF with
a competitive advantage in the crop insurance industry. For a discussion of the
accounting treatment of the Company's MPCI business, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company -- Overview."
The Federal Crop Insurance Reform Act of 1994 (the "1994 Reform Act")
required farmers for the first time to purchase at least a basic level of MPCI
coverage ("CAT Coverage") in order to be eligible for other federally-sponsored
farm benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by local USDA offices. Partly as a result of the
increase in the size of the MPCI market resulting from the 1994 Reform Act, the
Company's MPCI Premiums increased to $53.4 million in 1995 from $44.3 million in
1994 and the fees and reimbursement payments received by the Company from its
MPCI business increased to $21.1 million in 1995 from $14.0 million in 1994.
However, the Federal Agriculture Improvement and Reform Act of 1996 (the "1996
Reform Act"), signed into law by President Clinton in April, 1996, limits the
role of the USDA offices in the delivery of MPCI coverage beginning in July,
1996, which is the commencement of the 1997 crop year, and also eliminates the
linkage between CAT Coverage and qualification for certain federal farm program
benefits. The limitation of the USDA's role in the delivery system for MPCI
should provide the Company with the opportunity to realize increased revenues
from the distribution and servicing of its MPCI product. As a result of this
limitation, the FCIC has transferred to the Company approximately 8,900 insureds
for CAT Coverage who previously purchased such coverage from USDA field offices.
The Company has not experienced any material negative impact in 1996 from the
delinkage mandated by the 1996 Reform Act. The Company believes that any future
potential negative impact of the delinkage mandated by the 1996 Reform Act will
be mitigated by, among other factors, the likelihood that farmers will continue
to purchase MPCI to provide basic protection against natural disasters since ad
hoc federal disaster relief programs have been reduced or eliminated. There can,
however, be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
The Company has multiple strategies to achieve profitable growth including
the following:
- The Company will continue to develop its two niche product lines:
nonstandard automobile insurance and crop insurance.
- Through GGS Holdings, the Company intends to take advantage of
acquisition opportunities in the consolidating nonstandard automobile
insurance industry.
4
<PAGE> 7
- The Company will use the Superior acquisition to market its automobile
insurance products to additional markets and to expand the multi-tiered
marketing approach currently employed by Superior.
- The Company will continue to emphasize providing quality, cost efficient
services to its independent agencies together with a commission structure
designed to encourage those agencies to place a high volume of profitable
business with its insurance subsidiaries.
- The Company will continue to develop and enhance its relationship with
its crop agencies by using an electronic communications network that
enables agencies to communicate directly with the Company's central
computer system, thereby limiting agencies' handling costs.
- The Company will seek to enhance the underwriting profits and reduce the
volatility of its crop insurance business through geographic
diversification and the effective use of federal and third-party
catastrophic reinsurance arrangements.
The Company is continually reviewing potential acquisition opportunities.
As of the date of this Prospectus, the Company has not entered into a letter of
intent or agreement in principle with any potential acquisition targets.
The Company is a wholly-owned subsidiary of Goran. The ordinary shares of
Goran are traded on the Toronto Stock Exchange under the symbol "GNC" and on the
Nasdaq National Market under the symbol "GNCNF." Following the Offering, Goran
will hold approximately 70% of the Common Stock, assuming no exercise of the
Underwriters' over-allotment option. Goran engages, through subsidiaries other
than the Company, in certain reinsurance and surplus lines underwriting
operations. These subsidiaries of Goran have certain business relationships with
the Company which the Company expects will continue after consummation of the
Offering.
The Company's state of incorporation is Indiana; its principal executive
offices are located at 4720 Kingsway Drive, Indianapolis, Indiana; and its
telephone number is (317) 259-6300.
RECENT DEVELOPMENTS
The Company's condensed results of operations for the three and nine month
periods ended September 30, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1995(1) SEPTEMBER 30, 1995(1) SEPTEMBER 30, 1996(1) SEPTEMBER 30, 1996(1)
--------------------- --------------------- --------------------- ---------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Gross premiums
written.............. $ $ $ $
Net premiums earned....
Net income.............
Earnings per share.....
Shares outstanding.....
</TABLE>
- -------------------------
(1) The Company's consolidated results of operations for the nine months ended
September 30, 1996 include five months results of operations of Superior
subsequent to the Acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Overview"
for a discussion of the accounting treatment accorded to the crop insurance
business.
5
<PAGE> 8
THE OFFERING
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Common Stock being offered by the Company.... 3,000,000 shares
Common Stock outstanding (1)
Before the Offering........................ 7,000,000 shares
After the Offering......................... 10,000,000 shares
Use of Proceeds.............................. The Company intends to apply the net proceeds
from the Offering as follows: (i) to
contribute approximately $9.0 million to IGF
to increase its statutory surplus to provide
support for the writing of additional crop
insurance coverages; (ii) to repay certain
bank indebtedness of the Company in the
amount of $7.5 million; (iii) to retire a
note in the principal amount of approximately
$3.5 million issued to Pafco by one of the
Company's wholly-owned Subsidiaries; (iv) to
retire the Company's indebtedness to Goran
(the aggregate outstanding balance of which
is approximately $7.5 million (the "Parent
Indebtedness")); (v) to pay a dividend to
Goran in the amount of up to $3.5 million;
and (vi) to apply the remainder of the net
proceeds, if any, for general corporate
purposes, including acquisitions. See "The
Company" and "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... SIGC
</TABLE>
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(1) Excluding 1,000,000 shares reserved for issuance pursuant to certain
employment agreements with officers of IGF and the Company's 1996 Stock
Option Plan, of which options for 827,000 shares have been granted. See
"Management -- Executive Compensation -- Employment Contracts and
Termination of Employment -- IGF" and "-- Stock Option Plans -- SIG 1996
Stock Option Plan."
6
<PAGE> 9
SUMMARY COMPANY CONSOLIDATED FINANCIAL DATA
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<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------- ---------------------------------
PRO FORMA PRO FORMA
FOR THE FOR THE
TRANSACTIONS TRANSACTIONS
AND THE AND THE
OFFERING OFFERING
1991 1992 1993 1994 1995 1995(1) 1995 1996(2) 1996(1)
------- -------- ------- -------- -------- ------------ ------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA: (3)
Gross premiums written... $91,974 $109,219 $88,936 $103,134 $124,634 $214,275 $95,759 $146,950 $190,943
Net premiums written..... 31,543 35,425 31,760 35,139 53,447 142,978 30,855 77,042 120,660
Net premiums earned...... 30,388 35,985 31,428 32,126 49,641 143,682 22,789 59,066 98,453
Net investment income.... 1,370 1,319 1,489 1,241 1,173 8,262 636 1,533 3,985
Other income............. -- -- 886 1,622 2,174 6,345 997 4,062 6,279
Net realized capital
gain (loss)............ 381 486 (119) (159) (344) 1,610 79 228 257
------- -------- ------- -------- -------- -------- ------- -------- --------
Total revenues....... 32,139 37,790 33,684 34,830 52,644 159,899 24,501 64,889 108,974
------- -------- ------- -------- -------- -------- ------- -------- --------
Net income (loss) (4).... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,701 $ 2,006 $ 4,304 $ 5,928
Net income (loss) per
common share (4)....... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.58
Weighted average shares
outstanding............ 7,000 7,000 7,000 7,000 7,000 10,129 7,000 7,000 10,129
GAAP RATIOS: (3)(5)
Loss and LAE ratio....... 76.1% 76.6% 79.8% 82.4% 72.5% 73.4% 69.1% 76.7% 73.1%
Expense ratio............ 20.8 23.4 31.5 21.7 18.6 31.0 25.4 22.9 26.4
------- -------- ------- -------- -------- -------- ------- -------- --------
Combined ratio........... 96.9% 100.0% 111.3% 104.1% 91.1% 104.4% 94.5% 99.6% 99.5%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
DECEMBER 31, AS ADJUSTED
-------------------------------------------------- FOR THE
1991 1992 1993 1994 1995 ACTUAL OFFERING(1)
------- -------- ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA: (3)
Investments................... $26,049 $ 27,941 $21,497 $ 18,572 $ 25,902 $161,205 $ 173,705
Total assets.................. 78,749 75,001 81,540 66,628 110,516 378,673 391,173
Losses and loss adjustment
expenses.................... 38,607 38,616 54,143 29,269 59,421 93,628 93,628
Total debt.................... 9,009 11,528 9,341 10,683 11,776 63,287 48,250
Minority interest............. 466 55 -- 16 -- 17,723 17,723
Total shareholders' equity.... 484 1,193 2,219 4,255 9,535 17,757 45,294
Book value per share.......... $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 2.54 $ 4.53
STATUTORY CAPITAL AND SURPLUS:
(6)
Pafco......................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 14,872 $ 14,872
IGF........................... $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 11,559 $ 20,559
Superior...................... $ 48,036 $ 48,036
</TABLE>
- -------------------------
(1) Results of operations of Superior for the years ended December 31, 1993,
1994 and 1995 and for the six months ended June 30, 1995 and 1996 are
presented herein in "Selected Consolidated Historical Financial Data of
Superior Insurance Company." The pro forma consolidated statement of
operations data for the year ended December 31, 1995 and for the six months
ended June 30, 1996 present results for the Company as if the Formation
Transaction, the Acquisition, and the other transactions described in "The
Company -- Formation of GGS Holdings; Acquisition of Superior"
(collectively, the "Transactions") and the Offering had occurred as of
January 1, 1995 and eliminate all of the operations related to the
commercial business ceded to Granite Reinsurance Company Ltd., a subsidiary
of Goran ("Granite Re"), for the year ended December 31, 1995. See
"Unaudited Pro Forma Consolidated Statements of Operations" for a discussion
of pro forma statement of operations adjustments. The as adjusted
consolidated balance sheet data as of June 30, 1996 gives effect to the
Offering as if it had occurred as of June 30, 1996. The as adjusted
consolidated balance sheet data assumes a per share offering price of $11.00
per share and 3,000,000 shares issued less estimated issuance costs of
$4,000,000 and the application of the net proceeds of the Offering. See "Use
of Proceeds."
(2) The Company's consolidated results of operations for the six months ended
June 30, 1996 include the two months results of operations of Superior
subsequent to the Acquisition.
(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Overview" for a discussion of the accounting
treatment accorded to the crop insurance business.
(4) In 1993, the Company recognized an increase to net income as a result of a
cumulative effect of a change in accounting principle of $1,175,000. The net
income per share for 1993 excluding this cumulative effect was $(0.20).
(5) The loss and LAE ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. The expense ratio is calculated by dividing
the sum of policy acquisition and general and administrative expenses and
interest expense by net premiums earned. The combined ratio is the sum of
the loss and LAE and expense ratios. As a result of the unique accounting
treatment accorded to the MPCI business, the Company's GAAP loss and LAE,
expense and combined ratios are not comparable to the ratios for other
property and casualty insurers.
(6) Statutory capital and surplus is calculated under SAP and is relevant for
insurance regulatory purposes in determining the amount of business an
insurance company may write. Among the differences between SAP and GAAP
capital and surplus are the following: SAP does not recognize as assets
deferred acquisition costs, certain assets such as furniture and fixtures,
agents' balances in excess of 90 days, and deferred tax assets or
liabilities. In addition, the historical capital and surplus of an acquired
entity carries over for statutory purposes. The statutory surplus of Pafco
includes Pafco's share of IGF's statutory surplus prior to April 30, 1996.
Pafco owned the following percentages of IGF at December 31 for each of the
following years: 1991, 87.9%; 1992, 98.2%; 1993, 98.2%; 1994, 98.8%; 1995,
100%. At April 30, 1996, Pafco transferred IGF Holdings to SIG. Prior to the
Transfer (as defined below), IGF Holdings also paid a dividend to Pafco in
the form of cash of $7,500,000 and a promissory note with a principal amount
of $3,500,000. See "The Company -- Formation of GGS Holdings; Acquisition of
Superior."
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RISK FACTORS
There are certain risks involved in an investment in the Common Stock.
Accordingly, prospective purchasers of the Common Stock should consider
carefully the factors set forth below as well as the other information contained
in this Prospectus.
UNCERTAIN PRICING AND PROFITABILITY
One of the distinguishing features of the property and casualty industry is
that its products generally are priced before its costs are known, because
premium rates usually are determined before losses are reported. Premium rate
levels are related in part to the availability of insurance coverage, which
varies according to the level of surplus in the industry. Increases in surplus
have generally been accompanied by increased price competition among property
and casualty insurers. The nonstandard automobile insurance business in recent
years has experienced very competitive pricing conditions and there can be no
assurance as to the Company's ability to achieve adequate pricing. Changes in
case law, the passage of new statutes or the adoption of new regulations
relating to the interpretation of insurance contracts can retroactively and
dramatically affect the liabilities associated with known risks after an
insurance contract is in place. New products also present special issues in
establishing appropriate premium levels in the absence of a base of experience
with such products' performance.
The number of competitors and the similarity of products offered, as well
as regulatory constraints, limit the ability of property and casualty insurers
to increase prices in response to declines in profitability. In states which
require prior approval of rates, it may be more difficult for the Company to
achieve premium rates which are commensurate with the Company's underwriting
experience with respect to risks located in those states. In addition, the
Company does not control rates on its MPCI business, which are instead set by
the FCIC. Accordingly, there can be no assurance that these rates will be
sufficient to produce an underwriting profit.
The reported profits and losses of a property and casualty insurance
company are also determined, in part, by the establishment of, and adjustments
to, reserves reflecting estimates made by management as to the amount of losses
and loss adjustment expenses ("LAE") that will ultimately be incurred in the
settlement of claims. The ultimate liability of the insurer for all losses and
LAE reserved at any given time will likely be greater or less than these
estimates, and material differences in the estimates may have a material adverse
effect on the insurer's financial position or results of operations in future
periods. See "Risk Factors -- Uncertainty Associated with Estimating Reserves
for Unpaid Losses and LAE."
NATURE OF NONSTANDARD AUTOMOBILE INSURANCE BUSINESS
The nonstandard automobile insurance business is affected by many factors
which can cause fluctuations in the results of operations of this business. Many
of these factors are not subject to the control of the Company. The size of the
nonstandard market can be significantly affected by, among other factors, the
underwriting capacity and underwriting criteria of standard automobile insurance
carriers. In addition, an economic downturn in the states in which the Company
writes business could result in fewer new car sales and less demand for
automobile insurance. Severe weather conditions could also adversely affect the
Company's business through higher losses and LAE. These factors, together with
competitive pricing and other considerations, could result in fluctuations in
the Company's underwriting results and net income.
NATURE OF CROP INSURANCE BUSINESS
The Company's operating results from its crop insurance program can vary
substantially from period to period as a result of various factors, including
timing and severity of losses from storms, droughts, floods, freezes and other
natural perils and crop production cycles. Therefore, the results for any
quarter or year are not necessarily indicative of results for any future period.
The underwriting results of the crop insurance business are recognized
throughout the year with a reconciliation for the current crop year in the
fourth quarter. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of the
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<PAGE> 11
Company -- Overview -- Crop Insurance Operations -- Recent Developments
Affecting MPCI Underwriting Results" for examples of recent events that could
adversely affect the Company's operating results.
The Company expects that for the foreseeable future a majority of its crop
insurance business will continue to be derived from MPCI business. The MPCI
program is federally regulated and supported by the federal government by means
of premium subsidies to farmers, expense reimbursement and federal reinsurance
pools for private insurers. As such, legislative or other changes affecting the
MPCI program could impact the Company's business prospects. The MPCI program has
historically been subject to modification at least annually since its
establishment in 1980, and some of these modifications have been significant. No
assurance can be given that future changes will not significantly affect the
MPCI program and the Company's crop insurance business.
The 1994 Reform Act also reduced the expense reimbursement rate payable to
the Company for its costs of servicing MPCI policies that exceed the basic CAT
Coverage level (such policies, "Buy-up Coverage") for the 1997, 1998 and 1999
crop years to 29%, 28% and 27.5%, respectively, of the MPCI Premium serviced, a
decrease from the 31% level established for the 1994, 1995 and 1996 crop years.
Although the 1994 Reform Act directs the FCIC to alter program procedures and
administrative requirements so that the administrative and operating costs of
private insurance companies participating in the MPCI program will be reduced in
an amount that corresponds to the reduction in the expense reimbursement rate,
there can be no assurance that the Company's actual costs will not exceed the
expense reimbursement rate. The FCIC has appointed several committees comprised
of members of the insurance industry to make recommendations concerning this
matter.
The 1994 Reform Act also directs the FCIC to establish adequate premiums
for all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program above the CAT Coverage level.
The 1996 Reform Act, signed into law by President Clinton in April, 1996,
provides that, effective for 1996 spring-planted crops, MPCI coverage is not
required for federal farm program benefits if producers sign a written waiver
that waives eligibility for emergency crop loss assistance. The 1996 Reform Act
also provides that, effective for the 1997 crop year, the Secretary of
Agriculture may continue to offer CAT Coverage through USDA offices if the
Secretary of Agriculture determines that the number of approved insurance
providers operating in a state is insufficient to adequately provide
catastrophic risk protection coverage to producers. There can be no assurance as
to the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
Total MPCI Premium for each farmer depends upon the kind of crops grown,
acreage planted and other factors determined by the FCIC. Each year, the FCIC
sets, by crop, the maximum per unit commodity price ("Price Election") to be
used in computing MPCI Premiums. Any reduction of the Price Election by the FCIC
will reduce the MPCI Premium charged per policy, and accordingly will adversely
impact MPCI Premium volume.
The Company's crop insurance business is also affected by market conditions
in the agricultural industry which vary depending on such factors as federal
legislation and administration policies, foreign country policies relating to
agricultural products and producers, demand for agricultural products, weather,
natural disasters, technological advances in agricultural practices,
international agricultural markets and general economic conditions both in the
United States and abroad. For example, the number of MPCI Buy-up Coverage
policies written has historically tended to increase after a year in which a
major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail. For further
information about the Company's MPCI business, see "Business -- Crop Insurance
- -- Products."
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<PAGE> 12
HIGHLY COMPETITIVE BUSINESSES
Both the nonstandard automobile insurance and crop insurance businesses are
highly competitive. Many of the Company's competitors in both the nonstandard
automobile insurance and crop insurance business segments have substantially
greater financial and other resources than the Company, and there can be no
assurance that the Company will be able to compete effectively against such
competitors in the future.
In its nonstandard automobile business, the Company competes with both
large national writers and smaller regional companies. The Company's competitors
include other companies which, like the Company, serve the independent agency
market, as well as companies which sell insurance directly to customers. Direct
writers may have certain competitive advantages over agency writers, including
increased name recognition, loyalty of the customer base to the insurer rather
than an independent agency and, potentially, reduced acquisition costs. In
addition, certain competitors of the Company have from time to time decreased
their prices in an apparent attempt to gain market share. Also, in certain
states, state assigned risk plans may provide nonstandard automobile insurance
products at a lower price than private insurers. See "Business -- Nonstandard
Automobile Insurance -- Competition."
In the crop insurance business, the Company competes against other crop
insurance companies and, with respect to CAT Coverage, USDA field service
offices in certain areas. In addition, the crop insurance industry has become
increasingly consolidated. From the 1985 crop year to the 1995 crop year, the
number of insurance companies that have entered into agreements with the FCIC to
sell and service MPCI policies has declined from 50 to 17. The Company believes
that to compete successfully in the crop insurance business it will have to
market and service a volume of premiums sufficiently large to enable the Company
to continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market consolidates further. See "Business -- Crop Insurance --
Competition."
IMPORTANCE OF RATINGS
A.M. Best has currently assigned Superior a B+ (Very Good) rating and Pafco
a B- (Adequate) rating. Subsequent to the Acquisition, the rating of Superior
was reduced from A- to B+ as a result of the leverage of GGS Holdings resulting
from indebtedness in connection with the Acquisition. A "B+" and a "B-" rating
are A.M. Best's sixth and eighth highest rating classifications, respectively,
out of 15 ratings. A "B+" rating is awarded to insurers which, in A.M. Best's
opinion, "have demonstrated very good overall performance when compared to the
standards established by the A.M. Best Company" and "have a good ability to meet
their obligations to policyholders over a long period of time." A "B-" rating is
awarded to insurers which, in A.M. Best's opinion, "have demonstrated adequate
overall performance when compared to the standards established by the A.M. Best
Company" and "generally have an adequate ability to meet their obligations to
policyholders, but their financial strength is vulnerable to unfavorable changes
in underwriting or economic conditions." IGF recently received an "NA-2" rating
(a "rating not assigned" category for companies that do not meet A.M. Best's
minimum size requirement) from A.M. Best. IGF intends to seek a revised rating
after the infusion of capital from the proceeds of the Offering, although there
can be no assurance that a revised rating will be obtained or as to the level of
any such rating. See "Use of Proceeds." A.M. Best bases its ratings on factors
that concern policyholders and agents and not upon factors concerning investor
protection. Such ratings are subject to change and are not recommendations to
buy, sell or hold securities. One factor in an insurer's ability to compete
effectively is its A.M. Best rating. The A.M. Best ratings for the Company's
rated Insurers are lower than for many of the Company's competitors. There can
be no assurance that such ratings or future changes therein will not affect the
Company's competitive position. See "Business -- Ratings."
GEOGRAPHIC CONCENTRATION
The Company's nonstandard automobile insurance business is concentrated in
the states of Florida, California, Indiana, Missouri and Virginia; consequently
the Company will be significantly affected by changes in the regulatory and
business climate in those states. For the six months ended June 30, 1996 on a
pro forma basis after giving effect to the Acquisition of Superior as if it had
occurred on January 1, 1996, gross premiums written by the Company in Florida
accounted for approximately 37% of the Company's total nonstandard
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<PAGE> 13
automobile insurance gross premiums written for this period. See "Business --
Nonstandard Automobile Insurance -- Marketing." The Company's crop insurance
business is concentrated in the states of Iowa, Texas, Illinois, Kansas and
Minnesota and the Company will be significantly affected by weather conditions,
natural perils and other factors affecting the crop insurance business in those
states. See "Business -- Crop Insurance -- Marketing; Distribution Network."
FUTURE GROWTH AND CONTINUED OPERATIONS DEPENDENT ON ACCESS TO CAPITAL
Property and casualty insurance is a capital intensive business. The
Company must maintain minimum levels of surplus in the Insurers in order to
continue to write business, meet the other related standards established by
insurance regulatory authorities and insurance rating bureaus and satisfy
financial ratio covenants in loan agreements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation of the Company --
Liquidity and Capital Resources."
Historically, the Company has achieved premium growth as a result of both
acquisitions and internal growth. It intends to continue to pursue acquisition
and new internal growth opportunities. Among the factors which may restrict the
Company's future growth is the availability of capital. Such capital will likely
have to be obtained through debt or equity financing or retained earnings. There
can be no assurance that the Insurers will have access to sufficient capital to
support future growth and also satisfy the capital requirements of rating
agencies and regulators. In addition, the Company will require additional
capital to finance future acquisitions. If the Company's representatives on the
Board of Directors of GGS Holdings cause GGS Holdings to decline acquisition
opportunities because the Company is unable to raise sufficient capital to fund
its pro rata share of the purchase price, the GS Funds may be able to force a
sale of GGS Holdings. The ability of each of the Company and GGS Holdings to
raise capital through an issuance of voting securities may be affected by
conflicts of interest between each of them and their respective control persons
and other affiliates. See "-- Control by Goran, "-- Potential Limitations on
Ability to Raise Additional Capital," "-- Conflicts of Interest" and "-- Certain
Rights of the GS Funds to Cause A Sale of GGS Holdings" below. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources."
UNCERTAINTY ASSOCIATED WITH ESTIMATING RESERVES FOR UNPAID LOSSES AND LAE
The reserves for unpaid losses and LAE established by the Company are
estimates of amounts needed to pay reported and unreported claims and related
LAE based on facts and circumstances then known. These reserves are based on
estimates of trends in claims severity, judicial theories of liability and other
factors.
Although the nature of the Company's insurance business is primarily
short-tail, the establishment of adequate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's reserves for losses and LAE and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating these amounts, it has been
necessary, and may over time continue to be necessary, to revise estimates of
the Company's reserves for losses and LAE. The historic development of reserves
for losses and LAE may not necessarily reflect future trends in the development
of these amounts. Accordingly, it may not be appropriate to extrapolate
redundancies or deficiencies based on historical information. See "Business --
Reserves for Losses and Loss Adjustment Expenses."
RELIANCE UPON REINSURANCE
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers, including the FCIC,
which the Company generally believes to be financially stable, a significant
reinsurer's insolvency or inability to make payments under the terms of a
reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.
The amount and cost of reinsurance available to companies specializing in
property and casualty insurance are subject, in large part, to prevailing market
conditions beyond the control of such companies. The
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<PAGE> 14
Company's ability to provide insurance at competitive premium rates and coverage
limits on a continuing basis depends upon its ability to obtain adequate
reinsurance in amounts and at rates that will not adversely affect its
competitive position.
Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments. See
"Business -- Nonstandard Automobile Insurance -- Reinsurance" and
"Business -- Crop Insurance -- Third Party Reinsurance in Effect for 1996."
RISKS ASSOCIATED WITH INVESTMENTS
The Company's results of operations depend in part on the performance of
its invested assets. As of June 30, 1996, 74.2% of the Company's investment
portfolio was invested in fixed maturity securities, 20.2% in equity securities,
3.7% in short-term investments, and 1.9% in real estate and mortgage loans.
Certain risks are inherent in connection with fixed maturity securities
including loss upon default and price volatility in reaction to changes in
interest rates and general market factors. Equity securities involve risks
arising from the financial performance of, or other developments affecting,
particular issuers as well as price volatility arising from general stock market
conditions. See "Business -- Investments."
COMPREHENSIVE STATE REGULATION
The Insurers are subject to comprehensive regulation by government agencies
in the states in which they operate. The nature and extent of that regulation
vary from jurisdiction to jurisdiction, but typically involve prior approval of
the acquisition of control of an insurance company or of any company controlling
an insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, limitations on dividends, approval
or filing of premium rates and policy forms for many lines of insurance,
solvency standards, minimum amounts of capital and surplus which must be
maintained, limitations on types and amounts of investments, restrictions on the
size of risks which may be insured by a single company, limitation of the right
to cancel or non-renew policies in some lines, regulation of the right to
withdraw from markets or agencies, requirements to participate in residual
markets, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, reporting with respect to financial condition, and
other matters. In addition, state insurance department examiners perform
periodic financial and market conduct examinations of insurance companies. Such
regulation is generally intended for the protection of policyholders rather than
security holders. No assurance can be given that future legislative or
regulatory changes will not adversely affect the Company. See
"Business -- Regulation."
HOLDING COMPANY STRUCTURE; DIVIDEND AND OTHER RESTRICTIONS; MANAGEMENT FEES
Holding Company Structure. The Company is a holding company whose principal
asset is the capital stock of the Subsidiaries. The Company relies primarily on
dividends and other payments from its Subsidiaries, including the Insurers, to
meet its obligations to creditors and to pay corporate expenses. The Insurers
are domiciled in the states of Indiana and Florida and each of these states
limits the payment of dividends and other distributions by insurance companies.
Dividend and Other Restrictions. Indiana law defines as "extraordinary" any
dividend or distribution which, together with all other dividends and
distributions to shareholders within the preceding twelve months, exceeds the
greater of: (i) 10% of statutory surplus as regards policyholders as of the end
of the preceding year or (ii) the prior year's net income. Dividends which are
not "extraordinary" may be paid ten days after the Indiana Department of
Insurance ("Indiana Department") receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner of Insurance (the "Indiana Commissioner")
or until the Indiana Commissioner has been given thirty days' prior notice and
has not disapproved within that period. The Indiana Department must receive
notice of all dividends, whether "extraordinary" or not, within five business
days after they are declared. Notwithstanding
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<PAGE> 15
the foregoing limit, a domestic insurer may not declare or pay a dividend from
any source of funds other than "earned surplus" without the prior approval of
the Indiana Department. "Earned Surplus" is defined as the amount of unassigned
funds set forth in the insurer's most recent annual statement, less surplus
attributable to unrealized capital gain or revaluation of assets. As of December
31, 1995, IGF had earned surplus of $2,713,000. Further, no Indiana domiciled
insurer may make payments in the form of dividends or otherwise to its
shareholders unless it possesses assets in the amount of such payments in excess
of the sum of its liabilities and the aggregate amount of the par value of all
shares of capital stock; provided, that in no instance shall such dividend
reduce the total of (i) gross paid-in and contributed surplus, plus (ii) special
surplus funds, plus (iii) unassigned funds, minus (iv) treasury stock at cost,
below an amount equal to 50% of the aggregate amount of the par value of all
shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department of Insurance ("Florida
Department") if the dividend or distribution does not exceed the larger of: (i)
the lesser of (a) 10% of surplus or (b) net income, not including realized
capital gains, plus a 2-year carryforward, (ii) 10% of surplus with dividends
payable constrained to unassigned funds minus 25% of unrealized capital gains,
or (iii) the lesser of (a) 10% of surplus or (b) net investment income plus a
3-year carryforward with dividends payable constrained to unassigned funds minus
25% of unrealized capital gains. Alternatively, a Florida domestic insurer may
pay a dividend or distribution without the prior written approval of the Florida
Department if (1) the dividend is equal to or less than the greater of: (i) 10%
of the insurer's surplus as regards policyholders derived from realized net
operating profits on its business and net realized capital gains or (ii) the
insurer's entire net operating profits (including unrealized gains or losses)
and realized net capital gains derived during the immediately preceding calendar
year; (2) the insurer will have policyholder surplus equal to or exceeding 115%
of the minimum required statutory surplus after the dividend or distribution;
(3) the insurer files a notice of the dividend or distribution with the Florida
Department at least ten business days prior to the dividend payment or
distribution; and (4) the notice includes a certification by an officer of the
insurer attesting that, after the payment of the dividend or distribution, the
insurer will have at least 115% of required statutory surplus as to
policyholders. Except as provided above, a Florida domiciled insurer may only
pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department or (ii) 30 days after the Florida Department has received
notice of such dividend or distribution and has not disapproved it within such
time. In the consent order approving the Acquisition (the "Consent Order"), the
Florida Department has prohibited Superior from paying any dividends (whether
extraordinary or not) for four years without the prior written approval of the
Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted to
be paid in 1996 by IGF without prior regulatory approval is $2,713,000, none of
which has been paid, and Pafco cannot pay any dividends in 1996 without prior
regulatory approval. Although the Company believes that funds required for it to
meet its financial and operating obligations will be available, there can be no
assurance in this regard. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Liquidity and Capital
Resources." Further, there can be no assurance that, if requested, the Indiana
Department will approve any request for extraordinary dividends from Pafco or
IGF or that the Florida Department will allow any dividends to be paid by
Superior during the four year period described above.
Payment of dividends by IGF requires prior approval by the lender under the
IGF Revolver (as defined herein). There can be no assurance that IGF will be
able to obtain this consent. The Company intends to seek regulatory approval for
a new arrangement whereby underwriting, marketing and administrative functions
of IGF will be assumed by, and employees will be transferred to, IGF Holdings.
As a result of this restructuring, Buy-up Expense Reimbursement Payments would
be paid by IGF to IGF Holdings, thereby providing an additional source of
liquidity for the Company to the extent these payments exceed the operating and
other expenses of IGF Holdings. There can be no assurance that this regulatory
approval will be obtained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -- Liquidity and
Capital Resources."
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The maximum dividends permitted by state law are not necessarily indicative
of an insurer's actual ability to pay dividends or other distributions to a
parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
Management Fees. The management agreement originally entered into between
the Company and Pafco was assigned as of April 30, 1996 by the Company to GGS
Management, Inc., a wholly-owned subsidiary of GGS Holdings ("GGS Management").
This agreement provides for an annual management fee equal to 15% of gross
premiums written. A similar management agreement with a management fee of 17% of
gross premiums written has been entered into between GGS Management and
Superior. Employees of the Company relating to the nonstandard automobile
insurance business and all Superior employees became employees of GGS Management
effective April 30, 1996. As part of the approval of the Formation Transaction,
the Indiana Department has required Pafco to resubmit its management agreement
for review by the Indiana Department no later than May 1, 1997 (the first
anniversary of the Formation Transaction), together with supporting evidence
that management fees charged to Pafco are fair and reasonable in comparison to
fees charged between unrelated parties for similar services. In the Consent
Order approving the Acquisition, the Florida Department has reserved, for a
period of three years, the right to reevaluate the reasonableness of fees
provided for in the Superior management agreement at the end of each calendar
year and to require Superior to make adjustments in the management fees based on
the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
Furthermore, as a result of certain restrictive covenants with respect to
dividends and other payments contained in the GGS Senior Credit Facility (as
defined herein), GGS Holdings and its subsidiaries, Pafco and Superior, are not
expected to constitute a significant source of funds for the Company. In
addition, since the GS Funds own 48% of the outstanding capital stock of GGS
Holdings, the Company would only be entitled to receive 52% of any dividend or
distribution paid by GGS Holdings to its stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company -- Liquidity and Capital Resources."
CONTROL BY GORAN
The Company is a wholly-owned subsidiary of Goran, and after completion of
the Offering, Goran will own approximately 70% of the outstanding Common Stock,
assuming no exercise of the Underwriters' over-allotment option. Goran will have
the power to control the Company, to elect its Board of Directors and to approve
any action requiring shareholder approval, including adopting amendments to the
Company's articles of incorporation and approving or disapproving mergers or
sales of all or substantially all of the assets of the Company. Because Goran
has the ability to elect the Board of Directors of the Company, it will be able
to effectively control all of the Company's policy decisions. As long as Goran
is the majority shareholder of the Company, third parties will not be able to
obtain control of the Company through purchases of Common Stock not owned by
Goran. The shares of the Company owned by Goran are pledged to Montreal Trust
Company of Canada, as Trustee, to secure Goran's obligations under certain
convertible subordinated notes.
G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS
Holdings and the father of Alan G. Symons, Chief Executive Officer of the
Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company, and members of the Symons family beneficially own in the aggregate
61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon
Symons and members of his family have the ability to elect the Board of
Directors of Goran, they will have the ability to elect the Board of Directors
of the Company and otherwise to influence significantly the Company's business
and operations. See "Securities Ownership of Management and Goran."
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Of the seven directors of the Company, five are current directors of Goran
(three of whom are members of the Symons family and two of whom are independent
directors of Goran) and two are outside directors. Directors and officers of the
Company and Goran may have conflicts of interest with respect to certain matters
affecting the Company, such as potential business opportunities and business
dealings between the Company and Goran and its affiliated companies. See
"Management -- Directors and Executive Officers of the Company."
POTENTIAL LIMITATIONS ON ABILITY TO RAISE ADDITIONAL CAPITAL
Goran's failure to maintain ownership of at least 50% of the Company's
voting securities will expose Goran to a risk that it will be characterized as
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "1940 Act"), unless Goran's remaining voting securities of the
Company, together with any other investment securities, represent not more than
40% of the total assets of Goran on an unconsolidated basis. In such event,
Goran would be required to comply with the registration and other requirements
of the 1940 Act, which would be significantly burdensome for Goran. This
constraint makes it unlikely that Goran would approve a stock issuance by the
Company that reduces Goran's ownership below 50% and therefore would likely
limit the amount of additional capital which can be raised by the Company
through the issuance of voting securities. Among other consequences, such a
limit could affect the Company's ability to raise funds for acquisition
opportunities which may become available to the Company or to GGS Holdings. In
addition, the stockholder agreement among the Company, the GS Funds, Goran and
GGS Holdings (the "Stockholder Agreement") establishes certain rights of the GS
Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering
events, including (i) the failure to consummate a registered initial public
offering of GGS Holdings stock representing, on a fully diluted basis, at least
20% of all such stock issued and outstanding, and generating at least $25
million in net proceeds to the sellers of such securities by April 30, 2001,
(ii) the third separate occasion, during the term of the Stockholder Agreement,
on which an equity financing or acquisition transaction proposed by the GS Funds
is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran, as being direct
or indirect ownership of more than 40% of the outstanding voting stock of Goran
if any other holder or group holds in excess of 10% of the outstanding voting
stock of Goran, and otherwise 25% thereof; and defined, with respect to the
Company, as requiring both (a) direct ownership by Goran of more than 50% of the
Company's voting stock and (b) retention by Alan G. Symons and his family
members of voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason. In any event, the Company will be unable to raise
equity capital by issuing additional shares of Common Stock unless Goran agrees
to that issuance. In addition, if Goran or the Company ever sold significant
amounts of shares of the Common Stock in the public market, those sales might
have an adverse effect on the market price of the Common Stock.
CONFLICTS OF INTEREST
Currently, Goran does not market property and casualty insurance products
which compete with products sold by the Company. Although there are no
restrictions on the activities in which Goran may engage, management of the
Company does not expect that Goran and the Company will compete with each other
to any significant degree in the sale of property and casualty insurance
products. There can be no assurance, however, that the Company will not
encounter competition from Goran in the future or that actions by Goran or its
affiliates will not inhibit the Company's growth strategy. See "Certain
Relationships and Related Transactions -- Control by Goran; Potential Conflicts
with Goran."
Conflicts of interest between the Company and Goran could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Goran. See "Certain
Relationships and Related Transactions -- Control by Goran; Potential Conflicts
with Goran."
15
<PAGE> 18
Conflicts of interest similar to those which could arise between the
Company and Goran could also arise between the Company and GGS Holdings. Alan G.
Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President
and Chief Operating Officer of the Company, also serve as the Chief Executive
Officer and President, and Executive Vice President, respectively, of GGS
Holdings. Such individuals have entered into employment agreements with GGS
Holdings requiring them to devote substantially all of their working time and
attention to the business and affairs of GGS Holdings. Further, Alan G. Symons
and certain other members of management of the Company are entitled, under
certain circumstances, to receive options to purchase shares of common stock of
GGS Holdings. See "Management -- Executive Compensation -- Employment Contracts
and Termination of Employment -- GGS Holdings." In addition, in the event that
the Company does not continue to own at least 50% of the outstanding voting
securities of GGS Holdings and the voting securities of GGS Holdings owned by
the Company, together with any other investment securities, represent over 40%
of the total assets of the Company on an unconsolidated basis, the Company will
be exposed to a risk that it would be characterized as an investment company
within the meaning of the 1940 Act. This consideration will limit the amount of
additional capital which can be raised through the issuance by GGS Holdings of
its voting securities.
CERTAIN RIGHTS OF THE GS FUNDS TO CAUSE A SALE OF GGS HOLDINGS
Events Which Trigger the Rights of the GS Funds to Cause A Sale of GGS
Holdings. The Stockholder Agreement establishes certain rights of the GS Funds
to cause a sale of GGS Holdings upon the occurrence of certain triggering
events, including (i) the failure to consummate a registered initial public
offering of GGS Holdings stock representing, on a fully diluted basis, at least
20% of all such stock issued and outstanding, and generating at least $25
million in net proceeds to the sellers of such securities, by April 30, 2001,
(ii) the third separate occasion, during the term of the Stockholder Agreement,
on which an equity financing or acquisition transaction proposed by the GS Funds
is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran, as being direct
or indirect ownership of more than 40% of the outstanding voting stock of Goran
if any other holder or group holds in excess of 10% of the outstanding voting
stock of Goran, and otherwise 25% thereof; and defined, with respect to the
Company, as requiring both (a) direct ownership by Goran in excess of 50% of the
Company's voting stock and (b) retention by Alan G. Symons and his family
members of voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason. As a result of the 1940 Act considerations with respect
to GGS Holdings discussed above, any public offering by GGS Holdings would
probably be required to consist solely of a secondary offering of shares held by
stockholders.
The Sale Process Resulting From a Triggering Event. Upon the occurrence of
any of such events, and at any time or from time to time thereafter, the GS
Funds may, by notifying the Company in writing, initiate the process of seeking
to effect a sale of GGS Holdings on terms and conditions which are acceptable to
the GS Funds. However, within thirty days after the Company receives notice of
the GS Funds' intention to initiate the sale of GGS Holdings, the Company may
provide written notice to the GS Funds that it wishes to acquire or combine with
GGS Holdings. The Company's notice to the GS Funds must include the proposed
purchase price and other material terms and conditions with such specificity as
is necessary to permit the GS Funds to evaluate the Company's offer. If, within
90 days of delivery of the notice by the Company, the GS Funds accept the
Company's offer, the Company will be obligated to acquire or combine with GGS
Holdings. In the event the GS Funds reject the Company's proposal, (i) any sale
to a third party effected within 180 days after receipt of such proposal must
not contain terms that are in the aggregate less favorable to the GGS Holdings
stockholders than those set forth in the Company's proposal, (ii) any sale must
provide for the same consideration to be paid to each stockholder, and (iii) no
sale may constitute an acquisition by or a combination with an affiliate of the
GS Funds. Accordingly, under certain circumstances, the GS Funds may have the
ability to force the Company to divest itself of its nonstandard automobile
operations. Further, a forced sale of GGS Holdings may also cause the Company to
be characterized as an investment company within the meaning of the 1940 Act
unless the proceeds are redeployed into other business operations or another
exemption from registration under the 1940 Act is available.
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<PAGE> 19
DEPENDENCE ON KEY PERSONNEL IN CONNECTION WITH FUTURE SUCCESS
The future success of the Company depends significantly upon the efforts of
certain key management personnel including G. Gordon Symons, Chairman of the
Board of the Company, Alan G. Symons, Chief Executive Officer of the Company,
Douglas H. Symons, President and Chief Operating Officer of the Company and
Pafco, Dennis G. Daggett, President of IGF, and Roger C. Sullivan, Jr.,
Executive Vice President of Superior. A loss of any of these officers could
adversely affect the Company's business. See "Management -- Directors and
Executive Officers of the Company."
POSSIBLE LIABILITIES RELATING TO TRANSACTIONS
Prior to the Offering, the Company entered into a number of transactions,
including the Formation Transaction, the Acquisition, the Transfer, the
Distribution, the Dividend (all as defined herein) and the other transactions
described under "The Company -- Formation of GGS Holdings; Acquisition of
Superior" (collectively, the "Transactions"). The application of the tax laws to
the factual circumstances relating to certain aspects of the Transactions is
uncertain. In particular, while the Company believes that there is substantial
authority for treating Pafco's contribution of IGF to IGF Holdings in exchange
for all of the capital stock of IGF Holdings (the "Contribution") as a tax-free
transaction under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"), and therefore that no tax penalties would in any event be payable,
there can be no assurance that the Internal Revenue Service (the "IRS") would
agree with the foregoing tax treatment. Among other things, the IRS could
attempt to recharacterize the Contribution and the Dividend which could result
in a material liability to the Company. See "The Company -- Formation of GGS
Holdings; Acquisition of Superior." The Company cannot predict with certainty
whether or when any such liabilities might arise. Accordingly, the Company's
results of operations in one or more future periods could be materially
adversely affected by liabilities related to the Transactions. Goran has agreed
to indemnify the Company against any of the foregoing liabilities; however, in
the event that Goran was unable to pay any such amount, the Company would remain
liable.
NO PRIOR PUBLIC MARKET FOR THE COMMON STOCK; TRADING OF GORAN COMMON STOCK
Prior to the Offering, there has been no public market for the Common
Stock. Although the Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "SIGC," subject to official notice of issuance,
there can be no assurance that an active trading market will develop or be
sustained. The initial public offering price of the Common Stock will be
determined solely through negotiations among the Company, Goran and
representatives of the Underwriters based on several factors and will not
necessarily reflect the price at which Common Stock may be sold in the public
market after this Offering. The market price of the Common Stock may be
significantly affected by trading in the shares of Goran common stock on the
Toronto Stock Exchange and the Nasdaq National Market since SIG currently
constitutes a substantial majority of the consolidated total assets of Goran and
contributes a substantial majority of the consolidated net income of Goran. In
addition, factors such as quarterly variations in the Company's financial
results, announcements by the Company or others and developments affecting the
Company could cause the market price of the Common Stock to fluctuate
significantly. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE AND POSSIBLE EFFECT ON THE MARKET PRICE OF THE
COMMON STOCK
Upon completion of the Offering, 7,000,000 shares of Common Stock held by
Goran will continue to be "restricted securities" as defined in Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"). Such shares may
not be resold in the absence of registration under the Securities Act or
exemptions from such registration, including, among others, the exemption
provided by Rule 144 under the Securities Act. As an affiliate of the Company,
Goran is subject to certain volume restrictions on the sale of shares of Common
Stock. The Company and Goran have agreed not to sell or otherwise dispose of any
shares of Common Stock or securities convertible into or exercisable for Common
Stock for a period of 180 days after the date of this Prospectus without the
prior written consent of the representatives of the Underwriters. See
"Underwriting."
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<PAGE> 20
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. If such sales reduce the market price of the Common Stock, the Company's
ability to raise additional capital in the equity markets could be adversely
affected. Pursuant to the registration rights agreement which will be entered
into between the Company and Goran (the "Goran Registration Rights Agreement"),
Goran will have the right to have any or all of the shares of Common Stock held
by it after the Offering included in a registration statement filed by the
Company under the Securities Act, subject to certain limitations set forth in
the Goran Registration Rights Agreement (a "Piggyback Registration"). See
"Certain Relationships and Related Transactions -- Registrations Rights
Agreement between the Company and Goran."
IMMEDIATE AND SUBSTANTIAL DILUTION
Based on an assumed initial public offering price per share of $11.00 and
after deduction of estimated underwriting discounts and expenses payable by the
Company in connection with the Offering, the Company's net tangible book value
per share of Common Stock as of June 30, 1996, after giving effect to the
Offering, would be $3.95. Accordingly, purchasers of Common Stock offered hereby
would suffer immediate dilution in net tangible book value per share of $7.05.
See "Dilution."
18
<PAGE> 21
THE COMPANY
FORMATION AND EARLY YEARS
The Company was incorporated on March 30, 1987 as a wholly-owned subsidiary
of Goran. The Company was formed as the holding company for Pafco which acquired
in 1987 a book of nonstandard automobile insurance business located in several
Midwestern states. In 1990, the Company entered the crop insurance business
through its purchase of shares of preferred stock of IGF representing 80% of the
outstanding voting securities of IGF. After this acquisition, the Company
purchased all the remaining outstanding shares of capital stock of IGF as the
shares became available for sale.
FORMATION OF GGS HOLDINGS; ACQUISITION OF SUPERIOR
In June, 1995, the Company entered into a letter of intent to acquire
Superior from Fortis, and in January, 1996, the Company secured a commitment
from the GS Funds to invest equity capital. On January 31, 1996, Goran, the
Company, Fortis and its wholly-owned subsidiary, Interfinancial, Inc.
("Interfinancial"), a holding company for Superior, entered into a Stock
Purchase Agreement (the "Superior Purchase Agreement") pursuant to which the
Company agreed to purchase Superior from Interfinancial (the "Acquisition") for
a purchase price of approximately $66.0 million. Simultaneously with the
execution of the Superior Purchase Agreement, Goran, the Company, GGS Holdings
and GS Capital Partners II, L.P., a Delaware limited partnership, entered into
an agreement (the "GGS Agreement") to capitalize GGS Holdings and to cause GGS
Holdings to issue its capital stock to the Company and to the GS Funds, so as to
give the Company a 52% ownership interest and the GS Funds a 48% ownership
interest (the "Formation Transaction"). Pursuant to the GGS Agreement, (a) the
Company contributed to GGS Holdings (i) all the outstanding common stock of
Pafco, with a book value determined in accordance with U.S. GAAP of at least
$15.3 million as reflected on an audited post-closing balance sheet of Pafco,
(ii) its right to acquire Superior pursuant to the Superior Purchase Agreement
and (iii) certain fixed assets, including office furniture and equipment, having
a value of approximately $350,000 and (b) the GS Funds contributed to GGS
Holdings $21.2 million in cash. If the book value of Pafco as reflected on the
final post-closing balance sheet is less than $15.3 million, the Company will be
required to contribute the amount of the deficiency in cash to GGS Holdings no
later than December 31, 1996, plus interest at the prime rate from the date of
closing of the Formation Transaction to date of payment. A draft of a Pafco
post-closing balance sheet as of April 30, 1996 has been submitted to the GS
Funds for their review. This draft post-closing balance sheet reflects a book
value which is greater than $15.3 million. Accordingly, the Company does not
anticipate that it will be required to make any deficiency payment to GGS
Holdings.
Pursuant to the GGS Agreement, prior to the Company's contribution of Pafco
to GGS Holdings, Pafco transferred all of the outstanding capital stock of IGF
(the "Transfer") in order to improve the risk-based capital rating of Pafco and
to permit GGS Holdings to focus exclusively on the nonstandard automobile
insurance business. Pafco accomplished the Transfer by forming a wholly-owned
subsidiary, IGF Holdings, Inc. ("IGF Holdings"), to which Pafco contributed all
of the outstanding shares of capital stock of IGF. Prior to the distribution of
the IGF Holdings capital stock to the Company, IGF Holdings paid to Pafco a
dividend in the aggregate amount of approximately $11.0 million (the
"Dividend"), consisting of $7.5 million in cash and a subordinated promissory
note in the principal amount of approximately $3.5 million (the "IGF Note").
Pafco then distributed the outstanding capital stock of IGF Holdings to the
Company. IGF Holdings funded the cash portion of the Dividend with bank debt in
the principal amount of $7.5 million (the "IGFH Bank Debt"). See "Risk Factors
- -- Possible Liabilities Relating to Transactions." The IGFH Bank Debt and the
IGF Note will be repaid with a portion of the proceeds from the Offering. See
"Use of Proceeds."
The Formation Transaction and the Acquisition were completed on April 30,
1996. The purchase price paid by GGS Holdings for Superior was approximately
$66.4 million based on a GAAP net book value of Superior of $63.2 million as
reflected in a preliminary pre-closing balance sheet, subject to post-closing
adjustment based on the net book value of Superior as reflected in an audited
post-closing balance sheet as of April 30, 1996. Fortis has submitted a proposed
Superior post-closing balance sheet to the Company which would not result in the
accrual of any additional purchase price. GGS Management funded the purchase
price
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<PAGE> 22
and associated transaction costs with a combination of the $21.2 million
contributed by the GS Funds and the proceeds of a $48.0 million senior bank
facility extended to GGS Management by several large commercial banks (the "GGS
Senior Credit Facility"). As of September 30, 1996, GGS Management was in
default of a covenant in the GGS Senior Credit Facility that required Pafco and
Superior to maintain a combined ratio of statutory net premiums written to
surplus of 3:1. The commercial bank lenders under the GGS Senior Credit Facility
have effectively waived this default for the four consecutive fiscal quarters
ended September 30, 1996. The Company intends to contribute additional capital
to these insurers in order to permit them to satisfy this covenant in future
periods. See "Risk Factors -- Holding Company Structure; Dividend and Other
Restrictions; Management Fees."
The Stockholder Agreement among the Company, the GS Funds, Goran and GGS
Holdings provides that the Board of Directors of GGS Holdings consists of five
members, of whom three shall be designated by the Company and two shall be
designated by the GS Funds. However, in the event that (x) at any time the
Company and its affiliates shall own less than 25% of the issued and outstanding
common stock of GGS Holdings by reason of the issuance of shares of common stock
to the GS Funds in satisfaction of the indemnification obligations of the
Company or Goran pursuant to the GGS Agreement (the "Indemnity Date") or (y) at
any time (i) the Company, Goran or GGS Holdings is in violation of any term of
the Stockholder Agreement or (ii) GGS Holdings or GGS Management shall remain in
violation of any covenant contained in the GGS Senior Credit Facility (whether
or not such violation is waived) after the expiration of any applicable cure
period or there shall occur an event of default under the GGS Senior Credit
Facility (whether or not waived), the size of the Board shall be reduced to four
members (a "Board Reduction"). The covenants contained in the GGS Senior Credit
Facility are customary commercial loan covenants relating to the maintenance of
financial ratios and restrictions on dividends, significant corporate
transactions and other matters. In such event, so long as the Indemnity Date has
not occurred, the Company shall be entitled to designate only two directors and
the GS Funds shall be entitled to designate two directors. After the occurrence
of the Indemnity Date, the Company shall be entitled to designate one director
and the GS Funds shall be entitled to designate three directors.
Prior to a Board Reduction, action may be taken by the Board only with the
approval of a majority of the members of the Board. After a Board Reduction,
prior to the Indemnity Date, action may only be taken with the approval of at
least one GS Funds designee and one Company designee. After the Indemnity Date
following a Board Reduction, action may only be taken by the Board with the
approval of a majority of the entire Board. Prior to a Board Reduction, GGS
Holdings may not take the following actions, among others, without first
obtaining approval by the Board and at least one GS Funds designee: (i)
consolidate or merge with any person, (ii) purchase the capital stock or
substantially all of the assets of any person, (iii) enter into any joint
venture or partnership or establish any non-wholly owned subsidiaries in which
the consideration paid by or invested by GGS Holdings is in excess of $1
million, (iv) voluntarily liquidate or dissolve, (v) offer any type of insurance
other than nonstandard automobile insurance (other than certain policies issued
on behalf of IGF or SIGF), (vi) sell, lease or transfer assets for an aggregate
consideration in excess of $1 million, (vii) subject to certain exceptions,
enter into any contract with a director or officer of Goran (or any relative or
affiliate of such person) or with any affiliate of Goran, (viii) create or
suffer to exist any indebtedness for borrowed money in an aggregate amount in
excess of $1 million excluding certain existing indebtedness, (ix) mortgage or
encumber its assets in an amount in excess of $1 million, (x) make or commit to
make any capital expenditure in an amount in excess of $1 million, (xi) redeem
or repurchase its outstanding capital stock, (xii) issue or sell any shares of
capital stock of GGS Holdings or its subsidiaries, (xiii) enter into, adopt or
amend any employment agreement or benefit plan, (xiv) amend its Certificate of
Incorporation or Bylaws, (xv) amend or waive any provision of the Stockholder
Agreement or the GGS Agreement, (xvi) change its independent certified
accountants or actuaries, (xvii) register any securities under the Securities
Act, (xviii) enter into one or more agreements to reinsure a substantial portion
of the liability of GGS Holdings or any of its subsidiaries, or (xix) adopt or
change the reserve policy or the investment policy of GGS Holdings or any of its
subsidiaries.
The Company's representatives on the Board of Directors of GGS Holdings are
G. Gordon Symons, Chairman of the Board of the Company, Alan G. Symons, Chief
Executive Officer of the Company and
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<PAGE> 23
Douglas H. Symons, President and Chief Operating Officer of the Company.
Pursuant to their power under the Stockholder Agreement to designate the
Chairman of the Board of GGS Holdings, the GS Funds have named G. Gordon Symons
as Chairman of the Board of GGS Holdings. The Stockholder Agreement designates
Alan G. Symons as the Chief Executive Officer of GGS Holdings and gives him the
right to designate and determine the compensation for all management personnel,
provided that the designation of, removal of, and determination of compensation
for, any person earning $100,000 or more per annum is subject to the prior
approval of the board. The GS Funds have the right at any time to designate a
chief operating officer for GGS Holdings but have currently not elected to
exercise this right. Upon request, the GS Funds have the right to appoint one
designee to each of the committees of the Board of Directors of GGS Holdings.
The Stockholder Agreement does not give the GS Funds the right to appoint any
designees to the board of directors of any of the subsidiaries of GGS Holdings.
Prior to the Offering, the Company, through Symons International Group,
Inc. (Florida) ("SIGF"), its specialized surplus lines underwriting unit based
in Florida, provided certain commercial insurance products through retail
agencies, principally in the southeast United States. SIGF writes these
specialty products through a number of different insurers including Pafco,
United National Insurance Group, Munich American Reinsurance Corp. and
underwriters at Lloyd's of London. Effective January 1, 1996, the Company
transferred to Goran all of the issued and outstanding shares of capital stock
of SIGF (the "Distribution").
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<PAGE> 24
USE OF PROCEEDS
Based on an estimated offering price of $11.00 per share and estimated
offering expenses of $4.0 million, the net proceeds to the Company of the
Offering are estimated to be approximately $29.0 million (approximately $33.5
million if the Underwriters' over-allotment option is exercised in full). The
Company intends to apply the net proceeds from the Offering as follows: (i) to
contribute approximately $9.0 million to IGF to increase its statutory surplus
to provide support for the writing of additional crop insurance coverages, (ii)
to repay in full the IGFH Bank Debt of approximately $7.5 million, (iii) to
retire the approximately $3.5 million IGF Note held by Pafco, (iv) to retire the
Parent Indebtedness, the aggregate outstanding balance of which is approximately
$7.5 million, and (v) to declare and pay a dividend to Goran in the amount of up
to $3.5 million, to the extent that excess net proceeds remain. Based on the
assumed offering price of $11 per share, estimated offering expenses of $1.33
per share and use of proceeds as noted above, and excluding the effects of any
exercise of overallotment options, funds remaining that would be available to
pay a dividend to Goran would aggregate approximately $1.4 million. See "The
Company -- Formation of GGS Holdings; Acquisition of Superior." The Company will
use the remainder of the net proceeds, if any, for general corporate purposes,
including acquisitions. Until utilized for the above purposes, the net proceeds
of the Offering will be invested in short-term, interest-bearing,
investment-grade securities. In the event that net proceeds of the Offering are
not sufficient for all the foregoing uses, the Company would first eliminate the
declaration and payment of the dividend payable to Goran and then, if necessary,
reduce the repayment of Parent Indebtedness.
The IGFH Bank Debt matures on January 1, 2001, with principal repayable in
16 quarterly installments of $468,750 commencing April 1, 1997. Interest will
accrue at a variable rate per annum equal to the prime rate until October 1,
1996 and thereafter at a rate equal to the prime rate plus one percent. The IGFH
Bank Debt is collateralized by a first priority security interest in all of the
outstanding shares of IGF and the guarantee of Symons International Group, Ltd.
("SIGL"), the controlling shareholder of Goran, collateralized by 966,600 shares
of Goran common stock. Additionally, certain financial covenants in favor of the
lender of the IGFH Bank Debt require IGF Holdings to maintain increasing levels
of income, retained earnings, and statutory capital over the term of the IGFH
Bank Debt. The IGF Note is payable on the earlier of November 30, 1996, or the
consummation of an IGFH or SIG Company Sale (as defined in the GGS Agreement).
The IGF Note may be prepaid only with the prior written consent of the lender of
the IGFH Bank Debt. The IGF Note bears interest at a variable rate per annum
equal to the prime rate plus one percent until October 1, 1996 and thereafter at
a rate equal to the prime rate plus two percent, and is collateralized by a
second lien on the outstanding shares of capital stock of IGF. The Parent
Indebtedness is payable on demand, accrues interest at a rate of 10% and was
originally incurred by SIG in 1992 as a result of Goran's partial funding of the
repayment of certain loan obligations arising from the capitalization of SIG's
U.S. operations.
After giving effect to the Transactions and the Offering on a pro forma
basis as if the Transactions and the Offering had occurred on January 1, 1995,
the pro forma net income per share for the year ended December 31, 1995 and the
six months ended June 30, 1996 is $0.66 and $0.58, respectively.
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<PAGE> 25
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future, except for the dividend to Goran
described in "Use of Proceeds." Any determination to pay cash dividends on the
Common Stock will depend on, among other things, the future earnings, capital
requirements and financial condition of the Company, legal restrictions on the
payment of dividends, and on such other factors as the Company's Board of
Directors may consider relevant. As a holding company, the Company will depend
on dividends and other payments from the Subsidiaries to meet its expenses and
other corporate obligations and, if declared, to pay dividends to shareholders.
In the case of the Insurers, such payments are restricted by the laws,
regulations and orders of regulatory authorities of the states of Indiana and
Florida. In addition, the GGS Senior Credit Facility effectively prohibits GGS
Management from paying dividends or making other payments to its affiliates in
excess of $100,000 per year in the aggregate and the IGF Revolver prohibits the
payment of dividends by IGF without the consent of the lender. See "Risk
Factors -- Holding Company Structure; Dividend and Other Restrictions;
Management Fees."
DILUTION
At June 30, 1996, the net tangible book value of the Common Stock was
approximately $12.0 million, or $1.71 per share. The net tangible book value per
share represents the amount of total tangible assets (total assets less
intangible assets) of the Company reduced by its total liabilities divided by
the number of shares of Common Stock outstanding. After giving effect to the
sale of 3,000,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $11.00 per share less estimated underwriting discounts
and commissions and offering expenses, but without taking into account any other
changes in net tangible book value after June 30, 1996, the adjusted net
tangible book value of the Common Stock at June 30, 1996 would have been $39.5
million, or $3.95 per share. This represents an immediate increase in the net
tangible book value to Goran of $2.24 per share, and an immediate dilution in
net tangible book value to new investors purchasing Common Stock in the Offering
of $7.05 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $11.00
Net book value per share.............................................. 2.54
Less: Intangible assets per share................................ 0.83
----
Net tangible book value per share...................... 1.71
Increase per share attributable to the purchase of Common Stock
by new investors in the Offering................................ 2.24
----
As adjusted net tangible book value per share after the Offering...... 3.95
------
Dilution per share to new investors (1)(2)............................ $ 7.05
======
</TABLE>
- -------------------------
(1) Dilution is determined by subtracting the net tangible book value per share
of Common Stock, after giving effect to the Offering, from the amount of
cash paid for a share of Common Stock by a new investor in the Offering.
(2) Intangible assets per share would be $2.71, net tangible book value per
share would be $(0.17), and dilution per share to new investors would be
$8.37 if deferred policy acquisition costs (which aggregated $13,192,000 at
June 30, 1996) were considered an intangible asset.
23
<PAGE> 26
CAPITALIZATION
Set forth below is the actual capitalization of the Company at June 30,
1996 and the capitalization of the Company at June 30, 1996 as adjusted to give
effect to the application of the net proceeds from the Offering (based on an
assumed offering price of $11.00 per share of Common Stock) as described in "Use
of Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------------
AS ADJUSTED FOR
ACTUAL THE OFFERING(1)
------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt...................................................... $15,287 $ 250
======= ========
Long-term bank debt.................................................. 48,000 48,000
------- --------
Minority interest.................................................... 17,723 17,723
------- --------
Shareholders' equity:................................................
Preferred stock; 50,000,000 shares authorized; no shares
outstanding.................................................... -- --
Common stock, no par value, and additional paid-in capital;
100,000,000 shares authorized; 7,000,000 shares outstanding and
10,000,000 shares outstanding as adjusted...................... 7,519 36,479
Unrealized gain on investments.................................. 484 484
Retained earnings............................................... 9,754 8,331
------- --------
Total shareholders' equity.................................... $17,757 $ 45,294
------- --------
Total capitalization................................................. $83,480 $ 111,017
======= ========
</TABLE>
- -------------------------
(1) The information as adjusted excludes shares reserved for issuance pursuant
to certain employment agreements with officers of IGF and the Company's 1996
Stock Option Plan, of which options for 827,000 shares have been granted.
See "Management -- Executive Compensation -- Employment Contracts and
Termination of Employment -- IGF" and "-- Stock Option Plans -- SIG 1996
Stock Option Plan."
24
<PAGE> 27
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma consolidated statements of operations of
the Company for the year ended December 31, 1995 and the six months ended June
30, 1996 present results for the Company as if the Transactions and the Offering
had occurred as of January 1, 1995, and eliminates all of the operations related
to the commercial business ceded to Granite Re for the year ended December 31,
1995. The pro forma adjustments are based on available information and certain
assumptions that the Company currently believes are reasonable in the
circumstances. The unaudited pro forma consolidated statements of operations
have been derived from and should be read in conjunction with the historical
Consolidated Financial Statements and Notes of the Company for the year ended
December 31, 1995 and the unaudited six months ended June 30, 1996 and the
historical Consolidated Financial Statements and Notes of Superior for the year
ended December 31, 1995 and the unaudited six months ended June 30, 1996, in
each case contained elsewhere herein, and should be read in conjunction with the
accompanying Notes to Unaudited Pro Forma Consolidated Statements of Operations.
The pro forma adjustments and pro forma consolidated amounts are provided for
informational purposes only.
For a discussion of the accounting statement accorded to the crop insurance
business, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations of the Company -- Overview -- Crop Insurance Operations."
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results of operations or financial position
that would have occurred had the Transactions and the Offering been consummated
on the dates assumed; nor is the pro forma information intended to be indicative
of the Company's future results of operations.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED JUNE 30, 1996
SIX MONTHS FOUR MONTHS ---------------------------------------------------------
ENDED ENDED APRIL PRO FORMA
JUNE 30, 30, FOR THE
1996 1996 PRO FORMA TRANSACTIONS
SIG SUPERIOR FOR THE OFFERING AND THE
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS ADJUSTMENTS OFFERING
---------- ----------- ----------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written...................... $146,950 $43,993 $ -- $190,943 $ -- $190,943
Net premiums written........................ 77,042 43,618 -- 120,660 -- 120,660
Net premiums earned......................... 59,066 39,387 -- 98,453 -- 98,453
Net investment income....................... 1,533 2,452 -- 3,985 -- 3,985
Other income................................ 4,062 2,217 140C2 6,419 (140)I 6,279
Net realized capital gain (loss)............ 228 29 -- 257 -- 257
------- -------- ------- -------- ----- --------
Total revenues.......................... 64,889 44,085 140 109,114 (140) 108,974
Losses and loss adjustment expenses......... 45,275 26,715 -- 71,990 -- 71,990
Policy acquisition and general and
administrative expenses................... 12,283 11,445 78A1 23,755 -- 23,755
42A2
(174)A3
81B2
Interest expense............................ 1,261 -- 1,330A4 2,962 (375)G 2,216
371C1 (371)H
------- -------- ------- -------- ----- --------
Total expenses.......................... 58,819 38,160 1,728 98,707 (746) 97,961
Income before income taxes and minority
interest.................................. 6,070 5,925 (1,588) 10,407 606 11,013
Provision for income taxes.................. 1,854 1,952 (542)F 3,264 206K 3,470
Minority interest........................... (88) -- 1,747B1 1,659 (44)J 1,615
------- -------- ------- -------- ----- --------
Net income.............................. $ 4,304 $ 3,973 $(2,793) $ 5,484 $ 444 $ 5,928
======= ======== ======= ======== ===== ========
$0.78 $0.58
Net income per common share................. ======== ========
Weighted average shares outstanding......... 7,000 3,129L 10,129
GAAP RATIOS:
Loss and LAE ratio.......................... 76.7% 67.8% 73.1% 73.1%
Expense ratio............................... 22.9% 29.1% 27.1% 26.4%
------- -------- -------- --------
Combined ratio.......................... 99.6% 96.9% 100.2% 99.5%
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
25
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
PRO FORMA
FOR THE
PRO FORMA TRANSACTIONS
SIG SUPERIOR FOR THE OFFERING AND THE
HISTORICAL HISTORICAL ADJUSTMENTS TRANSACTIONS ADJUSTMENTS OFFERING
---------- ---------- ----------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
Gross premiums written........ $ 124,634 $ 94,756 $(5,115)E $214,275 $ -- $214,275
Net premiums written.......... 53,447 94,070 (4,539)E 142,978 -- 142,978
Net premiums earned........... 49,641 97,614 (3,573)E 143,682 -- 143,682
Net investment income......... 1,173 7,093 (4)E 8,262 -- 8,262
Other income.................. 2,174 4,171 280C2 6,625 (280)I 6,345
Net realized capital gain
(loss)...................... (344) 1,954 -- 1,610 -- 1,610
---------- ---------- ----------- ------------ ----------- ------------
Total revenues.............. 52,644 110,832 (3,297) 160,179 (280)1 159,899
Losses and loss adjustment
expenses.................... 35,971 72,343 (2,880)E 105,434 -- 105,434
Policy acquisition and general
and administrative
expenses.................... 7,981 32,705 232A1 40,035 -- 40,035
126A2
(521)A3
244B2
(732)E
Interest expense.............. 1,248 -- 3,989A4 6,211 (750)G 4,487
974C1 (974)H
---------- ---------- ----------- ------------ ----------- ------------
Total expenses.............. 45,200 105,048 1,432 151,680 (1,724) 149,956
Income before income taxes,
minority interest, and
discontinued operations..... 7,444 5,784 (4,729) 8,499 1,444 9,943
Provision for income taxes.... 2,619 1,649 (1,565)F 2,703 491K 3,194
Minority interest............. -- -- 136B1 136 (88)J 48
Loss from discontinued
operations (less income
taxes)...................... (4) -- 4D -- -- --
---------- ---------- ----------- ------------ ----------- ------------
Net income.................. $ 4,821 $ 4,135 $(3,296) $ 5,660 $ 1,041 $ 6,701
======== ======== ========= ========= ========= =========
Net income per common share... $0.81 $0.66
========= =========
Weighted average shares
outstanding................. 7,000 3,129L 10,129
GAAP RATIOS:
Loss and LAE ratio............ 72.5% 74.1% 73.4% 73.4%
Expense ratio................. 18.6 33.5 32.2 31.0
---------- ---------- ------------ ------------
Combined ratio.............. 91.1% 107.6% 105.6% 104.4%
</TABLE>
The accompanying notes are an integral part of the pro forma consolidated
financial statements.
26
<PAGE> 29
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
PRO FORMA ADJUSTMENTS RELATING TO THE TRANSACTIONS
Acquisition of Superior
The Acquisition was accounted for under the purchase method of accounting.
Under this method, the total cost to acquire Superior was allocated to the
assets and liabilities based on their fair values as of the date of the
Acquisition with any excess of the total purchase price over the fair value of
the assets acquired less the fair value of the liabilities assumed recorded as
goodwill. Under the terms of the Superior Purchase Agreement, the total purchase
price for Superior was $66,389,000, including transaction costs of $140,000. The
GAAP carrying value of assets acquired and liabilities assumed at the
Acquisition date approximated fair value. There were no significant identifiable
intangible assets. Therefore, the excess cost of the total purchase price
($3,161,000) was recorded as goodwill.
The Acquisition was funded with (i) $21,200,000 of cash contributions from
the GS Funds in exchange for a 48% minority interest in GGS Holdings; and (ii)
$48,000,000 in cash from the GGS Senior Credit Facility. Funds received in
excess of the total purchase price of Superior plus acquisition costs financed,
estimated to be $192,000, are reflected as cash until final determination of the
Acquisition purchase price. No additional investment income is assumed to be
earned on the excess cash retained from the proceeds of the Acquisition
financing.
Pro forma adjustments relating to the Acquisition pertaining to the six
month period ended June 30, 1996 were calculated based on the period from
January 1, 1996 to April 30, 1996, the date of the Acquisition.
Pro forma adjustments to give effect to the Acquisition and related
transactions are summarized as follows:
A1. Policy acquisition and general and administrative expenses for the periods
prior to the Acquisition are adjusted by $232,000 for the year ended
December 31, 1995 and by $78,000 for the six months ended June 30, 1996 to
reflect the amortization of deferred loan origination costs of $1,397,000
incurred related to the GGS Senior Credit Facility. The debt issuance
costs are amortized over six years, the term of the GGS Senior Credit
Facility.
A2. Policy acquisition and general and administrative expenses for the periods
prior to the Acquisition are adjusted by $126,000 for the year ended
December 31, 1995 and by $42,000 for the six months ended June 30, 1996 to
reflect the amortization of goodwill of $3,161,000. Goodwill is amortized
over a 25-year period on a straight line basis based upon management's
estimate of the expected benefit period.
A3. Policy acquisition and general and administrative expenses for the periods
prior to the Acquisition are adjusted by $521,000 for the year ended
December 31, 1995 and by $174,000 for the six months ended June 30, 1996
to reflect the elimination of management fees charged by Superior's former
parent, Fortis, for corporate expenses.
A4. Interest expense for the periods prior to the Acquisition is adjusted by
$3,989,000 for the year ended December 31, 1995 and by $1,330,000 for the
six months ended June 30, 1996 to reflect the GGS Senior Credit Facility
financing of $48,000,000 related to the Acquisition. It is assumed that
the interest rate on the GGS Senior Credit Facility was 8.31% for both
periods. The Company entered into an interest rate swap to effectively fix
its borrowing costs at 8.31% through November 15, 1996 and 9.02% through
July 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company -- Liquidity and
Capital Resources."
The Formation Transaction
B1. Minority interest for the periods prior to the Formation Transaction is
$136,000 for the year ended December 31, 1995 and $1,747,000 for the six
months ended June 30, 1996 reflecting the 48% minority interest in GGS
Holdings.
27
<PAGE> 30
B2. Policy acquisition and general and administrative expenses for the periods
prior to the Formation Transaction is adjusted by $244,000 for the year
ended December 31, 1995 and by $81,000 for the six months ended June 30,
1996 to reflect the amortization of organizational costs of $1,220,000.
Organizational costs are amortized over a 5-year period on a straight line
basis.
The Transfer
In connection with the Transfer and immediately prior to the Formation
Transaction, IGF Holdings paid to Pafco the Dividend, consisting of $7,500,000
in cash and the $3,500,000 IGF Note. IGF Holdings funded the cash portion of the
Dividend with the proceeds of the $7,500,000 IGFH Bank Debt.
Pro forma adjustments to give effect to the Transfer and related
transactions are summarized as follows:
C1. Interest expense for the periods prior to the Transfer is adjusted to
reflect the financing of the Dividend. The interest rate on the IGFH Bank
Debt was 9.25% (prime rate plus 1%), which represents the interest
applicable for the majority of the debt service period. The stated
interest rate on the IGF Note is 8.0%. Pro forma interest expense
adjustments to give effect to the financing are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
IGFH Bank Debt.............. $ 694,000 $231,000
IGF Note.................... 280,000 140,000
-------- --------
$ 974,000 $371,000
======== ========
</TABLE>
C2. Other income has been adjusted by $280,000 for the year ended December 31,
1995 and by $140,000 for the six months ended June 30, 1996 to reflect the
interest income Pafco would earn which is derived from the $3,500,000 IGF
Note, at a stated rate of 8.0%.
The Distribution
D. Loss from discontinued operations is adjusted to reflect the Distribution,
which occurred on January 1, 1996. Accordingly, all of the discontinued
operations related to SIGF activities have been eliminated on a pro forma
basis. No adjustments have been made to the Pro Forma Consolidated
Statements of Operations for the six months ended June 30, 1996 as the
Distribution occurred on January 1, 1996.
E. On April 29, 1996, Pafco ceded all of its commercial business relating to
(i) 1995 and previous years, and (ii) prospectively written commercial
business, through a 100% quota share reinsurance agreement to Granite Re,
an affiliate of the Company, with an effective date of January 1, 1996.
Granite Re, a subsidiary of Goran, is not part of the consolidated group
of the Company. Therefore, the commercial business ceded to Granite Re has
been excluded from the Company's results of operations to reflect the
continuing impact of the Company's results of operations. On a pro forma
basis, all of the operations related to the commercial business have been
eliminated for the year ended December 31, 1995. No adjustments have been
made to the Pro Forma Consolidated Statements of Operations for the six
months ended June 30, 1996 as the cession of commercial business to
Granite Re occurred as of January 1, 1996. The following amounts have been
eliminated, on a pro forma basis:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
<S> <C>
Gross premiums written......................... $ 5,115,000
Net premiums written........................... 4,539,000
Net premiums earned............................ 3,573,000
Net investment income.......................... 4,000
Losses and LAE................................. 2,880,000
Policy acquisition and general and
administrative expenses...................... 732,000
</TABLE>
28
<PAGE> 31
The Company remains contingently liable with respect to the reinsurance
with Granite Re, which would become an ultimate liability of the Company
in the event that Granite Re is unable to meet its obligations under the
reinsurance agreements.
F. All applicable pro forma adjustments to operations are tax affected at
the effective rate.
PRO FORMA ADJUSTMENTS RELATING TO THE OFFERING
The Pro Forma Consolidated Statements of Operations reflect the assumed
issuance by the Company of 3,000,000 shares at an offering price of $11.00 per
share, and the application of the proceeds thereof (net of assumed offering
expenses of $3,300,000) as described in "Use of Proceeds."
G. Interest expense for the periods prior to the Offering are adjusted by
$750,000 for the year ended December 31, 1995 and by $375,000 for the six
months ended June 30, 1996 to reflect the retirement of the Parent
Indebtedness of $7,500,000, with a stated interest rate of 10%.
H. Interest expense for the periods prior to the Offering is adjusted to
reflect the repayment of the $7,500,000 IGFH Bank Debt, with an interest
rate of 9.25%, and the repayment of the IGF Note of $3,500,000, with a
stated interest rate of 8.0% as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
IGFH Bank Debt.............. $ 694,000 $231,000
IGF Note.................... 280,000 140,000
-------- --------
$ 974,000 $371,000
======== ========
</TABLE>
I. Other income has been adjusted by $280,000 for the year ended December
31, 1995 and by $140,000 for the six months ended June 30, 1996 to reflect
the elimination of interest income Pafco would have earned on the IGF Note
of $3,500,000, at a stated rate of 8%. No additional investment income is
assumed to be earned on the cash received by Pafco from the proceeds of
the IGF Note.
J. Minority interest for the periods prior to the Formation Transaction has
been adjusted by $88,000 for the year ended December 31, 1995 and by
$44,000 for the six months ended June 30, 1996 to reflect the 48.0%
minority interest in GGS Holdings resulting from entry I above.
K. All applicable pro forma adjustments to operations are tax affected at the
effective rate.
L. The weighted average shares outstanding have been adjusted to reflect the
3,000,000 shares issued in the Offering, and have been further increased
by 129,364 shares for the $1.4 million dividend to be paid to Goran from
the proceeds of the Offering, in accordance with accounting rules which
require such presentation for purposes of pro forma earnings per share
calculations.
29
<PAGE> 32
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SYMONS INTERNATIONAL GROUP, INC.
The selected consolidated financial data presented below is derived from
the consolidated financial statements of the Company and its Subsidiaries. Such
financial statements for, and as of the end of, each of the years in the three
year period ended December 31, 1995, have been audited by Coopers & Lybrand
L.L.P., independent public accountants, and are included in this Prospectus. The
selected consolidated financial data presented below for, and as of the end of,
each of the six month periods ended June 30, 1995 and 1996 are derived from the
unaudited consolidated financial statements of the Company included elsewhere in
this Prospectus. The results of the operations of the Company for the six months
ended June 30, 1996 are not necessarily indicative of the results of operations
that may be expected for the full year. In the opinion of management, the
unaudited information includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for such periods. The information set forth
below should be read in conjunction with the consolidated financial statements
of the Company and the notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------------- ----------------------------------
PRO FORMA PRO FORMA
FOR THE FOR THE
TRANSACTION TRANSACTION
AND THE AND THE
OFFERING OFFERING
1991 1992 1993 1994 1995 1995(1) 1995 1996(2) 1996(1)
------- -------- ------- -------- -------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:(3)
Gross premiums written.... $91,974 $109,219 $88,936 $103,134 $124,634 $214,275 $ 95,759 $146,950 $190,943
Net premiums written...... 31,543 35,425 31,760 35,139 53,447 142,978 30,855 77,042 120,660
Net premiums earned....... 30,388 35,985 31,428 32,126 49,641 143,682 22,789 59,066 98,453
Net investment income..... 1,370 1,319 1,489 1,241 1,173 8,262 636 1,533 3,985
Other income.............. -- -- 886 1,622 2,174 6,345 997 4,062 6,279
Net realized capital gain
(loss).................. 381 486 (119) (159) (344) 1,610 79 228 257
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Total revenues.... 32,139 37,790 33,684 34,830 52,644 159,899 24,501 64,889 108,974
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Losses and loss adjustment
expenses................ 23,137 27,572 25,080 26,470 35,971 105,434 15,751 45,275 71,990
Policy acquisition and
general and
administrative
expenses................ 5,480 7,955 8,914 5,801 7,981 40,035 5,589 12,283 23,755
Interest expense.......... 847 459 996 1,184 1,248 4,487 193 1,261 2,216
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Total expenses.... 29,464 35,986 34,990 33,455 45,200 149,956 21,533 58,819 97,961
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Income (loss) before
taxes, discontinued
operations,
extraordinary item,
cumulative effect of an
accounting change and
minority interest....... 2,675 1,804 (1,306) 1,375 7,444 9,943 2,968 6,070 11,013
Income taxes.............. 771 996 83 (718) 2,619 3,194 958 1,854 3,470
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Income (loss) before
discontinued operations,
extraordinary item,
cumulative effect of an
accounting change and
minority interest....... $ 1,904 $ 808 $(1,389) $ 2,093 $ 4,825 $ 6,749 $ 2,010 $ 4,216 $ 7,543
Net income (loss)......... $ 1,770 $ 817 $ (323) $ 2,117 $ 4,821 $ 6,701 $ 2,006 $ 4,304 $ 5,928
======== ========= ======== ========= ========= ======== ========= ========= =========
Per common share data:
Income (loss) before
discontinued
operations,
extraordinary item,
and cumulative effect
of an accounting
change and minority
interest.............. $ 0.27 $ 0.12 $ (0.20) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.74
Net income (loss)....... $ 0.25 $ 0.12 $ (0.05) $ 0.30 $ 0.69 $ 0.66 $ 0.29 $ 0.61 $ 0.58
======== ========= ======== ========= ========= ======== ========= ========= =========
Weighted average shares
outstanding............. 7,000 7,000 7,000 7,000 7,000 10,129 7,000 7,000 10,129
GAAP RATIOS: (3)(4)
Loss and LAE ratio........ 76.1% 76.6% 79.8% 82.4% 72.5% 73.4% 69.1% 76.7% 73.1%
Expense ratio............. 20.8 23.4 31.5 21.7 18.6 31.0 25.4 22.9 26.4
-------- --------- -------- --------- --------- -------- --------- --------- ---------
Combined ratio............ 96.9% 100.0% 111.3% 104.1% 91.1% 104.4% 94.5% 99.6% 99.5%
</TABLE>
(consolidated balance sheet data and footnotes on following page)
30
<PAGE> 33
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
AS
DECEMBER 31, ADJUSTED
------------------------------------------------------ FOR THE
1991 1992 1993 1994 1995 ACTUAL OFFERING(1)
------- -------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:(3)
Investments................................ $26,049 $ 27,941 $21,497 $ 18,572 $ 25,902 $161,205 $173,705
Total assets............................... 78,749 75,001 81,540 66,628 110,516 378,673 391,173
Losses and loss adjustment expenses........ 38,607 38,616 54,143 29,269 59,421 93,628 93,628
Total debt................................. 9,009 11,528 9,341 10,683 11,776 63,287 48,250
Minority interest.......................... 466 55 -- 16 -- 17,723 17,723
Total shareholders' equity................. 484 1,193 2,219 4,255 9,535 17,757 45,294
Book value per share....................... $ 0.07 $ 0.17 $ 0.32 $ 0.61 $ 1.36 $ 2.54 $ 4.53
STATUTORY CAPITAL AND SURPLUS:(5)
Pafco...................................... $ 8,251 $ 10,363 $ 8,132 $ 7,848 $ 11,875 $ 14,872 $ 14,872
IGF........................................ $ 5,277 $ 6,400 $ 2,789 $ 4,512 $ 9,219 $ 11,559 $ 20,559
Superior................................... $ 48,036 $ 48,036
</TABLE>
- -------------------------
(1) Results of operations of Superior for the years ended December 31, 1993,
1994 and 1995 and for the six months ended June 30, 1995 and 1996 are
presented herein in "Selected Consolidated Historical Financial Data of
Superior Insurance Company." The pro forma consolidated statement of
operations data for the year ended December 31, 1995 and for the six months
ended June 30, 1996 present results for the Company as if the Transactions
and the Offering had occurred as of January 1, 1995 and eliminate all of the
operations related to the commercial business ceded to Granite Re for the
year ended December 31, 1995. See "Unaudited Pro Forma Consolidated
Statements of Operations" for a discussion of such adjustments. The as
adjusted consolidated balance sheet data as of June 30, 1996 gives effect to
the Offering as if it had occurred as of June 30, 1996. The as adjusted
consolidated balance sheet data assumes a per share offering price of $11.00
and 3,000,000 shares issued less estimated issuance costs of $4,000,000 and
the application of the net proceeds of the Offering. See "Use of Proceeds."
(2) The Company's consolidated results of operations for the six months ended
June 30, 1996 include the results of operations of Superior subsequent to
the Acquisition.
(3) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Overview -- Crop Insurance Operations" for a
discussion of the accounting treatment accorded to the crop insurance
business.
(4) The loss and LAE ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. The expense ratio is calculated by dividing
the sum of policy acquisition and general and administrative expenses and
interest expense by net premiums earned. The combined ratio is the sum of
the loss and LAE and expense ratios. As a result of the unique accounting
treatment accorded to the MPCI business, the Company's GAAP loss and LAE,
expense and combined ratios are not comparable to the ratios for other
property and casualty insurers.
(5) The statutory surplus of Pafco includes Pafco's share of IGF's statutory
surplus prior to April 30, 1996. Pafco owned the following percentages of
IGF at December 31 of each of the following years: 1991, 87.9%; 1992, 98.2%;
1993, 98.2%; 1994, 98.8%; 1995, 100%. At April 30, 1996, Pafco transferred
IGF Holdings to SIG. Prior to the Transfer, IGF Holdings also paid a
dividend to Pafco in the form of cash of $7,500,000 and a promissory note
with a principal amount of $3,500,000. See "The Company -- Formation of GGS
Holdings; Acquisition of Superior."
31
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OF THE COMPANY
OVERVIEW
The Company underwrites and markets nonstandard private passenger
automobile insurance and crop insurance.
Nonstandard Automobile Insurance Operations; Impact of Formation Transaction and
Superior Acquisition
The Company, through its 52% owned Subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks." Nonstandard insureds are those
individuals who are unable to obtain insurance through standard market carriers
due to factors such as poor premium payment history, driving experience, record
of prior accidents or driving violations, particular occupation or type of
vehicle. Premium rates for nonstandard risks are higher than for standard risks.
Since it can be viewed as a residual market, the size of the nonstandard private
passenger automobile insurance market changes with the insurance environment and
grows when standard coverage becomes more restrictive. Nonstandard policies have
relatively short policy periods and low limits of liability. Due to the low
limits of coverage, the period of time that elapses between the incurrence and
settlement of losses under nonstandard policies is shorter than many other types
of insurance. Also, since the nonstandard automobile insurance business
typically experiences lower rates of retention than standard automobile
insurance, the number of new policyholders underwritten by nonstandard
automobile insurance carriers each year is substantially greater than the number
of new policyholders underwritten by standard carriers. While pricing conditions
have improved in certain markets in 1996, the nonstandard automobile insurance
business has experienced a high degree of competition in recent years that has
made it difficult for the Company to achieve adequate pricing. As a consequence
of these pricing conditions, the Company from time to time has had to
temporarily reduce its writings in certain markets. For information concerning
the Company's historical loss and LAE ratios on its nonstandard automobile
insurance business, see "-- Selected Segment Data of the Company."
Prior to consummation of the Formation Transaction and the Acquisition on
April 30, 1996, the Company provided nonstandard automobile insurance coverage
primarily through Pafco as a wholly-owned subsidiary. In connection with the
Formation Transaction, the management agreement formerly in place between the
Company and Pafco, which provides for an annual management fee payable to the
Company in an amount equal to 15% of gross premiums written, was assigned to GGS
Management. As a result of the change in the capital structure of the Company's
nonstandard automobile insurance business, the acquisition of Superior by GGS
Holdings and the assignment of the Pafco management agreement to GGS Management,
certain financial information relating to the Company's nonstandard business in
respect of periods prior to consummation of the Formation Transaction and the
Acquisition will not be comparable to corresponding financial information for
subsequent periods. See "The Company -- Formation of GGS Holdings; Acquisition
of Superior" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations of Superior."
Crop Insurance Operations
General. The majority of the Company's crop insurance business consists of
Multi-Peril Crop Insurance ("MPCI"). MPCI is a government-sponsored program with
accounting treatment which differs in certain respects from more traditional
property and casualty insurance lines. Farmers may purchase "CAT Coverage" (the
minimum available level of MPCI coverage) upon payment of a fixed administrative
fee of $50 per policy (the "CAT Coverage Fee") instead of a premium. This fee is
included in Other Income. Commissions paid to agents to write CAT policies are
partially offset by the CAT Coverage Fee, with such offset reflected in Other
Income. For purposes of the profit-sharing formula under the MPCI program
referred to below, the Company is credited with an imputed premium (its "MPCI
Imputed Premium") for all CAT Coverage policies it sells,
32
<PAGE> 35
determined in accordance with the profit-sharing formula established by the
FCIC. For income statement purposes under GAAP, gross premiums written consist
of the aggregate amount of premiums paid by farmers for "Buy-up Coverage" (MPCI
coverage in excess of CAT Coverage), and any related federal premium subsidies,
but do not include any MPCI Imputed Premium credited on CAT Coverage. By
contrast, net premiums written (and net premiums earned) do not include any MPCI
premiums or premium subsidies, all of which are deemed to be ceded to the U.S.
Government as reinsurer. The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a complex profit-sharing
formula established by federal regulation and the FCIC. For GAAP income
statement purposes, any such profit or loss sharing earned or payable by the
Company is treated as an adjustment to commission expense and is included in
policy acquisition and general and administrative expenses. Amounts receivable
from the FCIC are reflected on the Company's consolidated balance sheet as
reinsurance recoverables.
The Company also receives from the FCIC (i) an expense reimbursement
payment equal to a percentage of gross premiums written for each Buy-up Coverage
policy it writes (the "Buy-up Expense Reimbursement Payment"), (ii) an LAE
reimbursement payment equal to 13.0% of MPCI Imputed Premiums for each CAT
Coverage policy it writes (the "CAT LAE Reimbursement Payment") and (iii) a
small excess LAE reimbursement payment of two hundredths of one percent (.02%)
of MPCI Retention (as defined herein) to the extent the Company's MPCI loss
ratios on a per state basis exceed certain levels (the "MPCI Excess LAE
Reimbursement Payment"). For 1994, 1995 and 1996, the Buy-up Expense
Reimbursement Payment has been set at 31% of the MPCI Premium, but it is
scheduled to be reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999. For GAAP
income statement purposes, the Buy-up Expense Reimbursement Payment is treated
as a contribution to income and reflected as an offset against policy
acquisition and general and administrative expenses. The CAT LAE Reimbursement
Payment and the MPCI Excess LAE Reimbursement Payment are, for income statement
purposes, recorded as an offset against LAE, up to the actual amount of LAE
incurred by the Company in respect of such policies, and the remainder of the
payment, if any, is recorded as Other Income. See "Business -- Crop Insurance --
Products."
As a result of the unique accounting treatment accorded to the MPCI
business, the Company's GAAP loss and LAE, expense and combined ratios are not
comparable to the ratios for other property and casualty insurers. This lack of
comparability results from, among other things, (i) the recognition of MPCI
underwriting gain or loss as an offset to commission expense, (ii) the lack of
any net premium or loss and LAE for MPCI because of the deemed 100% reinsurance
by the federal government, and (iii) other aspects of MPCI accounting that
affect one or more aspects of the Company's operating ratios. Accordingly, such
ratios are included in this Prospectus not for comparison to other insurers, but
instead as a measure of the Company's relative performance in different years.
For loss and LAE, expense and combined ratio information with respect to the
Company's nonstandard automobile insurance business only, see "Business --
Nonstandard Automobile Insurance -- Underwriting."
Certain other characteristics of the Company's crop business may affect
comparisons of the Company's results and operating ratios with those of other
insurers, including: (i) the seasonal nature of the business whereby
underwriting gains are generally recognized throughout the year with a
reconciliation in the last quarter of the year; (ii) the short-term nature of
crop business whereby losses are known within a short time period; and (iii) the
limited amount of investment income associated with crop business. In addition,
cash flows from the crop business differ from cash flows from certain more
traditional lines. See "-- Liquidity and Capital Resources." The seasonal and
short term nature of the Company's crop business, as well as the impact on such
business of weather and other natural perils, may produce variations in the
Company's operating results.
Impact of 1994 Reform Act and 1996 Reform Act. The 1994 Reform Act required
farmers for the first time to purchase at least CAT Coverage in order to be
eligible for other federally sponsored farm benefits, including but not limited
to low interest loans and crop price supports. The 1994 Reform Act also
authorized for the first time the marketing and selling of CAT Coverage by the
local USDA offices. As a result of an increase in the number of policies and
acres insured in 1995, the Company's MPCI Premiums increased to $53.4 million in
1995 from $44.3 million in 1994 and the fees and commissions received by the
Company from its MPCI business increased to $21.1 million in 1995 from $14.0
million in 1994. However, the 1996 Reform Act limits the role of the USDA
offices in the delivery of MPCI coverage beginning in July, 1996, which is the
33
<PAGE> 36
commencement of the 1997 crop year, and also eliminates the linkage between CAT
Coverage and qualification for certain federal farm program benefits. The
limitation of the USDA's role in the delivery system for MPCI should provide the
Company with the opportunity to realize increased revenues from the distribution
and servicing of its MPCI product. As a result of this limitation, the FCIC has
transferred to the Company approximately 8,900 insureds for CAT Coverage who
previously purchased such coverage from USDA field offices. The Company has not
experienced any material negative impact in 1996 from the delinkage mandated by
the 1996 Reform Act. The Company believes that any future potential negative
impact of the delinkage mandated by the 1996 Reform Act will be mitigated by,
among other factors, the likelihood that farmers will continue to purchase MPCI
to provide basic protection against natural disasters since ad hoc federal
disaster relief programs have been reduced or eliminated. In addition, the
Company believes that (i) many lending institutions will likely continue to
require this coverage as a condition to crop lending and (ii) many of the
farmers who entered the MPCI program as a result of the 1994 Reform Act have
come to appreciate the reasonable price of the protection afforded by CAT
Coverage and will remain with the program regardless of delinkage. There can,
however, be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
Crop Revenue Coverage. The Company has recently introduced a new product in
its crop insurance business called Crop Revenue Coverage, or "CRC." In contrast
to standard MPCI coverage, which features a yield guarantee or coverage for the
loss of production at a fixed price per commodity unit established by the FCIC,
CRC provides the insured with a guaranteed revenue stream by combining both
yield and price variability protection. CRC protects against a grower's loss of
revenue resulting from fluctuating crop prices and/or low yields by providing
coverage when any combination of crop yield and price results in revenue that is
less than the revenue guarantee provided by the policy. CRC was approved by the
FCIC as a pilot program for revenue insurance coverage plans for the 1996 crop
year, and has been available for corn and soybeans in all counties in Iowa and
Nebraska for the 1996 crop year. The Company believes that CRC policies
represent approximately 30% of the combined corn policies written by IGF in Iowa
and Nebraska for the 1996 crop year. In July, 1996, the FCIC announced that CRC
will be made available in the fall of 1996 for winter wheat in the entire states
of Kansas, Michigan, Nebraska, South Dakota, Texas and Washington and in parts
of Montana. Since the FCIC generally regulates CRC as one of its own programs,
the material aspects of the CRC program are substantially similar to those of
other federal programs such as MPCI, including the FCIC profit-sharing
arrangement, the use of reinsurance pools and expense reimbursement payments
paid by the FCIC. Since CRC is, in certain respects, a new product approved by
the FCIC with which neither the Company nor the crop insurance industry has had
any prior experience, there is uncertainty as to the demand for, and the pricing
and profitability of, this product. Accordingly, there can be no assurance that
the Company's financial condition or results of operations will not be adversely
affected by the writing of CRC policies. For more information concerning the
pricing of this product and the liabilities insured, see "Business -- Crop
Insurance -- Products -- Crop Revenue Coverage."
Recent Developments Affecting MPCI Underwriting Results. A combination of
weather events occurring in early 1996 will affect the Company's underwriting
results from its MPCI business in 1996. Although underwriting results for winter
wheat crops were adversely affected by drought conditions, these losses were
offset, in part, by unusually good results from Florida citrus crops as a result
of better than normal weather. Additionally, weather conditions for summer crops
in most growing areas where IGF markets its products have been favorable to
date. The next main peril in 1996 is freeze, which may present a somewhat higher
exposure than usual for the Company in 1996 as a result of delays in planting
crops in the first part of 1996 due to rainy conditions.
Certain Accounting Policies for Crop Insurance Operations. In 1996, the
Company instituted a policy of recognizing (i) 35% of its estimated MPCI gross
premiums written for each of the first and second quarters, 20% for the third
quarter and 10% for the fourth quarter, (ii) commission expense at a rate of 16%
of MPCI gross premiums written recognized and (iii) Buy-up Expense Reimbursement
at a rate of 31% of MPCI gross premiums written recognized along with normal
operating expenses incurred in connection with premium writings. All amounts are
reconciled in the fourth quarter after final gross premium amounts are computed
from policyholder acreage reports which are generally filed by late September.
In prior years, recognition of MPCI gross premiums written was 30%, 30%, 30% and
10%, for the first, second, third and fourth quarters, respectively. Commencing
with its June 30, 1995 financial statements, the Company also began recognizing
MPCI underwriting gain or loss during the first and second quarters, as well as
the third quarter, reflecting the
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<PAGE> 37
Company's best estimate of the amount of such gain or loss to be recognized for
the full year, based on, among other things, historical results, plus a
provision for adverse developments. As a result of the inclusion in the
Company's estimate of this general provision for adverse development (which is
spread over the year), the Company's results of operations through June 30, 1996
do not reflect any reduction in underwriting gain specifically as a result of
potential losses due to the southern plains drought conditions which affected
winter wheat crops in Spring 1996. In the fourth quarter, a reconciliation
amount is recognized for the underwriting gain or loss based on final premium
and loss information.
Policy Acquisition and General and Administrative Expenses
Policy acquisition and general and administrative expenses consist of (i)
gross commissions paid to agents, (ii) ceding commission income from reinsurers,
(iii) Buy-up Expense Reimbursement Payments, (iv) underwriting gain or loss on
the Company's MPCI business and (v) other operating expenses. The following
table sets forth certain information with respect to the Company's policy
acquisition and general and administrative expenses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------- ---------------------------------------
1993 1994 1995 1995 1996
----------------- ------------------ ------------------ ------------------ ------------------
AUTO CROP AUTO CROP AUTO CROP AUTO CROP(1) AUTO CROP(1)
------- ------- ------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross commission
expenses.......... $ 8,345 $ 5,524 $ 7,070 $ 9,867 $ 7,162 $ 13,391 $ 2,893 $ 6,489 $12,040 $ 11,604
Ceding commission
income............ (9,173) (969) (5,381) (1,651) (2,991) (2,968) (1,473) -- 890 (530)
Buy-up Expense
Reimbursement
Payments(2)....... (8,854) (13,845) (16,366) (10,233) (19,402)
MPCI underwriting
(gain) or
loss(2)........... 1,515 (3,257) (9,653) (768) (1,610)
Other operating
expenses.......... 6,683 4,252 7,020 4,084 8,758 8,130 5,179 2,524 3,540 5,672
------- ------- ------- -------- ------- -------- ------- -------- ------- --------
Policy acquisition
and general and
administrative
expenses(3)....... $ 5,855 $ 1,468 $ 8,709 $ (4,802) $12,929 $ (7,466) $ 6,599 $ (1,988) $16,470 $ (4,266)
======= ======= ======= ======== ======= ======== ======= ======== ======= ========
</TABLE>
- -------------------------
(1) See discussion above under "-- Certain Accounting Policies for Crop
Insurance Operations."
(2) For GAAP income statement purposes, Buy-up Expense Reimbursement Payments
are treated as a contribution to income and reflected as an offset against
commission expenses. MPCI underwriting gain or loss is also treated as an
adjustment to commission expenses. This unique accounting treatment may from
time to time result in the creation of a "negative" expense for this line
item.
(3) Includes policy acquisition and general and administrative expenses for crop
insurance and nonstandard automobile insurance segments but excludes policy
acquisition and general and administrative expenses attributable to
corporate and discontinued operations.
DISCONTINUANCE OF SURPLUS LINES UNDERWRITING UNIT
Prior to the Offering, the Company, through SIGF, its specialized managing
general agency and surplus lines underwriting unit based in Florida, provided
certain commercial insurance products through retail agencies, principally in
the southeast United States. SIGF writes these specialty products through Pafco
as well as a number of other insurers, including United National Insurance
Group, Munich American Reinsurance Corp. and underwriters at Lloyd's of London.
Effective January 1, 1996, the Company transferred to Goran all of the issued
and outstanding shares of capital stock of SIGF. All Pafco insurance policies
issued through SIGF in respect of business other than nonstandard automobile
insurance have been 100% reinsured by Granite Reinsurance Company, Ltd.
("Granite Re"), a wholly-owned subsidiary of Goran. Although Pafco will in the
future continue to write business through SIGF, this business will also be
reinsured with Granite Re pursuant to such 100% quota share arrangement.
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<PAGE> 38
SELECTED SEGMENT DATA OF THE COMPANY
The following table presents historical segment data for the Company's
nonstandard automobile and crop insurance operations. This data does not reflect
results of operations attributable to corporate and discontinued operations nor
does it include the results of operations of Superior prior to April 30, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996(1)
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
NONSTANDARD AUTOMOBILE INSURANCE OPERATIONS:
Gross premiums written.................................. $52,187 $45,593 $49,005 $23,745 $62,290
Net premiums written.................................... 26,479 28,114 37,302 18,444 62,089
Net premiums earned..................................... 26,747 25,390 34,460 16,539 52,844
Net investment income................................... 1,144 904 624 446 1,435
Other income............................................ 886 1,545 1,787 450 2,333
Net realized capital gain (loss)........................ (44) (55) (508) 12 212
------- ------- ------- ------- -------
Total revenues...................................... 28,733 27,784 36,363 17,447 56,824
------- ------- ------- ------- -------
Losses and loss adjustment expenses..................... 17,152 18,303 25,423 11,808 38,831
Policy acquisition and general and administrative
expenses.............................................. 5,855 8,709 12,929 6,599 16,470
------- ------- ------- ------- -------
Total expenses...................................... 23,007 27,012 38,352 18,407 55,301
------- ------- ------- ------- -------
Income (loss) before income taxes....................... $ 5,726 $ 772 $(1,989) $ (960) $ 1,523
======= ======= ======= ======= =======
GAAP RATIOS (NONSTANDARD AUTOMOBILE ONLY):
Loss and LAE ratio...................................... 64.1% 72.1% 73.8% 71.4% 73.5%
Expense ratio........................................... 21.9 34.3 37.5 39.9 31.2
------- ------- ------- ------- -------
Combined ratio.......................................... 86.0% 106.4% 111.3% 111.3% 104.7%
CROP INSURANCE OPERATIONS:(2)
Gross premiums written(3)............................... $35,156 $54,455 $70,374 $69,942 $80,537
Net premiums written(3)................................. 4,281 4,565 11,608 10,323 14,953
Net premiums earned(3).................................. 4,281 4,565 11,608 4,779 6,222
Net investment income................................... 347 339 674 253 96
Other income............................................ 0 73 384 1,246 1,148
Net realized capital gain (loss)........................ 114 (104) 164 85 16
------- ------- ------- ------- -------
Total revenues...................................... 4,742 4,873 12,830 6,363 7,482
------- ------- ------- ------- -------
Losses and loss adjustment expenses..................... 6,774 7,031 8,629 4,351 6,444
Policy acquisition and general and administrative
expenses.............................................. 1,468 (4,802) (7,466) (1,988) (4,266)
Interest expense........................................ 235 492 627 323 120
------- ------- ------- ------- -------
Total expenses...................................... 8,477 2,721 1,790 2,686 2,298
------- ------- ------- ------- -------
Income (loss) before income taxes....................... $(3,735) $ 2,152 $11,040 $ 3,677 $ 5,184
======= ======= ======= ======= =======
STATUTORY CAPITAL AND SURPLUS:
Pafco(4)................................................ $ 8,132 $ 7,848 $11,875 $ 9,656 $14,872
IGF..................................................... 2,789 4,512 9,219 6,653 11,559
Superior................................................ 56,656 43,577 49,277 45,891 48,036
</TABLE>
- -------------------------
(1) The nonstandard automobile insurance operations include the results of
operations of Superior subsequent to the Acquisition.
(2) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Overview -- Crop Insurance Operations" for a
discussion of the accounting treatment accorded to the crop insurance
business.
(3) Crop hail insurance premiums are primarily written in the second and third
calendar quarters.
(4) The statutory surplus of Pafco includes Pafco's share of IGF's statutory
surplus prior to April 30, 1996. Pafco owned the following percentages of
IGF at December 31 of each of the following years: 1993, 98.2%; 1994, 98.8%;
1995, 100%. At April 30, 1996, Pafco transferred IGF to SIG. Prior to the
Transfer, IGF also paid a dividend to Pafco in the form of cash of
$7,500,000 and a promissory note of $3,500,000. See "The Company --
Formation of GGS Holdings; Acquisition of Superior."
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<PAGE> 39
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995:
Gross Premiums Written. Gross premiums written for the six month period
ended June 30, 1996 increased $51,191,000, or 53.5%, to $146,950,000 from
$95,759,000 for the same period in 1995 reflecting an increase in gross premiums
written of $38,545,000 in nonstandard automobile insurance, an increase of
$10,595,000 in crop insurance and an increase of $2,051,000 in premiums from
commercial business. Premiums on commercial business were 100% ceded to Granite
Re effective January 1, 1996. The increase in nonstandard automobile gross
premiums written was due to the Acquisition, which generated gross premiums
written of $25,202,000 subsequent to the Acquisition, as well as an increase in
policies in-force issued by Pafco of 15,888, or 32.3%, to 65,023 as of June 30,
1996 from 49,135 as of June 30, 1995. The increase in Pafco policies in-force
primarily resulted from improved service and certain product improvements. The
increase in crop insurance gross premiums written was primarily due to farmers'
electing higher percentage of crop price levels to be insured under MPCI Buy-up
Coverages, an increase in MPCI policies in-force and an increase in the number
of acres insured, together with an increase of $6,747,000, or 62.1%, in crop
hail premiums in the first six months of 1996 compared to the same period in
1995.
Net Premiums Written. The Company's net premiums written for the six month
period ended June 30, 1996 increased $46,187,000, or 149.7%, to $77,042,000 from
$30,855,000 for the same period in 1995 due to the Acquisition, which generated
net premiums written for Superior of $25,165,000 subsequent to the Acquisition,
and the increase in gross premiums written in Pafco's nonstandard automobile
insurance business. In addition, the increase in net premiums written resulted
from the Company's election not to renew, as of January 1, 1996, its 25% quota
share reinsurance on its nonstandard automobile business. As a result of
increases over time in its statutory capital, the Company determined that it no
longer required the additional capacity provided by this coverage in order to
maintain acceptable premium to surplus ratios. Although the Company's decision
not to renew this coverage will require the Company to pay a greater percentage
of the losses from the business it writes, the Company's operations could also
be potentially affected by the savings on the cost of reinsurance and by the
investment income from potential increases in invested assets. If the Company
had not maintained the 25% quota share reinsurance for the first six months of
1995, it is estimated that pre-tax income for the first six months of 1995 would
have decreased by approximately $331,000. Since all MPCI premiums are reported
as 100% ceded, MPCI gross premiums written have no effect on net premiums
written.
Net Premiums Earned. The Company's net premiums earned for the six month
period ended June 30, 1996 increased $36,277,000, or 159.2%, to $59,066,000 from
$22,789,000 for the same period in 1995 reflecting the increase in net premiums
written. The ratio of net premiums earned to net premiums written for
nonstandard automobile business decreased for the six months ended June 30, 1996
to 85.1% from 89.7% for the same period in 1995 due to growth in net premiums
written in 1996 exceeding growth in net premiums written in 1995.
Net Investment Income. The Company's net investment income for the six
month period ended June 30, 1996 increased $897,000, or 141.0%, to $1,533,000
from $636,000 for the same period in 1995. This increase was due to the
Acquisition, which generated net investment income of $850,000 subsequent to the
Acquisition. Also contributing to the increase in net investment income is an
increase in average invested assets (not including Superior) to $29,801,000 for
the six month period ended June 30, 1996 from $22,033,000 for the same period in
1995.
Other Income. The Company's other income for the six month period ended
June 30, 1996 increased $3,065,000, or 307.4%, to $4,062,000 from $997,000 for
the same period in 1995 due principally to (i) the Acquisition, which generated
other income, principally billing fee revenue, of $993,000 subsequent to the
Acquisition, (ii) increased billing fee revenue of $640,000 from nonstandard
automobile insurance policies, resulting from the increase in the in-force
policy count described above, and an increase in fees charged per installment in
late 1995, and (iii) increased CAT Coverage Fees and CAT LAE Reimbursement
Payments resulting from the introduction of CAT Coverages in the 1994 Reform
Act.
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<PAGE> 40
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital gain from the sale of investments of $228,000 for the six month period
ended June 30, 1996 compared to a net realized capital gain from the sale of
investments of $79,000 for the same period ended June 30, 1995. The gains for
the six month period ended June 30, 1996 were the result of the sale of
investments made in conjunction with the repositioning of the Company's
investment portfolio into a higher concentration of fixed income securities. The
repositioning was begun in the latter part of 1995 in connection with a change
in investment managers.
Losses and LAE. The Company's losses and LAE for the six month period ended
June 30, 1996 increased $29,524,000, or 187.4%, to $45,275,000 from $15,751,000
for the same period in 1995. Included in the losses and LAE for 1996 are
$18,804,000 from Superior subsequent to the Acquisition. The losses and LAE for
the nonstandard automobile segment for the six month period ended June 30, 1996
increased $27,023,000 to $38,831,000 compared to $11,808,000 for the same period
in 1995 primarily as a result of the Acquisition and the Company's nonrenewal of
its 25% automobile quota share reinsurance treaty effective January 1, 1996. As
a result of increases over time in statutory capital, the Company determined
that it no longer required the additional capacity provided by this coverage in
order to maintain acceptable premium to surplus ratios. The loss ratio for the
nonstandard automobile segment for the six month period ended June 30, 1996 was
73.5% as compared to 71.4% for the same period ended in 1995. The crop insurance
business experienced an increase in losses and LAE for the six month period
ended June 30, 1996 of $2,093,000 to $6,444,000, compared to $4,351,000 for the
same period in 1995. This 48.1% increase in losses and LAE reflected an increase
in net premiums earned for crop hail insurance for the same period, due to (i)
higher commodity prices, (ii) more acres insured and (iii) more policies
written. Crop hail loss ratios are similar for the periods at 62.0% and 60.2%
for the six month periods ended June 30, 1996 and 1995, respectively.
Policy Acquisition and General and Administrative Expenses. Policy
acquisition and general and administrative expenses for the six months ended
June 30, 1996 increased $6,694,000, or 119.8%, to $12,283,000 from $5,589,000
for the same period in 1995. The nonstandard automobile business experienced an
increase in policy acquisition and general and administrative expenses of
$9,871,000 due to (i) the Acquisition, which generated policy acquisition and
general and administrative expenses of $6,599,000 subsequent to the Acquisition,
and (ii) the Company's nonrenewal of nonstandard automobile quota share
reinsurance for 1996 which resulted in a reduction in ceding commission income
from $1,473,000 for the six months ended June 30, 1995 to an expense of $890,000
for the six months ended June 30, 1996 due to the recording of a ceding
commission expense on the recovery in 1996 of the unearned premium on the
previously ceded 1995 business. The remaining increase in nonstandard automobile
business was primarily due to an increase in expenses associated with growth in
premium volume, primarily commission expense. As a result of the unique
accounting for the crop insurance segment, such segment experienced a
contribution to income reflected in the policy acquisition and general and
administrative expense line item of $4,266,000 for the six months ended June 30,
1996 compared to a contribution to income of $1,988,000 for the same period in
1995. This increase in contribution resulted from (i) the adoption of new
accounting procedures for crop insurance operations as described above, (ii) an
increase in Buy-up Expense Reimbursement Payments due to higher gross premium
writings, and (iii) an increase in the estimated MPCI underwriting gain. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Company -- Overview -- Crop Insurance Operations" and
"-- Policy Acquisition and General and Administrative Expenses."
Interest Expense. The Company's interest expense for the six month period
ended June 30, 1996 increased $1,068,000 to $1,261,000 from $193,000 for the
same period in 1995 due primarily to (i) interest on the $48,000,000 GGS Senior
Credit Facility of $696,000, (ii) interest on the $7,500,000 IGFH Bank Debt of
$162,000, and (iii) interest expense related to increased borrowings under the
IGF Revolver due to increases in premiums written and timing of cash receipts.
Income Tax Expense. The Company's income tax expense for the six month
period ended June 30, 1996 increased $896,000 to $1,854,000 from $958,000 for
the same period in 1995 primarily as a result of an 104.5% increase in the
Company's income before federal income tax. The effective tax rate for the six
month period ended June 30, 1996 reflects a 30.5% provision compared to a 32.3%
provision for the same period in 1995.
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Years Ended December 31, 1995 and 1994:
Gross Premiums Written. Gross premiums written in 1995 increased
$21,500,000, or 20.8%, to $124,634,000 from $103,134,000 in 1994 reflecting an
increase in gross premiums written of $15,919,000 in crop insurance, $3,412,000
in nonstandard automobile insurance and $2,169,000 in premiums from commercial
business. The increase in gross premiums written for the nonstandard automobile
insurance segment was primarily attributable to an increase in policies in-force
of 6,220, or 13.4%, to 52,483 in 1995 from 46,263 in 1994. The Company
experienced a greater percentage increase in certain states due to the
introduction of product improvements. In Colorado, policies in-force increased
by 4,676 in 1995. In that state, the Company increased the number of its
deductible options and implemented more favorable pricing for certain of its
personal injury protection coverages. The crop insurance segment experienced
growth in both the crop hail and MPCI business. The increase in crop hail gross
premiums written to $16,966,000 in 1995 from $10,130,000 in 1994 was due
primarily to increased opportunities to market crop hail coverages to farmers as
a result of the increases in sales of MPCI products (both Buy-up Coverage and
CAT Coverage) due to the 1994 Act. The net increase in MPCI gross premiums
written to $53,408,000 in 1995 from $44,325,000 in 1994 resulted from an
increase in the number of acres insured in 1995 following the 1994 Reform Act.
Net Premiums Written. The Company's net premiums written in 1995 increased
$18,308,000, or 52.1%, to $53,447,000 from $35,139,000 in 1994 due to an
increase in gross premiums written and a reduction in premiums ceded to
reinsurers under quota share reinsurance for both nonstandard automobile and
crop hail insurance. The percent of the Company's nonstandard automobile
premiums ceded under its quota share reinsurance treaty was reduced to 25% from
an effective percent ceded of 38% in 1994 as a result of a reduction in the
Company's need for the additional capacity provided by this reinsurance. If the
Company had not maintained quota share reinsurance for 1995, it is estimated
that the pre-tax income for 1995 would have decreased by approximately $862,000.
Net Premiums Earned. The Company's net premiums earned in 1995 increased
$17,515,000, or 54.5%, to $49,641,000 from $32,126,000 in 1994 reflecting an
increase in net premiums written and a reduction in quota share reinsurance on
the nonstandard automobile insurance business. The ratio of net premiums earned
to net premiums written for nonstandard automobile insurance in 1995 remained
relatively unchanged at 92.4% as compared to 90.3% in 1994.
Net Investment Income. Net investment income in 1995 decreased $68,000, or
5.5%, to $1,173,000 from $1,241,000 in 1994 principally due to a decrease in the
average yield earned on invested assets to 5.2% in 1995 from 6.0% in 1994.
Although market interest rates increased in 1995, the average yield on
investments declined primarily as a result of the repositioning of the Company's
investment portfolio, begun in the latter part of 1995, into a higher
concentration in fixed income securities, particularly including shorter term
securities. The decrease in the average yield was partially offset by an
increase in average invested assets to $22,653,000 in 1995 from $20,628,000 in
1994.
Other Income. The Company's other income in 1995 increased $552,000, or
34.0%, to $2,174,000 from $1,622,000 in 1994 as a result of increased billing
fee income on nonstandard automobile business of $351,000 due primarily to the
increase in the in-force policy count as described above, with the remainder due
primarily to the receipt of CAT Coverage Fees and CAT LAE Reimbursement Payments
following the 1995 introduction of CAT Coverages.
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital loss from the sale of investments of $344,000 in 1995 as compared to a
net realized capital loss of $159,000 in 1994. The net realized capital loss in
1995 was the result of appointing a new investment manager in October 1995 and
the resulting repositioning of the Company's investment portfolio described
above, as well as certain write-downs taken on investments with an other than
temporary decline in estimated fair value.
Losses and LAE. The Company's losses and LAE in 1995 increased $9,501,000,
or 35.9%, to $35,971,000 from $26,470,000 in 1994. The 35.9% increase in losses
and LAE was less than the 54.5% increase in net premiums earned. Of such
amounts, the nonstandard automobile business experienced a $7,120,000 increase
in losses and LAE to $25,423,000 in 1995 from $18,303,000 in 1994 due primarily
to an increase in net premium writings. The nonstandard automobile business loss
and LAE ratio increased to 73.8% in 1995 from
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<PAGE> 42
72.1% in 1994 primarily due to increased repair costs for automobile parts
resulting from the implementation of laws prohibiting use of reconditioned parts
as well as general inflationary pressures on costs of settling claims. In
addition, the crop business experienced an increase in losses and LAE to
$8,629,000 in 1995 from $7,031,000 in 1994 primarily as a result of the
increased volume of crop hail business written in 1995. The crop hail loss and
LAE ratio decreased to 74.3% in 1995 from 154.0% in 1994 due to more favorable
weather conditions than in the prior year. Crop insurance losses and LAE were
also impacted by net MPCI LAE of $0 in 1995 and $936,000 in 1994, after
reduction for LAE reimbursements of $3,324,000 in 1995 compared to $107,000 in
1994. These reimbursements are reflected in losses and LAE up to the actual
amount of LAE incurred with any excess reflected in Other Income. For more
information concerning losses and LAE, see "Business -- Reserves for Losses and
Loss Adjustment Expenses."
Policy Acquisition and General and Administrative Expenses. The Company's
policy acquisition and general and administrative expenses in 1995 increased
$2,180,000, or 37.6%, to $7,981,000 from $5,801,000 in 1994. The nonstandard
automobile business experienced an increase in policy acquisition and general
and administrative expense of $4,220,000 primarily due to a $2,390,000, or 44%,
reduction in ceding commission income in 1995 arising from reduced reliance on
quota share reinsurance. As a result of the unique accounting for the crop
insurance segment, such segment experienced a contribution to income reflected
in the policy acquisition and general and administrative expense line item of
$7,466,000 in 1995 compared to a contribution to income of $4,802,000 in 1994.
This increase in contribution resulted from an increase in Buy-Up Expense
Reimbursement Payments due to higher gross premium writings in 1995, together
with an increase in the MPCI underwriting gain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Overview -- Policy Acquisition and General and Administrative Expenses."
Interest Expense. The Company's interest expense in 1995 increased $64,000,
or 5.4%, to $1,248,000 from $1,184,000 in 1994 as a result of increased line of
credit borrowings by IGF due to an increase in cash flow requirements and an
increase in applicable interest rates. This was partially offset by interest
savings in 1995 over 1994 resulting from debt principal repayments and the
retirement of a Company term loan in June, 1995.
Income Tax Expense. The Company's income tax expense (benefit) related to a
tax provision on income (loss) from continuing operations increased to
$2,619,000 in 1995 from $(718,000) in 1994. The effective tax rate in 1995 was
35.2% as compared to an effective tax rate of (52.2)% in 1994. The tax benefit
in 1994 was due to a $1,492,000 reduction in the valuation allowance the Company
had previously established for its deferred tax assets.
Years Ended December 31, 1994 and 1993:
Gross Premiums Written. Gross premiums written in 1994 increased
$14,198,000, or 16.0%, to $103,134,000 from $88,936,000 in 1993 reflecting an
increase in gross premiums written of $19,299,000 in crop insurance, a decrease
in gross premiums written of $6,594,000 in nonstandard automobile insurance, and
a $1,493,000 increase in premiums from commercial business. The increase in crop
insurance gross premiums written resulted from (i) farmers increasing the
amounts of catastrophe protection as a result of the significant losses caused
by the severe flooding in the Midwest in 1993, and (ii) increased market share.
The decrease in nonstandard automobile gross premiums written was due in part to
price competition as the Company decided not to match the lower premium rates of
certain of its competitors who were seeking to gain market share. As a result in
part of the foregoing, policies in force declined by 1,473, or 3.1%, to 46,263
in 1994 from 47,736 in 1993.
Net Premiums Written. The Company's net premiums written in 1994 increased
$3,379,000, or 10.6%, to $35,139,000 from $31,760,000 in 1993 due to a reduction
in premiums ceded to reinsurers due to the Company's reduction of its quota
share reinsurance on its nonstandard automobile insurance to an effective
percent ceded of 38% from 49% in 1993. The Company anticipated lower gross
premiums written in 1994 due principally to increased competition and adjusted
its reinsurance capacity accordingly. If the Company had not maintained quota
share reinsurance for 1994, it is estimated that pre-tax income for 1994 would
have decreased by approximately $1,046,000 due primarily to an additional
underwriting loss of approximately
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$1,016,000 and lower investment income of approximately $30,000. The effect of
not carrying quota share reinsurance for 1993 would not have been material due
to the relatively low loss ratio for that period.
Net Premiums Earned. The Company's net premiums earned in 1994 increased
$698,000, or 2.2%, to $32,126,000 from $31,428,000 in 1993 reflecting an
increase in net premiums written. The ratio of net premiums earned to net
premiums written for nonstandard automobile insurance decreased in 1994 to 90.3%
from 101.0% in 1993. In late 1992, the Company experienced significant growth in
net premiums written that were primarily earned in 1993. In 1993, the Company's
net premiums written continued to decline throughout the year as the Company
decided not to match the lower premium rates of certain of its competitors who
were seeking to gain market share.
Net Investment Income. Net investment income in 1994 decreased $248,000, or
16.7%, to $1,241,000 from $1,489,000 in 1993 principally due to a decrease in
average invested assets of $4,091,000 resulting from a reduction in nonstandard
automobile insurance premium volume and higher losses and LAE.
Other Income. The Company's other income in 1994 increased $736,000, or
83.1%, to $1,622,000 from $886,000 in 1993 primarily as a result of 1994 being
the first full year in which the Company earned billing fee income in the
nonstandard automobile insurance business. Billing fee income from nonstandard
automobile insurance increased to $1,033,000 in 1994 as compared to
approximately $521,000 in 1993, as a result of the new billing program
introduced on July 1, 1993. Prior to July 1, 1993, the Company's insurance
policies had two-month terms. During this period, the insurance regulators were
beginning to require all nonstandard insurers to provide longer policy terms. As
a result of this change in regulation and to accommodate and provide an
affordable payment schedule, the Company instituted an installment billing
process which included billing fees approved by the regulators.
Net Realized Capital Gain (Loss). The Company recorded a net realized
capital loss from the sale of investments of $159,000 in 1994 as compared to a
net realized capital loss of $119,000 in 1993. The losses in 1994 were the
result of the Company's election to take net realized capital losses from the
sale of certain investments. The losses in 1993 were due to sales of investments
and write-downs of investments.
Losses and LAE. The Company's losses and LAE in 1994 increased $1,390,000,
or 5.5%, to $26,470,000 from $25,080,000 in 1993. Of such amounts, the
nonstandard automobile business experienced a $1,151,000 increase in losses and
LAE to $18,303,000 in 1994 from $17,152,000 in 1993 as higher replacement part
costs for automobile repairs resulting from the implementation of laws
prohibiting the use of reconditioned parts increased costs associated with
physical damage losses. The Company also reduced its quota share reinsurance
resulting in a higher retention of losses and LAE liabilities. The nonstandard
automobile loss and LAE ratio increased to 72.1% in 1994 as compared to 64.1% in
1993. In addition, the crop insurance business experienced an increase of
$257,000, or 3.8%, in losses and LAE to $7,031,000 in 1994 from $6,774,000 in
1993. Despite the decline in the crop hail loss and LAE ratio from 158.2% in
1993 to 154.0% in 1994, the increase in net premiums earned accounted for the
small dollar increase in losses and LAE. For more information concerning losses
and LAE, see "Business -- Reserves for Losses and Loss Adjustment Expenses."
Policy Acquisition and General and Administrative Expenses. The Company's
policy acquisition and general and administrative expenses in 1994 decreased
$3,113,000, or 34.9%, to $5,801,000 from $8,914,000 in 1993. The nonstandard
automobile business experienced an increase in policy acquisition and general
and administrative expense of $2,854,000 primarily due to a $3,792,000, or
41.3%, reduction in ceding commission income in 1994 arising from reduced
reliance on quota share reinsurance. As a result of the unique accounting for
the crop insurance segment, such segment experienced a contribution to income
reflected in the policy acquisition and general and administrative expense line
item of $4,802,000 in 1994 compared to an expense of $1,468,000 in 1993. The
contribution to income in 1994 resulted from an increase in Buy-Up Expense
Reimbursement Payments due to higher gross premium writings in 1994, together
with an increase in the MPCI underwriting gain. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Company --
Overview -- Policy Acquisition and General and Administrative Expenses."
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Interest Expense. The Company's interest expense in 1994 increased
$188,000, or 18.9%, to $1,184,000 from $996,000 in 1993 due to increased cash
flow requirements and line of credit borrowings by IGF on the crop business.
This was partially offset by a decline in applicable interest rates.
Income Tax Expense. In 1994, the Company recognized an income tax benefit
of $718,000 as it reduced the valuation allowance it had previously established
for its deferred tax assets. The effective tax rate in 1994 was (52.2)%. This
compares to income tax expense of $83,000 and an effective tax rate of (6.35)%
in 1993. In 1993, the Company increased its valuation allowance by $696,000 to
$1,752,000.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of funds available to the Company and its Subsidiaries
are premiums, investment income and proceeds from the maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions, dividends and the purchase of investments. There is
variability to cash outflows because of uncertainties regarding settlement dates
for liabilities for unpaid losses and because of the potential for large losses
either individually or in the aggregate. Accordingly, the Company maintains
investment programs generally intended to provide adequate funds to pay claims
without the forced sale of investments.
Net cash provided by operating activities for the six months ended June 30,
1996 was $7,982,000 compared to $4,006,000 for the six months ended June 30,
1995 for an increase of $3,976,000. This increase was due to improved
profitability and growth in written premiums. Loss payments in the nonstandard
automobile insurance business tend to lag behind receipt of premiums thus
providing cash for operations.
Cash used in investing activities increased from $3,488,000 for the six
months ended June 30, 1995 to $82,579,000 for the six months ended June 30,
1996. Included in the six month results for 1996 was a $66,389,000 use of cash
for the Acquisition. The remaining increase in cash used in investing activities
for the six months ended June 30, 1996 related to the growth in investments due
to increased cash provided by operating activities.
The primary items comprising the $72,286,000 of cash provided by financing
activities for the six months ended June 30, 1996 were the $48,000,000 of
proceeds from the GGS Senior Credit Facility and the $21,200,000 minority
interest investment received as part of the formation of GGS Holdings and the
Acquisition.
Net cash provided by operating activities in 1995 was $9,654,000 compared
to net cash used by operating activities of $3,302,000 in 1994. Operations in
1995 provided an additional $12,956,000 in cash compared to 1994 due to
additional net earnings of $2,704,000 and cash flow provided of $5,109,000
relating to premium receipts and loss payments, including effects of
reinsurance, due primarily to growth in operations with the remainder due to
timing of tax and other liability payments. Net cash used in operating
activities decreased in 1994 to $3,302,000 from $7,561,000 in 1993. Operations
in 1994 used $4,259,000 less cash than in 1993 due primarily to additional net
income of $2,440,000. Cash flow activity in 1994 and 1993 relating to premium
receipts and loss payments including effects of reinsurance were comparable.
Net cash of $8,835,000 was used in investing activities in 1995 compared to
net cash provided by investing activities in 1994 of $1,473,000. Net cash
provided by investing activities in 1994 of $1,473,000 decreased from $5,466,000
in 1993. The increase in the use of cash in 1995 and the decrease in net cash
provided by investing activities in 1994 primarily relates to investing of
excess funds generated by additional operating earnings in fixed income
securities. Due to the nature of insurance operations, the Company does not have
a significant amount of expenditures on property and equipment.
Cash provided or used by financing activities in the three years ended
December 31, 1995 primarily related to activity in the Company's line of credit
for its crop segment. The nonstandard auto segment generates sufficient cash
from operations to preclude the need for working capital borrowings while the
timing of receipts and payments in the crop segment is such that an operating
line of credit is necessary.
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After the Offering, SIG, on a stand-alone basis, will require funds to
defray operating expenses which will consist primarily of legal, accounting and
other fees and expenses in connection with the disclosure and regulatory
obligations of a public company and to satisfy debt service obligations on any
remaining balance of the Parent Indebtedness. The Parent Indebtedness is payable
on demand, accrues interest at a rate of 10% and was originally incurred by SIG
in 1992 as a result of Goran's partial funding of the repayment of certain loan
obligations arising from the capitalization of SIG's U.S. operations. In order
to satisfy its cash requirements, SIG intends to rely primarily on the fees from
an administrative agreement between SIG and IGF (the "Administration Agreement")
pursuant to which the Company will provide certain executive management,
accounting, investing, marketing, data processing and reinsurance services in
exchange for a fee in the amount of $150,000 quarterly. In addition, subject to
obtaining the required approval from the Indiana Department, the Company is
currently implementing arrangements whereby the underwriting, marketing and
administrative functions of IGF will be assumed by, and employees will be
transferred to, IGF Holdings. There can, however, be no assurance that the
required regulatory approval will be obtained. In accordance with industry
practice, the FCIC will continue to pay Buy-up Expense Reimbursement Payments to
IGF, and such payments will be in turn paid by IGF to IGF Holdings. Accordingly,
IGF Holdings will be able to pay dividends to the Company to the extent that
Buy-up Expense Reimbursement Payments exceed the operating and other expenses of
IGF Holdings. There can, however, be no assurance that IGF Holdings will have
sufficient excess cash flow to permit the payment of any dividends to the
Company. Except for the fees to be paid under the Administration Agreement and
amounts paid in respect of Buy-up Expense Reimbursement Payments, IGF is not
expected to provide a significant source of funds for the Company in view of
Indiana regulatory restrictions on the payment of dividends, restrictive
covenants contained in the IGF Revolver (as defined herein) and the capital
needed by IGF to support growth in its premium writings. If, however, the
Company does not obtain regulatory approval for the payment by IGF of Buy-up
Expense Reimbursement Payments to IGF Holdings, the Company will have to rely on
dividends from IGF to satisfy liquidity needs in excess of the amounts paid
pursuant to the Administration Agreement. Payment of dividends by IGF requires
prior approval by the lender under the IGF Revolver. There can be no assurance
that IGF will be able to obtain this consent or any required regulatory
approvals. See "Risk Factors -- Holding Company Structure -- Dividends and Other
Restrictions."
As a result of the restrictive covenants contained in the credit agreement
with respect to the GGS Senior Credit Facility, GGS Holdings and its
subsidiaries, Pafco and Superior, are not expected to constitute a significant
source of funds for the Company. The GGS Senior Credit Facility restricts the
ability of GGS Management to undertake certain actions, including making, or
permitting any of its subsidiaries to make, certain restricted payments in
excess of $100,000 per year in the aggregate. For purposes of the GGS Senior
Credit Facility, "restricted payments" include dividends in the form of cash or
other tangible or intangible property (other than stock, options, warrants or
other rights to purchase stock), as well as administrative, advisory, management
and billing fees payable by GGS Management to any of its affiliates (other than
investment banking fees payable to Goldman, Sachs). As a result, this covenant
restricts the ability of GGS Management to pay dividends to its parent company,
GGS Holdings, in excess of $100,000 per year.
GGS Management, the wholly-owned subsidiary of GGS Holdings, collects
billing fees charged to policyholders of Pafco and Superior who elect to make
their premium payments in installments. GGS Management also receives management
fees of 15% of gross premiums and 17% of gross premiums, respectively, under its
management agreements with Pafco and Superior. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees. Further, in the Consent Order
approving the Acquisition, the Florida Department has prohibited Superior from
paying any dividends (whether extraordinary or not) for four years without the
prior written approval of the Florida Department, and extraordinary dividends
within the meaning of the Indiana Insurance Code cannot be paid by Pafco without
the prior approval of the Indiana Commissioner. See "Risk Factors -- Holding
Company Structure; Dividend and Other Restrictions; Management Fees." GGS
Management will require cash flow to defray operating expenses and repay the GGS
Senior Credit Facility. See "The Company -- Formation of GGS Holdings;
Acquisition of Superior."
The GGS Senior Credit Facility, with an outstanding principal balance of
$48 million, matures on April 30, 2002 and will be repaid in 11 consecutive
semi-annual installments, the first of which will occur on
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the first anniversary of the closing date of the GGS Senior Credit Facility. The
first installments of principal repayments will be $3,128,000 and $2,886,500,
respectively, with the remaining annual installments to be paid as follows: 1997
- -$6,014,500; 1998 - $6,494,500; 1999 - $7,938,000; 2000 - $9,742,000; 2001 -
$11,611,500; and 2002 - $6,199,500. At the election of GGS Management, interest
on the GGS Senior Credit Facility shall be payable either at the "Base Rate"
option or LIBOR option, plus in each case the applicable margin. The Base Rate
is defined as the higher of (i) the federal funds rate plus 1/2 of 1% or (ii)
the prime commercial lending rate of the lending bank. LIBOR is defined as an
annual rate equal to the London Interbank Offered Rate for the corresponding
deposits of U.S. dollars. The applicable margin for Base Rate loans is 1.50% and
for LIBOR loans is 2.75%. In May, 1996, the Company entered into an interest
rate swap agreement to protect the Company against interest rate volatility. As
a result, the Company fixed its interest rate on the GGS Senior Credit Facility
at 8.3% through November, 1996. The GGS Senior Credit Facility is collateralized
by a pledge of all of the tangible and intangible assets of GGS Holdings,
including all of the outstanding shares of GGS Management, and by a pledge of
all of the tangible and intangible assets of GGS Management, including all of
the outstanding shares of capital stock of Pafco and Superior. As of September
30, 1996, GGS Management was in default of a covenant in the GGS Senior Credit
Facility that required Pafco and Superior to maintain a combined ratio of
statutory net premiums written to surplus of 3:1. The commercial bank lenders
under the GGS Senior Credit Facility have effectively waived this default for
the four consecutive fiscal quarters ended September 30, 1996. The Company
intends to contribute additional capital to these insurers in order to permit
them to satisfy this covenant in future periods. GGS Management intends to rely
primarily on management fees from Pafco and Superior and billing fee income to
satisfy these debt service requirements. See "Risk Factors -- Holding Company
Structure -- Management Fees."
While there can be no assurance as to the sufficiency of the Company's cash
flow in future periods, the Company believes that its cash flow will be
sufficient to meet all of the Company's operating expenses and debt service for
the foreseeable future and, therefore, does not anticipate additional borrowings
except as may be necessary to finance acquisitions. Liquidity constraints may
significantly affect the Company's ability to finance future acquisitions. See
"Risk Factors -- Future Growth and Continued Operations Dependent on Access to
Capital."
While GAAP shareholders' equity was $17,757,000 at June 30, 1996, it does
not reflect the statutory equity upon which SIG conducts its various insurance
operations. Pafco, Superior and IGF individually had statutory surplus at June
30, 1996 of $14,872,000, $48,036,000 and $11,559,000, respectively.
Cash flows in the Company's MPCI business differ from cash flows from
certain more traditional lines. The Company pays insured losses to farmers as
they are incurred during the growing season, with the full amount of such
payments being reimbursed to the Company by the federal government within three
business days. MPCI premiums are not received from farmers until covered crops
are harvested. Such premiums are required to be paid over in full to the FCIC by
the Company, with interest if not paid by a specified date in each crop year.
During 1995, IGF continued the practice of borrowing funds under a
revolving line of credit to finance premium payables to the FCIC on amounts not
yet received from farmers (the "IGF Revolver"). The maximum borrowing amount
under the IGF Revolver was $6,000,000 until July 1, 1996, at which time the
maximum borrowing amount increased to $7,000,000. The IGF Revolver carried a
weighted average interest rate of 6.0%, 8.1% and 9.7%, in 1993, 1994 and 1995,
respectively, and 9.57% and 8.75% for the six months ended June 30, 1995 and
1996, respectively. These payables to the FCIC accrue interest at a rate of 15%,
as do the receivables from farmers. By utilizing the IGF Revolver, which bears
interest at a floating rate equal to the prime rate plus 1/4%, IGF avoids
incurring interest expense at the rate of 15% on interest payable to the FCIC
while continuing to earn 15% interest on the receivables due from the farmer.
The IGF Revolver contains certain covenants which restrict IGF's ability to (i)
incur indebtedness; (ii) declare dividends or make any capital distribution upon
its stock whether through redemption or otherwise; and (iii) make loans to
others, including affiliates. The IGF Revolver also contains other customary
covenants which, among other things, restrict IGF's ability to participate in
mergers, acquire another enterprise or participate in the organization or
creation of any other business entity. In 1995, IGF incurred $627,222 in
interest expense attributable to draws under the IGF Revolver to satisfy premium
payables to the FCIC. At June 30, 1996, $2,254,000 remains available under the
IGF Revolver.
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IGF has the opportunity to increase its business as the result of the
addition of new agents and the transfer of the delivery of MPCI coverage for
winter wheat and certain spring crops from the USDA to private agencies in
designated states. See "Business -- Crop Insurance -- Industry Background."
Because of surplus-based limits imposed on all MPCI insurers by the FCIC on the
volume of MPCI business that may be written as well as restrictions on premium
writing imposed by state regulatory authorities, IGF is at present unable to
increase its MPCI writings without additional capital. These limits prohibit
MPCI writers from (i) writing aggregate MPCI Premiums and MPCI Imputed Premiums
in excess of nine times an insurer's capital base and (ii) retaining an exposure
to net MPCI losses after reinsurance of greater than 50% of capital. The Company
estimates that the $9.0 million capital contribution to be made to IGF with a
portion of the net proceeds of the Offering would provide IGF with the surplus
capacity under the FCIC's rules to write up to approximately $65 million in
additional MPCI Premiums and MPCI Imputed Premiums in the aggregate. There can
be no assurance, however, as to the amount of increase, if any, in MPCI business
written that IGF will actually be able to achieve.
EFFECTS OF INFLATION
The effects of inflation on the Company are implicitly considered in
estimating reserves for unpaid losses and LAE, and in the premium rate-making
process. The actual effects of inflation on the Company's results of operations
cannot be accurately known until the ultimate settlement of claims. However,
based upon the actual results reported to date, it is management's opinion that
the Company's liability for losses and LAE, including liabilities for losses
that have been incurred but not yet reported, make adequate provision for the
effects of inflation.
NEW ACCOUNTING STANDARDS
During January, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." The Company adopted SFAS No. 109 for the year ended December 31,
1993. The Statement adopts the liability method of accounting for deferred
income taxes. Under the liability method, companies will establish a deferred
tax liability or asset for the future tax effects of temporary differences
between book and taxable income. The effect on years prior to 1993 of changing
to this method was an increase in net income for 1993 of $1,175,000 and is
reflected in the Consolidated Statement of Operations for the Company, included
elsewhere in this Prospectus, as the cumulative effect of a change in accounting
principles.
On January 1, 1994, the Company adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." In
accordance with SFAS No. 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect as
of January 1, 1994 of adopting Statement 115 has no effect on net income. The
effect of this change in accounting principle was an increase in stockholder's
equity of $139,000, net of deferred taxes of $73,000 on net unrealized gains on
fixed maturities classified as available for sale that were previously carried
at amortized cost.
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires that long-lived assets to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This Statement is effective for financial statements for fiscal
years beginning after December 15, 1995. Adoption of SFAS No. 121 did not have a
material impact on the Company's results of operations.
In December 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. It introduces the use of a fair-value based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." However, SFAS No. 123 requires companies that choose not to adopt
the new fair value accounting rules to disclose pro forma net income and
earnings per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15,
45
<PAGE> 48
1995. The Company has not yet determined the impact of adopting SFAS No. 123;
however, the adoption of this statement is not expected to have a material
impact on the Company's financial condition or results of operations.
The National Association of Insurance Commissioners ("NAIC") is considering
the adoption of a recommended statutory accounting standard for crop insurers,
the impact of which is uncertain since several methodologies are currently being
examined. Although the Indiana Department has permitted the Company to continue
for its statutory financial statements through December 31, 1996 its practice of
recording its MPCI business as 100% ceded to the FCIC with net underwriting
results recognized in ceding commissions, the Indiana Department has indicated
that in the future it will require the Company to adopt the MPCI accounting
practices recommended by the NAIC or any similar practice adopted by the Indiana
Department. Since such a standard would be adopted industry wide for crop
insurers, the Company would also be required to conform its future GAAP
financial statements to reflect the new MPCI statutory accounting methodology
and to restate all historical GAAP financial statements consistently with this
methodology for comparability. The Company can not predict what accounting
methodology will eventually be implemented or when the Company will be required
to adopt such methodology. The Company anticipates that any such new crop
accounting methodology will not affect GAAP net income.
46
<PAGE> 49
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF
SUPERIOR INSURANCE COMPANY
The following table presents historical data of Superior and its
subsidiaries.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Gross premiums written...................... $115,660 $112,906 $ 94,756 $42,915 $69,119
Net premiums written........................ 115,294 112,515 94,070 42,515 68,707
Net premiums earned......................... 118,136 112,837 97,614 50,053 62,739
Net investment income....................... 8,170 7,024 7,093 4,161 3,476
Other income................................ 5,879 3,344 4,171 1,692 3,092
Net realized capital gain (loss)............ 3,559 (200) 1,954 711 2,104
-------- -------- -------- ------- -------
Total revenues............................ 135,744 123,005 110,832 56,617 71,411
Losses and loss adjustment expenses......... 85,902 92,378 72,343 38,129 45,963
Policy acquisition and general and
administrative expenses................... 36,292 38,902 32,705 17,212 17,104
-------- -------- -------- ------- -------
Total expenses............................ 122,194 131,280 105,048 55,341 63,067
Income (loss) before income taxes, and a
cumulative effect of a change in
accounting principle...................... 13,550 (8,275) 5,784 1,276 8,344
Income taxes................................ 3,981 (3,800) 1,649 161 2,313
Income (loss) before cumulative effect of a
change in accounting principle............ 9,569 (4,475) 4,135 1,115 6,031
Cumulative effective of a change in
accounting principle...................... 1,389 -- -- -- --
-------- -------- -------- ------- -------
Net income (loss)......................... $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031
======== ======== ======== ======= =======
GAAP RATIOS: (1)
Loss and LAE ratio.......................... 72.7% 81.9% 74.1% 76.2% 73.3%
Expense ratio............................... 30.7 34.5 33.5 34.4 27.3
-------- -------- -------- ------- -------
Combined ratio.............................. 103.4% 116.4% 107.6% 110.6% 100.6%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995 JUNE 30, 1996
-------- -------- -------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Investments................................. $132,060 $107,346 $116,362 $120,503
Total assets................................ 180,241 161,864 160,130 172,158
Losses and loss adjustment expenses......... 52,610 54,577 47,112 47,155
Total shareholders' equity.................. 73,756 51,878 61,616 64,617
STATUTORY CAPITAL AND SURPLUS............... $ 56,656 $ 43,577 $ 49,277 $ 48,036
</TABLE>
- -------------------------
(1) The loss and LAE ratio is calculated by dividing losses and loss adjustment
expenses by net premiums earned. The expense ratio is calculated by dividing
the sum of policy acquisition and general and administrative expenses and
interest expense by net premiums earned. The combined ratio is the sum of
the loss and LAE and expense ratios.
47
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OF SUPERIOR
OVERVIEW
Superior is engaged in the writing of insurance coverage on automobile
physical damage and liability policies for "nonstandard risks." Nonstandard
insureds are those individuals who are unable to obtain insurance through
standard market carriers due to factors such as poor premium payment history,
driving experience, record of prior accidents or driving violations, particular
occupation or type of vehicle. Premium rates for nonstandard risks are higher
than for standard risks. Since it can be viewed as a residual market, the size
of the nonstandard private passenger automobile insurance market changes with
the insurance environment and grows when standard coverage becomes more
restrictive. Nonstandard policies have relatively short policy periods and low
limits of liability. Due to the low limits of coverage, the period of time that
elapses between the incurrence and settlement of losses under nonstandard
policies is shorter than under many other types of insurance. Also, since the
nonstandard automobile insurance business typically experiences lower rates of
retention than standard automobile insurance, the number of new policyholders
underwritten by nonstandard automobile insurance carriers each year is
substantially greater than the number of new policyholders underwritten by
standard carriers. While pricing conditions have improved in 1996, the
nonstandard automobile insurance business has experienced very competitive
pricing conditions in recent years which have made it difficult for Superior to
achieve adequate pricing.
The majority of Superior's business consists of personal lines nonstandard
automobile insurance. Superior writes in eleven states, principally in the
southeastern United States, and distributes its product through 3,250
independent agents. In mid-1995, Superior made a strategic decision to modify
its approach from providing a broad band single nonstandard automobile product
with a 15% commission rate to a multi-tiered, multi-commission program that was
similar to, but provided a price advantage over, programs offered by the larger
competitors in the nonstandard automobile marketplace. This step, combined with
a concentration of Superior's efforts on four major states, was designed to
present a more competitive product with a lower loss ratio and provide a
franchised configuration that could be exported to the remainder of Superior's
states. The modification of Superior's programs, more stringent underwriting
criteria and a concentration on four specific states resulted in a reduction in
gross premiums written from the 1994 level of $112.9 million to a 1995 year end
level of $94.8 million. From September 1995, Superior took steps to reduce its
cost of operations. For example, more favorable contracts were negotiated with
outside vendors and internal processes were evaluated for cost effectiveness.
The change in market approach, the effects of cost containment and the
acceptance of a lower commission level by the independent agents resulted in net
income in 1995 of $4.1 million compared to a net loss of $4.5 million in 1994.
The combined ratio in 1995 was reduced to 107.6% compared to 1994's combined
ratio of 116.4%.
In order to shorten reporting lines, improve quality and decrease costs,
the branch claims offices were reduced from nine to three in the second half of
1995. In addition to the consolidation of claims offices, the claims department
management was changed and revised operating procedures were introduced that
included the creation of specialties within the department for the handling of
claims involving subrogation, salvage and physical damage litigation. These
changes resulted in a substantial reduction in the expense for the operation of
the claims department and an improvement in the quality of file handling with a
resulting reduction in average paid severity.
Superior's strategy for 1996 is to refine its three-tier, multi-commission
level programs and to move the multi-tiered products into the states of Georgia
and Mississippi, in addition to its current multi-tiered offerings in
California, Florida, Texas and Virginia. Superior's processing flow has
undergone a reengineering to reduce cost and shorten processing intervals in
order to provide an improved level of service. In addition to the reengineering
of the processing flow, Superior has made a commitment to eliminate its previous
manually intensive automated operating system for a new processing system that
Superior believes will help improve productivity and lower operating expense by
freeing it from an outside data processing vendor.
48
<PAGE> 51
On April 30, 1996, Superior was acquired by GGS Holdings. The acquisition
of Superior was accounted for under the purchase method of accounting and was
recorded as follows:
<TABLE>
<S> <C>
Assets Acquired:
Invested Assets.......................................................... $118,665,000
Receivables.............................................................. 35,223,000
Deferred Acquisition Costs............................................... 7,925,000
Other Assets............................................................. 1,981,000
-----------
Total.................................................................... 163,794,000
-----------
Liabilities Assumed:
Unpaid Losses and Loss Adjustment Expenses............................... 44,423,000
Unearned Premiums........................................................ 45,280,000
Other Liabilities........................................................ 10,863,000
-----------
Total.................................................................... 100,566,000
-----------
Net Assets Acquired........................................................ 63,228,000
Purchase Price............................................................. 66,389,000
-----------
Goodwill................................................................... $ 3,161,000
===========
</TABLE>
Goodwill is amortized over a 25 year period on a straight line basis based
upon management's estimate of the expected benefit period.
The Company's results from operations for the six months ended June 30,
1996 include the results of Superior subsequent to April 30, 1996 as follows:
<TABLE>
<S> <C>
Gross Premiums............................................................. $25,202,000
===========
Net Premiums Earned........................................................ $23,429,000
Net Investment and Other Income............................................ 2,060,000
-----------
Total Revenue.............................................................. 25,489,000
-----------
Losses and Loss Adjustment Expenses........................................ 18,804,000
Policy Acquisition and General and Administration Expense.................. 6,149,000
-----------
Total Expenses............................................................. 24,953,000
-----------
Income Before Taxes and Minority Interest.................................. 536,000
Income Taxes............................................................... 182,000
-----------
Income before Minority Interest............................................ 354,000
Minority Interest.......................................................... 169,000
-----------
Net Income................................................................. $ 185,000
===========
</TABLE>
Amortization includes goodwill, as previously discussed, and deferred debt
and organizational costs of approximately $1,900,000 which are being amortized
over 5 to 6 years on the straight line basis. The impact on net income of the
aforementioned items was a reduction of $265,000.
As a result of the Acquisition, certain financial information relating to
Superior's nonstandard business in respect of periods prior to consummation of
the Acquisition will not be comparable to corresponding financial information
for subsequent periods. See "The Company -- Formation of GGS Holdings;
Acquisition of Superior" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company."
49
<PAGE> 52
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and 1995:
Gross Premiums Written. Superior's gross premiums written for the six month
period ended June 30, 1996 increased $26,204,000, or 61.1%, to $69,119,000 from
$42,915,000 for the same period in 1995 due to the modification of the
multi-tiered product offered in Florida and the introduction of a multi-tiered
product in the states of Virginia and California, the introduction of variable
commission levels and improved service to policyholders. The new variable
commission structure attracted sales from independent agents who perceived one
of Superior's major competitors as pursuing a direct marketing approach.
Net Premiums Written. Superior's net premiums written for the six month
period ended June 30, 1996 increased $26,192,000, or 61.6%, to $68,707,000 from
$42,515,000 for the same period in 1995 due to an increase in gross premiums
written.
Net Premiums Earned. Superior's net premiums earned for the six month
period ended June 30, 1996 increased $12,686,000, or 25.3%, to $62,739,000 from
$50,053,000 for the same period in 1995 reflecting an increase in net premiums
written. This increase in net premiums earned does not fully reflect the 61.6%
increase in net premiums written since net premiums earned lagged behind net
premiums written.
Net Investment Income. Superior's net investment income for the six month
period ended June 30, 1996 decreased $685,000, or 16.5%, to $3,476,000 from
$4,161,000 for the same period in 1995 due to the net effects of a decline in
the average yield on invested assets which was partially offset by an increase
in average invested assets.
Other Income. Superior's other income for the six month period ended June
30, 1996 increased $1,400,000, or 82.7%, to $3,092,000 from $1,692,000 for the
same period in 1995 due to a growth in premiums and an increase in billing fees
relating to payment programs associated with an increased number of policies
written.
Net Realized Capital Gain (Loss). Superior recorded a net realized capital
gain from the sale of investments of $2,104,000 for the six month period ended
June 30, 1996 compared to a net realized capital gain from the sale of
investments of $711,000 for the same period in 1995.
Losses and LAE. Superior's losses and LAE for the six month period ended
June 30, 1996 increased $7,834,000, or 20.5%, to $45,963,000 from $38,129,000
for the same period in 1995 due to an increase in net premiums earned. However,
the 20.5% increase in losses and LAE was less than the 25.3% increase in net
premiums earned due to improved results in claims administration which resulted
in a change of estimate that resulted in a decrease in reserves of $1,300,000 in
the first quarter of 1996. As a result, the loss and LAE ratio for the six month
period ended June 30, 1996 was 73.3% as compared to 76.2% for the same period in
1995. The improved results also reflect an improved work flow, productivity, and
a reduction in middle management positions as a result of the claims department
restructuring. Superior has negotiated flat rate fee agreements with all counsel
representing it and has obtained discounts for vendor service for independent
appraisals, total loss evaluations, medical bill review and the sale of salvage.
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses for the six month
period ended June 30, 1996 decreased $108,000, or 0.6%, to $17,104,000 from
$17,212,000 for the same period in 1995. Policy acquisition and general and
administrative expenses decreased 0.6% although net premiums earned increased
25.3% due to reduced agents' commissions in Florida and a general reduction in
the cost of overhead. As a result, the expense ratio for the six month period
ended June 30, 1996 was 27.3% as compared to 34.4% for the same period in 1995.
Income Tax Expense. Superior's income tax expense for the six month period
ended June 30, 1996 increased $2,152,000 to $2,313,000 from $161,000 for the
same period in 1995. The effective tax rate in 1996 was 27.7% compared to 12.6%
in 1995. The increase in income tax expense and the effective tax rate was due
to the utilization of net operating loss carry-forwards in 1995.
50
<PAGE> 53
Years Ended December 31, 1995 and 1994:
Gross Premiums Written. Superior's gross premiums written in 1995 decreased
$18,150,000, or 16.1%, to $94,756,000 from $112,906,000 in 1994 due to the
Company's curtailment of marketing efforts and writings in Illinois,
Mississippi, Tennessee, Texas, and Washington resulting from more restrictive
underwriting criteria, inadequately priced business in those states and other
unfavorable market conditions.
Net Premiums Written. Superior's net premiums written in 1995 decreased
$18,445,000, or 16.4%, to $94,070,000 from $112,515,000 in 1994 due to a
decrease in gross premiums written.
Net Premiums Earned. Superior's net premiums earned in 1995 decreased
$15,223,000, or 13.5%, to $97,614,000 from $112,837,000 in 1994 reflecting a
decrease in net premiums written.
Net Investment Income. Superior's net investment income in 1995 increased
$69,000, or 1.0%, to $7,093,000 from $7,024,000 in 1994 due to a slight increase
in the average yield earned on invested assets resulting from improved market
conditions and an increase in invested assets due to improved operating cash
flows.
Other Income. Superior's other income in 1995 increased $827,000, or 24.7%,
to $4,171,000 from $3,344,000 in 1994 due to higher billing fees in Florida
resulting from the ability to collect billing fees during the entire year in
1995 compared to only part of the year in 1994 because of an interruption in the
charging of billing fees due to a regulatory intervention. In April 1994,
Superior was notified by the Florida Department of Insurance (the "Florida
Department") that it could no longer charge billing fees. This order was in
response to an examination performed on Superior as a result of a change in
Florida law enacted in 1994 that affected all property and casualty reinsurers.
In November 1994, Superior provided the Florida Department with a revised
billing fee program which was accepted by the Florida Department and made
effective in 1995. Superior is not aware of any intention to modify this
legislation; however, there can be no assurance that the Florida Department will
not enact new legislation that would impact Superior's ability to charge billing
fees.
Net Realized Capital Gain (Loss). Superior recorded a net realized capital
gain from the sale of investments of $1,954,000 in 1995 compared to a net
realized capital loss from the sale of investments of $200,000 in 1994. The net
realized capital gain in 1995 was the result of disposing of invested assets
with increased market values.
Losses and LAE. Superior's losses and LAE in 1995 decreased $20,035,000, or
21.7%, to $72,343,000 from $92,378,000 in 1994 due to a decrease in net premiums
earned. However, the 21.7% decrease in losses and LAE was greater than the 13.5%
decrease in net premiums earned due to a more responsive approach in evaluating
and settling bodily injury claims, the specialization of the handling of
physical damage claims with a resulting reduction in average paid severities,
and an improvement in productivity and a reduction in cost as a result of the
consolidation of nine claims offices to three. As a result, the loss and LAE
ratio for 1995 was 74.1% as compared to 81.9% in 1994. For more information
concerning losses and LAE, see "Business -- Reserves for Losses and Loss
Adjustment Expenses."
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses in 1995 decreased
$6,197,000, or 15.9%, to $32,705,000 from $38,902,000 in 1994 due to
reengineering of internal operations aimed at reducing cost and the introduction
of reduced agent commission programs.
Income Tax Expense. Superior's income tax expense and effective tax rate
for 1995 were $1,649,000 and 28.5%, respectively. This compares to an income tax
benefit of $3,800,000 in 1994, which resulted in an effective tax rate of
(45.9)%. The increase in income tax expense is primarily a function of the
improvement in net income before taxes in 1995 as compared to 1994 and a
decreased portion of net investment income being derived from tax-free sources.
51
<PAGE> 54
Years Ended December 31, 1994 and 1993:
Gross Premiums Written. Superior's gross premiums written in 1994 decreased
$2,754,000, or 2.4%, to $112,906,000 from $115,660,000 in 1993 due to the
implementation of certain underwriting restrictions in Texas and the termination
of certain agency relationships in Texas.
Net Premiums Written. Superior's net premiums written in 1994 decreased
$2,779,000, or 2.4%, to $112,515,000 from $115,294,000 in 1993 due to a decrease
in gross premiums written.
Net Premiums Earned. Superior's net premiums earned in 1994 decreased
$5,299,000, or 4.5%, to $112,837,000 from $118,136,000 in 1993 reflecting a
decrease in net premiums written.
Net Investment Income. Superior's net investment income in 1994 decreased
$1,146,000, or 14.0%, to $7,024,000 from $8,170,000 in 1993 due primarily to a
decline in average invested assets which resulted from a decrease in operating
cash flow and dividends paid in early 1994.
Other Income. Superior's other income in 1994 decreased $2,535,000, or
43.1%, to $3,344,000 from $5,879,000 in income in 1993 due to an interruption in
the state of Florida in the charging of billing fees caused by a regulatory
change which increased the minimum down payments.
Net Realized Capital Gain (Loss). Superior recorded a net realized capital
loss from the sale of investments of $200,000 in 1994 compared to a net realized
capital gain from the sale of investments of $3,559,000 in 1993 due to market
conditions which drove market interest rates higher in 1994 causing Superior's
fixed maturity portfolio to decline in market value.
Losses and LAE. Superior's losses and LAE in 1994 increased $6,476,000, or
7.5%, to $92,378,000 from $85,902,000 in 1993 due to claims management
inefficiencies arising from inadequate managerial supervision and a conversion
to a new claims management system. These claims management inefficiencies were
substantially corrected in 1995 as a result of the completion of the
implementation of the new claims management system. The loss and LAE ratio for
1994 was 81.9% as compared to 72.7% for 1993. For more information concerning
losses and LAE, see "Business -- Reserves for Losses and Loss Adjustment
Expenses."
Policy Acquisition and General and Administrative Expenses. Superior's
policy acquisition and general and administrative expenses in 1994 increased
$2,610,000, or 7.2%, to $38,902,000 from $36,292,000 in 1993 due to a
significant increase in employee compensation caused by the hiring of new
officers and managers.
Income Tax Expense. Superior recorded an income tax benefit of $3,800,000
and an effective tax rate of (45.9)% in 1994 as compared to an income tax
expense of $3,981,000 and an effective tax rate of 29.4% in 1993. The income tax
benefit in 1994 was a function of the Company's generation of a net loss before
income taxes. The low effective tax rate in 1993 was due to a greater portion of
net investment income being derived from tax-free sources.
52
<PAGE> 55
BUSINESS
GENERAL
The Company underwrites and markets nonstandard private passenger
automobile insurance and crop insurance. The Company writes business in the U.S.
exclusively through independent agencies and seeks to distinguish itself by
offering high quality, technology based services for its agents and
policyholders. For the twelve months ended June 30, 1996, the Company had
consolidated gross premiums written of approximately $175.8 million (including
gross premiums written of $25.2 million for Superior for two months of 1996). In
addition to premium revenues, for the same period, the Company received fee
income of $31.2 million, consisting of CAT Coverage Fees in the amount of $1.8
million, Buy-up Expense Reimbursement Payments in the amount of $25.5 million
and CAT LAE Reimbursement Payments and MPCI Excess LAE Reimbursement Payments in
the amount of $3.9 million. The Company's nonstandard automobile insurance
business, with its principal offices in Indianapolis, Indiana, Atlanta, Georgia,
and Tampa, Florida, writes insurance through approximately 4,500 independent
agencies in 18 states. IGF, with its principal office in Des Moines, Iowa and
regional offices in California, Indiana, Kansas, Mississippi and North Dakota,
writes MPCI and crop hail insurance through approximately 1,200 independent
agencies in 31 states. Based on a Company analysis of gross premiums written in
1995 as reported by A.M. Best, the Company believes that the combination of
Pafco and Superior makes the Company's nonstandard automobile group the
sixteenth largest underwriter of nonstandard automobile insurance in the United
States. Based on premium information compiled in 1995 by the FCIC and NCIS, the
Company believes that IGF is the fifth largest underwriter of MPCI in the United
States.
The following table sets forth the premiums written by Pafco and IGF by
line of business for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
SIX MONTHS ENDED
1993 1994 1995 JUNE 30, 1996
------------------- ------------------- ------------------- -------------------
GROSS NET GROSS NET GROSS NET GROSS NET
PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS
WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN WRITTEN
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nonstandard
Automobile(1)........... $52,187 $26,479 $ 45,593 $28,114 $ 49,005 $37,302 $ 62,290 $62,089
Crop Hail(2).............. 8,593 4,281 10,130 4,565 16,966 11,608 17,620 14,953
MPCI(3)................... 26,563 -- 44,325 -- 53,408 -- 62,916 --
Other..................... 1,593 1,000 3,086 2,460 5,255 4,537 4,124 --
-------- -------- --------- -------- --------- -------- --------- --------
Total................ $88,936 $31,760 $103,134 $35,139 $124,634 $53,447 $146,950 $77,042
======== ======== ========= ======== ========= ======== ========= ========
</TABLE>
- -------------------------
(1) Does not reflect net premiums written for Superior for the years ended
December 31, 1993, 1994 and 1995 and for the four months ended April 30,
1996. For the years ended December 31, 1993, 1994 and 1995, Superior and its
subsidiaries had gross premiums written of $115.7 million, $112.9 million
and $94.8 million, respectively, and net premiums written of $115.3 million,
$112.5 million and $94.1 million, respectively. For the four months ended
April 30, 1995 and 1996, Superior and its subsidiaries had gross premiums
written of $28.0 million and $44.0 million, respectively, and net premiums
written of $27.9 million and $43.6 million, respectively.
(2) Most crop hail insurance policies are sold in the second and third quarters
of the calendar year.
(3) For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company."
NONSTANDARD AUTOMOBILE INSURANCE
Industry Background
The Company, through its 52% owned Subsidiaries, Pafco and Superior, is
engaged in the writing of insurance coverage on automobile physical damage and
liability policies for "nonstandard risks." Nonstandard risks are those
individuals who are unable to obtain insurance through standard market carriers
due to factors
53
<PAGE> 56
such as poor premium payment history, driving experience, record of prior
accidents or driving violations, particular occupation or type of vehicle.
Premium rates for nonstandard risks are generally higher than for standard
risks. Total private passenger automobile insurance premiums written by
insurance carriers in the United States in 1995 have been estimated by A.M. Best
to be approximately $106 billion. Since it can be viewed as a residual market,
the size of the nonstandard private passenger automobile insurance market
changes with the insurance environment and grows when standard coverage becomes
more restrictive. Although this factor, as well as industry differences in the
criteria which distinguish standard from nonstandard insurance, make it
difficult to estimate the size of the nonstandard market, management of the
Company believes that the voluntary nonstandard market has accounted for
approximately 15% of total private passenger automobile insurance premiums
written in recent years. According to statistical information derived from
insurer annual statements compiled by A.M. Best, the nonstandard automobile
market accounted for $17.4 billion in annual premium volume for 1995.
Strategy
The Company has multiple strategies with respect to its nonstandard
automobile insurance operations, including:
- Through GGS Holdings, the Company seeks to achieve profitability through
a combination of internal growth and the acquisition of other insurers
and blocks of business. The Company regularly evaluates acquisition
opportunities. There can be no assurance, however, that any suitable
business opportunities will arise.
- The Company is committed to the use of integrated technologies which
permit it to rate, issue, bill and service policies in an efficient and
cost effective manner.
- The Company competes primarily on the basis of underwriting criteria and
service to agents and insureds and generally does not match price
decreases implemented by competitors which are directed towards obtaining
market share.
- The Company encourages agencies to place a large share of their
profitable business with Pafco and Superior by offering, in addition to
fixed commissions, a contingent commission based on a combination of
volume and profitability.
- The Company promptly responds to claims in an effort to reduce the costs
of claims settlements by reducing the number of pending claims and uses
computer databases to verify repair and vehicle replacement costs and to
increase subrogation and salvage recoveries.
- The Company will seek to expand the multi-tiered marketing approach
currently employed by Superior and its subsidiaries in Florida and other
states in order to offer to its independent agency network a broader
range of products with different premium and commission structures.
Products
The Company offers both liability and physical damage coverage in the
nonstandard automobile insurance marketplace, with policies having terms of
three to twelve months, with the majority of policies having a term of six
months. Most nonstandard automobile insurance policyholders choose the basic
limits of liability coverage which, though varying from state to state,
generally are $25,000 per person and $50,000 per accident for bodily injury, and
in the range of $10,000 to $20,000 for property damage. Of the approximately
144,000 combined policies of Pafco and Superior in force on December 31, 1995,
fewer than 6% had policy limits in excess of these basic limits of coverage. Of
the 54,000 policies of Pafco in force on December 31, 1995, approximately 90%
had policy periods of six months or less. Of the approximately 90,000 policies
of Superior in force as of December 31, 1995, approximately 42% had policy
periods of six months and approximately 58% had policy periods of 12 months.
The Company offers several different policies which are directed toward
different classes of risk within the nonstandard market. The Superior Choice
policy covers insureds whose prior driving record, insurability
54
<PAGE> 57
and other relevant characteristics indicate a lower risk profile than other
risks in the nonstandard market place. The Superior Standard policy is intended
for risks which do not qualify for Superior Choice but which nevertheless
present a more favorable risk profile than many other nonstandard risks. The
Superior Specialty policies cover risks which do not qualify for either the
Superior Choice or the Superior Standard. Pafco offers only a single nonstandard
policy which includes multiple discounts and surcharges designed to recognize
proof of prior insurance, driving violations, accident history and other factors
relevant to the level of risk insured. Superior offers a product similar to the
Pafco product in states in which it is not offering a multi-tiered product.
Marketing
The Company's nonstandard automobile insurance business is concentrated in
the states of Florida, California, Indiana, Missouri and Virginia, and the
Company writes nonstandard automobile insurance in 13 additional states.
Management plans to continue to expand selectively into additional states. GGS
Holdings will select states for expansion based on a number of criteria,
including the size of the nonstandard automobile insurance market, state-wide
loss results, competition and the regulatory climate.
The following table sets forth the geographic distribution of gross
premiums written for the Company and Superior individually and for the Company
and Superior on a combined basis for the periods indicated.
<TABLE>
<CAPTION>
COMPANY SUPERIOR
-------------------------------------- ----------------------------------------
SIX SIX
MONTHS MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
--------------------------- -------- ----------------------------- --------
1993 1994 1995 1996 1993 1994 1995 1996
------- ------- ------- -------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATE
Arkansas...... $ 1,497 $ 1,619 $ 1,796 $ 1,286 -- -- --
California.... -- -- -- -- $ 13,132 $ 13,422 $15,350 $ 9,561
Colorado...... 9,634 5,629 9,257 5,572 -- -- -- --
Florida....... -- -- -- -- 49,262 55,282 54,535 39,126
Georgia....... -- -- -- -- 6,149 7,342 5,927 3,707
Illinois...... -- -- 80 534 3,906 3,894 2,403 851
Indiana....... 16,559 13,648 13,710 9,087 57 414 132 --
Iowa.......... 5,239 3,769 3,832 2,873 -- -- -- --
Kentucky...... 6,093 9,573 7,840 5,790 -- -- -- --
Mississippi... -- -- -- -- 5,526 4,411 2,721 1,010
Missouri...... 10,766 8,163 8,513 8,120 -- -- -- --
Nebraska...... 2,399 3,192 3,660 2,627 -- -- -- --
Ohio.......... -- -- -- -- 7,312 4,325 3,164 1,639
Oklahoma...... -- -- 317 1,199 -- -- -- --
Tennessee..... -- -- -- -- 891 1,829 332 (2)
Texas......... -- -- -- -- 19,318 10,660 3,464 4,774
Virginia...... -- -- -- -- 8,748 7,500 5,035 8,370
Washington.... -- -- -- -- 1,359 3,827 1,693 83
------- ------- ------- ------- -------- -------- ------- -------
Totals... $52,187 $45,593 $49,005 $ 37,088 $115,660 $112,906 $94,756 $ 69,119
======= ======= ======= ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
COMBINED
COMPANY AND SUPERIOR
-----------------------------------------
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
------------------------------ --------
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
STATE
Arkansas...... $ 1,497 $ 1,619 $ 1,796 $ 1,286
California.... 13,132 13,422 15,350 9,561
Colorado...... 9,634 5,629 9,257 5,572
Florida....... 49,262 55,282 54,535 39,126
Georgia....... 6,149 7,342 5,927 3,707
Illinois...... 3,906 3,894 2,483 1,385
Indiana....... 16,616 14,062 13,842 9,087
Iowa.......... 5,239 3,769 3,832 2,873
Kentucky...... 6,093 9,573 7,840 5,790
Mississippi... 5,526 4,411 2,721 1,010
Missouri...... 10,766 8,163 8,513 8,120
Nebraska...... 2,399 3,192 3,660 2,627
Ohio.......... 7,312 4,325 3,164 1,639
Oklahoma...... -- -- 317 1,199
Tennessee..... 891 1,829 332 (2)
Texas......... 19,318 10,660 3,464 4,774
Virginia...... 8,748 7,500 5,035 8,370
Washington.... 1,359 3,827 1,693 83
-------- -------- -------- --------
Totals... $167,847 $158,499 $143,761 $106,207
======== ======== ======== ========
</TABLE>
The Company and Superior market their nonstandard products exclusively
through approximately 4,500 independent agencies and focus their marketing
efforts in rural areas and the peripheral areas of metropolitan centers. As part
of its strategy, management is continuing its efforts to establish the Company
as a low cost deliverer of nonstandard automobile insurance while maintaining a
commitment to provide quality service to both agents and insureds. This element
of the Company's strategy is being accomplished primarily through the automation
of certain marketing, underwriting and administrative functions. In order to
maintain and enhance its relationship with its agency base, the Company has 21
territorial managers, each of whom resides in a specific marketing region and
has access to the technology and software necessary to provide marketing, rating
and administrative support to the agencies in his or her region.
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<PAGE> 58
The Company attempts to foster strong service relationships with its
agencies and customers. The Company is currently developing computer software
that will provide on-line communication with its agency force. In addition, to
deliver prompt service while ensuring consistent underwriting, the Company
offers rating software to its agents in some states which permits them to
evaluate risks in their offices. The agent has the authority to sell and bind
insurance coverages in accordance with procedures established by the Company,
which is a common practice in the property and casualty insurance business. The
Company reviews all coverages bound by the agents promptly and generally accepts
all coverages which fall within its stated underwriting criteria. In most
jurisdictions, the Company has the right within a specified time period to
cancel any policy even if the risk falls within its underwriting criteria. See
"Business -- Nonstandard Automobile Insurance -- Underwriting."
Pafco and Superior compensate their agents on a commission basis based on a
percentage of premiums produced. Pafco also offers its agents a contingent
commission based on volume and profitability, thereby encouraging the agents to
enhance the placement of profitable business with the Company. Superior has
recently incorporated the contingent commission into the compensation package
for its agents.
The Company believes that the combination of Pafco with Superior and its
two Florida domiciled insurance subsidiaries will allow the Company the
flexibility to engage in multi-tiered marketing efforts in which specialized
automobile insurance products are directed toward specific segments of the
market. Since certain state insurance laws prohibit a single insurer from
offering similar products with different commission structures or, in some
cases, premium rates, it is necessary to have multiple licenses in certain
states in order to obtain the benefits of market segmentation. The Company is
currently offering multi-tiered products in Florida, Texas, Virginia and
California. The Company intends to expand the marketing of its multi-tiered
products into other states and to obtain multiple licenses for its Subsidiaries
in these states to permit maximum flexibility in designing commission
structures.
Underwriting
The Company underwrites its nonstandard automobile business with the goal
of achieving adequate pricing. The Company seeks to classify risks into narrowly
defined segments through the utilization of all available underwriting criteria.
The Company maintains an extensive, proprietary database which contains
statistical records with respect to its insureds on driving and repair
experience by location, class of driver and type of automobile. Management
believes this database gives the Company the ability to be more precise in the
underwriting and pricing of its products. Further, the Company uses motor
vehicle accident reporting agencies to verify accident history information
included in applications. As of June 30, 1996, the Company had a combined
nonstandard automobile underwriting and processing staff of approximately 200
employees.
The Company utilizes many factors in determining its rates. Some of the
characteristics used are type, age and location of the vehicle, number of
vehicles per policyholder, number and type of convictions or accidents, limits
of liability, deductibles, and, where allowed by law, age, sex and marital
status of the insured. The rate approval process varies from state to state;
some states, such as Indiana, Colorado, Kentucky and Missouri, allow filing and
use of rates, while others, such as Florida, Arkansas and California, require
approval of the insurance department prior to the use of the rates.
The Company has begun to integrate its automated underwriting process with
the functions performed by its agency force. For example, the Company has
recently introduced a rating software package for use by agents in some states.
In many instances, this software package, combined with agent access to the
automated retrieval of motor vehicle reports, ensures accurate underwriting and
pricing at the point of sale. The Company believes the automated rating and
underwriting system provides a significant competitive advantage because it (i)
improves efficiencies for the agent and the Company, further linking the agent
to the Company, (ii) makes more accurate and consistent underwriting decisions
possible, and (iii) can be changed easily to reflect new rates and underwriting
guidelines.
Underwriting results of insurance companies are frequently measured by
their combined ratios. However, investment income, federal income taxes and
other non-underwriting income or expense are not reflected in the combined
ratio. The profitability of property and casualty insurance companies depends on
income from
56
<PAGE> 59
underwriting, investment and service operations. Underwriting results are
generally considered profitable when the combined ratio is under 100% and
unprofitable when the combined ratio is over 100%. The following table sets
forth loss and LAE ratios, underwriting expense ratios and combined ratios for
the periods indicated for the nonstandard automobile insurance business of each
of the Company and Superior individually and on a combined basis. The ratios
shown in the table below are computed based upon GAAP, not SAP.
<TABLE>
<CAPTION>
COMBINED
COMPANY SUPERIOR COMPANY AND SUPERIOR(1)
---------------------------------- ----------------------------------- -----------------------------------
SIX SIX SIX
MONTHS MONTHS MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30,
---------------------- -------- ----------------------- -------- ----------------------- --------
1993 1994 1995 1996 1993 1994 1995 1996(2) 1993 1994 1995 1996(2)
---- ----- ----- -------- ----- ----- ----- -------- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss ratio.... 55.5% 62.3% 65.8% 66.5% 64.8% 72.3% 64.2% 67.2% 63.1% 70.5% 64.6% 65.7%
LAE ratio..... 8.6 9.8 8.0 7.0 7.9 9.6 9.9 6.1 8.0 9.6 9.4 5.9
Underwriting
expense
ratio....... 21.9% 34.3% 37.5% 31.2% 30.7% 34.5% 33.5% 27.3% 29.3% 34.5% 34.8% 30.0%
---- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Combined
ratio....... 86.0% 106.4% 111.3% 104.7% 103.4% 116.4% 107.6% 100.6% 100.4% 114.6% 108.8% 101.6%
==== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) These ratios have not been computed on a pro forma basis but rather have
been derived by adding the premiums, expenses, losses and LAE of each of the
Company and Superior through April 30, 1996.
(2) During the four months ended April 30, 1996, Superior decreased its IBNR
reserves by $1.3 million due to a change in estimate resulting from improved
claims administration.
In an effort to maintain and improve underwriting profits, the territorial
managers regularly monitor loss ratios of the agencies in their regions and meet
periodically with the agencies in order to address any adverse trends in loss
ratios.
Claims
The Company's nonstandard automobile claims department, consisting of
approximately 36 salaried claims personnel at Pafco and 83 at Superior as of May
31, 1996, handles claims on a regional basis from its Indianapolis, Indiana,
Atlanta, Georgia, Tampa, Florida and Anaheim, California locations. Management
believes that the employment of salaried claims personnel, as opposed to
independent adjusters, results in reduced ultimate loss payments, lower LAE and
improved customer service. The Company generally retains independent appraisers
and adjusters on an as needed basis for estimation of physical damage claims and
limited elements of investigation. The Company uses the Audapoint, Audatex and
Certified Collateral Corporation computer programs to verify, through a central
data base, the cost to repair a vehicle and to eliminate duplicate or "overlap"
costs from body shops. Autotrak, which is a national database of vehicles,
allows the Company to locate vehicles nearly identical in model, color and
mileage to the vehicle damaged in an accident, thereby reducing the frequency of
disagreements with claimants as to the replacement value of damaged vehicles. In
1995, the Company implemented new claims handling procedures designed to reduce
the number of pending claims.
Claims settlement authority levels are established for each adjuster or
manager based on the employee's ability and level of experience. Upon receipt,
each claim is reviewed and assigned to an adjuster based on the type and
severity of the claim. All claims-related litigation is monitored by a home
office supervisor or litigation manager. The claims policy of the Company
emphasizes prompt and fair settlement of meritorious claims, adequate reserving
for claims and controlling claims adjustment expenses.
Reinsurance
The Company follows the customary industry practice of reinsuring a portion
of its risks and paying for that protection based upon premiums received on all
policies subject to such reinsurance. Insurance is ceded principally to reduce
the Company's exposure on large individual risks and to provide protection
against large losses, including catastrophic losses. Although reinsurance does
not legally discharge the ceding insurer from its primary obligation to pay the
full amount of losses incurred under policies reinsured, it does render the
57
<PAGE> 60
reinsurer liable to the insurer to the extent provided by the terms of the
reinsurance treaty. As part of its internal procedures, the Company evaluates
the financial condition of each prospective reinsurer before it cedes business
to that carrier. Based on the Company's review of its reinsurers' financial
health and reputation in the insurance marketplace, the Company believes its
reinsurers are financially sound and that they therefore can meet their
obligations to the Company under the terms of the reinsurance treaties. Reserves
for uncollectible reinsurance are provided as deemed necessary.
In 1995, Pafco maintained a 25% quota share reinsurance treaty on its
nonstandard automobile insurance business, as well as an excess of loss treaty
covering 100% of losses on an individual occurrence basis in excess of $200,000
up to a maximum of $1,050,000. As of January 1, 1996, Pafco has terminated all
third party quota share reinsurance with respect to its nonstandard automobile
insurance business. Pafco has entered into a quota share reinsurance agreement
with Superior whereby Pafco shall cede 100% of its gross premiums written on or
after May 1, 1996 that are in excess of three times outstanding capital and
surplus. See "Certain Relationships and Related Transactions -- Reinsurance
Arrangements." In 1996, Pafco continues to maintain an excess of loss treaty on
its nonstandard automobile insurance business covering 100% of losses on an
individual occurrence basis in excess of $200,000 up to a maximum of $1,050,000.
For the six months ended June 30, 1996, premiums ceded to reinsurers on this
excess of loss cover were $49,995. Of such reinsurers, those having A.M. Best
ratings of A or better provided 83% of such coverage. The following table
provides information with respect to material third party reinsurers on the
foregoing Pafco nonstandard automobile reinsurance treaties:
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLES
AS OF JUNE 30, 1996(1)
A.M. BEST ------------------------
REINSURERS RATING
- -------------------------------------------------------------- --------- (IN THOUSANDS)
<S> <C> <C>
Chartwell Reinsurance Company................................. A(2) $ 619
Constitution Reinsurance Corporation.......................... A+(3) 2,566
SCOR Reinsurance Company...................................... A 292
Security Insurance Company of Hartford........................ A 290
Winterthur Reinsurance Corporation of America................. A 277
</TABLE>
- -------------------------
(1) Only recoverables greater than $200,000 are shown. Total nonstandard
automobile reinsurance recoverables as of June 30, 1996 were approximately
$4,382,000.
(2) An A.M. Best rating of "A" is the third highest of 15 ratings.
(3) An A.M. Best rating of "A+" is the second highest of 15 ratings.
In 1995, Superior maintained both automobile casualty and property
catastrophe excess reinsurance. Superior's casualty excess of loss treaties
covered losses in excess of $100,000 up to a maximum of $2 million. Superior's
first casualty excess layer contained limits of $200,000 excess of $100,000, its
second casualty excess layer contained limits of $700,000 excess of $300,000 and
its third casualty excess layer had a limit of $1 million excess of $1 million.
Superior's first layer of property catastrophe excess reinsurance covered 95% of
$500,000 excess of $500,000 with an annual limit of $1 million and its second
layer of property catastrophe excess reinsurance covered 95% of $2 million
excess of $1 million with an annual limit of $4 million. In 1996, Superior
maintained the same levels of coverage, except as follows: (i) as to its third
casualty excess layer, the limit was increased to $4 million, and (ii) Superior
added a third layer of property catastrophe excess reinsurance covering 95% of
$2 million excess of $3 million with an annual limit of $4 million. Superior has
had no quota share reinsurance on its nonstandard automobile business in either
1995 or 1996.
In 1995, Superior placed all of its reinsurance with Prudential Reinsurance
Company (now Everest Reinsurance Company). In 1996, Superior placed all of its
reinsurance with Everest Reinsurance Company, except for its third layer
casualty excess of loss treaty, which was placed as follows: Zurich Reinsurance
Centre, Inc., 50%; Skandia America Reinsurance Corporation, 15%; Transatlantic
Reinsurance Company, 15%; SOREMA North America Reinsurance Company, 10%; and
Winterthur Reinsurance Corporation of America, 10%. The foregoing reinsurers
have the following A.M. Best ratings: Everest Reinsurance Company -- "A";
Skandia America Reinsurance Corporation -- "A-" (the fourth highest of 15
ratings);
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<PAGE> 61
SOREMA North American Reinsurance Company -- "A-"; Transatlantic Reinsurance
Company -- "A+"; Winterthur Reinsurance Corporation of America -- "A"; and
Zurich Reinsurance Centre, Inc. -- "A". For the six months ended June 30, 1996,
Superior had $412,000 of ceded premiums to reinsurers.
Neither Pafco nor Superior has any facultative reinsurance with respect to
its nonstandard automobile insurance business.
Competition
The Company competes with both large national writers and smaller regional
companies in each state in which it operates. The Company's competitors include
other companies which, like the Company, serve the agency market, as well as
companies which sell insurance directly to customers. Direct writers may have
certain competitive advantages over agency writers, including increased name
recognition, increased loyalty of their customer base and, potentially, reduced
acquisition costs. The Company's primary competitors are Progressive Casualty
Insurance Company, Guaranty National Insurance Company, Integon Corporation
Group, Deerbrook Insurance Company (a member of the Allstate Insurance Group)
and the companies of the American Financial Group. Generally, these competitors
are larger and have greater financial resources than the Company. The
nonstandard automobile insurance business is price sensitive and certain
competitors of the Company have, from time to time, decreased their prices in an
apparent attempt to gain market share. Although the Company's pricing is
inevitably influenced to some degree by that of its competitors, management of
the Company believes that it is generally not in the Company's best interest to
match such price decreases, choosing instead to compete on the basis of
underwriting criteria and superior service to its agents and insureds.
CROP INSURANCE
Industry Background
The two principal components of the Company's crop insurance business are
Multi-Peril Crop Insurance ("MPCI") and private named peril, primarily crop hail
insurance. Crop insurance is purchased by farmers to reduce the risk of crop
loss from adverse weather and other uncontrollable events. Farms are subject to
drought, floods and other natural disasters that can cause widespread crop
losses and, in severe cases, force farmers out of business. Because many farmers
rely on credit to finance their purchases of such agricultural inputs as seed,
fertilizer, machinery and fuel, the loss of a crop to a natural disaster can
reduce their ability to repay these loans and to find sources of funding for the
following year's operating expenses.
MPCI was initiated by the federal government in the 1930s to help protect
farmers against loss of their crops as a result of drought, floods and other
natural disasters. In addition to MPCI, farmers whose crops are lost as a result
of natural disasters have, in the past, sometimes been supported by the federal
government in the form of ad hoc relief bills providing low interest
agricultural loans and direct payments. Prior to 1980, MPCI was available only
on major crops in major producing areas. In 1980, Congress expanded the scope
and coverage of the MPCI program. In addition, the delivery system for MPCI was
expanded to permit private insurance companies and licensed agents and brokers
to sell MPCI policies, and the FCIC was authorized to reimburse participating
companies for their administrative expenses and to provide federal reinsurance
for the majority of the risk assumed by such private companies.
Although expansion of the federal crop insurance program in 1980 was
expected to make crop insurance the farmer's primary risk management tool,
participation in the MPCI program was only 32% of eligible acreage in the 1993
crop year. Due in part to low participation in the MPCI program, Congress
provided an average of $1.5 billion per year in ad hoc disaster payments over
the six years prior to 1994. In view of the combination of low participation
rates in the MPCI program and large federal payments on both crop insurance
(with an average loss ratio of 147%) and ad hoc disaster payments since 1980,
Congress has, since 1990, considered major reform of its crop insurance and
disaster assistance policies. The 1994 Reform Act was enacted in order to
increase participation in the MPCI program and eliminate the need for ad hoc
federal disaster relief payments to farmers.
59
<PAGE> 62
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including, but not limited to, low interest loans and crop price
supports. The 1994 Reform Act also authorized the marketing and selling of CAT
Coverage by the local USDA offices. As a result of an increase in the number of
policies and acres insured, the Company's MPCI Premiums increased to $53.4
million in 1995 from $44.3 million in 1994 and the fees and commissions received
by the Company from its MPCI business increased to $21.1 million in 1995 from
$14.0 million in 1994. With respect to its MPCI business for recent crop years,
IGF issued 24,400 policies on 4,260,000 gross acres in 1993; 31,200 policies on
5,423,000 gross acres in 1994; and 68,600 policies on 13,957,000 gross acres in
1995. The foregoing acreages represent the gross acres insured by the Company,
without reduction for interests in insured acreage which are shared by two or
more persons. In 1995, 25,400 policies were CAT Coverage. The Company has not
experienced any material negative impact in 1996 from the delinkage mandated by
the 1996 Reform Act.
The 1996 Reform Act, signed into law by President Clinton in April, 1996,
limits the role of the USDA offices in the delivery of MPCI coverage beginning
in July, 1996, which is the commencement of the 1997 crop year, and also
eliminates the linkage between CAT Coverage and qualification for certain
federal farm program benefits. This limitation should provide the Company with
the opportunity to realize increased revenues from the distribution and
servicing of its MPCI product. In accordance with the 1996 Reform Act, the USDA
announced in July, 1996, the following 14 states in which CAT Coverage will no
longer be available through USDA offices but rather will be solely available
through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The FCIC has transferred to the Company approximately
8,900 insureds for CAT Coverage who previously purchased such coverage from USDA
field offices. The Company believes that any future potential negative impact of
the delinkage mandated by the 1996 Reform Act will be mitigated by, among other
factors, the likelihood that farmers will continue to purchase MPCI to provide
basic protection against natural disasters since ad hoc federal disaster relief
programs have been reduced or eliminated. In addition, the Company believes that
(i) lending institutions will likely continue to require this coverage as a
condition to crop lending and (ii) many of the farmers who entered the MPCI
program as a result of the 1994 Reform Act have come to appreciate the
reasonable price of the protection afforded by CAT Coverage and will remain with
the program regardless of delinkage. There can, however, be no assurance as to
the ultimate effect which the 1996 Reform Act may have on the business or
operations of the Company.
For a more detailed description of the Company's MPCI business, see "Risk
Factors -- Nature of Crop Insurance Business" and "Business -- Crop Insurance --
Products."
Strategy
The Company has multiple strategies for its crop insurance operations,
including the following:
- The Company will seek to enhance underwriting profits and reduce the
volatility of its crop insurance business through geographic
diversification and the appropriate allocation of risks among the federal
reinsurance pools and the effective use of federal and third-party
catastrophic reinsurance arrangements.
- The Company also limits the risks associated with crop insurance through
selective underwriting of crops based on its historical loss experience
data base.
- The Company continues to develop and maintain a proprietary
knowledge-based underwriting system which utilizes a database of
Company-specific underwriting rules.
- The Company has further strengthened its independent agency network by
using technology to provide fast, efficient service to its agencies and
providing application documentation designed for simplicity and
convenience.
- Unlike many of its competitors, the Company employs a number of full time
claims adjusters in order to reduce the losses experienced by IGF.
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<PAGE> 63
- The Company stops selling its crop hail policies after the date on which
the plant growth emerges from the ground in order to prevent farmers from
adversely selecting against IGF when a storm is forecast or hail damage
has already occurred.
- The Company continues to explore growth opportunities and product
diversification through new specialty coverages, including Crop Revenue
Coverage and named peril insurance.
- The Company continues to explore new opportunities for advances in
administrative efficiencies and product underwriting presented by advances
in Precision Farming software, Global Positioning System (GPS) software
and Geographical Information System (GIS) technology, all of which
continue to be adopted by insureds in their farming practices.
Products
Description of MPCI Insurance Program. MPCI is a federally-subsidized
program which is designed to provide participating farmers who suffer insured
crop damage with funds needed to continue operating and plant crops for the next
growing season. All of the material terms of the MPCI program and of the
participation of private insurers, such as the Company, in the program are set
by the FCIC under applicable law. MPCI provides coverage for insured crops
against substantially all natural perils. Purchasing an MPCI policy permits a
farmer to insure against the risk that his crop yield for any growing season
will be less than 50% to 75% (as selected by the farmer at the time of policy
application or renewal) of his historic crop yield. If a farmer's crop yield for
the year is greater than the yield coverage he selected, no payment is made to
the farmer under the MPCI program. However, if a farmer's crop yield for the
year is less than the yield coverage selected, MPCI entitles the farmer to a
payment equal to the yield shortfall multiplied by 60% to 100% of the price for
such crop (as selected by the farmer at the time of policy application or
renewal) for that season as set by the FCIC.
In order to encourage farmers to participate in the MPCI program and
thereby reduce dependence on traditional disaster relief measures, the 1994
Reform Act established CAT Coverage as a new minimum level of MPCI coverage,
which farmers may purchase upon payment of a fixed administrative fee of $50 per
policy instead of any premium. CAT Coverage insures 50% of historic crop yield
at 60% of the FCIC-set crop price for the applicable commodities standard unit
of measure, i.e., bushel, pound, etc. CAT Coverage can be obtained from private
insurers such as the Company or, in certain states, from USDA field offices.
In addition to CAT Coverage, MPCI policies that provide a greater level of
protection than the CAT Coverage level are also offered (such policies, "Buy-up
Coverage"). Most farmers purchasing MPCI have historically purchased at Buy-up
Coverage levels, with the most frequently sold policy providing coverage for 65%
of historic crop yield at 100% of the FCIC-set crop price per bushel. Buy-up
Coverages require payment of a premium in an amount determined by formula set by
the FCIC. Buy-up Coverage can only be purchased from private insurers. The
Company focuses its marketing efforts on Buy-up Coverages, which have higher
premiums and which the Company believes will continue to appeal to farmers who
desire, or whose lenders encourage or require, revenue protection.
The number of MPCI Buy-up policies written has historically tended to
increase after a year in which a major natural disaster adversely affecting
crops occurs, and to decrease following a year in which favorable weather
conditions prevail.
The Company, like other private insurers participating in the MPCI program,
generates revenues from the MPCI program in two ways. First, it markets, issues
and administers policies, for which it receives administrative fees; and second,
it participates in a profit-sharing arrangement in which it receives from the
government a portion of the aggregate profit, or pays a portion of the aggregate
loss, in respect of the business it writes.
The Company's share of profit or loss on the MPCI business it writes is
determined under a complex profit sharing formula established by the FCIC. Under
this formula, the primary factors that determine the Company's MPCI profit or
loss share are (i) the gross premiums the Company is credited with having
written; (ii) the amount of such credited premiums retained by the Company after
ceding premiums to certain federal
61
<PAGE> 64
reinsurance pools; and (iii) the loss experience of the Company's insureds. The
following discussion provides more detail about the implementation of this
profit sharing formula.
Gross Premiums. For each year, the FCIC sets the formulas for determining
premiums for different levels of Buy-up Coverage. Premiums are based on the type
of crop, acreage planted, farm location, price per bushel for the insured crop
as set by the FCIC for that year, and other factors. The federal government will
generally subsidize a portion of the total premium set by the FCIC and require
farmers to pay the remainder. Cash premiums are received by the Company from
farmers only after the end of a growing season and are then promptly remitted to
the federal government. Although applicable federal subsidies change from year
to year, such subsidies will range up to approximately 40% of the Buy-up
Coverage premium for 1996 depending on the crop insured and the level of Buy-up
Coverage purchased, if any. Federal premium subsidies are recorded on the
Company's behalf by the government. For purposes of the profit sharing formula,
the Company is credited with having written the full amount of premiums paid by
farmers for Buy-up Coverages, plus the amount of any related federal premium
subsidies (such total amount, its "MPCI Premium").
As previously noted, farmers pay an administrative fee of $50 per policy
but are not required to pay any premium for CAT Coverage. However, for purposes
of the profit sharing formula, the Company is credited with an imputed premium
(its "MPCI Imputed Premium") for all CAT Coverages it sells. The amount of such
MPCI Imputed Premium credited is determined by formula. In general, such MPCI
Imputed Premium will be less than 50% of the premium that would be payable for a
Buy-up Coverage policy that insured 65% of historic crop yield at 100% of the
FCIC-set crop price per standard unit of measure for the commodity, historically
the most frequently sold Buy-up Coverage. For income statement purposes under
GAAP, the Company's gross premiums written for MPCI consist only of its MPCI
Premiums, and do not include MPCI Imputed Premiums.
Reinsurance Pools. Under the MPCI program, the Company must allocate its
MPCI Premium or MPCI Imputed Premium in respect of a farm to one of three
federal reinsurance pools, at its discretion. These pools provide private
insurers with different levels of reinsurance protection from the FCIC on the
business they have written. For insured farms allocated to the "Commercial
Pool," the Company, at its election, generally retains 50% to 100% of the risk
and the FCIC assumes 0% - 50% of the risk; for those allocated to the
"Developmental Pool," the Company generally retains 35% of the risk and the FCIC
assumes 65%; and for those allocated to the "Assigned Risk Pool," the Company
retains 20% of the risk and the FCIC assumes 80%. The MPCI Retention is
protected by private third party stop loss treaties.
Although the Company in general must agree to insure any eligible farm, it
is not restricted in its decision to allocate a risk to any of the three pools,
subject to a minimum aggregate retention of 35% of its MPCI Premiums and MPCI
Imputed Premiums written. The Company uses a sophisticated methodology derived
from a comprehensive historical data base to allocate MPCI risks to the federal
reinsurance pools in an effort to enhance the underwriting profits realized from
this business. The Company has crop yield history information with respect to
over 100,000 farms in the United States. Generally, farms or crops which, based
on historical experience, location and other factors, appear to have a favorable
net loss ratio and to be less likely to suffer an insured loss, are placed in
the Commercial Pool. Farms or crops which appear to be more likely to suffer a
loss are placed in the Developmental Pool or Assigned Risk Pool. The Company has
historically allocated the bulk of its insured risks to the Commercial Pool.
The Company's share of profit or loss depends on the aggregate amount of
MPCI Premium and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the foregoing pools (its "MPCI Retention"). As previously
described, the Company purchases reinsurance from third parties other than the
FCIC to further reduce its MPCI loss exposure.
Loss Experience of Insureds. Under the MPCI program the Company pays losses
to farmers through a federally funded escrow account as they are incurred during
the growing season. The Company requests funding of the escrow account when a
claim is settled, and the escrow account is funded by the federal government
within three business days. After a growing season ends, the aggregate loss
experience of the Company's insureds in each state for risks allocated to each
of the three reinsurance pools is determined. If, for all risks allocated to a
particular pool in a particular state, the Company's share of losses incurred is
less
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<PAGE> 65
than its aggregate MPCI Retention, the Company shares in the gross amount of
such profit according to a schedule set by the FCIC for each year. The profit
and loss sharing percentages are different for risks allocated to each of the
three reinsurance pools, and private insurers will receive or pay the greatest
percentage of profit or loss for risks allocated to the Commercial Pool.
The percentage split between private insurers and the federal government of
any profit or loss which emerges from an MPCI Retention is set by the FCIC and
generally is adjusted from year to year. For 1995, 1996 and 1997 crop years, the
FCIC increased the maximum potential profit share of private insurers for risks
allocated to the Commercial Pool above the maximum potential profit share set
for 1994, without increasing the maximum potential share of loss for risks
allocated to that pool for 1995. This change increased the potential
profitability of risks allocated to the Commercial Pool by private insurers.
The following table presents MPCI Premiums, MPCI Imputed Premium, and
underwriting gains or losses of IGF for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
MPCI Premiums.................................................... $26,563 $44,325 $53,408
MPCI Imputed Premiums............................................ -- 2,171 19,552
Gross underwriting gain (loss)................................... (3,534) 4,344 10,870
Net private third-party reinsurance recovery (expense) and
other.......................................................... 2,019 (1,087) (1,217)
------- ------- -------
Net underwriting gain (loss)..................................... $(1,515) $ 3,257 $ 9,653
======= ======= =======
</TABLE>
MPCI Fees and Reimbursement Payments. The Company receives Buy-up Expense
Reimbursement Payments from the FCIC for writing and administering Buy-up
Coverage policies. These payments provide funds to compensate the Company for
its expenses, including agents' commissions and the costs of administering
policies and adjusting claims. In 1994, the Buy-up Expense Reimbursement
Payments were set at 31% of the MPCI Premium. In 1995 and 1996, this payment has
also been set at 31% of the MPCI Premium, but it is scheduled to be reduced to
29% in 1997, 28% in 1998, and 27.5% in 1999. Although the 1994 Reform Act
directs the FCIC to alter program procedures and administrative requirements so
that the administrative and operating costs of private insurance companies
participating in the MPCI program will be reduced in an amount that corresponds
to the reduction in the expense reimbursement rate, there can be no assurance
that the Company's actual costs will not exceed the expense reimbursement rate.
Farmers are required to pay a fixed administrative fee of $50 per policy in
order to obtain CAT Coverage. This fee is retained by the Company to defray the
cost of administration and policy acquisition. The Company also receives, from
the FCIC, a separate CAT LAE Reimbursement Payment equal to approximately 13.0%
of MPCI Imputed Premiums in respect of each CAT Coverage policy it writes and a
small MPCI Excess LAE Reimbursement Payment. In general, fees and payments
received by the Company in respect of CAT Coverage are significantly lower than
those received for Buy-up Coverage.
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<PAGE> 66
In addition to premium revenues, the Company received the following fees
and commissions from its crop insurance segment for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1993 1994 1995 1995(1) 1996(1)
------ ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CAT Coverage Fees............................... $ -- $ 74 $ 1,298 $ 446 $ 941
Buy-up Expense Reimbursement Payments........... 8,854 13,845 16,366 10,233 19,402
CAT LAE Reimbursement Payments and MPCI Excess
LAE Reimbursement Payments.................... 190 107 3,427 1,198 1,646
------- -------- -------- -------- --------
Total......................................... $9,044 $14,026 $21,091 $11,877 $21,989
======= ======== ======== ======== ========
</TABLE>
- -------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Company -- Overview -- Crop Insurance Operations" for a
discussion of the accounting treatment accorded to the crop insurance
business.
Crop Revenue Coverage. The Company has recently introduced a new product in
its crop insurance business called Crop Revenue Coverage, or "CRC." In contrast
to standard MPCI coverage, which features a yield guarantee or coverage for the
loss of production, CRC provides the insured with a guaranteed revenue stream by
combining both yield and price variability protection. CRC protects against a
grower's loss of revenue resulting from fluctuating crop prices and/or low
yields by providing coverage when any combination of crop yield and price
results in revenue that is less than the revenue guarantee provided by the
policy. CRC was approved by the FCIC as a pilot program for revenue insurance
coverage plans for the 1996 crop year, and has been available for corn and
soybeans in all counties in Iowa and Nebraska beginning with such crop year. CRC
policies represent approximately 30% of the combined corn policies written by
IGF in Iowa and Nebraska for the 1996 crop year. In July, 1996, the FCIC
announced that CRC will be made available in the fall of 1996 for winter wheat
in the entire states of Kansas, Michigan, Nebraska, South Dakota, Texas and
Washington and in parts of Montana.
Revenue insurance coverage plans such as CRC are the result of the 1994
Reform Act, which directed the FCIC to develop a pilot crop insurance program
providing coverage against loss of gross income as a result of reduced yield
and/or price. CRC was developed by a private insurance company other than the
Company under the auspices of this pilot program, which authorizes private
companies to design alternative revenue coverage plans and to submit them for
review, approval and endorsement by the FCIC. As a result, although CRC is
administered and reinsured by the FCIC and risks are allocated to the federal
reinsurance pools, CRC remains partially influenced by the private sector,
particularly with respect to changes in its rating structure.
CRC plans use the policy terms and conditions of the Actual Production
History ("APH") plan of MPCI as the basic provisions for coverage. The APH
provides the yield component by utilizing the insured's historic yield records.
The CRC revenue guarantee is the producer's approved APH times the coverage
level, times the higher of the spring futures price or harvest futures price (in
each case, for post-harvest delivery) of the insured crop for each unit of
farmland. The coverage levels and exclusions in a CRC policy are similar to
those in a standard MPCI policy. As with MPCI policies, the Company receives
from the FCIC an expense reimbursement payment equal to 31% of gross premiums
written in respect of each CRC policy it writes. See "-- MPCI Fees and
Reimbursement Payments." This expense reimbursement payment is scheduled to be
reduced to 29% in 1997, 28% in 1998 and 27.5% in 1999.
CRC protects revenues by extending crop insurance protection based on APH
to include price as well as yield variability. Unlike MPCI, in which the crop
price component of the coverage is set by the FCIC prior to the growing season
and generally does not reflect actual crop prices, CRC uses the commodity
futures market as the basis for its pricing component. Pricing occurs twice in
the CRC plan. The spring futures price is used to establish the initial policy
revenue guarantee and premium, and the harvest futures price is used to
establish the crop value to count against the revenue guarantee and to recompute
the revenue guarantee (and resulting indemnity payments) when the harvest price
is higher than the spring price.
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<PAGE> 67
The industry (including the Company) and the FCIC are reviewing the current
rating structure supporting the CRC product. The Company is studying this issue
and other factors as part of its MPCI underwriting and risk allocation plan,
although the Company currently expects to offer CRC in the regions where it can
be sold for winter wheat in 1996 because of high interest in the product among
farmers. Based on crop performance to date in the regions where it has written
CRC for spring planted crops, the Company does not believe that any potential
underpricing of CRC policies it has written for such crops will adversely affect
its results of operations.
Crop Hail. In addition to Multi-Peril Crop Insurance, the Company offers
stand alone crop hail insurance, which insures growing crops against damage
resulting from hail storms and which involves no federal participation, as well
as its proprietary HAILPLUS(TM) product which combines the application and
underwriting process for MPCI and hail coverages. IGF wrote crop hail coverage
in the following amounts for the following crop years: 6,500 policies on
2,595,000 gross acres in 1993; 7,300 policies on 3,066,000 gross acres in 1994;
and 9,000 policies on 4,422,000 gross acres in 1995. The HAILPLUS(TM) product
tends to produce less volatile loss ratios than the stand alone product since
the combined product generally insures a greater number of acres, thereby
spreading the risk of damage over a larger insured area. Approximately 50% of
IGF's hail policies are written in combination with MPCI. Although both crop
hail and MPCI provide insurance against hail damage, under crop hail coverages
farmers can receive payments for hail damage which would not be severe enough to
require a payment under an MPCI policy. The Company believes that offering crop
hail insurance enables it to sell more MPCI policies than it otherwise would.
Named Peril. In addition to crop hail insurance, the Company also sells a
small volume of insurance against crop damage from other specific named perils.
These products cover specific crops, including hybrid seed corn, cranberries,
cotton, tomatoes and onions, and are generally written on terms that are
specific to the kind of crop and farming practice involved and the amount of
actuarial data available. The Company plans to seek potential growth
opportunities in this niche market by developing basic policies on a diverse
number of named crops grown in a variety of geographic areas, and to offer these
polices primarily to large producers through certain select agents. The
Company's experienced product development team will develop the underwriting
criteria and actuarial rates for the named peril coverages. As with the
Company's other crop insurance products, loss adjustment procedures for named
peril policies are handled by full-time professional claims adjusters who have
specific agronomy training with respect to the crop and farming practice
involved in the coverage.
Third Party Reinsurance in Effect for 1996
In order to reduce the Company's potential loss exposure under the MPCI
program, the Company purchases stop loss reinsurance from other private insurers
in addition to reinsurance obtained from the FCIC. In addition, since the FCIC
and state regulatory authorities require IGF to limit its aggregate writings of
MPCI Premiums and MPCI Imputed Premiums to no more than 900% of capital, and
retain a net loss exposure of not in excess of 50% of capital, IGF may also
obtain reinsurance from private insurers in order to permit it to increase its
premium writings. Such private reinsurance would not eliminate the Company's
potential liability in the event a reinsurer was unable to pay or losses
exceeded the limits of the stop loss coverage. For crop hail insurance, the
Company has in effect quota share reinsurance of 10% of premiums, although the
reinsurer is only liable to participate in losses of the Company up to a 150%
pure loss ratio. The Company also has stop loss treaties for its crop hail
business which reinsure approximately 45% of losses in excess of an 80% pure
loss ratio up to a 100% pure loss ratio and 95% of losses in excess of a 100%
pure loss ratio up to a 140% pure loss ratio. With respect to its MPCI business,
the Company has stop loss treaties which reinsure 93.75% of the underwriting
losses experienced by the Company to the extent that aggregate losses of its
insureds nationwide are in excess of 100% of the Company's MPCI Retention up to
125% of MPCI Retention. The Company also has an additional layer of MPCI stop
loss reinsurance which covers 95% of the underwriting losses experienced by the
Company to the extent that aggregate losses of its insureds nationwide are in
excess of 125% of MPCI Retention up to 150% of MPCI Retention.
Based on a review of the reinsurers' financial health and reputation in the
insurance marketplace, the Company believes that the reinsurers for its crop
insurance business are financially sound and that they
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<PAGE> 68
therefore can meet their obligations to the Company under the terms of the
reinsurance treaties. Reserves for uncollectible reinsurance are provided as
deemed necessary. The following table provides information with respect to all
reinsurers on the aforementioned IGF reinsurance agreements;
<TABLE>
<CAPTION>
CEDED PREMIUM
FOR THE SIX MONTHS
A.M. BEST ENDED JUNE 30, 1996(1)
REINSURERS RATING ----------------------
- --------------------------------------------------------------- --------- (IN THOUSANDS)
<S> <C> <C>
Folksam International Insurance Co. Ltd........................ A-(2) $487
Frankona Ruckversicherungs AG.................................. A(3) 265
Granite Re..................................................... NR(4) 221
Insurance Corporation of Hannover.............................. A- 395
Liberty Mutual Insurance Co. (UK) Ltd.......................... A 210
Partner Reinsurance Company Ltd................................ A 604
R + V Versicherung AG.......................................... NR(5) 457
Scandinavian Reinsurance Company Ltd........................... A+(6) --(7)
</TABLE>
- -------------------------
(1) For the six months ended June 30, 1996, total ceded premiums were
$2,666,837.
(2) An A.M. Best rating of "A-" is the fourth highest of 15 ratings.
(3) An A.M. Best rating of "A" is the third highest of 15 ratings.
(4) Granite Re, an affiliate of the Company, is an insurer domiciled in Barbados
which has never applied for or requested such a rating.
(5) R + V Versicherung AG is an insurer domiciled outside of the United States
and, as such, does not have a rating from A.M. Best.
(6) An A.M. Best rating of "A+" is the second highest of 15 ratings.
(7) As of June 30, 1996, IGF had not yet recognized significant ceded premiums
to Scandinavian Reinsurance Company, although it expects to recognize
significant ceded premiums to such company for the full year.
Marketing; Distribution Network
IGF markets its products to the owners and operators of farms in 31 states
through approximately 2,500 agents associated with approximately 1,200
independent insurance agencies, with its primary geographic concentration in the
states of Iowa, Texas, Illinois, Kansas and Minnesota. The Company has, however,
begun to diversify outside of the Midwest and Texas in order to reduce the risk
associated with geographic concentration. IGF is licensed in 20 states and
markets its products in additional states through a fronting agreement with a
third party insurance company. IGF has a stable agency base and it experienced
negligible turnover in its agencies in 1995. Through its agencies, IGF targets
farmers with an acreage base of at least 1,000 acres. With respect to its MPCI
business, policies written on 1,000 or more acres accounted for the following
portion of gross acreage insured by IGF in the following crop years: for 1993,
12.5% (534,000 gross acres); for 1994, 12.1% (657,000 gross acres); and for
1995, 21.3% (2,975,000 gross acres). With respect to its crop hail business,
policies written on 1,000 or more acres accounted for the following portion of
gross acreage insured by IGF in the following crop years: for 1993, 37.3%
(967,000 gross acres); for 1994, 42.0% (1,291,000 gross acres); and for 1995,
48.4% (2,142,000 gross acres). Such larger farms typically have a lower risk
exposure since they tend to utilize better farming practices and to have
noncontiguous acreage, thereby making it less likely that the entire farm will
be affected by a particular occurrence. Many farmers with large farms tend to
buy or rent acreage which is increasingly distant from the central farm
location. Accordingly, the likelihood of a major storm (wind, rain or hail) or a
freeze affecting all of a particular farmer's acreage decreases.
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<PAGE> 69
The following table sets forth an analysis of the number of acres insured
by policy for the 1994 and 1995 crop years.
<TABLE>
<CAPTION>
ACREAGE (MILLIONS OF ACRES)
-------------------------------------------
1994 1995
------------------ -------------------
ACREAGE RANGE PER POLICY MPCI CROP HAIL MPCI CROP HAIL
- ------------------------------------------------------ ---- --------- ----- ---------
<S> <C> <C> <C> <C>
1 to 499.............................................. 3.68 1.05 8.04 1.29
500 to 999............................................ 1.09 .73 2.94 .99
1,000+................................................ .66 1.29 2.97 2.14
---- ----- ----- -----
Total............................................... 5.43 3.07 13.95 4.42
==== ===== ===== =====
</TABLE>
The following table presents MPCI Premiums written by IGF by state for the
years ended December 31, 1993, 1994 and 1995 and the six months ended June 30,
1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------- SIX MONTHS ENDED
STATE 1993 1994 1995 JUNE 30, 1996
- ------------------------------------------ ------- ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Texas..................................... $ 5,004 $ 6,751 $11,075 $ 12,214
Iowa...................................... 5,578 8,506 9,296 10,920
Illinois.................................. 4,090 7,302 7,305 8,485
Kansas.................................... 1,152 2,003 3,476 2,899
Minnesota................................. 1,030 1,965 2,026 2,524
Nebraska.................................. 843 1,536 1,992 2,275
Indiana................................... 1,047 1,486 1,875 2,161
Colorado.................................. 902 1,526 1,771 2,523
Missouri.................................. 633 1,785 1,718 1,881
North Dakota.............................. 1,037 1,153 1,638 2,454
All Other................................. 5,247 10,312 11,236 14,580
------- ------- ------- -------
Total................................ $26,563 $44,325 $53,408 $ 62,916
======= ======= ======= =======
</TABLE>
The following table presents gross premiums written by IGF by state for
crop hail coverages for the years ended December 31, 1993, 1994 and 1995 and the
six months ended June 30, 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------- SIX MONTHS ENDED
STATE 1993 1994 1995 JUNE 30, 1996
- ------------------------------------------ ------ ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Iowa...................................... $3,158 $ 3,954 $ 4,667 $ 3,481
Minnesota................................. 294 318 2,162 1,993
Colorado.................................. 558 964 1,775 760
Nebraska.................................. 672 1,022 1,477 1,086
Montana................................... 695 239 1,355 3,655
North Dakota.............................. 729 1,087 1,283 1,231
Kansas.................................... 705 765 846 477
South Dakota.............................. 101 124 756 1,291
Wisconsin................................. 328 315 458 351
Mississippi............................... 208 277 400 480
All Other................................. 1,145 1,065 1,787 2,815
------- ------- ------- -------
Total................................ $8,593 $10,130 $16,966 $ 17,620
======= ======= ======= =======
</TABLE>
The Company seeks to maintain and develop its agency relationships by
providing agencies with faster, more efficient service as well as marketing
support. IGF owns an IBM AS400 along with all peripheral and networking
equipment and has developed its own proprietary software package, Aplus, which
allows agencies to quote and examine various levels of coverage on their own
personal computers. The Company has seven
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<PAGE> 70
regional managers who are responsible for the Company's field operations within
an assigned geographic territory, including maintaining and enhancing
relationships with agencies in those territories. IGF also uses application
documentation which is designed for simplicity and convenience. The Company
believes that IGF is the only crop insurer which has created a single
application for MPCI and hail coverage.
IGF generally compensates its agents based on a percentage of premiums
produced and, in the case of CAT Coverage and crop hail insurance, a percentage
of underwriting gain realized with respect to business produced. This
compensation structure is designed to encourage agents to place profitable
business with IGF (which tends to be insurance coverages for larger farms with
respect to which the risk of loss is spread over larger, frequently
noncontiguous insured areas).
Underwriting Management
Because of the highly regulated nature of the MPCI program and the fact
that rates are established by the FCIC, the primary underwriting functions
performed by the Company's personnel with respect to MPCI coverage are (i)
selecting of marketing territories for MPCI based on the type of crops being
grown in the area, typical weather patterns and loss experience of both agencies
and farmers within a particular area, (ii) recruiting agencies within those
marketing territories which service larger farms and other more desirable risks
and (iii) ensuring that policies are underwritten in accordance with the FCIC
rules.
With respect to its hail coverage, IGF seeks to minimize its underwriting
losses by maintaining an adequate geographic spread of risk by rate group. In
addition, IGF establishes sales closing dates after which hail policies will not
be sold. These dates are dependent on planting schedules, vary by geographic
location and range from May 15 in Texas to July 15 in North Dakota. Prior to
these dates, crops are either seeds in the ground or young growth newly emerged
from the ground and hail damage to crops in either of these stages of growth is
minimal. The cut-off dates prevent farmers from adversely selecting against IGF
by waiting to purchase hail coverage until a storm is forecast or damage has
occurred. For its hail coverage, IGF also sets limits by policy ($400,000 each)
and by township ($2.0 million per township). As of December 31, 1995, IGF's
average exposure was approximately $30,000 per policy and approximately $375,000
per township. The Company also uses a daily report entitled "Severe Weather
Digest" which shows the time and geographic location of all extraordinary
weather events to check incoming policy applications against possible previous
damage.
Claims/Loss Adjustments
In contrast to most of its competitors who retain independent adjusters on
a part-time basis for loss adjusting services, as of May 31, 1996, IGF employed
approximately 40 full-time professional claims adjusters who are agronomy
trained as well as approximately 190 part-time loss adjusters. Management
believes that the professionalism of the IGF full-time claims staff coupled with
their exclusive commitment to IGF helps to ensure that claims are handled in a
manner so as to reduce overpayment of losses experienced by IGF. The adjusters
are located throughout IGF's marketing territories. In order to promote a rapid
claims response, the Company has deployed several small four wheel drive
vehicles for use by its adjusters. The adjusters report to a field service
representative in their territory who manages adjusters' assignments, assures
that all preliminary estimates for loss reserves are accurately reported and
assists in loss adjustment. Within 72 hours of reported damage, a loss notice is
reviewed by an IGF service office claims manager and a preliminary loss reserve
is determined which is based on the representative's and/or adjuster's knowledge
of the area or the particular storm which caused the loss. Generally, within
approximately two weeks, hail and MPCI claims are examined and reviewed on site
by an adjuster and the insured signs a proof of loss form containing a final
release. As part of the adjustment process, IGF's adjusters use Global
Positioning System Units, which are hand held devices using navigation
satellites to determine the precise location where a claimed loss has occurred.
IGF has a team of catastrophic claims specialists who are available on 48 hours
notice to travel to any of IGF's six regional service offices to assist in heavy
claim work load situations.
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<PAGE> 71
Competition
The crop insurance industry is highly competitive. The Company competes
against other private companies and, with respect to CAT Coverage, USDA field
service offices in certain areas. However, under the 1996 Reform Act, effective
for the 1997 crop year, USDA field service offices may offer CAT Coverage in a
state only if the Secretary of Agriculture determines that there is an
insufficient number of approved insurance providers operating in the state to
provide CAT Coverage to producers adequately.
Many of the Company's competitors have substantially greater financial and
other resources than the Company, and there can be no assurance that the Company
will be able to compete effectively against such competitors in the future. The
Company competes on the basis of the commissions paid to agents, the speed with
which claims are paid, the quality and extent of services offered, the
reputation and experience of its agency network and, in the case of private
insurance, policy rates. Because the FCIC establishes the rates that may be
offered for MPCI policies, the Company believes that quality of service and
level of commissions offered to agents are the principal factors on which it
competes in the area of MPCI. The Company believes that the crop hail and other
named peril crop insurance industry is extremely rate-sensitive and the ability
to offer competitive rate structures to agents is a critical factor in the
agent's ability to write crop hail and other named peril premiums. Because of
the varying state laws regarding the ability of agents to write crop hail and
other named peril premiums prior to completion of rate and form filings (and, in
some cases, state approval of such filings), a company may not be able to write
its expected premium volume if its rates are not competitive.
The crop insurance industry has become increasingly consolidated. From the
1985 crop year to the 1995 crop year, the number of insurance companies having
agreements with the FCIC to sell and service MPCI policies has declined from 50
to 17. The Company believes that IGF is the fifth largest MPCI crop insurer in
the U.S. based on premium information compiled in 1995 by the FCIC and NCIS. The
Company's primary competitors are Rain & Hail Insurance Service, Inc.
(affiliated with Cigna Insurance Company), Rural Community Insurance Services,
Inc. (which is owned by Norwest Corporation), American Growers Insurance Company
(Redland), Crop Growers Insurance, Inc., Great American Insurance Company,
Blakely Crop Hail (an affiliate of Farmers Alliance Mutual Insurance Company)
and North Central Crop Insurance, Inc. The Company believes that in order to
compete successfully in the crop insurance business it will have to market and
service a volume of premiums sufficiently large to enable the Company to
continue to realize operating efficiencies in conducting its business. No
assurance can be given that the Company will be able to compete successfully if
this market further consolidates.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss reserves are estimates, established at a given point in time based on
facts then known, of what an insurer predicts its exposure to be in connection
with incurred losses. LAE reserves are estimates of the ultimate liability
associated with the expense of settling all claims, including investigation and
litigation costs resulting from such claims. The actual liability of an insurer
for its losses and LAE reserves at any point in time will be greater or less
than these estimates.
The Company maintains reserves for the eventual payment of losses and LAE
with respect to both reported and unreported claims. Nonstandard automobile
reserves for reported claims are established on a case-by-case basis. The
reserving process takes into account the type of claim, policy provisions
relating to the type of loss and historical paid loss and LAE for similar
claims. Reported crop insurance claims are reserved based upon preliminary
notice to the Company and investigation of the loss in the field. The ultimate
settlement of a crop loss is based upon either the value or the yield of the
crop.
Under the second method, loss and LAE reserves for claims that have been
incurred but not reported are estimated based on many variables including
historical and statistical information, inflation, legal developments, economic
conditions, trends in claim severity and frequency and other factors that could
affect the adequacy of loss reserves.
The following table sets forth a three year analysis of the undiscounted
reserves for loss and LAE of the Company (not including Superior) at the
beginning of each year, the provision for new claims incurred in the
69
<PAGE> 72
current year, the effect of reserve adjustments on claims of prior years and the
actual payments made during the year on both current year and prior year claims.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1............................................. $30,924 $54,143 $29,269
Less reinsurance recoverables.................................... 11,643 36,891 12,542
------- ------- -------
Net balance at January 1....................................... 19,281 17,252 16,727
------- ------- -------
Incurred related to:
Current Year................................................... 23,931 26,268 35,184
Prior Years.................................................... 1,149 202 787
------- ------- -------
Total incurred............................................ 25,080 26,470 35,971
------- ------- -------
Paid related to:
Current Year................................................... 14,877 16,647 21,057
Prior Years.................................................... 12,232 10,348 10,018
------- ------- -------
Total paid................................................ 27,109 26,995 31,075
------- ------- -------
Net balance at December 31....................................... 17,252 16,727 21,623
Plus reinsurance recoverables.................................... 36,891 12,542 37,798
------- ------- -------
Balance at December 31........................................... $54,143 $29,269 $59,421
======= ======= =======
</TABLE>
Unpaid gross loss and loss adjustment expenses at December 31, 1994
decreased by $24,874,000 to $29,269,000 from $54,143,000 at December 31, 1993,
primarily due to a decline in reinsurance recoverables of $24,349,000, of which
$22,695,000 represented a decline in the amount recoverable from the FCIC in
respect of MPCI business. In addition, Pafco's statutory surplus began to grow
in the latter half of 1994, resulting in a decrease in its ratio of net premiums
written to surplus. State regulators generally establish required surplus levels
based on an insurer's premium levels. For property-casualty insurance companies,
ratios in excess of 3 to 1 in the amount of net premiums written to the amount
of statutory surplus are considered outside the usual range by insurance
regulators and rating agencies. Pafco's ratio of net premiums written to surplus
declined from 3.3 to 1 in 1992 to 2.1 to 1 in 1993, causing the Company to
reevaluate the amount of quota share reinsurance it needed to maintain a ratio
of premiums to surplus at or near 3 to 1. Therefore, in the second half of 1994,
the Company reduced its nonstandard quota share reinsurance to 32% in 1994 from
50% in 1993.
Unpaid gross loss and loss adjustment expenses at December 31, 1995
increased by $30,152,000 to $59,421,000 from $29,269,000 at December 31, 1994,
due to an increase in reinsurance recoverables and a higher volume of premiums.
The net increase in reinsurance recoverables of $25,256,000 was due to a
substantial increase in the MPCI business, all of which was ceded to the federal
government (representing a $26,262,000 increase in reinsurance recoverables),
offset in part by a continued decline in nonstandard quota share reinsurance
with third party reinsurers. In 1995, the Company reduced its nonstandard quota
share reinsurance from 32% to 25% based on excess surplus capacity.
The following table sets forth a three year analysis of the undiscounted
reserves for loss and LAE of Superior at the beginning of each year, the
provision for new claims incurred in the current year, the effect of
70
<PAGE> 73
reserve adjustments on claims of prior years and the actual payments made during
the year on both current year and prior year claims.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1............................................. $57,164 $52,610 $54,577
Less reinsurance recoverables.................................... 361 68 1,099
------- ------- -------
Net balance at January 1....................................... 56,803 52,542 53,478
------- ------- -------
Incurred related to:
Current Year................................................... 92,619 91,064 77,266
Prior Years.................................................... (6,717) 1,314 (4,923)
------- ------- -------
Total incurred............................................ 85,902 92,378 72,343
------- ------- -------
Paid related to:
Current Year................................................... 57,929 56,505 48,272
Prior Years.................................................... 32,234 34,937 31,424
------- ------- -------
Total paid................................................ 90,163 91,442 79,696
------- ------- -------
Net balance at December 31....................................... 52,542 53,478 46,125
Plus reinsurance recoverables.................................... 68 1,099 987
------- ------- -------
Balance at December 31........................................... $52,610 $54,577 $47,112
======= ======= =======
</TABLE>
The following loss reserve development tables illustrate the change over
time of reserves established for claims and claims expense at the end of various
calendar years for the nonstandard automobile segment of the Company (not
including Superior), and for Superior separately. The first three line items
show the reserves as originally reported at the end of the stated year. The
table also includes the cumulative amounts paid as of the end of successive
years with respect to that reserve liability. The "liabilities reestimated"
section indicates reestimates of the original recorded reserve as of the end of
each successive year based on additional information pertaining to such
liabilities. The last portion of the table compares the latest reestimated
reserve to the reserve amount as originally established and indicates whether or
not the original recorded amount was adequate or inadequate to cover the
estimated costs of unsettled claims.
The reserve for claims and claims expense is an accumulation of the
estimated amounts necessary to settle all outstanding claims as of the date for
which the reserve is stated. The reserve and payment data shown below have been
reduced for estimated subrogation and salvage recoveries. The reserve estimates
are based upon the factors in each case and experience with similar cases. No
attempt is made to isolate explicitly the impact of inflation from the multitude
of factors influencing the reserve estimates though inflation is implicitly
included in the estimates. The Company and Superior regularly update their
reserve forecasts by type of claim as new facts become known and events occur
which affect unsettled claims. The Company and Superior do not discount their
reserves for unpaid claims and claims expense.
The following loss reserve development tables are cumulative and,
therefore, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.
Conditions and trends that have affected the development of liability in the
past may not necessarily recur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies from the table.
71
<PAGE> 74
THE COMPANY -- NONSTANDARD AUTOMOBILE INSURANCE ONLY (NOT INCLUDING SUPERIOR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for unpaid losses
and LAE........................ $29,125 $26,819 $30,844
Deduct: Reinsurance
recoverable.................... 12,581 10,927 9,921
------- ------- -------
Reserve for unpaid losses and
LAE, net of reinsurance........ $4,748 $10,775 $14,346 $17,083 $17,449 $18,706 $16,544 $16,522 $20,923
Paid cumulative as of:
One year later................. 2,517 6,159 7,606 7,475 8,781 10,312 9,204 9,059
Two years later................ 4,318 7,510 10,388 10,930 12,723 14,934 12,966
Three years later.............. 4,433 7,875 12,107 12,497 14,461 16,845
Four years later............... 4,146 8,225 12,863 13,271 15,071
Five years later............... 4,154 8,513 13,147 13,503
Six years later................ 4,297 8,546 13,237
Seven years later.............. 4,297 8,561
Eight years later.............. 4,295
Liabilities reestimated as of:
One year later................. 3,434 11,208 15,060 15,103 16,797 18,872 16,747 17,000
Two years later................ 4,588 11,413 14,178 14,745 16,943 19,599 17,023
Three years later.............. 4,702 10,923 14,236 14,993 16,914 19,662
Four years later............... 4,311 10,791 14,479 14,809 16,750
Five years later............... 4,234 10,877 14,436 14,659
Six years later................ 4,320 10,825 14,368
Seven years later.............. 4,278 10,922
Eight years later.............. 4,309
Net cumulative (deficiency) or
redundancy..................... 439 (147) (22) 2,424 699 (956) (479) (478) --
Expressed as a percentage of
unpaid losses and LAE.......... 9.2% (1.4%) (0.0%) 14.2% 4.0% (5.1%) (2.9%) (2.9%)
</TABLE>
Net reserves for the nonstandard automobile business of the Company
increased substantially in 1988, 1989, 1990 and 1995. Such changes were due
entirely to changes in the premium volume of the nonstandard automobile business
for those years. In general, the Company's nonstandard automobile segment has
not developed significant redundancies or deficiencies as compared to original
reserves. A deficiency of $956,000, or 5.1%, of original reserves developed with
respect to loss reserves at December 31, 1992 due to an unexpected increase in
loss severity and average claim cost.
72
<PAGE> 75
SUPERIOR
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserves for
unpaid losses and
LAE................... $52,610 $54,577 $47,112
Deduct: Reinsurance
recoverable........... 68 1,099 987
------- ------- -------
Reserve for unpaid
losses and LAE, net of
reinsurance........... $15,070 $26,245 $37,851 $56,424 $60,118 $60,224 $56,803 $52,542 $53,487 $46,125
Paid cumulative as of:
One year later........ 13,540 18,202 23,265 31,544 33,275 31,484 30,689 32,313 28,227
Two years later....... 17,390 25,526 34,122 43,547 44,128 40,513 41,231 38,908
Three years later..... 19,355 29,670 39,524 48,037 47,442 44,183 43,198
Four years later...... 20,119 32,545 41,257 49,064 49,256 44,708
Five years later...... 21,090 33,242 41,492 49,522 49,365
Six years later....... 21,422 33,395 41,716 49,327
Seven years later..... 21,512 33,535 41,576
Eight years later..... 21,523 33,469
Nine years later...... 21,447
Liabilities reestimated
as of:
One year later........ 22,557 31,911 48,376 54,858 58,148 53,515 50,086 53,856 48,564
Two years later....... 22,985 37,118 49,327 53,715 56,626 50,520 50,474 50,006
Three years later..... 24,968 37,932 49,051 53,022 55,147 51,854 46,624
Four years later...... 24,724 38,424 49,436 52,644 57,720 49,739
Five years later...... 24,971 38,580 49,297 54,030 56,824
Six years later....... 25,111 38,584 50,701 53,697
Seven years later..... 25,116 39,965 50,515
Eight years later..... 26,471 39,861
Nine years later...... 26,376
Net cumulative
(deficiency) or
redundancy............ (11,306) (13,616) (12,664) 2,727 3,294 10,485 10,179 2,536 4,923
Expressed as a
percentage of unpaid
losses and LAE........ (75.0%) (51.9%) (33.5%) 4.8% 5.5% 17.4% 17.9% 4.8% 9.2%
</TABLE>
Net reserves for Superior increased substantially through 1990 before
decreasing in 1992. Such changes were due to changes in premium volume and
reduction of reserve redundancies. The decrease in 1995 reflects the Company's
curtailment of marketing efforts and writings in Illinois, Mississippi,
Tennessee, Texas and Washington resulting from more restrictive underwriting
criteria, inadequately priced business in these states and other unfavorable
marketing conditions. Significant deficiencies developed in reserves established
as of December 31 of each of 1986 through 1988 which were substantially offset
by reserve additions in 1989 due to changes in reserve methodology. With respect
to reserves established as of December 31, 1991 and 1992, Superior developed
significant redundancies due to conservative levels of case basis and IBNR
reserves. Beginning in 1993, Superior began to adjust its reserving methodology
to reduce its redundancies and to take steps to close older claim files which
still carried redundant reserves.
The Company and Superior employ an independent actuary to annually evaluate
and certify the adequacy of their loss and LAE reserves.
INVESTMENTS
Insurance company investments must comply with applicable laws and
regulations which prescribe the kind, quality and concentration of investments.
In general, these laws and regulations permit investments, within specified
limits and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, preferred and common securities, real estate
mortgages and real estate.
73
<PAGE> 76
The Company's investment policies are determined by the Company's Board of
Directors and are reviewed on a regular basis. The Company's investment strategy
is to maximize the after-tax yield of the portfolio while emphasizing the
stability and preservation of the Company's capital base. Further, the portfolio
is invested in types of securities and in an aggregate duration which reflect
the nature of the Company's liabilities and expected liquidity needs. The
investment portfolios of the Company are managed by third party professional
administrators, including Goldman Sachs, in accordance with pre-established
investment policy guidelines established by the Company. The investment
portfolios of the Company at June 30, 1996 consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
TYPE OF INVESTMENT COST VALUE
- ------------------------------------------------------------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturities:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies..................................... $ 58,152 $ 56,474
Obligations of states and political subdivisions................. 26,409 24,727
Corporate securities............................................. 34,375 38,436
-------- --------
Total fixed maturities...................................... 118,936 119,637
Equity securities:
Preferred stocks................................................. 3,353 3,285
Common stocks.................................................... 29,107 29,207
-------- --------
32,460 32,492
Short-term investments............................................. 5,989(1) 5,989(1)
Real estate........................................................ 477 477
Mortgage loans..................................................... 2,560 2,560
Other loans........................................................ 50 50
-------- --------
Total investments........................................... $ 160,472 $ 161,205
======== ========
</TABLE>
- -------------------------
(1) Due to the nature of crop insurance, the Company must maintain short-term
investments to fund amounts due under the MPCI program. Historically, these
short-term funds are highest in the fall corresponding to the cash flow of
the agricultural industry.
74
<PAGE> 77
The following table sets forth, as of December 31, 1994 and 1995 and June
30, 1996, the composition of the fixed maturity securities portfolio of the
Company by time to maturity.
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------
DECEMBER 31,
--------------------------------------
JUNE 30,
1994 1995 1996
----------------- ----------------- -------------------
PERCENT PERCENT PERCENT
TOTAL TOTAL TOTAL
MARKET MARKET MARKET MARKET MARKET MARKET
TIME TO MATURITY VALUE VALUE VALUE VALUE VALUE VALUE
- ------------------------------------------ ------ ------- ------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1 year or less............................ $1,573 17.8% $ 4,610 35.6 % $ 1,750 1.5%
More than 1 year through 5 years.......... 4,074 46.0 5,051 39.1 67,599 56.5
More than 5 years through 10 years........ 1,724 19.4 3,270 25.3 31,861 26.6
More than 10 years........................ 1,490 16.8 -- -- 18,427 15.4
------ ----- ------- ----- -------- -----
Total................................ $8,861 100.0% $12,931 100.0 % $119,637 100.0%
====== ===== ======= ===== ======== =====
</TABLE>
The following table sets forth, as of December 31, 1994 and 1995 and June
30, 1996, the ratings assigned to the fixed maturity securities of the Company.
<TABLE>
<CAPTION>
THE COMPANY
-------------------------------------------------------------
DECEMBER 31,
--------------------------------------
JUNE 30,
1994 1995 1996
----------------- ----------------- -------------------
PERCENT PERCENT PERCENT
TOTAL TOTAL TOTAL
MARKET MARKET MARKET MARKET MARKET MARKET
RATING(1) VALUE VALUE VALUE VALUE VALUE VALUE
- ------------------------------------------ ------ ------- ------- ------ -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Aaa or AAA................................ $5,772 65.1% $ 7,753 60.0 % $ 57,632 48.1%
Aa or AA.................................. 748 8.4 680 5.2 5,384 4.5
A......................................... 1,144 12.9 257 2.0 21,979 18.4
Baa or BBB................................ 100 1.2 100 0.8 11,913 10.0
Ba or BB.................................. -- -- -- -- 2,817 2.4
Other below investment grade.............. -- -- -- -- -- --
Not rated (2)............................. 1,097 12.4 4,141 32.0 19,912 16.6
------ ----- ------- ----- -------- -----
Total................................ $8,861 100.0% $12,931 100.0 % $119,637 100.0%
====== ===== ======= ===== ======== =====
</TABLE>
- -------------------------
(1) Ratings are assigned by Moody's Investors Service, Inc., and when not
available are based on ratings assigned by Standard & Poor's Corporation.
(2) These securities were not rated by the rating agencies. However, these
securities are designated as Category 1 securities by the NAIC, which is the
equivalent rating of A or better.
The investment results of the Company for the periods indicated are set
forth below:
<TABLE>
<CAPTION>
THE COMPANY
------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net investment income (1)................... $ 1,489 $ 1,241 $ 1,173 $ 636 $ 1,533
Average investment portfolio (2)............ $24,719 $20,628 $22,653 $22,033 $146,757
Pre-tax return on average investment
portfolio (3)............................. 6.0% 6.0% 5.2% 5.8% 4.4%
Net realized gains (losses)................. $ (119) $ (159) $ (344) $ 79 $ 228
</TABLE>
- -------------------------
(1) Includes dividend income received in respect of holdings of common stock.
(2) Average investment portfolio represents the average (based on amortized
cost) of the beginning and ending investment portfolio. For the six months
ended June 30, 1996, the average investment portfolio included $29,801 of
the Company prior to the Acquisition and $116,956 due to the Acquisition.
(3) The pre-tax return on average investment portfolio for the six months ended
June 30, 1995 and 1996 was calculated based upon a simple annualization of
net investment income.
75
<PAGE> 78
RATINGS
A.M. Best has currently assigned a B+ rating to Superior and a B- rating to
Pafco. Pafco's rating has been confirmed by A.M. Best at a B- rating subsequent
to the Acquisition. Superior's rating was reduced from A- to B+ as a result of
the leverage of GGS Holdings resulting from indebtedness assumed in connection
with the Acquisition. IGF recently received an "NA-2" rating (a "rating not
assigned" category for companies that do not meet A.M. Best's minimum size
requirement) from A.M. Best but intends to seek a revised rating after the
infusion of capital from the proceeds of the Offering, although there can be no
assurance that a revised rating will be obtained or as to the level of any such
rating. See "Use of Proceeds."
A.M. Best's ratings are based upon a comprehensive review of a company's
financial performance, which is supplemented by certain data, including
responses to A.M. Best's questionnaires, phone calls and other correspondence
between A.M. Best analysts and company management, quarterly NAIC filings, state
insurance department examination reports, loss reserve reports, annual reports,
company business plans and other reports filed with state insurance departments.
A.M. Best undertakes a quantitative evaluation, based upon profitability,
leverage and liquidity, and a qualitative evaluation, based upon the composition
of a company'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, the soundness of a company's capital structure, the extent of a
company's market presence, and the experience and competence of its management.
A.M. Best's ratings represent an independent opinion of a company's financial
strength and ability to meet its obligations to policyholders. A.M. Best's
ratings are not a measure of protection afforded investors. "B+" and "B-"
ratings are A.M. Best's sixth and eighth highest rating classifications,
respectively, out of 15 ratings. A "B+" rating is awarded to insurers which, in
A.M. Best's opinion, "have demonstrated very good overall performance when
compared to the standards established by the A.M. Best Company" and "have a good
ability to meet their obligations to policyholders over a long period of time."
A "B-" rating is awarded to insurers which, in A.M. Best's opinion, "have
demonstrated adequate overall performance when compared to the standards
established by the A.M. Best Company" and "generally have an adequate ability to
meet their obligations to policyholders, but their financial strength is
vulnerable to unfavorable changes in underwriting or economic conditions." There
can be no assurance that such ratings or changes therein will not in the future
adversely affect the Company's competitive position.
REGULATION
General
As a general rule, an insurance company must be licensed to transact
insurance business in each jurisdiction in which it operates, and almost all
significant operations of a licensed insurer are subject to regulatory scrutiny.
Licensed insurance companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. These
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance businesses are subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition;
(ii) periodic financial examination; (iii) approval of rates and policy forms;
(iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers
and their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
Pafco, IGF and Superior are subject to triennial examinations by state
insurance regulators. Such examinations were last conducted for Pafco as of June
30, 1992 (covering the period to that date from September 30, 1990), for IGF as
of March 31, 1992 (covering the period to that date from December 31,
76
<PAGE> 79
1987), and Superior as of December 31, 1993 (covering the period to that date
from January 1, 1991). Pafco, Superior and IGF have not been notified of the
dates of their next examination.
Insurance Holding Company Regulation
The Company also is subject to laws governing insurance holding companies
in Florida and Indiana, where the Insurers are domiciled. These laws, among
other things, (i) require the Company to file periodic information with state
regulatory authorities including information concerning its capital structure,
ownership, financial condition and general business operations; (ii) regulate
certain transactions between the Company, its affiliates and the Insurers,
including the amount of dividends and other distributions and the terms of
surplus notes; and (iii) restrict the ability of any one person to acquire
certain levels of the Company's voting securities without prior regulatory
approval.
Any purchaser of 10% or more of the outstanding shares of Common Stock of
the Company would be presumed to have acquired control of IGF unless the Indiana
Commissioner, upon application, has determined otherwise. In addition, any
purchaser of approximately 19% or more of the outstanding shares of Common Stock
of the Company will be presumed to have acquired control of Pafco and Superior
unless the Indiana Commissioner and the Commissioner of Insurance of the State
of Florida, upon application, have determined otherwise.
Indiana law defines as "extraordinary" any dividend or distribution which,
together with all other dividends and distributions to shareholders within the
preceding twelve months, exceeds the greater of: (i) 10% of statutory surplus as
regards policyholders as of the end of the preceding year or (ii) the prior
year's net income. Dividends which are not "extraordinary" may be paid ten days
after the Indiana Department receives notice of their declaration.
"Extraordinary" dividends and distributions may not be paid without the prior
approval of the Indiana Commissioner or until the Indiana Commissioner has been
given thirty days prior notice and has not disapproved within that period. The
Indiana Department must receive notice of all dividends, whether "extraordinary"
or not, within five business days after they are declared. Notwithstanding the
foregoing limit, a domestic insurer may not declare or pay a dividend from any
source of funds other than earned surplus without the prior approval of the
Indiana Department. "Earned surplus" is defined as the amount of unassigned
funds set forth in the insurer's most recent annual statement, less surplus
attributable to unrealized capital gains or reevaluation of assets. As of
December 31, 1995, IGF had earned surplus of $2,713,000. Further, no Indiana
domiciled insurer may make payments in the form of dividends or otherwise to
shareholders as such unless it possesses assets in the amount of such payment in
excess of the sum of its liabilities and the aggregate amount of the par value
of all shares of its capital stock; provided, that in no instance shall such
dividend reduce the total of (i) gross paid-in and contributed surplus, plus
(ii) special surplus funds, plus (iii) unassigned funds, minus (iv) treasury
stock at cost, below an amount equal to 50% of the aggregate amount of the par
value of all shares of the insurer's capital stock.
Under Florida law, a domestic insurer may not pay any dividend or
distribute cash or other property to its stockholders except out of that part of
its available and accumulated surplus funds which is derived from realized net
operating profits on its business and net realized capital gains. A Florida
domestic insurer may make dividend payments or distributions to stockholders
without prior approval of the Florida Department if the dividend or distribution
does not exceed the larger of: (i) the lesser of (a) 10% of surplus or (b) net
income, not including realized capital gains, plus a 2-year carryforward, (ii)
10% of surplus with dividends payable constrained to unassigned funds minus 25%
of unrealized capital gains, or (iii) the lesser of (a) 10% of surplus or (b)
net investment income plus a 3-year carryforward with dividends payable
constrained to unassigned funds minus 25% of unrealized capital gains.
Alternatively, a Florida domestic insurer may pay a dividend or distribution
without the prior written approval of the Florida Department if (1) the dividend
is equal to or less than the greater of: (i) 10% of the insurer's surplus as
regards policyholders derived from realized net operating profits on its
business and net realized capital gains or (ii) the insurer's entire net
operating profits (including unrealized gains or losses) and realized net
capital gains derived during the immediately preceding calendar year; (2) the
insurer will have policyholder surplus equal to or exceeding 115% of the minimum
required statutory surplus after the dividend or distribution; (3) the insurer
files a notice of the dividend or distribution with the department at least ten
business days prior to the dividend
77
<PAGE> 80
payment or distribution; and (4) the notice includes a certification by an
officer of the insurer attesting that, after the payment of the dividend or
distribution, the insurer will have at least 115% of required statutory surplus
as to policyholders. Except as provided above, a Florida domiciled insurer may
only pay a dividend or make a distribution (i) subject to prior approval by the
Florida Department or (ii) 30 days after the Florida Department has received
notice of such dividend or distribution and has not disapproved it within such
time. In the Consent Order approving the Acquisition, the Florida Department has
prohibited Superior from paying any dividends (whether extraordinary or not) for
four years without the prior written approval of the Florida Department.
Under these laws, the maximum aggregate amounts of dividends permitted to
be paid to the Company in 1996 by IGF without prior regulatory approval is
$2,713,000, none of which has been paid, and Pafco cannot pay to the Company any
dividends in 1996 without prior regulatory approval. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company -- Liquidity and Capital Resources." Further, there
can be no assurance that, if requested, the Indiana Department will approve any
request for extraordinary dividends from Pafco or IGF or that the Florida
Department will allow any dividends to be paid by Superior during the four year
period described above.
The maximum dividends permitted by state law are not necessarily indicative
of an insurer's actual ability to pay dividends or other distributions to a
parent company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
While the non-insurance company Subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a Subsidiary within the holding company
system may charge any of the Insurers for services (e.g., management fees and
commissions). These regulations may affect the amount of management fees which
may be paid by Pafco and Superior to GGS Management. See "The Company --
Formation of GGS Holdings; Acquisition of Superior." The management agreement
formerly in place between the Company and Pafco which provides for an annual
management fee equal to 15% of gross premiums has been assigned to GGS
Management, a wholly-owned subsidiary of GGS Holdings. A similar management
agreement with a management fee of 17% of gross premiums has been entered into
between GGS Management and Superior. Employees of the Company relating to the
nonstandard automobile insurance business and all Superior employees became
employees of GGS Management effective April 30, 1996. As part of the approval of
the Formation Transaction, the Indiana Department has required Pafco to resubmit
its management agreement for review by the Indiana Department no later than May
1, 1997 (the first anniversary of the Formation Transaction), together with
supporting evidence that management fees charged to Pafco are fair and
reasonable in comparison to fees charged between unrelated parties for similar
services. In the Consent Order approving the Acquisition, the Florida Department
has reserved, for three years, the right to reevaluate the reasonableness of
fees provided for in the Superior management agreement at the end of each
calendar year and to require Superior to make adjustments in the management fees
based on the Florida Department's consideration of the performance and operating
percentages of Superior and other pertinent data. There can be no assurance that
either the Indiana Department or the Florida Department will not in the future
require a reduction in these management fees.
Federal Regulation
The Company's MPCI program is federally regulated and supported by the
federal government by means of premium subsidies to farmers, expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the FCIC. The MPCI program
regulations generally require compliance with federal guidelines with respect to
underwriting, rating and claims administration. The Company is required to
perform continuous internal audit procedures and is subject to audit by several
federal government agencies.
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<PAGE> 81
The MPCI program has historically been subject to change by the federal
government at least annually since its establishment in 1980, some of which
changes have been significant. The most recent significant changes to the MPCI
program came as a result of the passage by Congress of the 1994 Reform Act and
the 1996 Reform Act. See "Risk Factors -- Nature of Crop Insurance Business."
Certain provisions of the 1994 Reform Act, when implemented by the FCIC,
may increase competition among private insurers in the pricing of Buy-up
Coverage. The 1994 Reform Act authorizes the FCIC to implement regulations
permitting insurance companies to pass on to farmers in the form of reduced
premiums certain cost efficiencies related to any excess expense reimbursement
over the insurer's actual cost to administer the program, which could result in
increased price competition. To date, the FCIC has not enacted regulations
implementing these provisions but is currently collecting information from the
private sector regarding how to implement these provisions.
The 1994 Reform Act required farmers for the first time to purchase at
least CAT Coverage in order to be eligible for other federally sponsored farm
benefits, including but not limited to low interest loans and crop price
supports. The 1994 Reform Act also authorized for the first time the marketing
and selling of CAT Coverage by the local USDA offices. Partly as a result of the
increase in the size of the MPCI market resulting from the 1994 Reform Act, the
Company's MPCI Premium increased to $53.4 million in 1995 from $44.3 million in
1994. However, the 1996 Reform Act, signed into law by President Clinton in
April, 1996, eliminates the linkage between CAT Coverage and qualification for
certain federal farm program benefits and also limits the role of the USDA
offices in the delivery of MPCI coverage. In accordance with the 1996 Reform
Act, the USDA announced in July, 1996, 14 states where CAT Coverage will no
longer be available through USDA offices but rather would solely be available
through private agencies: Arizona, Colorado, Illinois, Indiana, Iowa, Kansas,
Minnesota, Montana, Nebraska, North Carolina, North Dakota, South Dakota,
Washington and Wyoming. The limitation of the USDA's role in the delivery system
for MPCI should provide the Company with the opportunity to realize increased
revenues from the distribution and servicing of its MPCI product. The Company
has not experienced any material negative impact in 1996 from the delinkage
mandated by the 1996 Reform Act. In addition, the FCIC has transferred to the
Company approximately 8,900 insureds for CAT Coverage who previously purchased
such coverage from USDA field offices. The Company believes that any future
potential negative impact of the delinkage mandated by the 1996 Reform Act will
be mitigated by, among other factors, the likelihood that farmers will continue
to purchase MPCI to provide basic protection against natural disasters since ad
hoc federal disaster relief programs have been reduced or eliminated. In
addition, the Company believes that (i) lending institutions will likely
continue to require this coverage as a condition to crop lending and (ii) many
of the farmers who entered the MPCI program as a result of the 1994 Reform Act
have come to appreciate the reasonable price of the protection afforded by CAT
Coverage and will remain with the program regardless of delinkage. There can,
however, be no assurance as to the ultimate effect which the 1996 Reform Act may
have on the business or operations of the Company.
Underwriting and Marketing Restrictions
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity and
pricing. These regulations include (i) the creation of "market assistance plans"
under which insurers are induced to provide certain coverages, (ii) restrictions
on the ability of insurers to rescind or otherwise cancel certain policies in
mid-term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals, and (iv) limitations upon or decreases in rates permitted
to be charged.
Insurance Regulatory Information System
The NAIC Insurance Regulatory Information System ("IRIS") was developed
primarily to assist state insurance departments in executing their statutory
mandate to oversee the financial condition of insurance companies. Insurance
companies submit data on an annual basis to the NAIC, which analyzes the data
using ratios concerning various categories of financial data. IRIS ratios
consist of 12 ratios with defined acceptable ranges. They are used as an initial
screening process for identifying companies that may be in need of special
attention. Companies that have several ratios that fall outside of the
acceptable range are selected for closer
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<PAGE> 82
review by the NAIC. If the NAIC determines that more attention may be warranted,
one of several priority designations is assigned, and the insurance department
of the state of domicile is then responsible for follow-up action.
During 1993, 1994 and 1995, Pafco had a liabilities to liquid assets ratio
ranging from 115% to 147%. The NAIC considers as "unusual" a liabilities to
liquid assets ratio in an amount greater than 105%. Pafco maintained such an
"unusual" ratio during this period due to its investment in IGF, which is not
considered a liquid asset. Primarily as a result of the Transfer, Pafco's
liabilities to liquid assets ratio declined to 100% as of June 30, 1996.
During 1993, 1994 and 1995, IGF had "unusual" values in the IRIS tests for
premiums to surplus, liabilities to liquid assets and reserve deficiency to
surplus ratios. IGF also had "unusual" values for investment yield, agents
balances to surplus and surplus aid to surplus ratios for 1994 and 1995. Due to
the unique accounting method employed by IGF, it is expected that these
"unusual" ratios will develop. The ratios for premiums to surplus, agents'
balances to surplus and surplus aid to surplus are impacted by the reinsurance
program mandated by the FCIC for the distribution of the MPCI program. See "--
Crop Insurance -- Products." The ratio of liabilities to liquid assets is
"unusual" since agents' balances at December 31 are usually not settled until
late February. The investment yield ratio is "unusual" as premiums for crop
insurance are not due and payable until the crops are harvested. In addition,
late February is also the point in time where claims settlement is the highest,
thus resulting in minimal invested assets. The reserve deficiency to surplus
ratio is also "unusual" because such ratio is calculated utilizing a projection
of historical reserve development which can be inaccurate due to potential
corrections in reserving methodology. Additionally, crop reserves are short tail
lines which do not generate a significant adverse reserve development.
The Company believes the proceeds applied to IGF from the Offering will
substantially ameliorate the premium writings to surplus leverage test.
Risk-Based Capital Requirements
In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for property and casualty insurance companies designed to assess
minimum capital requirements and to raise the level of protection that statutory
surplus provides for policyholder obligations. Indiana and Florida have
substantially adopted the NAIC model law, and Indiana has directly, and Florida
has indirectly, adopted the NAIC model formula. The RBC formula for property and
casualty insurance companies measures four major areas of risk facing property
and casualty insurers: (i) underwriting, which encompasses the risk of adverse
loss developments and inadequate pricing; (ii) declines in asset values arising
from credit risk; (iii) declines in asset values arising from investment risks;
and (iv) off-balance sheet risk arising from adverse experience from
non-controlled assets, guarantees for affiliates, contingent liabilities and
reserve and premium growth. Pursuant to the model law, insurers having less
statutory surplus than that required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy.
The RBC model law provides for four levels of regulatory action. The extent
of regulatory intervention and action increases as the level of surplus to RBC
falls. The first level, the Company Action Level (as defined by the NAIC),
requires an insurer to submit a plan of corrective actions to the regulator if
surplus falls below 200% of the RBC amount. The Regulatory Action Level (as
defined by the NAIC) requires an insurer to submit a plan containing corrective
actions and requires the relevant insurance commissioner to perform an
examination or other analysis and issue a corrective order if surplus falls
below 150% of the RBC amount. The Authorized Control Level (as defined by the
NAIC) gives the relevant insurance commissioner the option either to take the
aforementioned actions or to rehabilitate or liquidate the insurer if surplus
falls below 100% of the RBC amount. The fourth action level is the Mandatory
Control Level (as defined by the NAIC) which requires the relevant insurance
commissioner to rehabilitate or liquidate the insurer if surplus falls below 70%
of the RBC amount. Based on the foregoing formulae, as of May 1, 1996, the RBC
ratios of the Insurers were in excess of levels that would require regulatory
action.
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Guaranty Funds
The Insurers also may be required under the solvency or guaranty laws of
most states in which they do business to pay assessments (up to certain
prescribed limits) to fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be deferred or forgiven
under most guaranty laws if they would threaten an insurer's financial strength
and, in certain instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the Insurers in
pools or funds to provide some types of insurance coverages which they would not
ordinarily accept. The Company recognizes its obligations for guaranty fund
assessments when it receives notice that an amount is payable to the fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations, and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.
LEGAL PROCEEDINGS
The Company's insurance subsidiaries are parties to litigation arising in
the ordinary course of business. The Company believes that the ultimate
resolution of these lawsuits will not have a material adverse effect on its
financial condition or results of operations. The Company, through its claims
reserves, reserves for both the amount of estimated damages attributable to
these lawsuits and the estimated costs of litigation.
IGF is the administrator of a run-off book of business. The FCIC has
requested that IGF take responsibility for the claims liabilities of these
policies under its administration. IGF has requested reimbursement of certain
expenses from the FCIC with respect to this run-off activity. IGF instituted
litigation against the FCIC on March 23, 1995 in the United States District
Court for the Southern District of Iowa seeking $4.3 million as reimbursement
for these expenses. The FCIC has counterclaimed for approximately $1.2 million
in claims payments for which FCIC contends IGF is responsible as successor to
the run-off book of business. While the outcome of this lawsuit cannot be
predicted with certainty, the Company believes that the final resolution of this
lawsuit will not have a material adverse effect on the financial condition of
the Company.
PROPERTIES
The headquarters for the Company, GGS Holdings and Pafco are located at
4720 Kingsway Drive, Indianapolis, Indiana 46205. The building is an 80,000
square foot multilevel structure approximately 50% of which is utilized by
Pafco. The remaining space is leased to third parties at a price of
approximately $10 per square foot.
Pafco also owns an investment property located at 2105 North Meridian,
Indianapolis, Indiana. The property is a 21,700 square foot, multilevel building
leased out entirely to third parties.
Superior's operations are conducted at leased facilities located in
Atlanta, Georgia, Tampa, Florida and Orange, California. Under a lease term
which extends through February, 1998, Superior leases office space at 280
Interstate North Circle, N.W., Suite 500, Atlanta, Georgia. Superior occupies
43,448 square feet at this location and subleases an additional 3,303 square
feet to third party tenants. Superior also has an office located at 3030 W.
Rocky Point Drive, Suite 770, Tampa, Florida consisting of 18,477 square feet of
space leased for a term extending through February, 2000. In addition, Superior
occupies an office at 1745 West Orangewood, Orange, California consisting of
3,264 square feet under a lease extending through May, 1997.
IGF owns a 17,500 square foot office building located at 2882 106th Street,
Des Moines, Iowa which serves as its corporate headquarters. The building is
fully occupied by IGF. IGF also owns certain improved commercial property which
is adjacent to its corporate headquarters.
The Company has a townhouse in Indianapolis, Indiana with an original
purchase price of $135,000 which is principally for use by out-of-town employees
and visitors to Indianapolis.
EMPLOYEES
At June 30, 1996, the Company and its Subsidiaries employed approximately
600 persons. The Company believes that relations with its employees are
excellent.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The directors of the Company are divided into three classes and are elected
to hold office for a three-year term or until their successors are elected and
qualified. The election of each class of directors is staggered over each
three-year period. See "Description of Capital Stock -- Anti-takeover
Provisions." All directors of the Company were elected by Goran as the sole
shareholder of the Company. After completion of the Offering, Goran will own
approximately 70% of the outstanding Common Stock (assuming no exercise of the
Underwriters' over-allotment option) and will continue to have the power to
control the Company and to be able to elect the Company's Board of Directors.
See "Risk Factors -- Control by Goran; Certain Continuing Relationships with
Goran and its Affiliates; Conflicts of Interest." All executive officers of the
Company are elected for one year terms and serve at the pleasure of the Board of
Directors.
The following table provides information regarding the executive officers
and directors of the Company and certain officers of the Subsidiaries. The Board
of Directors of the Company intends to appoint an additional independent
director to the Board of Directors after consummation of the Offering.
<TABLE>
<CAPTION>
EXPIRATION OF
TERM AS DIRECTOR
NAME AGE POSITION OF THE COMPANY
- ------------------------------- --- -------------------------------------------- ----------------
<S> <C> <C> <C>
G. Gordon Symons............... 75 Chairman of the Board of Directors of the 1999
Company
Alan G. Symons................. 49 Director and Chief Executive Officer of the 1997
Company
Douglas H. Symons.............. 44 Director, President and Chief Operating 1998
Officer of the Company
John J. McKeating.............. 60 Director of the Company 1999
Robert C. Whiting.............. 64 Director of the Company 1997
James G. Torrance, Q.C......... 67 Director of the Company 1998
David R. Doyle................. 50 Director of the Company 1999
David L. Bates................. 37 Vice President, General Counsel and
Secretary of the Company
Gary P. Hutchcraft............. 35 Vice President, Chief Financial Officer and
Treasurer of the Company
Dennis G. Daggett.............. 41 President and Chief Operating Officer of IGF
Thomas F. Gowdy................ 37 Executive Vice President of IGF
Roger C. Sullivan, Jr.......... 50 Executive Vice President of Superior
Donald J. Goodenow............. 49 Executive Vice President of Pafco
</TABLE>
Biographical information for each of the individuals listed in the above
table is set forth below.
G. Gordon Symons has been Chairman of the Board of Directors of the Company
since its formation in 1987. He founded the predecessor to Goran in 1964 and has
served as the Chairman of the Board of Goran since its formation in 1986. Mr.
Symons also served as the President of Goran until 1992 and the Chief Executive
Officer of Goran until 1994. Mr. Symons currently serves as a director of Symons
International Group Ltd. ("SIGL"), a federally-chartered Canadian corporation
controlled by him which, together with members of the Symons family, controls
Goran. Mr. Symons also serves as Chairman of the Board of Directors of all of
the subsidiaries of Goran, including the Subsidiaries. Mr. Symons is the father
of Alan G. Symons and Douglas H. Symons.
Alan G. Symons has served as a director of the Company since 1995 and was
named its Chief Executive Officer in 1996. Mr. Symons has been a director of
Goran since 1986, and has served as Goran's President and Chief Executive
Officer since 1994. Mr. Symons has served as a director and as President and
Chief Executive Officer of each of GGS Holdings and GGS Management since the
formation of such companies in 1996, has served as Vice Chairman of the Board of
Directors of Pafco since 1995 and has served as President and Chief
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Executive Officer of Superior since 1996. Prior to becoming the President and
Chief Executive Officer of Goran, Mr. Symons held other executive positions
within Goran since its inception in 1986. Mr. Symons is the son of G. Gordon
Symons and the brother of Douglas H. Symons.
Douglas H. Symons has served as a director and as President of the Company
since its formation in 1987 and as its Chief Operating Officer since July, 1996.
Mr. Symons served as Chief Executive Officer of the Company from 1989 until
July, 1996. Mr. Symons has been the President, Chief Executive Officer and a
director of Pafco since 1987. Mr. Symons has been a director of Goran since
1989, and has served as Goran's Chief Operating Officer and Vice President since
1989. Mr. Symons has served as a director and an Executive Vice President of
each of GGS Holdings and GGS Management since their formation in 1996 and has
served as a director and Executive Vice President of Superior since 1996. Mr.
Symons is the son of G. Gordon Symons and the brother of Alan G. Symons.
Mr. McKeating has served as a director of the Company since 1996 and as a
director of Goran since 1995. Mr. McKeating retired in January, 1996 after
serving as President and owner of Vision 20/20 Optometric Clinics ("Vision
20/20") for 36 years. Vision 20/20, located in Montreal, Quebec, is a chain of
Canadian full-service retail clinics offering all aspects of professional eye
care.
Mr. Whiting has served as a director of the Company since 1996, and has
served as a director of Granite Re since its formation in 1990. Since July,
1994, Mr. Whiting has served as President of Prime Advisors, Ltd., a
Bermuda-based insurance consulting firm. From its inception until June, 1994,
Mr. Whiting served as President and Chairman of the Board of Directors of
Jardine Pinehurst Management Co., Ltd., a Bermuda-based insurance management and
brokerage firm.
Mr. Torrance has served as a director of the Company since 1996. Mr.
Torrance was a founding partner in the Canadian law firm of Smith Lyons in 1962,
and, in April 1993, was named a partner emeritus in that firm. Mr. Torrance was
reelected as a director of Goran in 1995 after having left the Board of
Directors of Goran in 1991. He also serves as a director of Dynacare Inc.,
Mitsui & Co. (Canada) Ltd., Potash Company of Canada Limited, Sakura Bank
(Canada), Toyota Canada Inc. and Wintershall Canada Ltd.
Mr. Doyle has served as a director of the Company since 1996. Since
January, 1996, Mr. Doyle has been Vice President, Finance & Administration, and
a director of Avantec, Inc., a Carmel, Indiana-based company which provides data
management services for the pharmaceutical industry in connection with clinical
trials. From May, 1994 to January, 1996, Mr. Doyle served as Vice President --
Financial Consultant of Raffensberger Hughes & Co., which provides securities
brokerage and financial consulting services. From December, 1992 to May, 1994,
Mr. Doyle was employed by Prudential Securities, Inc. as Vice President --
Investments. Prior to that, Mr. Doyle was employed by INB National Bank of
Indianapolis, Indiana from 1973 to 1992, including his service as First Vice
President & Department Manager from 1989 to 1992. Mr. Doyle has served on the
boards of numerous civic organizations, including the Children's Bureau of
Indianapolis, the Children's Bureau Foundation and Child Advocates, Inc.
Mr. Bates, J.D., C.P.A., has served as Vice President, General Counsel and
Secretary of the Company since November, 1995, after having been named Vice
President and General Counsel of Goran in April, 1995. Mr. Bates served as a
member of the Fort Howard Corporation Legal Department from September, 1988
through March, 1995. Prior to that time, Mr. Bates served as a Tax Manager with
Deloitte & Touche.
Mr. Hutchcraft, C.P.A., has served as Vice President, Chief Financial
Officer and Treasurer of the Company and Goran since July, 1996. Prior to that
time, Mr. Hutchcraft served as an Assurance Manager with KPMG Peat Marwick, LLP
from July, 1988 to July, 1996.
Mr. Daggett has served as the Chief Operating Officer of IGF since 1994, as
its President since September, 1996 and as a director of IGF since 1989. From
1992 to 1996, Mr. Daggett served as an Executive Vice President of IGF. Mr.
Daggett also served as Vice President of Marketing for IGF from 1988 to 1993.
Prior to joining IGF, Mr. Daggett was an initial employee of a crop insurance
managing general agency, McDonald National Insurance Services, Inc., from 1984
until 1988. From 1977 to 1983, Mr. Daggett was employed as a crop insurance
specialist with the FCIC.
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Mr. Gowdy joined IGF in 1987 as a field representative, and subsequently
served as a regional manager for IGF's Mid-America service office. Mr. Gowdy
served as the Vice President of Marketing of IGF from 1993 until September,
1996, when he was named Executive Vice President of IGF. Mr. Gowdy has served as
a director of IGF since 1993.
Mr. Sullivan was named Executive Vice President of Superior in May, 1996.
From June, 1995 to May, 1996, Mr. Sullivan served as Vice President of Claims
for Superior. Prior to joining Superior, Mr. Sullivan served as a claim
consultant and on-site manager for Milliman and Robertson, Inc., a Chicago-based
insurance consulting firm, from August, 1994, to June, 1995. From May, 1987 to
August, 1994, Mr. Sullivan served as Vice President of Claims for Atlanta
Casualty Insurance Companies, an Atlanta-based carrier of standard and
nonstandard automobile insurance.
Mr. Goodenow has served as a director and Executive Vice President of Pafco
since 1989 and as a director of Superior since 1996. Mr. Goodenow also served as
a director and Executive Vice President of the Company from 1989 to 1996. Prior
to joining the Company, Mr. Goodenow served in various executive capacities at
Horace Mann Insurance Company, an Illinois insurance company.
COMMITTEES AND COMPENSATION OF THE BOARD OF DIRECTORS
Directors of the Company who are not employees of the Company or its
affiliates receive a flat annual retainer of $10,000. The annual retainer is
paid currently in cash. In addition, the Company reimburses Directors for
reasonable travel expenses incurred in attending Board and Board committee
meetings. Each director of the Company who is not also an employee of the
Company will automatically be granted options to acquire 5,000 shares of Common
Stock upon consummation of the Offering under the Company's 1996 Stock Option
Plan. See "Executive Compensation -- Stock Option Plans -- SIG 1996 Stock Option
Plan."
The Company's Compensation Committee consists of Messrs. Doyle, Torrance
and Douglas H. Symons. The Company's Audit Committee consists of Messrs. Alan G.
Symons, Torrance and McKeating.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer of the Company and to each of the other four most highly compensated
executive officers of the Company and the Subsidiaries whose annual salary and
bonus for services rendered to the Company and the Subsidiaries in 1995 exceeded
$100,000 (such individuals being collectively referred to as the "Named
Executives").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND FISCAL --------------------- SIG OPTIONS
PRINCIPAL POSITION YEAR SALARY(1) BONUS (#)
- ---------------------------------------------------- ------ --------- -------- --------------
<S> <C> <C> <C> <C>
Alan G. Symons
Chief Executive Officer of the Company............ 1995 $ 50,000 $ -- (2)
Douglas H. Symons
President and Chief Operating Officer of the
Company........................................... 1995 $ 149,982 $ 40,000 (2)
Dennis G. Daggett
President and Chief Operating Officer of IGF...... 1995 $ 125,000 $115,000 20,000(3)
Thomas F. Gowdy
Executive Vice President of IGF................... 1995 $ 92,000 $ 86,000 20,000(3)
Roger C. Sullivan, Jr.
Executive Vice President of Superior.............. 1995 $ 125,000 $ 24,940 --
</TABLE>
(footnotes on following page)
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- -------------------------
(1) Effective May, 1996, the annual salaries of the Named Executives were
increased to the following amounts: Alan G. Symons, $200,000; Douglas H.
Symons, $150,000; Mr. Daggett, $180,000; Mr. Gowdy, $140,000; and Mr.
Sullivan, $130,000.
(2) Alan G. Symons and Douglas H. Symons hold options to acquire 125,828 shares
and 73,855 shares, respectively, of Goran common stock. These executives
have also been granted options to acquire 55,555 and 27,777 shares,
respectively, of common stock of GGS Holdings under the GGS Stock Option
Plan. See "-- Stock Option Plans -- GGS Holdings Stock Option Plan."
(3) Under their employment agreements with IGF, each of Mr. Daggett and Mr.
Gowdy will automatically acquire an option to purchase 20,000 shares of
Common Stock of the Company upon consummation of the Offering, with an
exercise price per share equal to the initial public offering price. See "--
Employment Contracts and Termination of Employment -- IGF."
Stock Option Plans
Goran Share Option Plan. The directors and executive officers of the
Company, including the Named Executives, are eligible to participate in Goran's
Share Option Plan (the "Share Option Plan"). Under the Share Option Plan, 10% of
the common shares of Goran outstanding from time to time have been reserved for
issuance. The objective of these grants is to increase the participant's equity
interest in Goran and to allow them to share in the appreciation of Goran's
common stock. The Share Option Plan has been approved by Goran's shareholders.
The terms, conditions and limitations of options granted under the Share
Option Plan are determined by the Board of Directors of Goran with respect to
each option, within certain limitations. The exercise price per share is the
closing price on The Toronto Stock Exchange on the date of grant of the option.
The term of each option is fixed by the Board of Directors of Goran when the
option is granted, but may not be longer than eight years from the date of the
grant. The exercise price per share is payable in full on the date of exercise.
Options granted under the Share Option Plan are not assignable.
The following table sets forth information on grants of stock options
pursuant to the Share Option Plan during 1995 to certain of the Named
Executives. All options are for the purchase of shares of common stock of Goran.
The Named Executives and other employees of Goran who participate in the Share
Option Plan will continue to hold their Goran stock options which remain
unexercised after the closing of the Offering. During 1995, options to purchase
a total of 63,354 common shares were granted to executive officers and directors
of Goran pursuant to the Share Option Plan, excluding options granted and
subsequently cancelled during the year. Options have been granted under the
Share Option Plan for an aggregate of 436,410 common shares of Goran as of
December 31, 1995, at an average exercise price of CDN$1.94 per share.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS PER SHARE STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES OR BASE EXPIRATION --------------------------
NAME GRANTED IN 1995(1) PRICE DATE(2) 5% 10%
- ---------------------- ---------- ------------- --------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Alan G. Symons........ 18,945 29.9 CDN$7.25 4/25/2000 CDN$86,380 CDN$218,897
Douglas H. Symons..... 9,473 15.0 7.25 4/25/2000 43,192 109,454
</TABLE>
- -------------------------
(1) Goran granted options totalling 63,364 shares to all employees of Goran and
its subsidiaries in 1995.
(2) The options were granted for a term of five years, subject to earlier
termination upon the occurrence of certain events related to termination of
employment.
(3) Amounts represent the potential realizable value of each grant of options,
assuming that the market price of the underlying shares appreciates in value
from the date of grant to the end of the option term, at annualized rates of
5% and 10%.
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The following table sets forth information with respect to option exercises
in 1995 and unexercised options to purchase shares of common stock of Goran
granted in 1995 and prior years under the Share Option Plan to the Named
Executives. As in the table above, all options are for the purchase of shares of
common stock of Goran.
AGGREGATED OPTION EXERCISES IN 1995 AND OPTION VALUES AT DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, 1995 DECEMBER 31, 1995(2)
ACQUIRED VALUE --------------------------- -----------------------------
NAME ON EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ -------------- -------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan G. Symons.......... 0 0 125,828 0 CDN$1,164,386 0
Douglas H. Symons....... 0 0 73,855 0 637,131 0
</TABLE>
- -------------------------
(1) In 1996, Alan G. Symons and Douglas H. Symons acquired 49,383 and 33,333
shares, respectively, of common stock of Goran through the exercise of
options.
(2) Based on the closing price of the Toronto Stock Exchange of Goran's common
stock on December 29, 1995 (CDN$11.88).
GGS Holdings Stock Option Plan. The Board of Directors of GGS Holdings has
adopted the GGS Management Holdings, Inc. 1996 Stock Option Plan (the "GGS Stock
Option Plan"), effective as of April 30, 1996. A maximum of 10% of the issued
and outstanding shares of GGS Holdings' common stock (on a fully diluted basis
assuming exercise in full of all options) may be made the subject of options
granted under the GGS Stock Option Plan. A total of 111,111 shares of common
stock of GGS Holdings have actually been reserved for issuance under the GGS
Stock Option Plan, which authorizes the grant of incentive stock options to such
officers and other key employees as may be designated by the Board of Directors
of GGS Holdings. Stock options granted under the GGS Stock Option Plan will be
exercisable at such times and at such exercise prices as the Board of Directors
of GGS Holdings shall determine, but in any event not prior to the earlier of
(i) an initial public offering of GGS Holdings, and (ii) a Company Sale (as
defined in the GGS Agreement), and not later than ten years from the date of the
grant. Options granted under the GGS Stock Option Plan vest at a rate of 20% per
year for five years after the date of the grant. The exercise price of options
granted as of April 30, 1996 is, with respect to 50% of the shares subject to
each such option, $44.17 per share. The exercise price per share for the
remaining 50% is $44.17, subject to a compound annual increase in the exercise
price of 10%. Alan G. Symons has received 55,555 such options, and Douglas H.
Symons has received 27,777 such options. The exercise price of any options
granted under the GGS Stock Option Plan after April 30, 1996, will be subject to
a similar formula, with 50% of the shares subject to any such option having an
exercise price determined by the Board of Directors in its discretion, and the
other 50% having an exercise price which increases on each anniversary of the
date of the grant. No option granted under the GGS Stock Option Plan is
transferable by the option holder other than by the laws of descent and
distribution. Shares received upon exercise of such an option are not
transferable, except as provided in the Stockholder Agreement among the Company
and the GS Funds.
SIG 1996 Stock Option Plan. The Company's Board of Directors, and Goran as
the sole shareholder, have adopted the Company's 1996 Stock Option Plan (the
"Stock Option Plan"), effective as of October 21, 1996. A total of 1,000,000
shares of Common Stock have been reserved for issuance under the Stock Option
Plan. Options to purchase 827,000 shares of Common Stock have been granted under
the Stock Option Plan with an exercise price equal to the Offering price and
none of these options have been exercised.
The Stock Option Plan authorizes the granting of stock options to certain
officers, other key employees and non-employee directors of the Company
("Outside Directors"), key employees of any direct or indirect subsidiaries of
the Company and directors of Goran.
Stock option grants will provide the opportunity for officers, directors
and key employees of the Company and directors of Goran to purchase shares of
Common Stock of the Company at a price equal to the average of the high and the
low prices of the Common Stock on the date of grant (or if the date of grant is
not a trading date, then on the last previous trading day.) Stock options shall
not be exercisable after expiration of such
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period as shall be fixed by the Compensation Committee at the time of grant,
which such period shall in no event exceed ten years for incentive stock options
and ten years and one day for non-qualified stock options. Under the terms of
the Stock Option Plan, the Compensation Committee may not grant options to an
employee of the Company who possesses more than 10% of the voting power of all
shares of common stock of the Company unless at the time the option is granted
the exercise price is at least 110% of the fair market value of the Common Stock
and the option is not exercisable after the expiration of five years from the
date of grant. The Compensation Committee may also award a stock appreciation
right in conjunction with an incentive stock option or non-qualified stock
option.
The Stock Option Plan also provides for automatic grants of non-qualified
stock options to purchase 5,000 shares of Common Stock to directors as of the
first day following the closing of the Offering. The exercise price of the
non-qualified stock options so granted to Outside Directors shall be the
Offering price. Each of such options will have a term of ten years from the date
of grant and will not be exercisable during the first six months of their term.
Once they become exercisable, such options may be exercised in whole or in part
during their term.
Incentive stock options granted under the Stock Option Plan may not be
transferred by an optionee otherwise than by the laws of descent and
distribution, and during the lifetime of the optionee shall be exercisable only
by the optionee. Non-qualified stock options are transferable subject to certain
exceptions. If an employee optionee ceases to be an employee of the Company, or
if a Goran director optionee ceases to be a director of Goran, any option
granted to such optionee shall forthwith terminate unless the option grant to
the optionee provides otherwise. If an Outside Director ceases to be a director
of the Company for any reason other than death, any option granted to that
Outside Director may be exercised in whole or in part at any time within the six
year period immediately following the date on which his or her status as a
director terminated. In the event of the death of an Outside Director while
serving as a director of the Company, any option granted to that Outside
Director may be exercised in whole or in part by the executor or administrator
of the Outside Director's estate or by the person or persons entitled to the
option by will or by applicable laws of descent and distribution within three
years after the date of the Outside Director's death, whether or not such option
was exercisable at such date of death.
Retirement Savings Plan
The Company maintains the Symons International Group, Inc. Retirement
Savings Plan, a savings plan designed to take advantage of section 401(k) of the
Code (the "Savings Plan"). The Company is in the process of securing a
determination letter from the IRS confirming that the Savings Plan meets the
criteria of section 401(k). Employees who have been employed by the Company or
its Subsidiaries for at least six months and who elect to participate in the
Savings Plan, including the Company's executive officers, may deposit a portion
of their pay, subject to a maximum dollar limitation, into an account maintained
for them by the Savings Plan's trustee. The Company may make discretionary
matching contributions and profit sharing contributions to the Savings Plan
depending on the performance of the Company, in accordance with a formula
adopted by the Board of Directors from time to time. For a participating
employee with less than five years of service to the Company, employer
contributions vest over time, based on the number of years of service.
Participants may select from a number of investment options under the Savings
Plan, including shares of common stock of Goran, and they are permitted to
change their investment options from time to time, subject to certain
limitations.
Employment Contracts and Termination of Employment
GGS Holdings. In connection with the Formation Transaction, GGS Holdings
has entered into employment agreements with each of Alan G. Symons and Douglas
H. Symons, pursuant to which these executives have agreed to serve as Chief
Executive Officer and Executive Vice President, respectively, of GGS Holdings.
Alan G. Symons' employment agreement provides that he is entitled to serve on
the Board of Directors of GGS Holdings until removed pursuant to the terms of
the Stockholder Agreement among the Company and the GS Funds.
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The term of each of these employment agreements commenced as of the closing
of the Formation Transaction, or April 30, 1996, and continues in effect for an
initial period of five years. Upon the expiration of the initial five-year
period, the term of each agreement is automatically extended from year to year
thereafter, unless either party gives the other party six months' written notice
of an intention not to extend the term of the agreement. Each of the agreements
may be earlier terminated upon mutual agreement, retirement, death, or
disability, or for "cause," as defined in the agreements.
The employment agreements set forth the responsibilities of the employees
in their capacities as officers of GGS Holdings, as well as their compensation,
benefits and eligibility for stock options under the GGS Stock Option Plan.
These agreements require these individuals to devote substantially all of their
working time and attention to the business and affairs of GGS Holdings. Each of
the employment agreements also provides that in the event of termination of
employment for any reason, GGS Holdings will continue to provide the executive's
base salary, bonus and other compensation and benefits in accordance with GGS
Holdings' policies then in effect. Further, in the event such termination is by
reason of the executive's death, GGS Holdings will continue to provide the
executive's base salary for a period of six months after the date of
termination. The employment agreements also contain customary restrictive
covenants respecting confidentiality and non-competition which prevent the
executives from, among other things, competing with GGS Holdings in various
capacities both during the term of their employment and for a period of two
years after their termination in the event such termination is effected
voluntarily by the executive, by reason of his disability, or by GGS Holdings
for "cause."
Under the employment agreements, Alan G. Symons is entitled to a base
salary of not less than $200,000 per year, and Douglas H. Symons is entitled to
a base salary of not less than $150,000 per year. The employment agreements
further provide that Alan G. Symons may earn a bonus in an amount ranging from
25% to 100% of base salary, or $50,000 to $200,000, and Douglas H. Symons may
earn a bonus in an amount ranging from 25% to 50% of base salary, or $37,500 to
$75,000.
IGF. IGF has entered into employment agreements with each of Dennis G.
Daggett and Thomas F. Gowdy, pursuant to which these executives have agreed to
serve as Chief Operating Officer and President and as Executive Vice President,
respectively, of IGF. The agreements provide that each of the executives is
entitled to serve on the Board of Directors of IGF until his successor is duly
elected and qualified. Should he not be appointed to the Board during the term
of his employment agreement, IGF will be deemed to be in material breach of the
agreement, and the executive may treat such a breach as "termination without
cause."
The term of each of these employment agreements commenced as of February 1,
1996, and continues for a period of three years through January 31, 1999, unless
earlier terminated in accordance with the terms of the agreement. Upon the
expiration of the initial three-year period, the term of each agreement is
automatically extended from year to year thereafter, unless either party gives
the other party six months' written notice of an intention not to extend the
term of the agreement. Notwithstanding the initial three-year period, an
executive's employment under each of these agreements may be terminated by
either party at any time for any reason. However, if the executive's employment
is terminated for any reason other than for "cause" (as defined in the
agreements), the executive is entitled to receive severance pay in the form of
one year's salary continuation from the date of termination. If the executive is
terminated without cause, receipt of severance payments is conditioned upon the
execution by both IGF and the executive of a mutual waiver and release. The
employment agreements also contain customary restrictive covenants respecting
confidentiality and non-competition which prevent the executives from, among
other things, competing with IGF in various capacities both during the term of
their employment and for a period of two years after their termination, in the
event such termination is effected voluntarily by the executive, by reason of
his disability, by IGF for "cause," or pursuant to a notice of non-renewal
delivered by either party.
The employment agreements with Mr. Daggett and Mr. Gowdy set forth the
responsibilities of the employees in their capacities as officers of IGF, as
well as their compensation, benefits, perquisites, expense reimbursement and
eligibility for stock options under Goran's Share Option Plan and any stock
option plan that may be adopted by IGF. Mr. Daggett receives a minimum annual
salary of $180,000 and Mr. Gowdy receives a minimum annual salary of $140,000.
Each of Mr. Daggett and Mr. Gowdy participates in a bonus
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program established for achieving certain pre-tax profit figures, pursuant to
which the Compensation Committee of the Board of Directors of IGF may make a
discretionary award not to exceed 150% of the awardee's base salary. Upon
entering into their employment agreements, each of Mr. Daggett and Mr. Gowdy
received an option to acquire 20,000 shares of common stock of Goran, with an
exercise price equal to the fair market value of such shares on the date of
grant. In addition, the employment agreements provide that each of Mr. Daggett
and Mr. Gowdy will automatically acquire an option to purchase 20,000 shares of
Common Stock of the Company upon consummation of the Offering with an exercise
price per share equal to the initial public offering price. Finally, the IGF
employment agreements provide that each of Mr. Daggett and Mr. Gowdy will
receive options to acquire shares of IGF common stock, either (i) at the
discretion of the Board of Directors of IGF, or (ii) in the event of an initial
public offering of IGF common stock, pursuant to a formula set forth in the
agreement. This formula generally entitles the executive to receive options to
acquire up to 1.25% of the total shares of IGF common stock outstanding after
such an offering, provided that the executive relinquishes all previously
granted Goran options in connection therewith. Alternatively, the formula
provides that the executive may receive options to acquire only 0.75% of the
total shares of IGF common stock outstanding after such an offering and still
retain his Goran options. Any options to acquire shares of IGF common stock
granted pursuant to these agreements vest ratably over a five year period from
the date of grant. The employment agreements further entitle Mr. Daggett and Mr.
Gowdy to borrow up to $500,000 from IGF or one of its affiliates for the purpose
of purchasing IGF common stock.
Superior. Superior has entered into an employment agreement with Roger
Sullivan. The employment agreement provides that Mr. Sullivan is to receive an
annual salary in the amount of $125,000, subject to annual salary reviews which
commenced on February 1, 1996. Mr. Sullivan is also entitled to participate in
Superior's Executive Bonus Program, pursuant to which he will be eligible to
receive an annual bonus of up to 30% of his gross annual salary based on
individual performance and Superior's profitability. In addition, Mr. Sullivan
is entitled to participate in Superior's 401(k) profit sharing plan and pension
plan and to receive other customary employee benefits. In the event Superior is
sold, liquidated or merged with another company within four years after the
effective date of Mr. Sullivan's employment and, as a result of such event, his
employment is terminated, Mr. Sullivan is entitled to receive severance pay in
an amount equal to his then current annual base salary, provided that his
termination is not due to unsatisfactory performance. Mr. Sullivan is also
entitled to additional perquisites, including a company car and an expense
allowance, and is eligible to receive options of GGS Holdings common stock under
the GGS Stock Option Plan.
Goran. Goran has entered into an employment agreement with Gary P.
Hutchcraft, pursuant to which Mr. Hutchcraft has agreed to serve as Vice
President and Chief Financial Officer of Goran and its subsidiaries, including
the Company. Under the employment agreement, Mr. Hutchcraft is entitled to a
base salary of not less than $120,000 per year and may earn a bonus in an amount
ranging from 10% to 30% of his base salary or $12,000 to $36,000.
The term of this employment agreement commenced as of June 30, 1996 and
continues until December 31, 1996, unless earlier terminated in accordance with
the terms of the agreement. Upon expiration of the initial six month period, the
term of the agreement is automatically extended from year to year thereafter,
unless either party gives the other party six months' written notice of an
intention not to extend the term of the agreement. Notwithstanding the
foregoing, the employment agreement may be terminated by either party at any
time for any reason. However, if Mr. Hutchcraft's employment is terminated for
any reason other than for "cause," as is defined in the agreement, he shall
receive, as severance pay, one month's current salary for each full and partial
year of service to SIG. Such severance pay is conditioned, however, upon the
execution by both parties of a mutual release and waiver. Furthermore, if within
twelve months after a change of control (defined in the agreement as the
inability of the Symons family to cause the election of a majority of the Board
of Directors of Goran, SIG or their successors) Mr. Hutchcraft receives a notice
of non-renewal, is terminated without cause or the Company is in breach of the
employment agreement (the "Change of Control Termination"), then Mr. Hutchcraft
shall receive his then current salary for (i) 78 weeks or (ii) until he
commences employment with another entity such that his base salary with that
entity is equal to or greater than his salary as of the Change of Control
Termination. In the case of Mr. Hutchcraft's commencing employment with another
entity within 78 weeks of the Change of Control Termination at a salary less
than
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his salary with the Company at the time of the Change of Control Termination,
the Company will pay Mr. Hutchcraft an amount equal to the difference between
his salary with the Company at the time of the Change of Control Termination and
his salary with the new entity for a period ending 78 weeks after the Change of
Control Termination.
The employment agreement sets forth the responsibilities of Mr. Hutchcraft
in his capacity as an officer of SIG, as well as his compensation, benefits, and
perquisites. The employment agreement also contains customary restrictive
covenants respecting confidentiality and non-competition which prevent Mr.
Hutchcraft from, among other things, competing with SIG in various capacities
both during the term of his employment and for a period of two years after his
termination in the event such termination is effected voluntarily by Mr.
Hutchcraft, by reason of his disability, or by SIG for "cause" or pursuant to a
"notice of non-renewal" as provided in the agreement.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee consists of three directors, Messrs.
Doyle, Torrance and Douglas H. Symons. Neither Mr. Torrance nor Mr. Doyle have
any interlocks reportable under Item 402(j)(3) and (4) of Regulation S-K.
Douglas H. Symons has served as a director and executive officer of the Company
since its formation in 1987 and as a director and Chief Operating Officer of
Goran since 1989. Douglas H. Symons is also an executive officer of each of the
Subsidiaries. Since Alan G. Symons, the Chief Executive Officer of the Company,
is a director of each of the Subsidiaries and is empowered by the Stockholder
Agreement to determine the compensation of the managers of GGS Holdings, Douglas
and Alan Symons have reportable interests under Item 402(j)(3)(i)-(iii) of
Regulation S-K. See "Management -- Executive Compensation" for details regarding
the compensation of Douglas and Alan Symons. See also "Certain Relationships and
Related Transactions" for information concerning certain transactions between
each of Goran and GGS Holdings and the Company. Mr. Alan Symons determined
executive compensation for fiscal year 1995.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE FORMATION TRANSACTION AND THE SUPERIOR ACQUISITION
Formation Transaction
Simultaneously with the execution of the Superior Purchase Agreement,
Goran, the Company, GGS Holdings and GS Capital Partners II, L.P., a Delaware
limited partnership, entered into the GGS Agreement to capitalize GGS Holdings
and to cause GGS Holdings to issue its capital stock to the Company and to the
GS Funds, so as to give the Company a 52% ownership interest and the GS Funds a
48% ownership interest in GGS Holdings. Pursuant to the GGS Agreement, (a) the
Company contributed to GGS Holdings (i) Pafco common stock with a book value
determined in accordance with U.S. GAAP of at least $15.3 million as reflected
on an audited post-closing balance sheet of Pafco, (ii) its right to acquire
Superior pursuant to the Superior Purchase Agreement and (iii) certain fixed
assets, including office furniture and equipment, having a value of
approximately $350,000, and (b) the GS Funds contributed to GGS Holdings $21.2
million in cash. If the book value of Pafco as reflected on the final
post-closing balance sheet is less than $15.3 million, the Company will be
required to contribute the amount of the deficiency in cash to GGS Holdings no
later than December 31, 1996, plus interest at the prime rate from the date of
closing of the Formation Transaction to the date of payment.
In the GGS Agreement, Goran and the Company have jointly and severally
given customary representations and warranties which relate to, among other
matters, (i) due organization and good standing, (ii) corporate power and
authorization, (iii) conformity of financial statements to GAAP and statutory
accounting principles as applicable, (iv) absence of undisclosed liabilities and
material changes in business and financial condition, (v) possession of
necessary intellectual property rights to conduct business, (vi) good and
marketable title to assets, (vii) litigation and judicial orders, (viii)
compliance of regulatory filings with
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applicable laws and regulations, (ix) approval of policy forms, and (x) material
contracts and agreements and the absence of a default under reinsurance
agreements.
The GGS Agreement also contains representations that all tax returns of
Pafco applicable to periods prior to the execution of the GGS Agreement have
been filed and all taxes shown to have become due pursuant to such terms have
been paid. Further, pursuant to the GGS Agreement, Goran and SIG agree to
jointly and severally indemnify and hold harmless GGS Management and Pafco
against any and all tax liabilities assessed against Pafco for periods prior to
the execution of the GGS Agreement. The GGS Agreement also contains
representations that Goran, SIG, Pafco and each of their respective ERISA
affiliates have performed all material obligations required to be performed by
them and that each Pafco benefit plan is in compliance with applicable laws;
that such plans remain so qualified and that no prohibited transactions (within
the meaning of Section 4975 of the Internal Revenue Code of 1986) have occurred.
Further, Goran and SIG jointly and severally indemnify GGS Management against
any and all losses arising out of or relating to any benefit matter arising
prior to the date of execution of the GGS Agreement.
The GGS Agreement also contains provisions whereby Goran and SIG, jointly
and severally, shall indemnify, defend and hold harmless the GS Funds and their
affiliates, for all loss incurred by such parties as a result of a breach of the
representations and warranties contained in the GGS Agreement. Any issuance of
stock in connection with satisfying an indemnification obligation could expose
the Company to a risk that it would be characterized as an investment company
within the meaning of the 1940 Act. See "Risk Factors -- Conflicts of Interest."
If a claim for indemnification is brought, the indemnitor shall have the
right to conduct any proceeding or negotiation in connection therewith, to take
all other steps to settle or defend any such claim (provided that such
settlement is with the consent of the indemnitee) and to employ counsel,
reasonably acceptable to the indemnitee, to contest any such claim or liability
in the name of the indemnitee or otherwise. The indemnitor shall have the right
to conduct the defense of such claim for which indemnity is sought, but the
indemnitee shall be entitled to participate at its own expense and by its own
counsel in any proceedings relating to any third party claim.
The representations and warranties survive the closing of the Formation
Transaction for at least three years from the closing date and, in some cases
(including representations as to environmental and tax liabilities and as to
employee benefits), indefinitely. The GGS Agreement sets forth the methods by
which Goran and the Company may indemnify the GS Funds for indemnifiable losses.
Before the earlier of an IGF or SIG Company Sale (as defined in the GGS
Agreement) or the first anniversary of the Formation Transaction, Goran or the
Company shall indemnify the GS Funds for any losses by, at the option of the GS
Funds, either (1) issuing to the GS Funds a promissory note for the losses, (2)
issuing a promissory note to GGS Holdings for the losses, or (3) causing GGS
Holdings to issue to the GS Funds (a) additional shares of GGS Holdings common
stock, up to a maximum number of shares which would result in the Company's
retention of majority ownership of GGS Holdings, and (b) a promissory note for
the balance of any losses after the maximum number of shares have been issued.
After the earlier of an IGF or SIG Company Sale (as defined in the GGS
Agreement) or the first anniversary of the Formation Transaction, Goran or the
Company shall indemnify the GS Funds for any losses by, at the option of the GS
Funds, either (1) paying cash to the GS Funds, (2) making a contribution to GGS
Holdings, or (3) issuing to the GS Funds additional shares of GGS Holdings
common stock. Any promissory note issued in connection with these
indemnification arrangements will bear interest at the prime rate.
IGF Transfer
Pafco transferred all of the outstanding capital stock of IGF pursuant to
the Transfer in order to improve the risk based capital rating of Pafco and to
permit GGS Holdings to focus exclusively on the nonstandard automobile insurance
business. Pafco accomplished the Transfer by forming a wholly-owned subsidiary,
IGF Holdings, to which Pafco contributed all of the outstanding shares of
capital stock of IGF.
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IGF Holdings Dividend
Prior to the Transfer, Pafco received as a dividend from IGF Holdings cash
and the IGF Note having an aggregate value of approximately $11.0 million. IGF
Holdings funded the cash portion of the Dividend with the proceeds of the IGFH
Bank Debt. The IGFH Bank Debt matures on January 1, 2001, with principal
repayable in 16 quarterly installments of $468,750 commencing April 1, 1997.
Interest will accrue at a variable rate per annum equal to the prime rate until
October 1, 1996 and thereafter at a rate equal to the prime rate plus one
percent. The IGFH Bank Debt is collateralized by a first priority security
interest in all of the outstanding shares of IGF and the guarantee of Symons
International Group, Ltd., the controlling shareholder of Goran, collateralized
by 966,600 shares of Goran common stock. Additionally, certain financial
covenants in favor of the lender of the IGFH Bank Debt require IGF Holdings to
maintain increasing levels of income, retained earnings and statutory capital
over the term of the IGFH Bank Debt. The IGF Note is payable on the earlier of
November 30, 1996, or the consummation of an IGF or SIG Company Sale (as defined
in the GGS Agreement). The IGFH Note may be prepaid only with the prior written
consent of the lender of the IGFH Bank Debt. The IGF Note bears interest at a
variable rate per annum equal to the prime rate plus one percent until October
1, 1996 and thereafter at a rate equal to the prime rate plus two percent and is
collateralized by a second lien on the outstanding shares of capital stock of
IGF. The IGFH Bank Debt and the IGF Note will be repaid with a portion of the
proceeds from the Offering. See "Use of Proceeds."
GGS Holdings Stockholder Agreement
The Stockholder Agreement among the Company, the GS Funds, Goran and GGS
Holdings provides, subject to certain exceptions, that the Board of Directors of
GGS Holdings consists of five members, of whom three shall be designated by the
Company and two shall be designated by the GS Funds. See "The Company --
Formation of GGS Holdings; Acquisition of Superior.". The Company's
representatives on the Board of Directors of GGS Holdings are G. Gordon Symons,
Chairman of the Board of the Company, Alan G. Symons, Chief Executive Officer of
the Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company.
The Stockholder Agreement places restrictions on the ability of the Company
and the GS Funds to transfer their shares in GGS Holdings, other than proposed
transfers to affiliates or transfers made in connection with a sale of GGS
Holdings, without first offering the shares to the other party pursuant to a
right of first refusal procedure. In addition, in the event that either party
proposes to sell more than 20% of the issued and outstanding shares of GGS
Holdings to an outside purchaser, the other party is granted "tag-along rights"
pursuant to which it may participate proportionately in the proposed sale.
The Stockholder Agreement establishes certain rights of the GS Funds to
cause a sale of GGS Holdings upon the occurrence of certain triggering events,
including (i) the failure to consummate a registered initial public offering of
GGS Holdings stock representing, on a fully diluted basis, at least 20% of all
such stock issued and outstanding, and generating at least $25 million in net
proceeds to the sellers of such securities, by April 30, 2001, (ii) the third
separate occasion, during the term of the Stockholder Agreement, on which an
equity financing or acquisition transaction proposed by the GS Funds is rejected
by the GGS Holdings Board of Directors, (iii) the loss of voting control of
Goran or the Company (defined, with respect to Goran, as being direct or
indirect ownership of more than 40% of the outstanding voting stock of Goran if
any other holder or group holds in excess of 10% of the outstanding voting stock
of Goran, and otherwise 25% thereof; and defined, with respect to the Company,
as requiring both (a) direct ownership by Goran of more than 50% of the
Company's voting stock and (b) retention by Alan G. Symons and his family
members of voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason.
Upon the occurrence of any of such events, and at any time or from time to
time thereafter, the GS Funds may, by notifying the Company in writing, initiate
the process of seeking to effect a sale of GGS Holdings on terms and conditions
which are acceptable to the GS Funds. However, within thirty days after the
Company receives notice of the GS Funds' intention to initiate the sale of GGS
Holdings, the Company may provide written notice to the GS Funds that it wishes
to acquire or combine with GGS Holdings. The
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Company's notice to the GS Funds must include the proposed purchase price and
other material terms and conditions with such specificity as is necessary to
permit the GS Funds to evaluate the Company's offer. If, within 90 days of
delivery of the notice by the Company, the GS Funds accept the Company's offer,
the Company will be obligated to acquire or combine with GGS Holdings. In the
event the GS Funds reject the Company's proposal, (i) any sale to a third party
effected within 180 days after receipt of such proposal must not contain terms
that are in the aggregate less favorable to the GGS Holdings stockholders than
those set forth in the Company's proposal, (ii) any sale must provide for the
same consideration to be paid to each stockholder, and (iii) no sale may
constitute an acquisition by or a combination with an affiliate of the GS Funds.
Accordingly, under certain circumstances, the GS Funds may have the ability to
force the Company to divest itself of its nonstandard automobile operations.
Further, a forced sale of GGS Holdings may also cause the Company to be
characterized as an investment company within the meaning of the 1940 Act unless
the proceeds are redeployed into other business operations or another exemption
from registration under the 1940 Act is available.
Except as provided in the immediately preceding paragraph, and except for
sales either to affiliates or in a public offering, neither stockholder may sell
any of its stock in GGS Holdings for a period of two years from the closing date
of the Formation Transaction.
Registration Rights Agreement
Pursuant to a registration rights agreement that GGS Holdings, the GS
Funds, Goran and the Company entered into in connection with the Formation
Transaction (the "Registration Rights Agreement"), each of the GS Funds and the
Company has certain "demand registration" rights to require GGS Holdings, after
the closing of an initial public offering of GGS Holdings common stock or after
the expiration of the two-year period following consummation of the Formation
Transaction, to file a registration statement under the Securities Act covering
all or any part of its shares, subject to the following conditions: (a) that it
holds at least 25% of the shares issued and outstanding as of the closing date
of the Formation Transaction; (b) that it seeks to register at least 20% of the
shares which were issued and outstanding as of the closing date; (c) that the
offering price would be at least $25 million; and (d) that GGS Holdings need not
effect such demand registration within six months of the effective date of
another registration of GGS Holdings common stock. Each of the GS Funds and the
Company also has certain "piggyback registration" rights to have any or all of
its shares of GGS Holdings common stock included in any proposed or required
registration of equity securities by GGS Holdings under the Securities Act on
Form S-1, S-2 or S-3. If, in connection with either demand registration or
piggyback registration, there is to be an underwritten offering, all persons
participating in such registration must agree to sell their shares pursuant to
the underwriting agreement. Neither this nor any other provision of the
Registration Rights Agreement, however, should be deemed to create an
independent obligation on the part of the Company or the GS Funds to sell its
shares pursuant to any effective registration statement. The Registration Rights
Agreement requires GGS Holdings to indemnify the Company and the GS Funds, and
requires the Company and the GS Funds to indemnify each other, against certain
liabilities, including liabilities under the Securities Act, in connection with
the registration of the shares of GGS Holdings common stock pursuant to the
Registration Rights Agreement. In the event that such indemnification is
unavailable or is insufficient, each indemnifying party will be subject to a
duty of contribution based on rules of proportionate fault.
REINSURANCE ARRANGEMENTS
Prior to the Transactions, certain of the Subsidiaries from time to time
have written policies of insurance on behalf of other Subsidiaries. Under the
GGS Agreement, Goran and the Company are required to cause Pafco to enter into
agreements of reinsurance with respect to all insurance policies previously
issued by Pafco (i) on behalf of SIGF and (ii) in respect of any other type of
insurance other than nonstandard automobile insurance. Pursuant to such
arrangements, all liabilities under, and all rights to receive premiums with
respect to, such policies are to be assigned to and assumed by a third party,
provided that such arrangements are on arm's length market terms. All Pafco
insurance policies previously issued through SIGF in respect of business other
than nonstandard automobile insurance have been 100% reinsured by Granite Re.
Although Pafco will,
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in the future, continue to write business through SIGF, this business will also
be reinsured with Granite Re pursuant to a 100% quota share arrangement. Pafco
has in the past issued policies, and will in the future continue to issue
policies for, MPCI, commercial crop hail and commercial named peril insurance on
behalf of IGF, all of which business is 100% ceded to IGF through reinsurance.
Also under the GGS Agreement, Goran and the Company have caused Pafco and
IGF to enter into agreements of reinsurance pursuant to which all policies
relating to nonstandard automobile insurance previously issued by IGF on behalf
of Pafco have been assigned to and assumed by Pafco. Also, for so long as Goran
has voting control of IGF, Goran and the Company are obligated, upon request by
GGS Holdings, to cause IGF to issue policies on behalf of Pafco, which policies
must be fully reinsured by Pafco.
Under the terms of a quota share reinsurance agreement effective for
business written on or after May 1, 1996, Pafco shall cede to Superior 100% of
its gross premiums written that are in excess of three times statutory capital
and surplus at the end of 1996 or any subsequent year for which such agreement
is in force.
IGF reinsures a significant portion of its crop insurance business with
Granite Re. For 1996, Granite Re reinsures 15% of IGF's MPCI underwriting losses
to the extent that aggregate losses of its insureds nationwide exceed 100% of
MPCI Retention up to 125% of MPCI Retention, and 95% of IGF's MPCI underwriting
losses to the extent that aggregate losses of its insureds nationwide exceed
125% of MPCI Retention up to 150% of MPCI Retention. Also for 1996, Granite Re
has a 5% participation in 95% of IGF's crop hail losses in excess of an 80% pure
loss ratio up to a 100% pure loss ratio, and a 10% participation in 95% of IGF's
crop hail losses in excess of a 100% pure loss ratio up to a 140% pure loss
ratio. As of June 30, 1996, premiums ceded by IGF to Granite Re totaled
$221,000.
In the event the Company and the GS Funds agree to the issuance of any
insurance policy on behalf of Goran or any of its affiliates by GGS Holdings or
its subsidiaries, Goran will be required to arrange for an agreement of
reinsurance with a third party, such as, subject to certain restrictions,
Granite Re. Goran and the Company must indemnify GGS Holdings and its
subsidiaries from and against all losses relating to such policies.
MANAGEMENT AGREEMENTS
Pafco and Superior Management Agreements
The management agreement formerly in place between the Company and Pafco
(the "Pafco Management Agreement") which provides for an annual management fee
equal to 15% of gross premiums has been assigned to GGS Management. Under the
management agreement, as assigned, GGS Management is granted the exclusive
authority, on behalf of Pafco, to receive and accept proposals for insurance in
all states in which Pafco conducts business. GGS Management has full and
exclusive authority and responsibility, as manager, to engage in certain
activities relating to Pafco's insurance business including, among other things,
collecting premium payments, appointing adjusters, adjusting and settling
claims, and fulfilling the obligations of Pafco under applicable laws and
regulations, including those to the Indiana Department and other governmental
agencies. The management agreement requires Pafco to indemnify GGS Management
with respect to (i) all claims for losses incurred by policyholders which are
caused directly by Pafco's error in processing and handling policies and (ii)
any actions taken by Pafco which result in loss or damage to GGS Management.
Likewise, GGS Management is required to indemnify Pafco for damages arising from
actions taken on behalf of Pafco as its agent under the agreement. Although the
agreement provides for an initial five-year term followed by automatically
renewable three-year terms, either party may terminate the agreement upon sixty
days' written notice to the other party.
A similar management agreement, with a management fee of 17% of gross
premiums, has been entered into between GGS Management and Superior (the
"Superior Management Agreement"). All employees of SIG related to the
nonstandard automobile insurance business and employees of Superior are now
employees of GGS Management. The management agreement between GGS Management and
Superior is similar to the Pafco management agreement and confers upon GGS
Management the exclusive authority, on behalf of Superior, to receive and accept
proposals for insurance in all states in which such companies conduct business.
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GGS Management has full authority and responsibility, as manager, to engage in
certain activities relating to Superior's insurance business including, among
other things, collecting premium payments and holding such funds in a fiduciary
capacity, appointing adjusters, adjusting and settling claims, and fulfilling
the obligations of Superior under applicable laws and regulations, including
those to the Florida Department and other governmental agencies. Under the
agreement, GGS Management has a duty to report claims to Superior in a timely
manner, and to notify Superior in certain situations relating to the payment of
claims. Furthermore, the agreement prohibits GGS Management from engaging in
certain activities on behalf of Superior, including, among other things, binding
Superior to reinsurance treaties or retrocession agreements or committing
Superior to participate in insurance or reinsurance syndicates. The management
agreement requires Superior to indemnify GGS Management with respect to (i) all
claims for losses incurred by policyholders which are caused directly by
Superior's error in processing and handling policies and (ii) any actions taken
by Superior which result in loss or damage to GGS Management. Likewise, GGS
Management is required to indemnify Superior for damages arising from actions
taken on behalf of Superior as its agent under the agreement. Although the
agreement provides for an initial five-year term followed by automatically
renewable three-year terms, either party may terminate the agreement without
cause upon sixty days' written notice to the other party, or under certain
conditions defined in the agreement as constituting cause.
The Pafco Management Agreement and the Superior Management Agreement are
subject to periodic review by the Indiana Department and the Florida Department,
respectively, in order to determine whether the fees charged thereunder and
other terms are fair and reasonable to policyholders. As part of the approval of
the Formation Transaction and the Transfer, the Indiana Department has required
Pafco to resubmit its management agreement for review by the Indiana Department
no later than May 1, 1997 (the first anniversary of the Formation Transaction),
together with supporting evidence that management fees charged to Pafco are fair
and reasonable in comparison to fees charged between unrelated parties for
similar services. In the Consent Order approving the Acquisition, the Florida
Department has reserved, for a period of three years, the right to reevaluate
the reasonableness of fees provided for in the Superior Management Agreement at
the end of each calendar year and to require Superior to make adjustments in the
management fees based on the Florida Department's consideration of the
performance and operating percentages of Superior and other
pertinent data. There can be no assurance that either the Indiana Department or
the Florida Department may not in the future require a reduction in these
management fees.
IGF Administration Agreement (Nonstandard Automobile)
The Company and IGF have entered into an administration agreement (the "IGF
Administration Agreement") with respect to nonstandard automobile insurance
policies written by IGF and ceded to Pafco. The IGF Administration Agreement
confers broad authority upon the Company, as manager, to conduct IGF's
nonstandard automobile insurance business, subject to IGF's right to review and
consult with the Company concerning underwriting, rates, claims issues, reserves
and other matters pertaining to IGF's nonstandard automobile insurance
operations. The agreement prohibits IGF from marketing nonstandard automobile
insurance through any agents or brokers other than those appointed by the
Company, but it does not limit IGF's ability to make other products available to
its agency force, including crop insurance products. In consideration for its
services under the agreement, the Company receives an administration fee in an
amount equal to 30.5% of IGF's gross premiums written for nonstandard automobile
insurance, from which the Company is obligated to pay applicable underwriting
expenses and unallocated LAE. Other expenses are to be paid by the Company out
of funds derived from IGF's operations. IGF is entitled to 1% of all investment
income on funds deposited under this agreement to the account of IGF, and Pafco
is entitled to 99% of such investment income, which is payable quarterly on a
pro rata basis. Under the IGF Administration Agreement, the Company has agreed
to indemnify IGF and its directors, officers and employees for (i) fines or
penalties imposed on IGF by governmental authorities and (ii) claims and
expenses arising from contractual liability or punitive damages, including
damages arising under insurance contracts. The IGF Administration Agreement is
for an indefinite term but is subject to termination by either party upon sixty
(60) days' prior written notice, and immediately by IGF for "cause," which is
generally defined to mean the failure of Pafco to comply with the Quota Share
Reinsurance Agreement between IGF and Pafco and the failure of the Company to
comply with applicable laws and regulations in administering the agreement.
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IGF Administration Agreement (Crop)
The Company and IGF have also entered into an administrative agreement (the
"Administration Agreement") with respect to the management of IGF's crop
insurance operations by the Company, pursuant to which the Company receives fees
payable in quarterly installments of $150,000. This Administration Agreement
requires the Company, through certain of its senior executives, to provide such
executive management functions as may from time to time be required by IGF,
including without limitation management services in the areas of accounting,
investments, marketing, data processing and reinsurance. The initial term of the
Administration Agreement commenced on January 1, 1990 and continued through
December 31, 1991. The Administration Agreement may be extended year to year by
written addendum executed by both parties and has been so extended through
December 31, 1996.
Goran Management Agreement
Prior to 1996, the Company was a party to a management agreement with
Goran, pursuant to which Goran provided to the Company various administrative
services. The Company paid to Goran $300,000, $494,000 and $414,000 in 1993,
1994 and 1995, respectively, under this agreement. This agreement has been
terminated as of April 30, 1996.
INVESTMENT BANKING SERVICES
Under the GGS Agreement, Goldman Sachs and any of its affiliates are given
the right to perform all investment banking services for GGS Holdings for which
an investment banking firm is retained after consummation of the Formation
Transaction. These services include, for example, advice and consultation in
connection with any sale of GGS Holdings, or service as the lead managing
underwriter with respect to any public offering or secondary offering of
securities of GGS Holdings.
REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY AND GORAN
Pursuant to the registration rights agreement entered into between the
Company and Goran as of May 29, 1996 (the "Goran Registration Rights
Agreement"), Goran has the right to have any or all of the shares of Common
Stock held by it after the Offering included in a registration statement filed
by the Company under the Securities Act, subject to certain limitations set
forth in the Goran Registration Rights Agreement (a "Piggyback Registration").
In addition, subject to (i) the Underwriting Agreement among the Underwriters,
the Company and Goran, which restricts the right of Goran to sell any Common
Stock for 180 days after the completion of the Offering, and (ii) certain other
conditions, Goran also has the right to require the Company to file a
registration statement under the Securities Act with respect to the Common Stock
held by Goran (a "Demand Registration").
Subject to certain limitations, Goran is entitled to an unlimited number of
Demand Registrations, and an unlimited number of Piggyback Registrations. The
registration rights are assignable in whole or in part. Generally, the Company
is required to file a registration statement within 45 days (60 days if the
registration statement is on a form other than S-3) of a request by Goran.
However, if the Company is advised by its managing underwriter that a Demand
Registration would materially and adversely affect any planned offering
contemplated by the Company prior to receipt of such Demand Registration, then
the Company may defer compliance with any Demand Registration for up to 180 days
or until such planned offering is abandoned. Furthermore, if the Company
determines in good faith that the filing of a registration statement would
require disclosure of material information that the Company has a bona fide
business purpose for preserving as confidential or the Company is unable to
comply with applicable Commission requirements, then the Company is not required
to effect registration until the earlier of (i) the disclosure of such
information to the public or the time such information ceases to be material or
until the Company is able to comply with the Commission requirements and (ii) 45
days after the Company makes such a determination. Lastly, the Company will not
be required to file a registration statement with respect to a Demand
Registration if such a demand is received within twelve (12) months of the
effective date of any other registration statement demanded pursuant to the
Goran Registration Rights Agreement or if such request is for shares of Common
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Stock constituting less than 10% of the shares of Common Stock held by Goran or
if Goran owns less than 10% of the outstanding shares of Common Stock of the
Company. The amount of any shares of Common Stock owned by Goran to be included
in a Piggyback Registration may be limited to the extent that the managing
underwriter with respect to any such registration advises that the offering
contemplated thereby would be adversely affected by the inclusion of Goran's
shares of Common Stock in such offering.
In general, Goran will bear all of the registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, "blue sky"
fees and expenses and the expense of any special audits incident to or required
by any Demand Registration. Goran will generally be responsible for expenses
incurred in connection with any Piggyback Registration to the extent of
incremental expenses associated with including Goran's shares in such an
offering. Goran will also bear all fees and expenses of its counsel.
The Company and Goran agree to indemnify each other against certain
liabilities, including liabilities under the Securities Act, in connection with
the registration of Common Stock pursuant to the Goran Registration Rights
Agreement.
CONTROL BY GORAN; POTENTIAL CONFLICTS WITH GORAN
The Company is a wholly-owned subsidiary of Goran, and after completion of
the Offering, Goran will own approximately 70% of the outstanding Common Stock,
assuming no exercise of the Underwriters' over-allotment option. Goran will have
the power to control the Company, to elect its Board of Directors and to approve
any action requiring shareholder approval, including adopting amendments to the
Company's articles of incorporation and approving or disapproving mergers or
sales of all or substantially all of the assets of the Company. Because Goran
has the ability to elect the Board of Directors of the Company, it will be able
to effectively control all of the Company's policy decisions. As long as Goran
is the majority shareholder of the Company, third parties will not be able to
obtain control of the Company through purchases of Common Stock not owned by
Goran. The shares of the Company owned by Goran are pledged to Montreal Trust
Company of Canada, as Trustee, to secure Goran's obligations under certain
convertible subordinated notes.
G. Gordon Symons, Chairman of the Board of Goran, the Company and GGS
Holdings and the father of Alan G. Symons, Chief Executive Officer of the
Company, and Douglas H. Symons, President and Chief Operating Officer of the
Company, and members of the Symons family beneficially own in the aggregate
61.0% of the outstanding common stock of Goran. Accordingly, since G. Gordon
Symons and members of his family have the ability to elect the Board of
Directors of Goran, they will have the ability to elect the Board of Directors
of the Company and otherwise to influence significantly the Company's business
and operations. Further, directors and executive officers of SIG, including
members of the Symons family, beneficially own in the aggregate approximately
62.4% of the outstanding shares of Goran. See "Securities Ownership of
Management and Goran."
Of the seven directors of the Company, five are current directors of Goran
(three of whom are members of the Symons family and two of whom are independent
directors of Goran), and two are outside directors. Directors and officers of
the Company and Goran may have conflicts of interest with respect to certain
matters affecting the Company, such as potential business opportunities and
business dealings between the Company and Goran and its affiliated companies.
See "Management -- Directors and Executive Officers of the Company."
Goran's failure to maintain ownership of at least 50% of the Company's
voting securities will expose Goran to a risk that it will be characterized as
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "1940 Act"), unless Goran's remaining voting securities of the
Company together with any other investment securities represent not more than
40% of the total assets of Goran on an unconsolidated basis. In such event,
Goran would be required to comply with the registration and other requirements
of the 1940 Act, which would be significantly burdensome for Goran. This
constraint makes it unlikely that Goran would approve a stock issuance by the
Company that reduces Goran's ownership below 50% and therefore would likely
limit the amount of additional capital which can be raised by the Company
through the issuance of voting securities. Among other consequences, such a
limit could affect the Company's ability to raise funds for acquisition
opportunities which may become available to the Company or
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to GGS Holdings. In addition, the stockholder agreement between the Company and
the GS Funds (the "Stockholder Agreement") establishes certain rights of the GS
Funds to cause a sale of GGS Holdings upon the occurrence of certain triggering
events, including (i) the failure to consummate a registered initial public
offering of GGS Holdings stock representing, on a fully diluted basis, at least
20% of all such stock issued and outstanding, and generating at least $25
million in net proceeds to the sellers of such securities, by April 30, 2001,
(ii) the third separate occasion, during the term of the Stockholder Agreement,
on which an equity financing or acquisition transaction proposed by the GS Funds
is rejected by the GGS Holdings Board of Directors, (iii) the loss of voting
control of Goran or the Company (defined, with respect to Goran, as being direct
or indirect ownership of more than 40% of the outstanding voting stock of Goran
if any other holder or group holds in excess of 10% of the outstanding voting
stock of Goran, and otherwise 25% thereof; and defined, with respect to the
Company, as requiring both (a) direct ownership by Goran of more than 50% of the
Company's voting stock and (b) retention by Alan G. Symons and his family
members of voting control of Goran) by Alan G. Symons or his family members or
affiliates, or (iv) the cessation of Alan G. Symons' employment as CEO of GGS
Holdings for any reason. In any event, the Company will be unable to raise
equity capital by issuing additional shares of Common Stock unless Goran agrees
to that issuance. In addition, if Goran or the Company ever sold significant
amounts of shares of the Common Stock in the public market, those sales might
have an adverse effect on the market price of the Common Stock.
Currently, Goran does not market property and casualty insurance products
which compete with products sold by the Company. Although there are no
restrictions on the activities in which Goran may engage, management of the
Company does not expect that Goran and the Company will compete with each other
to any significant degree in the sale of property and casualty insurance
products. There can be no assurance, however, that the Company will not
encounter competition from Goran in the future or that actions by Goran or its
affiliates will not inhibit the Company's growth strategy. See "Risk Factors --
Control by Goran; Certain Continuing Relationships with Goran and its
Affiliates; Conflicts of Interest."
Conflicts of interest between the Company and Goran could arise with
respect to business dealings between them, including potential acquisitions of
businesses or properties, the issuance of additional securities, the election of
new or additional directors and the payment of dividends by the Company. The
Company has not instituted any formal plan or arrangement to address potential
conflicts of interest that may arise between the Company and Goran. See "Risk
Factors -- Control by Goran; Certain Continuing Relationships with Goran and its
Affiliates; Conflicts of Interest."
Conflicts of interest similar to those which could arise between the
Company and Goran could also arise between the Company and GGS Holdings. Alan G.
Symons, Chief Executive Officer of the Company, and Douglas H. Symons, President
and Chief Operating Officer of the Company, also serve as the Chief Executive
Officer and President, and Vice President, respectively, of GGS Holdings. Such
individuals have entered into employment agreements with GGS Holdings requiring
them to devote substantially all of their working time and attention to the
business and affairs of GGS Holdings. Further, Alan G. Symons and certain other
members of management of the Company are entitled, under certain circumstances,
to receive options to purchase shares of common stock of GGS Holdings. See
"Management -- Executive Compensation -- Employment Contracts and Termination of
Employment -- GGS Holdings." In addition, in the event that the Company does not
continue to own at least 50% of the outstanding voting securities of GGS
Holdings and the voting securities of GGS Holdings owned by the Company,
together with any other investment securities, represent over 40% of the total
assets of the Company on an unconsolidated basis, the Company will be exposed to
a risk that it would be characterized as an investment company within the
meaning of the 1940 Act. This consideration will limit the amount of additional
capital which can be raised through the issuance by GGS Holdings of voting
securities.
COMPUTER SOFTWARE SUPPORT AND LICENSING AGREEMENTS
The Company is a party to a software support agreement and software
licensing agreement with Tritech Financial Systems, Inc. ("Tritech"), which
provides software and maintenance services for numerous companies in the
insurance industry to facilitate compliance with applicable insurance laws and
industry mandated requirements. Robert Symons, the brother of Alan G. Symons and
Douglas H. Symons and son of
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G. Gordon Symons, is the President and controlling shareholder of Tritech.
Pursuant to the support and licensing agreements, the Company paid $74,488
during the fiscal year ended December 31, 1995. As of June 30, 1996, the Company
has paid $25,000 pursuant to the support and licensing agreement for the 1996
fiscal year.
PARENT INDEBTEDNESS
The Parent Indebtedness consists of: (i) a demand note of the Company
payable to Goran which bears interest at 10% per annum and had a balance of
approximately $2,344,000, including accrued interest of approximately $508,000,
at June 30, 1996; (ii) a demand note of the Company payable to Granite Re which
bears interest at 10% per annum and had a balance of approximately $4,193,000,
including accrued interest of approximately $1,235,000, at June 30, 1996; and
(iii) a demand note issued in April, 1996 payable to Goran which has a principal
balance of $1,000,000 and bears interest at 10% per annum.
GUARANTEE OF EMPLOYEE LOANS TO PURCHASE COMMON STOCK
At the request of the Company, the Underwriters are reserving up to 144,000
shares of Common Stock at the public offering price as set forth on the cover
page of the Prospectus for sales to certain officers, directors and employees of
the Company and affiliates, certain family members of the foregoing and other
persons having business relationships with the Company or its affiliates. See
"Underwriting." The Company has received a commitment from a commercial bank to
provide funds to certain executives of the Company to purchase reserved shares.
The Company has agreed to guarantee 100% of the aggregate principal amount,
including unpaid accrued interest, extended by the commercial bank under this
commitment. The maximum amount of principal the Company may be obligated to
guarantee under this commitment is approximately $1.6 million.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
The following directors and Named Executive Officers of the Company were
indebted to Goran in amounts exceeding $60,000 during the financial year ended
December 31, 1995, on account of loans to purchase common shares of Goran and
its affiliates, certain of which were made pursuant to the Share Option Plan
(see "Management -- Executive Compensation -- Stock Option Plans -- Goran Share
Option Plan"):
<TABLE>
<CAPTION>
LARGEST
LOAN BALANCE
NAME DATE OF LOAN DURING 1995 PRESENT BALANCE
- ---------------------------------------------------- ------------- ------------ ---------------
<S> <C> <C> <C>
G. Gordon Symons.................................... June 27, 1986 $148,000 $ 148,000
June 30, 1986 200,000 200,000
Alan G. Symons...................................... June 27, 1986 9,974 9,974
June 30, 1986 50,599 40,172
</TABLE>
The foregoing loans are collateralized by pledges of the common shares of
Goran acquired and are payable on demand and are interest free. In addition, G.
Gordon Symons has an unsecured loan payable to Goran in the amount of $70,000
not relating to the purchase of common shares of Goran. This loan was taken out
on January 2, 1988, is payable on demand and is interest free.
G. Gordon Symons also has a demand loan payable to the Company in the
amount of $76,729 as of December 31, 1995 that bears interest at a per annum
rate equal to the 180-day treasury bill rate, of which $51,729 was used to
purchase common shares of Goran and its affiliates. Douglas H. Symons has a
demand loan payable to the Company in the amount of $74,000 as of December 31,
1995 that bears interest at a per annum rate equal to the 180-day treasury bill
rate. Alan G. Symons has a demand loan payable to the Company in the amount of
$47,875 as of December 31, 1995 that bears interest at a per annum rate equal to
the 180-day treasury bill rate, of which $27,309 was used to purchase common
shares of Goran and its affiliates. In addition, the Company holds a mortgage
note of G. Gordon Symons collateralized by a second mortgage on his personal
residence. This mortgage loan was originally incurred on October 3, 1988, has a
current principal balance of $277,502, matures on May 8, 1999 and bears interest
at 7% per annum.
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OTHER TRANSACTIONS WITH AFFILIATES
IGF owns 9,800 shares of nonredeemable, nonvoting preferred stock of
Granite Insurance Company, a subsidiary of Goran. At December 31, 1995, this
preferred stock had a book value of $702,000.
The Company also has a receivable in the approximate amount of $116,000 at
December 31, 1995 from Vector Solutions, Inc., a wholly-owned subsidiary of
Goran ("Vector"). The amounts were advanced by the Company to fund operating
costs of Vector, including the payment of third party suppliers.
On September 1, 1989, the following interrelated transactions occurred.
First, Pafco loaned $1,700,000 (the "Pafco Loan") to Cliffstan Investments,
Inc., a Nevada corporation ("Cliffstan"). In return, Cliffstan issued a
promissory note in the amount of $1,700,000, bearing interest at 7.8% per annum,
in favor of Pafco (the "Cliffstan Note"). The Cliffstan Note is collateralized
by the unconditional guarantee of Gage North Holdings, Inc., an Ontario
corporation ("Gage North"). The guarantee of Gage North is in turn
collateralized by a mortgage on certain real property held by Gage North. Alan
G. Symons has a 33% ownership interest in, and is Chairman of the Board of
Directors of, Gage North. Second, Cliffstan loaned the proceeds of the Pafco
Loan to SIGL, who in return issued a promissory note in the amount of
$1,700,000, bearing interest at a rate of 8.3% per annum, in favor of Cliffstan
(the "SIGL Note"). Lastly, SIGL agreed to discharge the obligations of Cliffstan
under the Cliffstan Note in return for Cliffstan discharging SIGL's obligations
under the SIGL Note. On September 30, 1992, Pafco and Granite Re entered into a
purchase agreement (the "Cliffstan Note Purchase Agreement") whereby Pafco
assigned a beneficial interest in the Cliffstan Note, as amended to be payable
on demand, to Granite Re and Granite Re agreed to pay Pafco: (i) one installment
of $345,201, comprising the accrued interest on the Cliffstan Note, on September
30, 1992 and (ii) consecutive quarterly installments of $200,000 plus interest
at a rate of 7.8% per annum beginning on December 31, 1992, until the full
amount of the purchase price is repaid, at which time Granite Re is to take
legal title to the Cliffstan Note. Pursuant to a guaranty dated April 22, 1994,
Alan G. Symons guarantees the obligations of Granite Re to Pafco under the
Cliffstan Note Purchase Agreement and the obligations of Cliffstan to Granite Re
under the Cliffstan Note, up to $350,000 in the aggregate. Once the obligations
of Granite Re to Pafco under the Cliffstan Note Purchase Agreement are less than
$1,000,000, the guaranty of Alan G. Symons is null and void. The guarantee of
Alan G. Symons is collateralized by 200,000 shares of Goran common stock pledged
by SIGL. The largest amount owing under the Cliffstan Note since the beginning
of 1993, 1994 and 1995 was $1,700,000, $1,500,000 and $1,355,335, respectively.
The amount due under the Cliffstan Note as of June 30, 1996 is $1,355,335.
SECURITIES OWNERSHIP OF MANAGEMENT AND GORAN
OWNERSHIP OF THE COMPANY
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock, as of the date of this Prospectus and
after giving effect to the Offering, by each person known by the Company to
beneficially own more than 5% of the outstanding shares of Common Stock.
As of the date hereof, none of the outstanding shares of Common Stock is
owned by any director or executive officer of the Company.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
SHARES OF SHARES OF
NUMBER COMMON STOCK COMMON STOCK
OF BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME AND ADDRESS TITLE OF CLASS SHARES PRIOR TO THE OFFERING AFTER THE OFFERING
- --------------------------------- -------------- --------- --------------------- ------------------
<S> <C> <C> <C> <C>
Goran Capital Inc. Common Stock, 7,000,000(1) 100.0% 70.0%(2)
181 University Avenue no par value
Suite 1101
Toronto, Ontario
Canada M5H 3M7
</TABLE>
- -------------------------
(1) Goran has sole voting and dispositive power over all of these shares.
(2) Goran would beneficially own 67.0% of the Company after the Offering if the
Underwriters' over-allotment option is exercised in full.
100
<PAGE> 103
OWNERSHIP OF GORAN
The following table sets forth certain information regarding beneficial
ownership of the capital stock of Goran, as of July 25, 1996 (unless otherwise
indicated), by (i) each person known by the Company to beneficially own more
than 5% of the outstanding shares of a class of capital stock of Goran, (ii) by
each of the Company's Named Executives and directors, and (iii) by all executive
officers and directors of the Company as a group. Except as otherwise indicated,
based on information furnished by such owners, the beneficial owners of the
capital stock listed below have sole voting and dispositive power with respect
to such shares, subject to community property laws where applicable. Fractional
shares are rounded to the nearest whole share.
The ownership of Goran will not be affected by the Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
NATURE NUMBER OF OF COMMON STOCK
NAME AND ADDRESS TITLE OF CLASS OF OWNERSHIP SHARES BENEFICIALLY OWNED
- -------------------------- -------------- ------------------------------ --------- --------------------
<S> <C> <C> <C> <C>
Symons International...... Common Shares Directly Owned 1,650,413(1) 31.0%
Group, Ltd.
4720 Kingsway Drive
Indianapolis, Indiana
46205
G. Gordon Symons.......... Common Shares Directly Owned 855,167(1)
3 Queen's Cove, Apt. B6 Held of Record by SIGL 1,650,413
Fairylands Subject to Exercisable Options 243,345
Pembroke, Bermuda HM 05 --------
2,748,925 49.3%
Alan G. Symons............ Common Shares Directly Owned 509,366
4720 Kingsway Drive Subject to Exercisable Options 55,344
Indianapolis, Indiana --------
46205 564,710 10.5%
Douglas H. Symons......... Common Shares Directly Owned 87,083
4720 Kingsway Drive Subject to Exercisable Options 93,855
Indianapolis, Indiana --------
46205 180,938 3.3%
John J. McKeating......... Common Shares Subject to Exercisable Options 2,000
2120 Guy Street
Montreal, Quebec H3H218
Robert C. Whiting......... Common Shares Directly Owned 41,000 *
7 Hastings Road
Pembroke, Bermuda
James G. Torrance, Q.C.... Common Shares Subject to Exercisable Options 2,000 *
100 North Drive
Etobicoke, Ontario
Canada M9A 4R2
David R. Doyle............ Common Shares Directly Owned 2,350 *
1821 Park North Lane
Indianapolis, Indiana
46260
Dennis G. Daggett......... Common Shares Directly Owned 257
2882 106th Street Subject to Exercisable Options 20,000
Des Moines, Iowa 50322 --------
20,257 *
Thomas F. Gowdy........... Common Shares Directly Owned 568
2882 106th Street Subject to Exercisable Options 20,000
Des Moines, Iowa 50322 --------
20,568 *
Roger C. Sullivan, Jr..... Common Shares N/A -0- 0%
280 Interstate Circle NW
Atlanta, Georgia 30339
All Directors and Common Shares Directly Owned 1,505,288(1)
Executive................. Held of Record by SIGL 1,650,413
Officers as a group (13 Subject to Exercisable Options 436,544
persons) --------
3,592,245 62.4%
</TABLE>
- -------------------------
(1) These shares are also indicated as being beneficially owned by G. Gordon
Symons, since he is the controlling shareholder of Symons International
Group, Ltd.
* Less than 1%.
101
<PAGE> 104
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock and 50,000,000 shares of preferred stock (the "Preferred Stock").
Immediately following the Offering, approximately 10,000,000 shares of Common
Stock will be outstanding (10,450,000 shares assuming the Underwriters' over-
allotment option is exercised). All of the shares of Common Stock that will be
outstanding immediately following consummation of the Offering, including the
shares of the Common Stock sold in the Offering, will be validly issued, fully
paid and nonassessable.
COMMON STOCK
The holders of Common Stock will be entitled to one vote for each share on
all matters voted on by shareholders, including elections of directors, and,
except as otherwise required by law and provided in any resolution adopted by
the Company's Board of Directors with respect to any series of Preferred Stock,
the holders of such shares will possess exclusive voting power. The Articles of
Incorporation of the Company (the "Articles") do not provide for cumulative
voting in the election of directors. Holders of Common Stock shall have no
preemptive, subscription, redemption or conversion rights. Subject to any
preferential rights of any outstanding series of Preferred Stock created by the
Company's Board of Directors from time to time, the holders of Common Stock will
be entitled to such dividends as may be declared from time to time by the
Company's Board of Directors from funds available therefor, and upon liquidation
will be entitled to receive pro rata all assets of the Company available for
distribution to such holders.
PREFERRED STOCK
The Indiana Business Corporation Law (the "IBCL") and the Company's
Articles authorize the Company's Board of Directors to establish one or more
series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including (i) the
designation of the series, (ii) the number of shares of the series, which number
the Company's Board of Directors may thereafter (except where otherwise provided
in the applicable certificate of designation) increase or decrease (but not
below the number of shares thereof then outstanding), (iii) whether dividends,
if any, will be cumulative or noncumulative, the preference or relation which
such dividend, if any, will bear to the dividends payable on any other class or
classes of any other series of capital stock, and the dividend rate of the
series, (iv) the conditions and dates upon which dividends, if any, will be
payable, (v) the redemption rights and price or prices, if any, for shares of
the series, (vi) the terms and amounts of any sinking fund provided for the
purchase or redemption of shares of the series, (vii) the amounts payable on and
the preference, if any, of shares of the series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, (viii)(a) whether the shares of the series will be convertible or
exchangeable into shares of any other class or series, or any other security, of
the Company or any other corporation, and (b) if so, the specification of such
other class or series or such other security, the conversion or exchange
price(s) or rate(s), any adjustments thereof, the date(s) as of which such
shares shall be convertible or exchangeable and all other terms and conditions
upon which such conversion or exchange may be made, (ix) restrictions on the
issuance of shares of the same series or of any other class or series, (x) the
voting rights, if any, of the holders of the shares of the series, and (xi) any
other relative rights, preferences and limitations of such series.
Although the Company's Board of Directors has no present intention of doing
so, it could issue a series of Preferred Stock that, depending on the terms of
such series, could impede the completion of a merger, tender offer or other
takeover attempt. The Company's Board of Directors will make any determination
to issue such shares based on its judgment as to the best interests of the
Company and its shareholders. The Company's Board of Directors, in so acting,
could issue Preferred Stock having terms that could discourage an acquisition
attempt through which an acquiror may be able to change the composition of the
Company's Board of Directors, including a tender offer or other transaction that
some, or a majority, of the Company's shareholders may believe to be in their
best interests or in which shareholders might receive a premium for their Common
Stock over the then current market price of such Common Stock.
102
<PAGE> 105
ANTI-TAKEOVER PROVISIONS
The following discussion is a general summary of the material provisions of
the Company's Articles, the Company's By-Laws (the "By-Laws") and certain other
provisions which may be deemed to have an effect of delaying, deferring or
preventing a change in control. The following description of certain of these
provisions is general and not necessarily complete and is qualified by reference
to the Articles and By-Laws.
Directors
Certain provisions in the Articles and By-Laws will impede changes in
majority control of the Board of Directors of the Company. The Articles and
By-Laws provide that the Board of Directors of the Company will be divided into
three classes, with directors in each class elected for three-year staggered
terms. Therefore, it would take two annual elections to replace a majority of
the Company's Board of Directors. The By-Laws also impose certain notice and
information requirements in connection with the nomination by shareholders of
candidates for election to the Board of Directors or the proposal by
shareholders of business to be acted upon at an annual meeting of shareholders.
The Articles provide that directors may be removed only by the affirmative vote
of at least a majority of the shares eligible to vote generally in the election
of directors.
Authorization of Preferred Stock
The Board of Directors of the Company is authorized, without shareholder
approval, to issue Preferred Stock in series and to fix the voting designations,
preferences and relative, participating, optional or other special rights of the
shares of each series and the qualifications, limitations and restrictions
thereof. Preferred Stock may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, and could have full or superior voting
rights. The holders of Preferred Stock will be entitled to vote as a separate
class or a series under certain circumstances, regardless of any other voting
rights which such holders may have. Accordingly, issuance of shares of Preferred
Stock could adversely affect the voting power of holders of Common Stock or
could have the effect of deterring or delaying an attempt to obtain control of
the Company.
Provisions of Indiana Law
Several provisions of the IBCL could affect the acquisition of shares of
the Common Stock or otherwise the control over the Company. Chapter 43 of the
IBCL prohibits certain business combinations, including but not limited to
mergers, sales of assets, recapitalizations and reverse stock splits, between
corporations such as the Company (assuming that it has over 100 shareholders)
and any interested shareholder, defined to include any direct or indirect
beneficial owner of 10% or more of the voting power of the outstanding voting
shares, for five years following the date on which the shareholder obtained 10%
ownership unless the business combination or the purchase of the shares was
approved in advance of that date by the board of directors. If prior approval is
not obtained, several price and procedural requirements must be met before the
business combination can be completed.
In addition, Chapter 42 of the IBCL (the "Control Share Acquisition
Statute") contains provisions designed to assure that minority shareholders have
a voice in determining their future relationship with an Indiana corporation
(the definition of which would include the Company if the Company has over 100
shareholders) in the event that a person were to make a tender offer for, or
otherwise acquire enough shares to increase such person's percentage holdings of
such corporation's outstanding voting securities past any one or more of the
following threshold levels: 20%, 33 1/3%, and 50%. Under the Control Share
Acquisition Statute, if an acquiror purchases those shares at a time that the
corporation is subject to the Control Share Acquisitions Statute, then until
each class or series of shares entitled to vote separately on the proposal
approves, by a majority of all votes entitled to be cast by that group
(excluding shares held by officers of the corporation, by employees of the
corporation who are directors thereof and by the acquiror), the rights of the
acquiror to vote the shares that take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote those shares.
The IBCL requires directors to discharge their duties, based on the facts
then known to them, in good faith, with the care an ordinary, prudent person in
a like position would exercise under similar circumstances
103
<PAGE> 106
and in a manner the director reasonably believes to be in the best interests of
the corporation. The director is not personally liable for any action taken as a
director, or any failure to take any action, unless the director has breached,
or failed to perform the duties of the director's office in compliance with, the
foregoing standard and the breach or failure to perform constitutes willful
misconduct or recklessness.
The IBCL specifically authorizes directors, in considering the best
interests of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. Under the IBCL,
directors are not required to approve a proposed business combination or other
corporate action if the directors determine in good faith that such approval is
not in the best interests of the corporation. The IBCL explicitly provides that
the different or higher degree of scrutiny imposed in Delaware and certain other
jurisdictions upon director actions taken in response to potential changes in
control will not apply.
The foregoing provisions of the IBCL could have the effect of preventing or
delaying a person from acquiring or seeking to acquire a substantial equity
interest in, or control of, the Company.
Insurance Regulation Concerning Change of Control
Many state insurance regulatory laws, including Indiana's and Florida's,
intended primarily for the protection of policyholders contain provisions that
require advance approval by state agencies of any change in control of an
insurance company or insurance holding company which owns an insurance company
that is domiciled (or, in some cases, having such substantial business that it
is deemed commercially domiciled) in that state. In addition, many state
insurance regulatory laws contain provisions that require prenotification to
state agencies of a change in control of a nondomestic admitted insurance
company in that state. While such prenotification statutes do not authorize the
state agency to disapprove the change of control, such statutes do authorize
issuance of a cease and desist order with respect to the nondomestic admitted
insurer if certain conditions exist, such as undue market concentration. Any
future transactions constituting a change in control of the Company would
generally require prior approval by the insurance departments of Indiana and
Florida, as well as notification in those states which have preacquisition
notification statutes or regulations. The need to comply with those requirements
may deter, delay or prevent certain transactions affecting the control of the
Company or the ownership of the Company's Common Stock, including transactions
which could be advantageous to the shareholders of the Company. For a more
comprehensive discussion of applicable Indiana and Florida regulations, see
"Business -- Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 10,000,000 shares
of Common Stock outstanding (10,450,000 if the Underwriters' over-allotment
option is exercised in full). Of those shares, the 3,000,000 shares of Common
Stock sold in the Offering (3,450,000 if the Underwriters' over-allotment option
is exercised in full) will be freely transferable without restriction under the
Securities Act, except for any such shares of Common Stock which may be acquired
by an "affiliate" of the Company (as that term is defined in Rule 144
promulgated under the Securities Act), which shares will be subject to the
resale limitations of Rule 144. The remaining 7,000,000 shares of outstanding
Common Stock held by Goran are "restricted securities" within the meaning of
Rule 144 and may not be resold in a public distribution except in compliance
with the registration requirements of the Securities Act or pursuant to an
exemption from registration, such as that to which Rule 144 relates.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned
"restricted securities" for a period of at least two years from the later of the
date on which such restricted securities were acquired from the Company or from
an affiliate of the Company is entitled to sell, within any three-month period,
a number of such securities that does not exceed the greater of 1% of the then
outstanding shares of the Common Stock or the average weekly trading volume in
the Common Stock reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain
104
<PAGE> 107
restrictions on the manner of sale, notice requirements, and the availability of
current public information about the Company. Further, under Rule 144(k), if a
period of at least three years has elapsed between the later of the date on
which restricted shares were acquired from the Company or from an affiliate of
the Company, a holder of such restricted securities who is not an affiliate of
the Company for at least three months prior to the sale would be entitled to
sell the shares immediately without regard to the volume limitations and other
conditions described above.
The Company, its directors and executive officers and Goran have agreed not
to sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Advest, Inc., except for shares of Common Stock offered in connection with the
Offering. See "Underwriting." Goran, its directors, executive officers and
principal stockholders have agreed not to sell or otherwise dispose of any
shares of common stock of Goran, or securities convertible into or exchangable
or exercisable for such common stock, for a period of 180 days after the date of
this Prospectus without the prior written consent of Advest, Inc.
Pursuant to the Goran Registration Rights Agreement between the Company and
Goran, Goran has certain rights to require the Company to effect the
registration under the Securities Act of shares of Common Stock owned by Goran,
in which event such shares could be sold publicly upon the effectiveness of any
such registration without restriction. See "Certain Relationships and Related
Transactions -- Registration Rights Agreement between the Company and Goran."
Prior to the Offering, there has been no public market for the Common Stock
and no prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144
because this will depend on the market price of the Common Stock, the individual
circumstances of the sellers and other factors. Any sale of substantial amounts
of Common Stock in the open market could adversely affect the market price of
the Common Stock.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "SIGC," subject to official notice of issuance.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company, Goran and each of the Underwriters named below (the "Underwriting
Agreement"), the Underwriters named below have agreed, severally and not
jointly, through Advest, Inc. and Mesirow Financial, Inc., the representatives
of the Underwriters (the "Representatives"), to purchase from the Company, and
the Company has agreed to sell to the Underwriters, the aggregate number of
shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Advest, Inc......................................................................
Mesirow Financial, Inc...........................................................
---------
Total....................................................................... 3,000,000
=========
</TABLE>
The Underwriters are committed to purchase and pay for all of the shares of
Common Stock offered hereby if any are purchased. The Underwriting Agreement
provides that the obligations of the several Underwriters are subject to
approval of certain matters by their counsel and to various other conditions.
105
<PAGE> 108
The Underwriters have advised the Company that they propose to offer the
shares of the Common Stock directly to the public at the offering price set
forth on the cover page of this Prospectus and to certain selected dealers at
such price less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share to certain other dealers. After the public
offering of the shares, the public offering price, concession and re-allowance
to dealers may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period beginning on the date of the Prospectus, to purchase up to
450,000 additional shares of Common Stock, solely to cover over-allotments, if
any, at the public offering price less the underwriting discounts set forth on
the cover page of the Prospectus. If the Underwriters exercise such option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the table above, bears to the 3,000,000
shares of Common Stock. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 3,000,000 shares are being
sold.
The Company has agreed to pay to Advest, Inc., on behalf of the
Underwriters, a non-accountable expense allowance in the amount of 1% of the
gross proceeds from the sale of the shares offered hereby.
The Company has agreed to pay a transaction fee of $125,000, plus 4,000
shares of Goran common stock, upon the completion of the Offering to an
individual who has served as a consultant to the Company for a number of years
and who is neither directly nor indirectly affiliated or associated with any
Underwriter.
The Company, Goran and the executive officers and directors of the Company
have agreed that they will not offer, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock held by them (other than issuances by the
Company pursuant to outstanding warrants or options) for a period of 180 days
after the date of this Prospectus, without the written consent of the
Representatives. Goran, its directors, executive officers and principal
stockholders have agreed not to sell or otherwise dispose of any shares of
common stock of Goran, or securities convertible into or exchangable or
exercisable for such common stock, for a period of 180 days after the date of
this Prospectus without the prior written consent of Advest, Inc.
The Company, Goran and IGF Holdings have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain
liabilities, including liabilities under the Securities Act subject to certain
limitations.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
solely through negotiations among the Company, Goran and representatives of the
Underwriters based on several factors and will not necessarily reflect the price
at which Common Stock may be sold in the public market after this Offering.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to a copy of
the Underwriting Agreement which is on file as an exhibit to the Registration
Statement.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
At the request of the Company, the Underwriters are reserving up to 144,000
shares of Common Stock at the public offering price as set forth on the cover
page of the Prospectus for sales to certain officers, directors and employees of
the Company and affiliates, certain family members of the foregoing and other
persons having business relationships with the Company or its affiliates. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares of Common Stock
offered hereby.
LEGAL MATTERS
The validity of the Shares offered hereby and certain other legal matters
in connection with the Offering are being passed upon for the Company by Barnes
& Thornburg, Indianapolis, Indiana. Certain legal matters
106
<PAGE> 109
in connection with the Offering are being passed upon for the Underwriters by
LeBoeuf, Lamb, Greene & MacRae, L.L.P., a limited liability partnership
including professional corporations, New York, New York.
EXPERTS
The consolidated financial statements and related schedules of the Company
as of December 31, 1994 and 1995 and for each of the years in the three year
period ended December 31, 1995 appearing in this Prospectus and the Registration
Statement have been audited and reported upon by Coopers & Lybrand L.L.P.,
independent public accountants, as set forth in their reports thereon appearing
elsewhere herein and are included herein upon the authority of said firm as
experts in accounting and auditing. The consolidated financial statements and
related schedules of Superior as of December 31, 1994 and 1995 and for each of
the years in the three year period ended December 31, 1995 appearing in this
Prospectus and the Registration Statement have been audited and reported upon by
Coopers & Lybrand L.L.P., independent public accountants, as set forth in their
reports thereon appearing elsewhere herein and are included herein upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (including any amendments,
exhibits and schedules thereto, the "Registration Statement") under the
Securities Act, with respect to the securities offered by this Prospectus. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is made. Statements made in this
Prospectus regarding the contents of any contract or any other document filed as
an exhibit to the Registration Statement are not necessarily complete and, in
each instance, reference is hereby made to the copy of such contract or other
document filed as an exhibit to the Registration Statement and the full text of
such statement is qualified in its entirety by reference to such contract or
document. The Registration Statement may be inspected at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its Regional Offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission also maintains a Web site on the
Internet that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission,
including the Company. The address of such site is: http://www.sec.gov.
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. Such information can be inspected and copied
after the Offering at the public reference facilities maintained by the
Commission. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "SIGC," subject to official notice of issuance.
Such listing application will also be available for inspection at the National
Association of Securities Dealers, Inc., 1735 K Street, Washington, D.C. 20006.
In addition, the Company intends to furnish its shareholders with annual reports
containing consolidated financial statements certified by an independent public
accounting firm.
107
<PAGE> 110
GLOSSARY OF SELECTED INSURANCE
AND CERTAIN DEFINED TERMS
1940 ACT...................... The Investment Company Act of 1940, as amended.
1994 REFORM ACT............... The Federal Crop Insurance Reform Act of 1994.
1996 REFORM ACT............... The Federal Agriculture Improvement and Reform
Act of 1996.
ACQUISITION................... The acquisition by GGS Holdings of Superior
Insurance Company, a Florida property and
casualty insurer primarily engaged in the
writing of nonstandard automobile insurance.
ACTUAL PRODUCTION HISTORY
("APH")..................... A plan of MPCI which provides the yield
component and yield forecast of an insured by
utilizing the insured's historic yield record.
CRC plans use the policy terms and conditions
of the APH as their basic provisions of
coverage.
ACTUARIAL ANALYSIS; ACTUARIAL
MODELS........................ Evaluation of risks in order to attempt to
assure that premiums and loss reserves
adequately reflect expected future loss
experience and claims payments; in evaluating
risks, mathematical models are used to predict
future loss experience and claims payments
based on past loss ratios and loss development
patterns and other relevant data and
assumptions.
ADMITTED INSURER.............. An insurance company licensed by a state
regulatory authority to transact insurance
business in that state. An admitted insurer is
subject to the rules and regulations of each
state in which it is licensed governing
virtually all aspects of its insurance
operations and financial condition. A
non-admitted insurer, also known as an excess
and surplus lines insurer, is not licensed to
transact insurance business in a given state
but may be permitted to write certain business
in that state in accordance with the provisions
of excess and surplus lines insurance laws
which generally involve less rate and
operational regulation.
A.M. BEST..................... A. M. Best Company, Inc., a rating agency and
publisher for the insurance industry.
ASSUME........................ To accept from the primary insurer or reinsurer
all or a portion of the liability underwritten
by such primary insurer or reinsurer.
BUY-UP COVERAGE............... Multi-Peril Crop Insurance policy providing
coverage in excess of that provided by CAT
Coverage. Buy-up Coverage is offered only
through private insurers.
BUY-UP EXPENSE REIMBURSEMENT
PAYMENT..................... An expense reimbursement payment made by the
FCIC to an MPCI insurer equal to a percentage
of gross premiums written for each Buy-up
Coverage policy written by such MPCI insurer.
CASUALTY INSURANCE............ Insurance which is primarily concerned with the
losses caused by injuries to third persons
(i.e., not the policyholder) and the legal
liability imposed on the insured resulting
therefrom. It includes, but is not limited to,
employers' liability, workers' compensation,
public liability, automobile liability,
personal liability and aviation liability
insurance. It excludes certain types of loss
that by law or
108
<PAGE> 111
custom are considered as being exclusively
within the scope of other types of insurance,
such as fire or marine.
CAT COVERAGE (CAT)............ The minimum available level of Multi-Peril Crop
Insurance, providing coverage for 50% of a
farmer's historical yield for eligible crops at
60% of the price per commodity unit for such
crop set by the FCIC. This coverage is offered
through private insurers and, in certain
states, USDA field offices.
CAT COVERAGE FEE.............. A fixed administrative fee of $50 per policy
for which farmers may purchase CAT Coverage.
The CAT Coverage Fee takes the place of a
premium.
CAT LAE REIMBURSEMENT
PAYMENT....................... An LAE reimbursement payment made by the FCIC
to an MPCI insurer equal to 13.0% of MPCI
Imputed Premiums for each CAT Coverage policy
written by such MPCI insurer.
CEDE; CEDING COMPANY.......... When an insurance company reinsures its risk
with another insurance company, it "cedes"
business and is referred to as the "ceding
company."
CODE.......................... Internal Revenue Code of 1986, as amended.
COMBINED RATIO................ The sum of the expense ratio and the loss and
LAE ratio determined in accordance with GAAP or
SAP.
COMMISSION.................... The Securities and Exchange Commission.
COMMON STOCK.................. The shares of common stock, no par value, of
the Company.
COMPANY (OR SIG).............. Symons International Group, Inc. and its
Subsidiaries, unless the context indicates
otherwise.
CONTRIBUTION.................. The contribution by Pafco of IGF to IGF
Holdings in exchange for all of the capital
stock of IGF Holdings.
CROP REVENUE COVERAGE (CRC)... CRC provides the insured with a guaranteed
revenue stream by combining both yield and
price variability protection and protects
against a grower's loss of revenue resulting
from fluctuating crop prices and/or low yields
by providing coverage when any combination of
crop yield and price results in revenue that is
less than the revenue guarantee provided by the
policy.
CROP YEAR..................... For MPCI, a crop year commences on July 1 and
ends on June 30. For crop hail insurance, the
crop year is the calendar year.
DIRECT PREMIUMS WRITTEN....... Total premiums collected in respect of policies
issued by an insurer during a given period
without any reduction for premiums ceded to
reinsurer.
DIRECT WRITER................. An insurer or reinsurer that markets and sells
insurance directly to its insured, either by
use of telephone, mail or exclusive agents.
DISTRIBUTION.................. The distribution by the Company to Goran of all
of the outstanding capital stock of Symons
International Group, Inc. (Florida), a Florida
based surplus lines underwriting manager.
DIVIDEND...................... The payment by IGF Holdings to Pafco of a
dividend consisting of $7.5 million in cash and
the IGF Note.
109
<PAGE> 112
EXCESS AND SURPLUS LINES
INSURANCE..................... The business of insuring risks for which
insurance is unavailable from admitted insurers
in whole or in part. Such business is placed by
the broker or agent with nonadmitted insurers
in accordance with the excess and surplus lines
provisions of state insurance laws.
EXCESS OF LOSS REINSURANCE.... A form of reinsurance whereby the reinsurer,
subject to a specified limit, agrees to
indemnify the ceding company for the amount of
each loss, on a defined class of business, that
exceeds a specified retention.
EXCHANGE ACT.................. The Securities Exchange Act of 1934, as
amended.
EXPENSE RATIO................. Under statutory accounting, the ratio of
underwriting expenses to net premiums written.
Under GAAP accounting, the ratio of
underwriting expenses to net premiums earned.
FEDERAL CROP INSURANCE
CORPORATION (FCIC)............ A wholly-owned federal government corporation
within the Farm Services Agency.
FLORIDA DEPARTMENT............ The Florida Department of Insurance.
FORMATION TRANSACTION......... The formation of GGS Management Holdings, Inc.,
a corporation 52% owned by the Company and 48%
owned by the GS Funds.
FORTIS........................ Fortis, Inc., the parent company of
Interfinancial, the former holding company for
Superior.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)........... Accounting principles as set forth in opinions
of the Accounting Principles Board of the
American Institute of Certified Public
Accountants and/or in statements of the
Financial Accounting Standards Board and/or
their respective successors and which are
applicable in the circumstances as of the date
in question.
GGS AGREEMENT................. The agreement by and among Goran, SIG, GGS
Holdings and the GS Funds dated January 31,
1996 evidencing the Formation Transaction.
GGS HOLDINGS.................. GGS Management Holdings, Inc., a holding
company for Pafco and Superior controlled by
the Company.
GGS MANAGEMENT................ GGS Management, Inc., a wholly-owned subsidiary
of GGS Holdings.
GGS SENIOR CREDIT FACILITY.... A $48 million senior bank facility extended to
GGS Management used to partially fund the
purchase of Superior.
GOLDMAN SACHS................. Goldman, Sachs & Co.
GORAN......................... Goran Capital Inc., a Canadian
federally-chartered corporation and the current
sole shareholder of the Company.
GRANITE RE.................... Granite Reinsurance Company Ltd., a subsidiary
of Goran.
GROSS PREMIUMS WRITTEN........ Direct premiums written plus premiums collected
in respect of policies assumed, in whole or in
part, from other insurance carriers.
GS FUNDS...................... GS Capital Partners II, L.P.; GS Capital
Partners II Offshore, L.P.; Stone Street Funds
L.P.; Bridge Street Funds L.P.; and
110
<PAGE> 113
Goldman Sachs & Co. Verwaltungs GmbH, all of
which are investment funds affiliated with
Goldman Sachs.
IBCL.......................... The Indiana Business Corporation Law.
IGF........................... IGF Insurance Company, an indirect wholly-owned
subsidiary of the Company.
IGFH BANK DEBT................ Promissory note with respect to a bank loan in
the principal amount of $7.5 million issued by
IGF Holdings.
IGF HOLDINGS.................. IGF Holdings, Inc., a wholly-owned subsidiary
of the Company.
IGF NOTE...................... A subordinated promissory note of IGF Holdings
in the principal amount of approximately $3.5
million issued to Pafco by IGF Holdings as part
of the Dividend.
IGF REVOLVER.................. IGF's revolving line of credit used to finance
premium payables on amounts not yet received
from farmers.
INCURRED BUT NOT REPORTED
(IBNR) CLAIMS................. Claims under policies that have been incurred
but have not yet been reported to the Company
by the insured.
INCURRED BUT NOT REPORTED
(IBNR) RESERVES............... IBNR reserves include LAE related to losses
anticipated from IBNR claims and may also
provide for future adverse loss development on
reported claims.
INDIANA COMMISSIONER.......... The Indiana Commissioner of Insurance.
INDIANA DEPARTMENT............ The Indiana Department of Insurance.
INSURANCE REGULATORY
INFORMATION SYSTEM (IRIS)..... A system of ratio analysis developed by the
NAIC primarily intended to assist state
insurance departments in executing their
statutory mandates to oversee the financial
condition of insurance companies.
INSURERS...................... The direct and indirect consolidated insurance
subsidiaries of the Company, which include IGF,
Pafco and Superior.
INTERFINANCIAL................ Interfinancial, Inc., a wholly-owned subsidiary
of Fortis, Inc. and the former holding company
for Superior.
IRS........................... Internal Revenue Service.
LOSS ADJUSTMENT EXPENSES
(LAE)......................... Expenses incurred in the settlement of claims,
including outside adjustment expenses, legal
fees and internal administrative costs
associated with the claims adjustment process,
but not including general overhead expenses.
LOSS AND LAE RATIO............ The ratio of losses and LAE incurred to
premiums earned.
LOSS AND LAE RESERVES......... Liabilities established by insurers to reflect
the ultimate estimated cost of claim payments
as of a given date.
MPCI EXCESS LAE REIMBURSEMENT
PAYMENT..................... A small excess LAE reimbursement payment made
by the FCIC to an MPCI insurer of two
hundredths of one percent of MPCI Retention
determined after ceding to the FCIC's three
reinsurance
111
<PAGE> 114
pools, to the extent that loss ratios on a per
state basis exceeds certain levels.
MPCI IMPUTED PREMIUM.......... For purposes of the profit/loss sharing
arrangement with the federal government, the
amount of premiums credited to the Company for
all CAT Coverage it sells, as such amount is
determined by formula.
MPCI PREMIUM.................. For purposes of the profit/loss sharing
arrangement with the federal government, the
amount of premiums credited to the Company for
all Buy-up Coverage sold, consisting of amounts
paid by farmers plus the amount of any related
federal premium subsidies.
MPCI RETENTION................ The aggregate amount of MPCI Premium and MPCI
Imputed Premium on which the Company retains
risk after allocating farms to the three
federal reinsurance pools.
MULTI-PERIL CROP INSURANCE
(MPCI)...................... A federally-regulated and subsidized crop
insurance program that provides producers of
crops with varying levels of insurance
protection against substantially all natural
perils to growing crops.
NAIC.......................... The National Association of Insurance
Commissioners.
NASDAQ NATIONAL MARKET........ The Nasdaq Stock Market's National Market.
NCIS.......................... National Crop Insurance Services, Inc., the
actuarial data facility for the commercial crop
insurance industry.
NET PREMIUMS EARNED........... The portion of net premiums written applicable
to the expired period of policies and,
accordingly, recognized as income during a
given period.
NET WRITTEN PREMIUMS.......... Total premiums for insurance written (less any
return premiums) during a given period, reduced
by premiums ceded in respect of liability
reinsured by other carriers.
NONSTANDARD AUTOMOBILE
INSURANCE..................... Personal lines automobile insurance written for
those individuals presenting an above average
risk profile (i.e., higher risk) in terms of
payment history, driving experience, record of
prior accidents or driving violations,
particular occupation or type of vehicle and
other factors.
OFFERING...................... The offering by the Company of up to 3,450,000
shares of its Common Stock by the Underwriters.
PAFCO......................... Pafco General Insurance Company, an Indiana
property and casualty insurance company.
PARENT INDEBTEDNESS........... Indebtedness of the Company to Goran in the
principal amount of approximately $7.5 million.
POLICIES IN-FORCE............. Policies written and recorded on the books of
an insurance carrier which are unexpired as of
a given date.
POLICYHOLDERS' OR STATUTORY
SURPLUS....................... As determined under SAP, the excess of total
admitted assets over total liabilities.
PRICE ELECTION................ The maximum per unit commodity price by crop to
be used in computing MPCI Premiums, which is
set each year by the FCIC.
112
<PAGE> 115
QUOTA SHARE REINSURANCE....... A form of reinsurance in which the reinsurer
shares a proportional part of both the original
premiums and the losses of the reinsured.
REINSURANCE................... The practice whereby a company called the
"reinsurer" assumes, for a share of the
premium, all or part of a risk originally
undertaken by another insurer called the
"ceding" company or "cedent." Reinsurance may
be affected by "treaty" reinsurance, where a
standing agreement between the ceding and
reinsuring companies automatically covers all
risks of a defined category, amount and type,
or by "facultative" reinsurance where
reinsurance is negotiated and accepted on a
risk-by-risk basis.
REPRESENTATIVES............... Advest, Inc. and Mesirow Financial, Inc., the
representatives of the Underwriters.
RETENTION..................... The amount of liability, premiums or losses
which an insurance company keeps for its own
account after reinsurance.
RISK-BASED CAPITAL (RBC)
REQUIREMENTS................ Capital requirements for property and casualty
insurance companies adopted by the NAIC to
assess minimum capital requirements and to
raise the level of protection that statutory
surplus provides for policyholder obligations.
SECURITIES ACT................ The Securities Act of 1933, as amended.
SIG (OR THE COMPANY).......... Symons International Group, Inc., a specialty
insurer which underwrites and markets
nonstandard private passenger automobile
insurance and crop insurance.
SIGF.......................... Symons International Group, Inc. (Florida), a
Florida based surplus lines underwriting
manager and a subsidiary of Goran.
SIGL.......................... Symons International Group, Ltd., a Canadian
corporation and the controlling shareholder of
Goran.
STANDARD AUTOMOBILE
INSURANCE..................... Personal lines automobile insurance written for
those individuals presenting an average risk
profile in terms of loss history, driving
record, type of vehicle driven and other
factors.
STATUTORY ACCOUNTING PRACTICES
(SAP)....................... Accounting practices which consist of recording
transactions and preparing financial statements
in accordance with the rules and procedures
prescribed or permitted by state regulatory
authorities. Statutory accounting emphasizes
solvency rather than matching revenues and
expenses during an accounting period.
STATUTORY SURPLUS............. The excess of admitted assets over total
liabilities (including loss reserves),
determined using data reported in accordance
with SAP.
STOCKHOLDER AGREEMENT......... The stockholder agreement, as amended and
restated, among the Company, Goran, GGS
Holdings and the GS Funds.
STOP LOSS REINSURANCE......... A form of reinsurance, similar to Excess of
Loss Reinsurance, whereby the primary insurer
caps its loss on a particular risk by
purchasing reinsurance in excess of such cap.
SUBSIDIARIES.................. All of the direct and indirect consolidated
subsidiaries of the Company.
113
<PAGE> 116
SUPERIOR...................... Superior Insurance Company, a Florida property
and casualty insurer primarily engaged in the
writing of nonstandard automobile insurance and
its principal subsidiaries, Superior American
Insurance Company, a Florida insurance company,
and Superior Guaranty Insurance Company, a
Florida insurance company.
SUPERIOR PURCHASE AGREEMENT... Stock Purchase Agreement, dated January 31,
1996, by and among Goran, the Company, Fortis
and Interfinancial pursuant to which the
Company purchased Superior.
SURPLUS....................... The same as "policyholders' or statutory
surplus," defined above.
TAIL.......................... The period of time that elapses between the
incurrence and settlement of losses under a
policy. A "short-tail" insurance product is one
where losses are known comparatively quickly;
ultimate losses under a "long-tail" insurance
product are sometimes not known for years.
TRANSACTIONS.................. The Formation Transaction (defined herein), the
Acquisition (defined herein) and other related
transactions, including the Transfer (defined
herein), the Dividend (defined herein) and the
Distribution (defined herein).
TRANSFER...................... The transfer by Pafco of all of the outstanding
capital stock of IGF through the formation of
IGF Holdings and the contribution to IGF
Holdings of all of the outstanding shares of
capital stock of IGF and the distribution of
IGF Holdings to the Company.
TREATY REINSURANCE............ The reinsurance of a specified type or category
of risks defined in a reinsurance agreement (a
"treaty") between a primary insurer or other
reinsured and a reinsurer. Typically, in treaty
reinsurance, the primary insurer or reinsured
is obligated to offer and the reinsurer is
obligated to accept a specified portion of all
such type or category of risks originally
underwritten by the primary insurer or
reinsured.
UNDERWRITING.................. The insurer's or reinsurer's process of
reviewing applications submitted for insurance
coverage, deciding whether to accept all or
part of the coverage requested and determining
the applicable premiums.
UNDERWRITING EXPENSES......... The aggregate of policy acquisition costs,
including commissions, and the portion of
administrative, general and other expenses
attributable to underwriting operations.
UNEARNED PREMIUMS............. The portion of a premium representing the
unexpired portion of the contract term as of a
certain date.
USDA.......................... United States Department of Agriculture.
114
<PAGE> 117
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
Report of Independent Accountants............................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996....................................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-4
Consolidated Statements of Changes in Stockholder's Equity for the Years Ended
December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and
1996....................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-6
Notes to Consolidated Financial Statements...................................... F-7-F-27
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Report of Independent Accountants............................................... F-28
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996....................................................................... F-29
Consolidated Statements of Operations for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-30
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 and the Six Months Ended June 30, 1995 and
1996....................................................................... F-31
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993,
1994 and 1995 and the Six Months Ended June 30, 1995 and 1996.............. F-32
Notes to Consolidated Financial Statements...................................... F-33-F-46
</TABLE>
F-1
<PAGE> 118
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Symons International Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Symons
International Group, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
Symons International Group, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994,
the Company adopted Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
As discussed in Notes 1 and 8 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, during the year ended December 31, 1993.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 18, 1996, except for Note 1.a.;
the second, third and fourth paragraphs
in Note 6; and Note 18, as to which
the date is July 29, 1996, and except
for the third paragraph of Note 1.m., as to
which the date is October 21, 1996
F-2
<PAGE> 119
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Assets:
Investments:
Available for sale:
Fixed maturities, at market............................... $ 8,861 $ 12,931 $ 119,637
Equity securities, at market.............................. 5,424 4,231 32,492
Short-term investments, at amortized cost
which approximates market............................... 790 5,283 5,989
Real estate, at cost......................................... 507 487 477
Mortgage loans............................................... 2,940 2,920 2,560
Other........................................................ 50 50 50
Investments in and advances to related parties............... 2,948 2,952 2,868
Cash and cash equivalents.................................... 42 2,311 --
Receivables (net of allowance for doubtful accounts of
$1,209,000, $927,000, and $1,673,000 (unaudited) in 1994,
1995 and June 30, 1996, respectively)..................... 14,665 8,203 59,189
Reinsurance recoverable on paid and unpaid losses, net....... 12,886 54,136 83,611
Prepaid reinsurance premiums................................. 6,988 6,263 42,407
Federal income taxes recoverable............................. 192 -- --
Deferred policy acquisition costs............................ 1,479 2,379 13,192
Deferred income taxes........................................ 2,002 1,421 1,635
Property and equipment....................................... 4,236 5,502 6,552
Goodwill..................................................... -- -- 3,140
Other........................................................ 2,618 1,447 4,874
------- -------- --------
Total assets......................................... $66,628 $110,516 $ 378,673
======= ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Losses and loss adjustment expenses.......................... $29,269 $ 59,421 $ 93,628
Unearned premiums............................................ 14,416 17,497 114,854
Reinsurance payables......................................... 4,073 6,206 52,555
Payables to affiliates....................................... 5,390 6,474 7,537
Federal income tax payable................................... -- 133 563
Line of credit and notes payable............................. 5,441 5,811 7,750
Term debt.................................................... -- -- 48,000
Other........................................................ 3,768 5,439 18,306
------- -------- --------
Total liabilities.................................... 62,357 100,981 343,193
------- -------- --------
Minority interest in consolidated subsidiary................. 16 -- 17,723
------- -------- --------
Commitments and contingencies
Stockholder's equity:
Common stock, no par value, 100,000,000 shares authorized,
7,000,000 issued and outstanding........................ 1,000 1,000 1,000
Additional paid-in capital................................ 3,130 3,130 6,519
Unrealized gain (loss) on investments, net of deferred tax
benefit (expense) of $260,000 in 1994, $23,000 in 1995
and ($249,000) (unaudited) at June 30, 1996............. (504) (45) 484
Retained earnings......................................... 629 5,450 9,754
------- -------- --------
Total stockholder's equity........................... 4,255 9,535 17,757
------- -------- --------
Total liabilities and stockholder's equity........... $66,628 $110,516 $ 378,673
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 120
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Gross premiums written............................... $ 88,936 $103,134 $124,634 $ 95,759 $146,950
Less ceded premiums.................................. (57,176) (67,995) (71,187) (64,904) (69,908)
------- ------- ------- ------- -------
Net premiums written................................. 31,760 35,139 53,447 30,855 77,042
Change in unearned premiums.......................... (332) (3,013) (3,806) (8,066) (17,976)
------- ------- ------- ------- -------
Net premiums earned.................................. 31,428 32,126 49,641 22,789 59,066
Net investment income................................ 1,489 1,241 1,173 636 1,533
Other income......................................... 886 1,622 2,174 997 4,062
Net realized capital gain (loss)..................... (119) (159) (344) 79 228
------- ------- ------- ------- -------
Total revenues............................... 33,684 34,830 52,644 24,501 64,889
------- ------- ------- ------- -------
Expenses:
Losses and loss adjustment expenses.................. 25,080 26,470 35,971 15,751 45,275
Policy acquisition and general and administrative
expenses.......................................... 8,914 5,801 7,981 5,589 12,283
Interest expense..................................... 996 1,184 1,248 193 1,261
------- ------- ------- ------- -------
Total expenses....................................... 34,990 33,455 45,200 21,533 58,819
------- ------- ------- ------- -------
Income (loss) before taxes, discontinued operations,
cumulative effect of a change in accounting
principle, and minority interest.................. (1,306) 1,375 7,444 2,968 6,070
------- ------- ------- ------- -------
Income taxes:
Current income tax expense (benefit)................. (530) 462 2,275 1,009 1,190
Deferred income tax expense (benefit)................ 613 (1,180) 344 (51) 664
------- ------- ------- ------- -------
Total income taxes........................... 83 (718) 2,619 958 1,854
------- ------- ------- ------- -------
Income (loss) from continuing operations before
discontinued operations, cumulative effect of a
change in accounting principle, and minority
interest.......................................... (1,389) 2,093 4,825 2,010 4,216
Income (loss) from discontinued operations, net of
income taxes...................................... (160) 10 (4) -- --
------- ------- ------- ------- -------
Net income (loss) before cumulative effect of a
change in accounting principle and minority
interest........................................ (1,549) 2,103 4,821 2,010 4,216
Cumulative effect on prior years of accounting
change............................................ 1,175 -- -- -- --
------- ------- ------- ------- -------
Net income (loss) before minority interest........... (374) 2,103 4,821 2,010 4,216
Minority interest.................................... 51 14 -- (4) 88
------- ------- ------- ------- -------
Net income (loss).................................... $ (323) $ 2,117 $ 4,821 $ 2,006 $ 4,304
======= ======= ======= ======= =======
Weighted average shares outstanding.................. 7,000 7,000 7,000 7,000 7,000
======= ======= ======= ======= =======
Per common share data:
Income (loss) from continuing operations before
discontinued operations, cumulative effect of a
change in accounting principle and after minority
interest.......................................... $ (0.20) $ 0.30 $ 0.69 $ 0.29 $ 0.61
Income (loss) from discontinued operations, net of
income taxes...................................... (0.02) -- -- -- --
Cumulative effect on prior years of accounting
change............................................ 0.17 -- -- -- --
------- ------- ------- ------- -------
Net income (loss).................................... $ (0.05) $ 0.30 $ 0.69 $ 0.29 $ 0.61
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 121
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED RETAINED TOTAL
COMMON PAID-IN LOSS ON EARNINGS STOCKHOLDER'S
STOCK CAPITAL INVESTMENTS (DEFICIT) EQUITY
------ ---------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993................... $1,000 $1,530 $(172) $ (1,165) $ 1,193
Additional paid-in capital................. -- 1,600 -- -- 1,600
Change in unrealized loss on equity
securities, net of deferred taxes....... -- -- (251) -- (251)
Net loss................................... -- -- -- (323) (323)
----- ------ ----- ------ -------
Balance at December 31, 1993................. 1,000 3,130 (423) (1,488) 2,219
Unrealized gain on fixed maturities,
resulting from a change in accounting
principle, net of deferred taxes........ -- -- 139 -- 139
Change in unrealized loss on investments,
net of deferred taxes................... -- -- (220) -- (220)
Net income................................. -- -- -- 2,117 2,117
----- ------ ----- ------ -------
Balance at December 31, 1994................. 1,000 3,130 (504) 629 4,255
Change in unrealized loss on investments,
net of deferred taxes (unaudited)....... -- -- 13 -- 13
Net income (unaudited)..................... -- -- -- 2,006 2,006
----- ------ ----- ------ -------
Balance at June 30, 1995 (unaudited)....... $1,000 $3,130 $(491) $ 2,635 $ 6,274
===== ====== ===== ====== =======
Balance at December 31, 1994................. $1,000 $3,130 $(504) $ 629 $ 4,255
Change in unrealized loss on investments,
net of deferred taxes................... -- -- 459 -- 459
Net income................................. -- -- -- 4,821 4,821
----- ------ ----- ------ -------
Balance at December 31, 1995................. 1,000 3,130 (45) 5,450 9,535
Sale of subsidiary stock................... -- 3,389 -- -- 3,389
Change in unrealized loss on investments,
net of deferred taxes (unaudited)....... -- -- 529 -- 529
Net income (unaudited)..................... -- -- -- 4,304 4,304
----- ------ ----- ------ -------
Balance at June 30, 1996 (unaudited)......... $1,000 $6,519 $ 484 $ 9,754 $17,757
===== ====== ===== ====== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 122
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss):................................ $ (323) $ 2,117 $ 4,821 $ 2,006 $ 4,304
Adjustments to reconcile net income (loss) to net
cash provided from (used in) operations:
Minority interest................................. (51) (14) -- 4 (88)
Depreciation and amortization..................... 913 690 742 244 221
Deferred income tax expense (benefit)............. (562) (1,180) 344 51 664
Net realized capital (gain) loss.................. 119 159 344 (79) (228)
Net changes in operating assets and liabilities
(net of assets acquired):
Receivables....................................... 6,965 (9,057) 6,462 (34,116) (48,085)
Reinsurance recoverable on paid and unpaid losses,
net............................................. (18,681) 25,130 (41,250) (11,283) (29,475)
Prepaid reinsurance premiums...................... (14) (3,343) 725 (1,464) (3,824)
Federal income taxes recoverable (payable)........ (890) 759 325 870 (490)
Deferred policy acquisition costs................. (249) (727) (900) (470) (2,888)
Other assets...................................... (409) 98 1,019 2,127 (3,264)
Losses and loss adjustment expenses............... 15,527 (24,874) 30,152 13,576 (10,216)
Unearned premiums................................. 346 6,356 3,081 9,371 52,077
Reinsurance payables.............................. (7,464) 1,982 2,133 20,992 46,349
Other liabilities................................. (2,788) (1,398) 1,656 2,177 2,925
-------- -------- -------- -------- --------
Net cash provided from (used in) operations....... (7,561) (3,302) 9,654 4,006 7,982
-------- -------- -------- -------- --------
Cash flow provided from (used in) investing
activities:
Cash paid for Superior net of cash acquired....... -- -- -- -- (66,389)
Net (purchases) sales of short-term investments... 2,194 (308) (4,493) (2,685) 11,342
Purchases of fixed maturities..................... (7,855) (7,587) (12,517) (2,832) (24,976)
Proceeds from sales, calls and maturities of fixed
maturities...................................... 11,702 8,460 8,603 5,566 17,896
Purchases of equity securities.................... (17,729) (10,122) (28,173) (13,717) (86,177)
Proceeds from sales of equity securities.......... 18,393 10,510 29,599 10,892 65,944
Proceeds from the sale of real estate............. -- 1,166 -- -- --
Purchase of real estate........................... (730) (1) -- -- --
Purchases of mortgage loans....................... -- (50) (100) -- --
Proceeds from repayment of mortgage loans......... -- 60 120 60 360
Purchase of property and equipment................ (509) (655) (1,874) (772) (579)
-------- -------- -------- -------- --------
Net cash provided from (used in) investing
activities...................................... 5,466 1,473 (8,835) (3,488) (82,579)
-------- -------- -------- -------- --------
Cash flow provided from (used in) financing
activities:
Proceeds from additional paid-in capital.......... 1,600 -- -- -- --
Proceeds from line of credit and notes payable.... 4,000 26,900 1,620 -- 7,750
Proceeds from term debt........................... -- -- -- -- 48,000
Payments on line of credit and notes payable...... (5,800) (26,459) (1,250) (1,314) (5,811)
Proceeds from minority interest owner............. -- -- -- -- 21,200
Repayments from related parties................... 1,188 711 44 407 1,063
Loans from related parties........................ 344 425 1,036 400 84
-------- -------- -------- -------- --------
Net cash provided from (used in) financing
activities...................................... 1,332 1,577 1,450 (507) 72,286
-------- -------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents..................................... (763) (252) 2,269 11 (2,311)
Cash and cash equivalents, beginning of year...... 1,057 294 42 42 2,311
-------- -------- -------- -------- --------
Cash and cash equivalents, end of year............ $ 294 $ 42 $ 2,311 $ 53 $ --
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 123
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Symons International Group, Inc. (the "Company") is a wholly-owned
subsidiary of Goran Capital, Inc. ("Goran"), a Canadian insurance holding
company. The Company is primarily involved in the sale of personal nonstandard
automobile insurance and crop insurance. Nonstandard automobile represents
approximately 51% of the Company's volume. The Company's products are marketed
through independent agents and brokers, within a 31 state area, primarily in the
Midwest and Southern United States.
The following is a description of the significant accounting policies and
practices employed:
a. Principles of Consolidation: The consolidated financial statements
include the accounts, after intercompany eliminations, of the Company and its
wholly-owned subsidiaries as follows:
- Pafco General Insurance Company ("PGIC") -- an insurance company
domiciled in Indiana;
- Pafco Premium Finance Company ("PPFC") -- an Indiana-based premium
finance company;
- IGF Holdings, Inc., ("IGFH") -- a holding company for the crop operations
which includes IGF and Hail Plus Corp.
- IGF Insurance Company ("IGF") -- an insurance company domiciled in
Indiana;
- Hail Plus Corp -- an Iowa-based premium finance company; and
- Symons International Group, Inc. of Ft. Lauderdale, Florida
("SIG-FLA") -- a managing general insurance agency.
On January 31, 1996, the Company entered into an agreement with GS Capital
Partners II, L.P. ("Goldman Funds") to create a company, GGSH, to be owned 52%
by the Company and 48% by Goldman Funds. GGSH created GGS Management, Inc.
("GGS"), a holding company for the nonstandard automobile operations which
include PGIC, PPFC and the Superior entities.
On May 1, 1996, GGSH acquired the following entities through a purchase
business combination:
- Superior Insurance Company ("Superior") -- an insurance company domiciled
in Florida;
- Superior American Insurance Company ("Superior American") -- an insurance
company domiciled in Florida; and
- Superior Guaranty Insurance Company ("Superior Guaranty") -- an insurance
company domiciled in Florida.
In 1995, PGIC acquired the remaining 1.2%, or 28,335 shares, of voting
interest IGF common stock for $56,670. On January 1, 1996, the Company sold
SIG-FLA to Goran for $2,000.
The Company's consolidated results of operations for the six months ended
June 30, 1996 include the results of operations of these entities subsequent to
April 30, 1996, the date of the acquisition. (See Note 18.)
b. Basis of Presentation: The accompanying financial statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
which differ from statutory accounting practices ("SAP") prescribed or permitted
for insurance companies by regulatory authorities in the following respects:
- Certain assets are included in the balance sheet that are excluded as
"Nonadmitted Assets" under statutory accounting.
- Costs incurred by the Company relating to the acquisition of new business
which are expensed for statutory purposes are deferred and amortized on a
straight-line basis over the term of the related
F-7
<PAGE> 124
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
policies. Commissions allowed by reinsurers on business ceded are
deferred and amortized with policy acquisition costs.
- The investment in wholly-owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or loss
and changes in unassigned surplus of the subsidiaries is reflected in net
income for the period rather than recorded directly to unassigned
surplus.
- Investments in bonds are designated at purchase as held to maturity,
trading, or available for sale. Held-to-maturity fixed maturity
investments are reported at amortized cost, and the remaining fixed
maturity investments are reported at fair value with unrealized holding
gains and losses reported in operations for those designated as trading
and as a separate component of stockholder's equity for those designated
as available for sale. All securities have been designated as available
for sale. For SAP, such fixed maturity investments would be reported at
amortized cost or market value based on their NAIC rating.
- The liability for losses and loss adjustment expenses and unearned
premium reserves are recorded net of their reinsured amounts for
statutory accounting purposes.
- Deferred income taxes are not recognized on a statutory basis.
- Credits for reinsurance are recorded only to the extent considered
realizable. Under SAP, credit for reinsurance ceded are allowed to the
extent the reinsurers meet the statutory requirements of the Insurance
Department of the State of Indiana, principally statutory solvency.
Net income and capital and surplus for PGIC and IGF reported on the
statutory accounting basis is as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
Capital and surplus:
PGIC....................................... $ 8,132 $7,848 $11,875
IGF........................................ 2,789 4,512 9,219
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1993 1994 1995
------- ------ -------
<S> <C> <C> <C>
Net income (loss):
PGIC....................................... $ 1,943 $ (571) $ (553)
IGF........................................ (3,020) 1,511 6,574
</TABLE>
c. Use of Estimates: The preparation of financial statements of insurance
companies requires management to make estimates and assumptions that affect
amounts reported in the financial statements and accompanying notes. Such
estimates and assumptions could change in the future as more information becomes
known which could impact the amounts reported and disclosed herein.
d. Premiums: Premiums are recognized as income ratably over the life of the
related policies and are stated net of ceded premiums. Unearned premiums are
computed on the semimonthly pro rata basis.
e.Investments:
Investments are presented on the following bases:
- Fixed maturities and equity securities -- at market value -- all such
securities are classified as available for sale and are carried at market
value with the unrealized gain or loss as a component of stockholder's
equity, net of deferred tax, and accordingly, have no effect on net
income.
F-8
<PAGE> 125
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
- Real estate -- at cost, less allowances for depreciation.
- Mortgage loans -- at outstanding principal balance.
Realized gains and losses on sales of investments are recorded on the trade
date and are recognized in net income on the specific identification basis.
Interest and dividend income are recognized as earned.
f. Cash and Cash Equivalents: For purposes of the statement of cash flows,
the Company includes in cash and cash equivalents all cash on hand and demand
deposits with original maturities of three months or less.
g. Deferred Policy Acquisition Costs: Deferred policy acquisition costs are
comprised of agents' commissions, premium taxes and certain other costs which
are related directly to the acquisition of new and renewal business, net of
expense allowances received in connection with reinsurance ceded, which have
been accounted for as a reduction of the related policy acquisition costs and
are deferred and amortized accordingly. These costs, to the extent that they are
considered recoverable, are deferred and amortized over the terms of the
policies to which they relate.
h. Property and Equipment: Property and equipment are recorded at cost.
Depreciation for buildings is based on the straight-line method over 31.5 years
and the declining balance method for other property and equipment over their
estimated useful lives ranging from five to seven years. Asset and accumulated
depreciation accounts are relieved for dispositions, with resulting gains or
losses reflected in net income.
i. Losses and Loss Adjustment Expenses: Reserves for losses and loss
adjustment expenses include estimates for reported unpaid losses and loss
adjustment expenses and for estimated losses incurred but not reported. These
reserves have not been discounted. The Company's losses and loss adjustment
expense reserves include an aggregate stop-loss program. The Company retains an
independent actuarial firm to estimate reserves. Reserves are established using
individual case-basis valuations and statistical analysis as claims are
reported. Those estimates are subject to the effects of trends in loss severity
and frequency. While management believes the reserves are adequate, the
provisions for losses and loss adjustment expenses are necessarily based on
estimates and are subject to considerable variability. Changes in the estimated
reserves are charged or credited to operations as additional information on the
estimated amount of a claim becomes known during the course of its settlement.
The reserves for losses and loss adjustment expenses are reported net of the
receivables for salvage and subrogation of approximately $795,000 and $948,000,
at December 31, 1994 and 1995, respectively.
j. Income Taxes: During January 1992, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. The Company adopted SFAS No. 109 for the year ended
December 31, 1993. The Statement adopts the liability method of accounting for
deferred income taxes. Under the liability method, companies will establish a
deferred tax liability or asset for the future tax effects of temporary
differences between book and taxable income. Changes in future tax rates will
result in immediate adjustments to deferred taxes. (See Note 8.) Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
k. Reinsurance: Reinsurance premiums, commissions, expense reimbursements,
and reserves related to reinsured business are accounted for on bases consistent
with those used in accounting for the original policies and the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported as a
reduction of premium income.
F-9
<PAGE> 126
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
l. Accounting Changes: On January 1, 1994, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities, ("Statement 115"). In
accordance with Statement 115, prior period financial statements have not been
restated to reflect the change in accounting principle. The cumulative effect as
of January 1, 1994 of adopting Statement 115 has no effect on net income. The
effect of this change in accounting principle was an increase to stockholder's
equity of approximately $139,000, net of deferred taxes of approximately
$73,000, of net unrealized gains on fixed maturities classified as available for
sale that were previously carried at amortized cost.
m. Recently Issued Accounting Pronouncements: On January 1, 1996, the
Company adopted the provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 121
requires that long-lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement was effective
for financial statements for fiscal years beginning after December 31, 1995.
Adoption of SFAS No. 121 did not have a material impact on the Company's results
of operations.
In December 1995, SFAS No. 123, Accounting for Stock-Based Compensation,
was issued. It introduces the use of a fair-value-based method of accounting for
stock-based compensation. It encourages, but does not require, companies to
recognize compensation expense for stock-based compensation to employees based
on the new fair value accounting rules. Companies that choose not to adopt the
new rules will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. However, SFAS No. 123 requires companies that choose not to adopt the
new fair value accounting rules to disclose pro forma net income and earnings
per share under the new method. SFAS No. 123 is effective for financial
statements for fiscal years beginning after December 15, 1995.
On May 1, 1996, GGS Management Holdings, Inc., a recently formed subsidiary
of the Company, adopted a stock option plan. The purpose of the plan is to
provide an incentive to the officers and employees based on the success of the
Company's business enterprises. The Company has not yet quantified the impact of
the adoption of SFAS No. 123.
On October 21, 1996, the Company adopted the SIG 1996 Stock Option Plan.
The SIG 1996 Stock Option Plan provides the Company authority to grant
non-qualified stock options and incentive stock options to officers and key
employees of the Company and its subsidiaries and non-qualified stock options to
non-employee directors of the Company and Goran. A total of 1,000,000 shares of
Common Stock have been reserved for issuance under the SIG 1996 Stock Option
Plan. On October 21, 1996, the Company issued 827,000 stock options to the
Company's and certain Goran directors, certain officers, and certain other key
employees of the Company. The options were granted at an exercise price equal to
the initial public offering price of the Company's common stock.
n. Vulnerability from Concentration: At December 31, 1995, the Company did
not have a material concentration of financial instruments in an industry or
geographic location. Also at December 31, 1995, the Company did not have a
concentration of (1) business transactions with a particular customer, lender or
distributor, (2) revenues from a particular product or service, (3) sources of
supply of labor or services used in the business, or (4) a market or geographic
area in which business is conducted that makes it vulnerable to an event that is
at least reasonably possible to occur in the near term and which could cause a
serious impact to the Company's financial condition.
F-10
<PAGE> 127
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
o. Earnings Per Share: The Company's net income per share calculations are
based upon the weighted average number of shares of common stock outstanding
during each period, as restated for the 7,000-for-1 stock split.
p. Unaudited Interim Financial Statements: The consolidated financial
statements for the six months ended June 30, 1995 and June 30, 1996 have been
prepared using the applicable accounting principles used in the audited
financial statements. These statements are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments and accruals) necessary for a fair presentation of the financial
information set forth herein. The operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996.
2. INVESTMENTS:
Investments are summarized as follows (dollars in thousands).
<TABLE>
<CAPTION>
COST OR UNREALIZED ESTIMATED
AMORTIZED -------------- MARKET
COST GAIN LOSS VALUE
--------- ---- ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $ 6,956 $ 12 $ (169) $ 6,799
Obligations of states and political subdivisions......... 311 -- -- 311
Corporate securities..................................... 1,779 -- (28) 1,751
------- ---- ------- -------
Total fixed maturities........................... 9,046 12 (197) 8,861
------- ---- ------- -------
Equity securities:
Preferred stocks......................................... 1,502 -- (11) 1,491
Common stocks............................................ 4,501 234 (802) 3,933
------- ---- ------- -------
6,003 234 (813) 5,424
------- ---- ------- -------
Short-term investments................................... 790 -- -- 790
Real estate.............................................. 507 -- -- 507
Mortgage loan............................................ 2,940 -- -- 2,940
Other loans.............................................. 50 -- -- 50
------- ---- ------- -------
Total investments................................ $19,336 $246 $(1,010) $18,572
======= ==== ======= =======
</TABLE>
F-11
<PAGE> 128
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COST OR ESTIMATED
AMORTIZED UNREALIZED MARKET
COST GAIN LOSS VALUE
------- ---- ------- -------
<S> <C> <C> <C> <C>
2. INVESTMENTS (CONTINUED):
DECEMBER 31, 1995
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.................. $10,978 $ 63 $ (1) $11,040
Obligations of states and political subdivisions......... 1,470 57 (1) 1,526
Corporate securities..................................... 364 1 -- 365
------- ---- ------- -------
Total fixed maturities........................... 12,812 121 (2) 12,931
------- ---- ------- -------
Equity securities:
Preferred stocks......................................... 100 1 (4) 97
Common stocks............................................ 4,318 108 (292) 4,134
------- ---- ------- -------
4,418 109 (296) 4,231
------- ---- ------- -------
Short-term investments................................... 5,283 -- -- 5,283
Real estate.............................................. 487 -- -- 487
Mortgage loans........................................... 2,920 -- -- 2,920
Other loans.............................................. 50 -- -- 50
------- ---- ------- -------
Total investments................................ $25,970 $230 $ (298) $25,902
======= ==== ======= =======
</TABLE>
At December 31, 1995 67.67% (remainder were not rated) of the Company's
fixed maturities were considered investment grade by The Standard & Poors
Corporation or Moody's Investor Services, Inc., and 64.97% were rated at least
AA by those agencies. Securities with quality ratings Baa and above are
considered investment grade securities. In addition, the Company's investments
in fixed maturities did not contain any significant geographic or industry
concentration of credit risk.
The amortized cost and estimated market value of fixed maturities by
contractual maturity, are shown in the table which follows. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalty (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1994 1995
---------------------- ----------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Maturity:
Due in one year or less................ $ 1,569 $1,573 $ 4,609 $ 4,610
Due after one year through five
years................................ 4,181 4,074 4,988 5,051
Due after five years through ten
years................................ 1,807 1,724 3,215 3,270
Due after ten years.................... 1,489 1,490 -- --
------ ------ ------- -------
Total........................ $ 9,046 $8,861 $12,812 $ 12,931
====== ====== ======= =======
</TABLE>
Gains and losses realized on sales of investments in fixed maturities are
as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Proceeds from sales.................................. $6,630 $4,083 $7,903
Gross gains realized................................. 132 119 106
Gross losses realized................................ 91 29 291
</TABLE>
F-12
<PAGE> 129
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED):
Real estate is reported net of accumulated depreciation of approximately
$131,000 and $143,000 for December 31, 1994 and 1995, respectively.
Investments in a single issuer greater than 10% of shareholder's equity at
December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------
FIXED EQUITY MORTGAGE SHORT-TERM TOTAL
DESCRIPTION MATURITIES SECURITIES LOANS INVESTMENTS INVESTMENTS
- --------------------------------------------- ---------- ---------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
United States Treasury Notes................. $ 3,126 $ -- $ -- $ -- $ 3,126
Federal Home Loan Bank....................... 4,116 -- -- -- 4,116
Federal National Mortgage Association........ 3,018 -- -- -- 3,018
Federal Government Obligation Fd 395......... -- 1,556 -- -- 1,556
United States Treasury Bill.................. -- -- -- 2,666 2,666
Dreyfus Treasury Cash Management............. -- -- -- 1,242 1,242
Comfort Inn.................................. -- -- 2,820 -- 2,820
------- ------ ------ ------ -------
$ 10,260 $1,556 $2,820 $ 3,908 $18,544
======= ====== ====== ====== =======
</TABLE>
An analysis of net investment income follows (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Fixed maturities................................. $ 745 $ 470 $ 534
Equity securities................................ 362 677 256
Cash and short-term investments.................. 78 99 194
Real estate...................................... 558 273 52
Mortgage loans................................... 2 132 231
Other............................................ 322 96 270
------ ------ ------
Total investment income..................... 2,067 1,747 1,537
Investment expenses.............................. (578) (506) (364)
------ ------ ------
Net investment income............................ $1,489 $1,241 $1,173
====== ====== ======
</TABLE>
In 1992, PGIC acquired a hotel property through a deed in lieu of
foreclosure on a mortgage it held in the amount of approximately $2,985,000. In
1993, the property was renovated and changed to a Comfort Inn. In June 1994, the
property was sold for net proceeds of approximately $4,166,000, resulting in a
gain on sale of approximately $147,000. Upon the sale, PGIC issued an 8%
mortgage loan due in the year 2001 in the amount of approximately $3,000,000. It
calls for monthly principal payments of approximately $10,000 plus interest. All
payments on the mortgage were current at December 31, 1995.
In 1995 a note with a balance outstanding of approximately $40,000 at
December 31, 1994 was repaid in full. The note was guaranteed by a foreign
corporation, which is 50% owned by a related party. The loan bore interest at
10% per annum and was repayable at approximately $10,000 per month plus
interest.
Investments with a market value of approximately $6,180,000 and $6,410,000
(amortized cost of approximately $6,245,000 and $6,296,000) as of December 31,
1994 and 1995, respectively, were on deposit in the United States and Canada.
The deposits are required by law to support certain reinsurance contracts,
performance bonds and outstanding loss reserves on assumed business.
Fixed maturities and short-term investments with a market value of
approximately $1,636,000 (amortized cost of approximately $1,619,000) as of
December 31, 1995 were pledged as collateral for an undrawn letter of credit in
the principal amount of approximately $1,500,000 which had been issued for the
benefit of certain ceding reinsurers.
F-13
<PAGE> 130
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions and underwriting expenses
net of reinsurance commission income on such policies. Policy acquisition costs
deferred and the related amortization charged to income were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year.................... $ 503 $ 752 $ 1,479
Costs deferred during year.................... 9,211 5,579 8,050
Amortization during year...................... (8,962) (4,852) (7,150)
------- ------- -------
Balance, end of year.......................... $ 752 $ 1,479 $ 2,379
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1994 1995 ACCUMULATED 1995
NET COST DEPRECIATION NET
------ ------ ------------- ------
<S> <C> <C> <C> <C>
Land........................................ $ 226 $ 226 $ -- $ 226
Buildings................................... 3,180 4,006 (797) 3,209
Office furniture and equipment.............. 229 1,256 (646) 610
Automobiles................................. 2 5 (4) 1
Computer equipment.......................... 599 2,235 (779) 1,456
------ ------ ------- ------
$4,236 $7,728 $(2,226) $5,502
====== ====== ======= ======
</TABLE>
Accumulated depreciation at December 31, 1994 was approximately $1,589,000.
Depreciation expense related to property and equipment for the years ended
December 31, 1993, 1994 and 1995 were approximately $294,000, $374,000, and
$637,000, respectively.
5. OTHER ASSETS:
Included in other assets in the accompanying Consolidated Balance Sheets
are intangible assets composed of goodwill of approximately $150,000 at December
31, 1994. Goodwill was amortized on a straight-line basis over a two- to
five-year period. Amortization of intangible assets were approximately $439,000,
$178,000, and $150,000 in 1993, 1994 and 1995, respectively.
6. LINE OF CREDIT AND NOTES PAYABLE AND TERM DEBT:
Line of credit and notes payable consists of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------ ------
<S> <C> <C>
Term loan note, bank, due in quarterly installments of $500
commencing June 30, 1993, plus interest at prime plus 2% (10.5%
at December 31, 1994), maturing June 30, 1995.................. $1,000 $ --
Revolving line of credit, not to exceed $6,000, due May 15, 1996.
Interest payable monthly at prime plus 0.5% (9% and 9.5% at
December 31, 1995 and 1994, respectively). See below for
collateralization and restrictive covenants.................... 4,191 5,811
Promissory note, maturing July 1, 1996, at prime plus 1% (9.5% at
December 31, 1994)............................................. 250 --
------ ------
$5,441 $5,811
====== ======
</TABLE>
F-14
<PAGE> 131
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT AND NOTES PAYABLE AND TERM DEBT (CONTINUED):
At December 31, 1995, IGF maintained a revolving bank line of credit in the
amount of $6,000,000. At December 31, 1995, the outstanding balance was
approximately $5,811,000. Interest on this line of credit was at the bank's
prime rate (8.5% at December 31, 1995) plus 0.5% adjusted daily. This line is
collateralized by the crop-related uncollected premiums, reinsurance recoverable
on paid losses, Federal Crop Insurance Corporation ("FCIC') annual settlement
and FCIC premium tax recoverable, and a first lien on the real estate owned by
IGF. The line requires IGF to maintain its primary banking relationship with the
issuing bank, limits dividend payments and capital purchases and requires the
maintenance of certain financial ratios. At December 31, 1995, IGF was in
compliance with or had obtained waivers for all covenants associated with the
line.
In May 1996, IGF renewed its line of credit with the same bank expiring in
June 1997. The new facility is in the amount of $7,000,000 and bears an interest
rate of .25% above the New York prime rate. The weighted average interest rate
on the line of credit was 6.0%, 8.1%, and 9.7% during December 31, 1993, 1994
and 1995, respectively.
Included in line of credit and notes payable is a note maintained by IGFH
which matures on January 1, 2001, with principal repayable in 16 quarterly
installments of $468,750 commencing April 1, 1997. In the event the Company
successfully completes an initial public offering, the IGFH Bank Debt will
become immediately due and payable. Interest will accrue at a variable rate per
annum equal to the prime rate through October 1996 and prime plus one percent
thereafter. The IGFH Bank Debt is collateralized by a first priority security
interest in all of the outstanding shares of IGF and the guarantee of Symons
International Group, Ltd. ("SIGL"), the controlling shareholder of Goran,
collateralized by 966,600 shares of Goran common stock. Additionally, certain
financial covenants in favor of the lender of the IGFH Bank Debt require IGFH to
maintain increasing levels of income, retained earnings, and statutory capital
over the term of the IGFH Bank Debt.
The Term Debt, with an outstanding principal balance of $48 million,
matures on April 30, 2002 and will be repaid in 11 consecutive semi-annual
installments, the first of which will occur on the first anniversary of the
closing date. The first installments of principal repayments will be $3,128,000
and $2,886,500, respectively, with the remaining annual installments over the
term of the debt to be paid as follows: 1997 -- $6,014,500; 1998 -- $6,494,500;
1999 -- $7,938,000; 2000 -- $9,742,000; 2001 -- $11,611,500; and 2002 --
$6,199,500. Interest on the Term Debt shall be payable either at the "Base Rate"
option or LIBOR option, plus in each case the applicable margin. The Base Rate
is defined as the higher of (i) the federal funds rate plus 1/2 of 1% or (ii)
the prime commercial lending rate of the lending bank. The applicable margin for
Base Rate loans is 1.50% and for LIBOR loans is 2.75%. In May, 1996, the Company
entered into an interest rate swap agreement to protect the Company against
interest rate volatility. As a result, the Company fixed its interest rate on
the Term Debt at 8.31% through November, 1996 and 9.07% from November, 1996
through July, 1997. The Term Debt is collateralized by a pledge of all of the
tangible and intangible assets of GGSH, including all of the outstanding shares
of GGS, and by a pledge of all of the tangible and intangible assets of GGS,
including all of the outstanding shares of capital stock of Pafco and Superior.
F-15
<PAGE> 132
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......................... $30,924 $54,143 $29,269
Less reinsurance recoverables................. 11,643 36,891 12,542
------ ------ ------
Net balance at January 1................. 19,281 17,252 16,727
------ ------ ------
Incurred related to:
Current year............................. 23,931 26,268 35,184
Prior years.............................. 1,149 202 787
------ ------ ------
Total incurred...................... 25,080 26,470 35,971
------ ------ ------
Paid related to:
Current year............................. 14,877 16,647 21,057
Prior years.............................. 12,232 10,348 10,018
------ ------ ------
Total paid.......................... 27,109 26,995 31,075
------ ------ ------
Net balance at December 31.......... 17,252 16,727 21,623
Plus reinsurance recoverables................. 36,891 12,542 37,798
------ ------ ------
Balance at December 31........................ $54,143 $29,269 $59,421
====== ====== ======
</TABLE>
The foregoing reconciliation shows that deficiencies of approximately
$1,149,000, $202,000, and $787,000 in the December 31, 1992, 1993, and 1994
liability for losses and loss adjustment expenses, respectively, emerged in the
following year. These deficiencies resulted from higher than anticipated losses
resulting from a change in settlement costs relating to those estimates.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and LAE. While anticipated price increases due
to inflation are considered in estimating the ultimate claim costs, the increase
in average severities of claims is caused by a number of factors that vary with
the individual type of policy written. Future average severities are projected
based on historical trends adjusted for implemented changes in underwriting
standards, policy provisions, and general economic trends. Those anticipated
trends are monitored based on actual development and are modified if necessary.
Liabilities for loss and loss adjustment expenses have been established
when sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, a liability has been established to
cover additional exposure on both known and unasserted claims. These liabilities
are reviewed and updated continually.
8. INCOME TAXES:
The Company files a consolidated federal income tax return with its
subsidiaries. An intercompany tax sharing agreement between the Company and its
subsidiaries provides that income taxes will be allocated based upon separate
return calculations in accordance with the Internal Revenue Code of 1986, as
amended. Intercompany tax payments are remitted at such times as estimated taxes
would be required to be made to the Internal Revenue Service.
F-16
<PAGE> 133
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED):
A reconciliation of the differences between federal tax computed by
applying the federal statutory rate of 34% to income before income taxes and the
income tax provision is as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1993 1994 1995
----- ------- ------
<S> <C> <C> <C>
Computed income taxes at statutory rate......... $(444) $ 468 $2,531
Dividends received deduction.................... (25) (30) (54)
Tax-exempt interest............................. (37) (36) (32)
Change in valuation allowance................... 696 (1,492) (237)
Other........................................... (107) 372 411
----- ------- ------
Income taxes.......................... $ 83 $ (718) $2,619
===== ======= ======
</TABLE>
State income taxes for the years ended December 31, 1993, 1994 and 1995 and
for the three months ended March 31, 1995 and 1996 are not significant.
Therefore, state income taxes have been recorded in general and administrative
expenses and not as part of income taxes.
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993.
The effect on years prior to 1993 of changing to this method was approximately
$1,175,000 and is reflected in the Consolidated Statement of Operations as the
cumulative effect of a change in accounting principle. The current or deferred
tax consequences of a transaction are measured by applying the provisions of
enacted tax laws to determine the amount of taxes payable currently or in future
years. The method of accounting for income taxes prior to SFAS No. 109 provided
that deferred taxes, once recorded, were not adjusted for changes in tax rates.
The net deferred tax asset is comprised of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses............... $ 750 $ 422
Unearned premiums........................................ 505 764
Allowance for doubtful accounts.......................... 411 315
Unrealized losses on investments......................... 260 23
Net operating loss carryforwards......................... 595 457
Other.................................................... 374 411
------ ------
2,895 2,392
Valuation allowance........................................ 260 23
------ ------
Net deferred tax asset........................... 2,635 2,369
------ ------
Deferred tax liabilities:
Deferred policy acquisition costs........................ (503) (809)
Other.................................................... (130) (139)
------ ------
(633) (948)
------ ------
Net deferred tax asset........................... $2,002 $1,421
====== ======
</TABLE>
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. At December
31, 1994 and 1995, approximately $260,000 and $23,000 respectively, of deferred
tax assets relating to net unrealized capital losses on fixed maturity and
equity securities available for sale were available to be recorded in
shareholder's equity before considering a valuation
F-17
<PAGE> 134
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED):
allowance. For federal income tax purposes, capital losses may be used only to
offset capital gains in the current year or during a three-year carryback and
five-year carryforward period. Due to these restrictions, and the uncertainty at
that time of future capital gains, these deferred tax assets were fully offset
in 1994 and 1995 by a valuation allowance of approximately $260,000 and $23,000,
respectively. No additional valuation allowance was established as of December
31, 1994 or 1995 on the remaining deferred tax assets, since management believes
it is more likely than not that the Company will realize the benefit of its
deferred tax assets. During 1994, as a result of the Company's improved
operations, the valuation allowance related to the net operating loss
carryforwards was reduced. Management considers primarily the scheduled reversal
of deferred tax liabilities and carryback provisions in making this assessment.
As of December 31, 1995, the Company has unused net operating loss
carryovers available as follows (dollars in thousands):
<TABLE>
<CAPTION>
EXPIRATION DATE AMOUNT
--------------- ------
<S> <C>
2000................................................... $1,217
2002................................................... 126
------
Total............................................. $1,343
======
</TABLE>
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided for the
possible effects of future assessments related to prior years.
9. REINSURANCE:
The Company limits the maximum net loss that can arise from a large risk,
or risks in concentrated areas of exposure, by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers, either on an automatic basis
under general reinsurance contracts known as "treaties," or by negotiation on
substantial individual risks. Such reinsurance includes quota share, excess of
loss, stop-loss and other forms of reinsurance on essentially all property and
casualty lines of insurance. In addition, the Company assumes reinsurance on
certain risks. The Company remains contingently liable with respect to
reinsurance, which would become an ultimate liability of the Company in the
event that such reinsuring companies might be unable, at some later date, to
meet their obligations under the reinsurance agreements.
Approximately 77% of amounts recoverable from reinsurers as of December 31,
1995 are with the FCIC, a branch of the federal government. Another 12% of
uncollateralized recoverable amounts as of such date are with a company which
maintains an A.M. Best rating of A+. Company management believes amounts
recoverable from reinsurers are collectible.
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were approximately $36,891,000, $12,542,000, and
$37,798,000, as of December 31, 1993, 1994 and 1995, respectively. These amounts
are also included in the related reserves for unpaid losses and loss adjustment
expenses in the accompanying Consolidated Balance Sheets.
F-18
<PAGE> 135
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REINSURANCE (CONTINUED):
Reinsurance activity for 1993, 1994 and 1995, which includes reinsurance
with related parties, is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 DIRECT ASSUMED CEDED NET
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Premiums written................................ $ 88,847 $ 89 $(57,176) $31,760
Premiums earned................................. 88,506 84 (57,162) 31,428
Incurred losses and loss adjustment expenses.... 106,871 4,728 (86,519) 25,080
Commission expenses (income).................... 15,787 149 (17,195) (1,259)
1994
Premiums written................................ $102,178 $ 956 $(67,995) $35,139
Premiums earned................................. 96,053 1,308 (65,235) 32,126
Incurred losses and loss adjustment expenses.... 57,951 1,588 (33,069) 26,470
Commission expenses (income).................... 19,619 48 (24,174) (4,507)
1995
Premiums written................................ $123,381 $1,253 $(71,187) $53,447
Premiums earned................................. 116,860 1,256 (68,475) 49,641
Incurred losses and loss adjustment expenses.... 125,382 2,839 (92,250) 35,971
Commission expenses (income).................... 17,177 174 (27,092) (9,741)
</TABLE>
10. RELATED-PARTY TRANSACTIONS:
The Company and its subsidiaries have entered into transactions with
various related parties including transactions with Goran, and its affiliates,
Symons International Group, Ltd. ("SIG Ltd."), Goran's parent, Granite Insurance
Company ("Granite"), and Granite Reinsurance Company, Ltd. ("Granite Re"),
Goran's subsidiaries.
The following balances were outstanding (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Investments in and advances to related parties:
Nonredeemable, nonvoting preferred stock of Granite...... $ 702 $ 702
Secured notes receivable from related parties............ 1,395 1,355
Unsecured mortgage loan from director and officer........ 278 278
Due from directors and officers.......................... 212 199
Other receivables from related parties................... 361 418
------ ------
$2,948 $2,952
====== ======
Payable to affiliates:
Loan and related interest payable to Goran............... $2,024 $2,232
Loan and related interest payable to Granite Re.......... 3,218 3,733
Other payables to Goran.................................. 146 500
Other payables to related parties........................ 2 9
------ ------
$5,390 $6,474
====== ======
</TABLE>
F-19
<PAGE> 136
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED-PARTY TRANSACTIONS (CONTINUED):
The following transactions occurred with related parties (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Management fees charged by Goran...................... $300 $494 $414
Reinsurance under various treaties, net:
Ceded premiums earned............................... (23) (73) 5,235
Ceded losses and loss adjustment expenses
incurred......................................... 44 -- 2,612
Ceded commissions................................... -- -- 1,142
Consulting fees charged by various related parties.... 50 75 26
Interest charged by Goran............................. 188 188 208
Dividend income from Granite Re....................... 70 18 --
Interest charged by Granite Re........................ 283 312 346
</TABLE>
Included in Secured notes receivable from related parties is a note for
approximately $1,700,000 to a third-party corporation ("TPC") carrying a
principal balance with capitalized interest of approximately $1,355,000 at
December 31, 1995 and 1994. The loan is collateralized by a guarantee and a
collateral mortgage from a corporation, one-third of which is owned by an
individual who is related to the majority shareholder of SIG Ltd. The TPC loaned
the approximately $1,700,000 to SIG Ltd. The renewed promissory note is payable
on demand and bears interest at 7.8% per annum. The guarantee is collateralized
by 200,000 common shares of Goran common stock. Also included in Secured notes
receivable from related parties is a loan receivable held by PGIC in the amount
of approximately $40,000 as of December 31, 1994.
The unsecured mortgage loan to the Chairman of the Company was amended in
1995 to extend the payment terms. The loan is due and payable on May 8, 1999 and
bears interest at 7% per annum. Interest payments on the loan are due monthly.
Amounts due from directors and officers of the Company bear interest at
6.11% per annum, payable semiannually. Subsequent to year end, the rate was
changed to the 180-day treasury bill rate. Loan principal is payable on demand.
The loan payable, including accrued interest, to Goran of approximately
$2,024,000 and $2,232,000, at December 31, 1994 and 1995, respectively, bears
interest at 10% per annum. The loan plus accrued interest is payable on demand.
The balance at December 31, 1994 and 1995 includes accrued interest of
approximately $188,000 and $396,000, respectively.
During 1992, Granite Re loaned the Company approximately $2,500,000. An
additional approximately $200,000 was loaned by Granite Re in 1995. The loan
bears interest at 10% per annum and is due on demand. The balance at December
31, 1994 and 1995 includes accrued interest of approximately $718,000 and
$1,064,000, respectively.
11. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS:
At December 31, 1994 and 1995, PGIC's statutory capital and surplus was
approximately $7,848,000 and $11,875,000, respectively, and IGF's statutory
capital and surplus was approximately $4,512,000 and $9,219,000, respectively.
The minimum regulatory requirement for capital and surplus is approximately
$1,250,000. The Indiana statute allows 10% of surplus as regards policyholders
or 100% of net income, whichever is greater, to be paid as dividends only from
earned surplus. Statutory requirements place
F-20
<PAGE> 137
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS
(CONTINUED):
limitations on the amount of funds which can be remitted to the Company from
PGIC and to PGIC from IGF.
Subsequent to Board of Directors and regulatory approval, IGF declared and
paid in December 1995 an extraordinary dividend to PGIC in the amount of $2
million on the 2,494,000 shares of convertible preferred stock owned by PGIC. In
December 1995, upon Board of Directors of PGIC and regulatory approval, PGIC
declared and paid to the Company a $1.5 million extraordinary dividend on the
common stock owned by the Company.
12. REGULATORY MATTERS:
PGIC and IGF, domiciled in Indiana, prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the Indiana Department of Insurance ("IDOI"). Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed.
IGF received written approval through June 30, 1996 from the IDOI to
reflect its business transacted with the FCIC as a 100% cession with any net
underwriting results recognized in ceding commissions for statutory accounting
purposes, which differs from prescribed statutory accounting practices. As of
December 31, 1995, that permitted transaction had no effect on statutory surplus
or net income. The underwriting profit (loss) results of the FCIC business, net
of reinsurance, of approximately $(1,515,000), $3,257,000, and $9,653,000, are
netted with policy acquisition and general and administrative expenses for the
years ended December 31, 1993, 1994, and 1995, respectively, in the accompanying
Consolidated Statements of Operations.
During the year, IGF and PGIC entered into a reinsurance agreement in which
IGF ceded approximately $17,696,000 of multi-peril crop business to PGIC, who in
turn ceded it to the FCIC. As a matter of course, intercompany reinsurance
agreements are filed with the IDOI for their approval. IDOI approval has not yet
been received with respect to this agreement; however, management believes it
will be received in due course.
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC requires no
corrective actions by PGIC, IGF or regulators. PGIC's Ratio at December 31, 1995
was below the "company action level," as defined by the NAIC RBC model law. At
this level, PGIC must submit a corrective action plan. After the spin-off of IGF
(see Note 18), PGIC's Ratio will be well above the minimum "company action
level" of 200%. As of December 31, 1995, IGF had a Ratio that was in excess of
the minimum RBC requirements.
13. LEASES:
The Company has certain commitments under long-term operating leases,
principally for equipment. Rental expense under these commitments were
approximately $186,000, $248,000, and $297,000 for 1993,
F-21
<PAGE> 138
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LEASES (CONTINUED):
1994 and 1995, respectively. Future minimum lease payments required under these
noncancelable operating leases are as follows (dollars in thousands):
<TABLE>
<S> <C>
1996.................................................. $181
1997.................................................. 89
1998.................................................. 26
1999.................................................. 8
2000.................................................. 8
----
Total............................................ $312
====
</TABLE>
14. CONTINGENCIES:
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the subsidiaries. These actions were considered by
the Company in establishing its loss reserves. The Company believes that the
ultimate disposition of these lawsuits will not materially affect the Company's
operations or financial position.
IGF is responsible for the administration of a run-off book of business.
FCIC has requested that IGF take responsibility for the claim liabilities under
its administration of these policies, and IGF has requested reimbursement of
certain expenses from the FCIC with respect to this run-off activity. It is the
Company's opinion, and that of its legal counsel, that there is no material
liability on the part of the Company for claim liabilities of other companies
under IGF's administration.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company recognizes its obligations for guaranty fund assessments
when it receives notice that an amount is payable to a guaranty fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
15. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest and income taxes are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994 1995
------ ---- ------
<S> <C> <C> <C>
Cash paid for interest............................. $1,217 $685 $ 553
Cash paid for income taxes, net of refunds......... 372 166 1,953
</TABLE>
During 1994, IGF exchanged 700,000 shares of Granite Reinsurance Company,
Ltd. stock for 9,800 shares of Granite Insurance Company stock, recording no
gain or loss. In addition, PGIC exchanged an investment in real estate for a
mortgage loan of approximately $3,000,000 plus cash of approximately $1,166,000.
During 1996, the Company sold the stock of Pafco and certain assets of the
Company totaling $15,907,000 to GGSH in exchange for a 52% ownership interest in
GGSH. In addition GGSH received a cash contribution of $21,200,000 from Goldman,
Sachs & Co. ("Goldman Funds") in return for a 48% ownership interest in GGSH.
For its cash contribution of $21,200,000, Goldman Funds received a minority
interest share in GGSH at the date of contribution of $17,811,000 resulting in a
$3,389,000 increase to additional paid in capital from the sale of Pafco common
stock and certain assets. See Note 18.
F-22
<PAGE> 139
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS:
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair value of the Company's financial instruments.
Considerable judgment is required to develop these fair values and, accordingly,
the estimates shown are not necessarily indicative of the amounts that would be
realized in a one-time, current market exchange of all of the Company's
financial instruments.
a. Fixed Maturity and Equity Securities: Fair values for fixed maturity and
equity securities are based on market values obtained from the NAIC Securities
Valuation Office. Such values approximate quoted market prices from published
information.
b. Mortgage Loan: The estimated fair value of the mortgage loan on real
estate on the Comfort Inn property was established using a discounted cash flow
method based on credit rating, maturity and future income when compared to the
expected yield for mortgages having similar characteristics. The ratings for
mortgages in good standing are based on property type, location, market
conditions, occupancy, debt service coverage, loan to value, caliber of tenancy,
borrower and payment record. Fair values for impaired mortgage loans are
measured based either on the present value of expected future cash flows
discounted at the loan's effective interest rate, at the loan's market price or
the fair value of the collateral if the loan is collateral dependent.
c. Short-term Investments, and Cash and Cash Equivalents: The carrying
value for assets classified as short-term investments, and cash and cash
equivalents in the accompanying balance sheets approximates their fair value.
d. Short-term and Long-term Debt: Fair values for long-term debt issues are
estimated using discounted cash flow analysis based on the Company's current
incremental borrowing rate for similar types of borrowing arrangements. In 1994,
the rates on long-term debt ranged from 9% to 9.5%, which approximates the
current rate for similar types of borrowing arrangements. For short-term debt,
the carrying value approximates fair value.
e. Advances to Related Parties and Payables to Affiliates: It is not
practicable to determine the fair value of the advances to related parties or
the payables to affiliates as of December 31, 1995, because these are related
party obligations and no comparable fair value measurement is available.
17. SEGMENT INFORMATION:
The Company has two business segments: Nonstandard automobile and Crop
insurance. The Nonstandard automobile segment offers personal nonstandard
automobile coverages through a network of independent general agencies. These
products are sold throughout the Midwest by PGIC in eight states and IGF in two
states. Effective in the first quarter of 1996, all nonstandard automobile
business will be retained in PGIC (see Note 18). The Crop segment writes
Multi-peril crop insurance ("MPCI") and crop hail insurance in 31 states through
independent agencies with its primary concentration in the Midwest. Activity
which is not included in the major business segments is shown as "Corporate and
Other."
"Corporate and Other" includes operations not directly related to the
business segments and unallocated corporate items (i.e., corporate investment
income, interest expense on corporate debt and unallocated overhead expenses).
F-23
<PAGE> 140
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED):
The revenue and pre-tax income by segment are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Revenue:
Nonstandard automobile...................................... $28,733 $27,784 $36,363
Crop........................................................ 4,742 4,873 12,830
Corporate and other......................................... 209 2,173 3,451
------- ------- -------
Total revenue....................................... $33,684 $34,830 $52,644
======= ======= =======
Income (loss) before income taxes, discontinued operations,
cumulative effect of a change in accounting principle, and
minority interest:
Nonstandard automobile...................................... $ 5,726 $ 772 $(1,989)
Crop........................................................ (3,735) 2,152 11,040
Corporate and other......................................... (3,297) (1,549) (1,607)
------- ------- -------
Income (loss) from continuing operations before taxes,
discontinued operations, cumulative effect of a change in
accounting principle, and minority interest.............. $(1,306) $ 1,375 $ 7,444
======= ======= =======
</TABLE>
18. SUBSEQUENT EVENTS (UNAUDITED):
On January 31, 1996, the Company entered into an agreement ("Agreement")
with GS Capital Partners II, L.P. to create a company, GGSH to be owned 52% by
the Company and 48% owned by Goldman Funds. In accordance with the Agreement,
the Company sold certain fixed assets and PGIC common stock with a predetermined
value of at least $15,300,000, to GGSH. If the sale of PGIC stock and certain
assets by the Company is less than $15,300,000, Goran will be required to
contribute the amount of the deficiency in cash to GGSH. Goldman Funds
contributed approximately $21,200,000 in cash in accordance with the Agreement,
for which it received a minority interest in GGSH of $17,811,000, resulting in a
$3,389,000 increase to additional paid in capital of the Company from the sale
of Pafco's common stock and certain assets.
In connection with the above transactions, GGSH acquired all of the
outstanding shares of common stock of Superior and its wholly owned
subsidiaries, Superior American and Superior Guaranty, insurance companies
domiciled in Florida, (collectively referred to as "Superior") for cash of
approximately $66,389,000. In conjunction with the acquisition, the Company's
funding was through a senior bank facility of approximately $48,000,000 and a
cash contribution from Goldman Funds of approximately $21,200,000. PGIC also
transferred all of the outstanding shares of IGF capital stock to the Company's
newly formed subsidiary, IGFH. Although the Company believes the plan of
reorganization or spin off did not result in gain or loss, no assurance can be
given that the Internal Revenue Service will not challenge the transaction.
The contribution of PGIC common stock to GGSH has been accounted for in a
manner similar to a pooling-of-interests. Accordingly, no gain or loss has been
recognized in connection with this transaction. The purchase of Superior has
been accounted for in accordance with the purchase method of accounting. In
April 1996, the IGF Board of Directors declared an $11,000,000 distribution to
Pafco in the form of cash of $7,500,000 and a note payable of $3,500,000.
Effective January 1, 1996, the Company transferred SIG-FL to Goran at its
net book value. At December 31, 1995, the net book value of SIG-FL was
approximately $2,000. The Company received approximately $2,000 consideration.
Accordingly, no gain or loss was recognized in 1996 on the transaction.
F-24
<PAGE> 141
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
In July 1996, the Company filed an initial draft of Form S-1 Registration
Statement with the Securities and Exchange commission in anticipation of an
initial public offering ("IPO") of common stock. The Company intends to sell up
to 3,000,000 shares of newly issued common stock to the general public. A
maximum of 30% (not assuming any of the underwriters' overallotment is
exercised) of the total outstanding common shares will be sold. After completion
of the IPO, it is expected that Goran will own 70% of the total common stock
outstanding. It is uncertain at this time what the total net sale proceeds to
the Company will be from the IPO.
The acquisition of Superior was accounted for under the purchase method of
accounting and was recorded as follows:
<TABLE>
<S> <C>
Assets Acquired:
Invested Assets............................................. $118,665,000
Receivables................................................. 35,223,000
Deferred Acquisition Costs.................................. 7,925,000
Other Assets................................................ 1,981,000
------------
Total....................................................... 163,794,000
------------
Liabilities Assumed:
Unpaid Losses and Loss Adjustment Expenses.................. 44,423,000
Unearned Premiums........................................... 45,280,000
Other Liabilities........................................... 10,863,000
------------
Total....................................................... 100,566,000
------------
Net Assets Acquired........................................... 63,228,000
Purchase Price................................................ 66,389,000
------------
Goodwill...................................................... $ 3,161,000
============
</TABLE>
Goodwill is amortized over a 25 year period on a straight line basis based
upon management's estimate of the expected benefit period.
The Company's results from operations for the six months ended June 30,
1996 include the results of Superior subsequent to April 30, 1996 as follows:
<TABLE>
<S> <C>
Gross Premiums Written.......................................... $25,202,000
===========
Net Premiums Earned............................................. $23,429,000
Net Investment and Other Income................................. 2,060,000
-----------
Total Revenue................................................... 25,489,000
-----------
Losses and Loss Adjustment Expenses............................. 18,804,000
Policy Acquisition and General and Administration Expenses...... 6,149,000
-----------
Total Expenses.................................................. 24,953,000
-----------
Income Before Taxes and Minority Interest....................... 536,000
Income Taxes.................................................... 182,000
-----------
Income before Minority Interest................................. 354,000
Minority Interest............................................... 169,000
-----------
Net Income...................................................... $ 185,000
===========
</TABLE>
F-25
<PAGE> 142
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
Amortization includes goodwill, as previously discussed, and deferred debt
and organizational costs of approximately $1,900,000 which are being amortized
over 5 to 6 years on the straight line basis. The impact on net income of the
aforementioned items was a reduction of $265,000.
Pro-forma operating results for the Company, assuming the acquisition of
Superior and formation of GGS Management Holdings, Inc. took place at the
beginning of each of the periods presented, follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1996 DECEMBER 31, 1995
---------------- -----------------
<S> <C> <C>
Gross Premium Revenue....................... $190,943,000 $ 219,390,000
Net Premiums Earned......................... $ 98,453,000 $ 147,255,000
Net Income.................................. $ 5,636,000 $ 4,371,000
Earnings Per Share.......................... $ 0.81 $ 0.62
</TABLE>
On July 29, 1996, the Board of Directors approved an increase in the
authorized common stock of the Company from 1,000 shares to 100,000,000 shares.
The common stock remains at no par value. On July 29, 1996, the Board approved a
7,000-for-1 stock split of the Company's issued and outstanding shares. All
share and per share amounts have been restated to retroactively reflect the
stock split. On July 29, 1996, the Board of Directors authorized the issuance of
50,000,000 shares of Preferred Stock. No shares of Preferred Stock have been
issued.
On April 29, 1996, PGIC and IGF entered into a 100% quota share reinsurance
agreement, whereby all of IGF's nonstandard automobile business from 1996 and
forward will be ceded to PGIC effective January 1, 1996.
On April 29, 1996, PGIC retroactively ceded all of its commercial business
relating to 1995 and previous years to Granite Re, with an effective date of
January 1, 1996. Amounts ceded for outstanding losses and loss adjustment
expenses and unearned premiums were approximately $3,519,000 and $2,380,000,
respectively. On this date, PGIC also entered into a 100% quota share
reinsurance agreement with Granite Re, whereby all of PGIC's commercial business
from 1996 and forward will be ceded to Granite Re effective January 1, 1996. The
Company remains contingently liable with respect to the reinsurance with Granite
Re, which would become an ultimate liability of the Company in the event that
Granite Re is unable to meet its obligations under the reinsurance agreements.
For purposes of disclosing the pro forma effect of the Company's ownership
interest in GGSH, the Company has reflected GGSH as a consolidated entity of the
Company.
Assuming that these transactions took place (including the IPO) at January
1, 1995 or at January 1, 1996, the pro forma effect of these transactions on the
Company's consolidated statement of operations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues........................................ $159,899,000 $108,974,000
Net income...................................... $ 6,701,000 $ 5,928,000
Net income per common share..................... $ .66 $ .58
</TABLE>
Assuming that these transactions took place (including the IPO) at January
1, 1995 or January 1, 1996, and that shares outstanding only included shares
issued in connection with the IPO whose proceeds were used
F-26
<PAGE> 143
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED):
to repay indebtedness, the pro forma effect of these transactions on the
Company's net income per common share is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
(UNAUDITED)
<S> <C> <C>
Net income per common share........................ $.80 $.71
</TABLE>
Outstanding shares used in the above calculation include the 7,000,000
shares outstanding before the IPO plus 1,364,000 shares issued in connection
with the IPO whose proceeds were used to pay indebtedness. The latter
calculation was determined by dividing the aggregate amount of the repayment of
the $7.5 million IGFH Bank Debt and the $7.5 million repayment of Parent
Indebtedness by the assumed offering price of $11 per share.
The pro forma results are not necessarily indicative of what actually would
have occurred if these transactions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
F-27
<PAGE> 144
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders of
Superior Insurance Company, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Superior
Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial position of
Superior Insurance Company, Inc. and Subsidiaries as of December 31, 1994 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities in 1993.
As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 109,
Accounting for Income Taxes, during the year ended December 31, 1993.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
June 14, 1996
F-28
<PAGE> 145
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- --------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C>
Assets:
Investments:
Available for sale:
Fixed maturities, at market.......................... $ 93,860 $ 99,556 $ 102,777
Equity securities, at market......................... 7,140 8,070 13,987
Short-term investments, at amortized cost,
which approximates market.......................... 5,538 8,462 3,739
Other investment, at cost............................ 808 274 --
Cash and cash equivalents............................... 11 1,430 4,331
Receivables (net of allowance for doubtful accounts of
$310,000 and $500,000 at December 31, 1994 and 1995,
respectively, and $500,000 (unaudited) at
June 30, 1996)....................................... 31,425 30,209 32,894
Reinsurance recoverable on unpaid losses................ 1,099 987 1,478
Federal income tax receivable........................... 3,521 -- --
Accrued investment income............................... 1,888 1,602 1,586
Deferred policy acquisition costs....................... 9,004 7,574 8,038
Deferred income taxes................................... 3,785 44 1,511
Property and equipment.................................. 357 697 657
Other assets............................................ 3,428 1,225 1,160
-------- -------- --------
Total assets.................................... $161,864 $160,130 $ 172,158
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Losses and loss adjustment expenses..................... $ 54,577 $ 47,112 $ 47,155
Unearned premiums....................................... 44,593 41,048 47,016
Draft payables.......................................... 6,509 6,070 7,998
Accrued expenses........................................ 4,307 4,107 4,088
Federal income tax payable.............................. -- 177 1,284
-------- -------- --------
Total liabilities............................... 109,986 98,514 107,541
-------- -------- --------
Stockholders' equity:
Common stock, $100 par value, 30,000 shares authorized,
issued and outstanding............................... 3,000 3,000 3,000
Additional paid-in capital.............................. 37,025 37,025 37,025
Unrealized (loss) gain on investments, net of deferred
tax (benefit) expense of $(412,000) in 1994,
$2,605,000 in 1995 and $973,000 (unaudited) at
June 30, 1996........................................ (765) 4,838 1,808
Retained earnings....................................... 12,618 16,753 22,784
-------- -------- --------
Total stockholders' equity........................... 51,878 61,616 64,617
-------- -------- --------
Total liabilities and stockholders' equity........... $161,864 $160,130 $ 172,158
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 146
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------- -------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross premiums written................ $115,660 $112,906 $ 94,756 $42,915 $69,119
Less ceded premiums................... (366) (391) (686) (400) (412)
-------- -------- -------- ------- -------
Net premiums written................ 115,294 112,515 94,070 42,515 68,707
Change in unearned premiums........... 2,842 322 3,544 7,538 (5,968)
-------- -------- -------- ------- -------
Net premiums earned................. 118,136 112,837 97,614 50,053 62,739
Net investment income................. 8,170 7,024 7,093 4,161 3,476
Other income.......................... 5,879 3,344 4,171 1,692 3,092
Net realized capital gain (loss)...... 3,559 (200) 1,954 711 2,104
-------- -------- -------- ------- -------
Total revenues.............. 135,744 123,005 110,832 56,617 71,411
-------- -------- -------- ------- -------
Expenses:
Losses and loss adjustment expenses... 85,902 92,378 72,343 38,129 45,963
Policy acquisition and general and
administrative expenses............. 36,292 38,902 32,705 17,212 17,104
-------- -------- -------- ------- -------
Total expenses.............. 122,194 131,280 105,048 55,341 63,067
-------- -------- -------- ------- -------
Income (loss) before income taxes
and cumulative effect of change in
accounting principle................ 13,550 (8,275) 5,784 1,276 8,344
-------- -------- -------- ------- -------
Income taxes:
Current income tax expense (benefit).. 3,207 (2,770) 925 (539) 2,153
Deferred income tax expense (benefit). 774 (1,030) 724 700 160
-------- -------- -------- ------- -------
Total income taxes.......... 3,981 (3,800) 1,649 161 2,313
-------- -------- -------- ------- -------
Income (loss) before cumulative
effect of a change in accounting
principle........................ 9,569 (4,475) 4,135 1,115 6,031
Cumulative effect of a change in
accounting principle............. 1,389 -- -- -- --
-------- -------- -------- ------- -------
Net income (loss)................... $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 147
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
ADDITIONAL GAIN (LOSS) TOTAL
COMMON PAID-IN ON RETAINED STOCKHOLDERS'
STOCK CAPITAL INVESTMENT EARNINGS EQUITY
------ ---------- ----------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993................. $1,500 $ 37,025 $ 655 $ 29,635 $ 68,815
Change in unrealized (loss) gain on
investments, net of deferred taxes.... -- -- 3,983 -- 3,983
Cash dividends paid...................... -- -- -- (10,000) (10,000)
Common stock dividends paid.............. 1,500 -- -- (1,500) --
Net income............................... -- -- -- 10,958 10,958
------ ------- ------ -------- --------
Balance at December 31, 1993............... 3,000 37,025 4,638 29,093 73,756
Change in unrealized (loss) gain on
investments, net of deferred taxes.... -- -- (5,403) -- (5,403)
Cash dividends paid...................... -- -- -- (12,000) (12,000)
Net loss................................. -- -- -- (4,475) (4,475)
------ ------- ------ -------- --------
Balance at December 31, 1994............... 3,000 37,025 (765) 12,618 51,878
Change in unrealized (loss) gain on
investments, net of deferred taxes
(unaudited)........................... -- -- 4,211 -- 4,211
Net income (unaudited)................... -- -- -- 1,115 1,115
------ ------- ------ -------- --------
Balance at June 30, 1995 (unaudited)....... $3,000 $ 37,025 $ 3,446 $ 13,733 $ 57,204
====== ======= ====== ======== ========
Balance at December 31, 1994............... 3,000 $ 37,025 $ (765) $ 12,618 $ 51,878
Change in unrealized (loss) gain on
investments, net of deferred taxes.... -- -- 5,603 -- 5,603
Net income (unaudited)................... -- -- -- 4,135 4,135
------ ------- ------ -------- --------
Balance at December 31, 1995............... 3,000 37,025 4,838 16,753 61,616
Change in unrealized (loss) gain on
investments, net of deferred taxes.... -- -- (3,030) -- (3,030)
Net income (unaudited)................... -- -- -- 6,031 6,031
------ ------- ------ -------- --------
Balance at June 30, 1996 (unaudited)....... $3,000 $ 37,025 $ 1,808 $ 22,784 $ 64,617
====== ======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 148
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE SIX MONTHS ENDED
JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
-------- --------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $ 10,958 $ (4,475) $ 4,135 $ 1,115 $ 6,031
Adjustments to reconcile net income to
net cash provided from (used in)
operations:
Net amortization on fixed
maturities.......................... 909 499 205 108 124
Depreciation of property and
equipment........................... 128 185 214 81 97
Deferred income tax expense
(benefit)........................... (615) (1,030) 724 700 160
Net (gain) loss on sale of fixed
assets and investments.............. (3,546) 210 (1,940) (711) (2,104)
Net changes in operating assets and
liabilities:
Receivables........................... (4,052) (1,303) 1,216 6,839 (2,685)
Reinsurance recoverable on unpaid
losses.............................. (12) -- 49 4 --
Accrued investment income............. 504 524 286 177 16
Federal income taxes receivable
(payable)........................... (23) (4,075) 3,698 (558) 1,107
Deferred policy acquisition costs..... 248 (78) 1,430 1,684 (464)
Other assets.......................... 89 (2,382) 2,203 2,210 65
Losses and loss adjustment expenses... (4,260) 985 (7,402) (4,966) 43
Unearned premiums..................... (2,842) (322) (3,545) (7,538) 5,968
Drafts payable........................ (2,091) (1,897) (439) (562) 1,928
Accrued expenses...................... -- 4,307 (200) (835) (19)
-------- --------- -------- -------- --------
Net cash provided from (used in)
operations..................... (4,605) (8,852) 634 (2,252) 10,267
-------- --------- -------- -------- --------
Cash flow from investing activities:
Net (purchases) sales of short-term
investments........................... 5,322 1,845 (2,924) (2,242) 4,723
Proceeds from sales, calls and maturities
of fixed maturities................... 91,866 77,224 58,725 36,513 49,057
Purchases of fixed maturities............ (76,991) (64,678) (56,222) (32,461) (55,323)
Proceeds from sales of equity
securities............................ 91,397 136,121 87,319 43,210 80,205
Purchase of equity securities............ (92,605) (133,482) (86,663) (43,022) (86,233)
Proceeds from the sale of other
investments........................... -- -- 1,105 382 274
Proceeds from sales of property and
equipment............................. 30 33 -- -- --
Purchases of property and equipment...... (388) (198) (555) (139) (69)
-------- --------- -------- -------- --------
Net cash provided from (used in)
investing activities........... 18,631 16,865 785 2,241 (7,366)
-------- --------- -------- -------- --------
Cash flow from financing activities:
Payment of dividends..................... (10,000) (12,000) -- -- --
-------- --------- -------- -------- --------
Net cash (used in) financing
activities..................... (10,000) (12,000) -- -- --
Increase (decrease) in cash and cash
equivalents........................... 4,026 (3,987) 1,419 (11) 2,901
Cash and cash equivalents, beginning of
year..................................... (28) 3,998 11 11 1,430
-------- --------- -------- -------- --------
Cash and cash equivalents, end of year..... $ 3,998 $ 11 $ 1,430 $ -- $ 4,331
======== ========= ======== ======== ========
Supplemental cash flow information:
Cash paid for income taxes, net of
refunds............................... $ 3,230 $ 1,305 $ (2,773) $ 19 $ 1,046
======== ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 149
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Superior Insurance Company, Inc. ("Superior" or the "Company") was a
wholly-owned subsidiary of Interfinancial Inc. (the "Parent"). Interfinancial
Inc. is a wholly-owned subsidiary of Fortis, Inc. Fortis, Inc. is equally owned
by Fortis AMEV, The Netherlands ("AMEV") and Fortis AG, Brussels, Belgium. As
further discussed in Note 14 the Company was sold by the Parent to GGS Holdings
on May 1, 1996.
The Company writes primarily private passenger automobile insurance
coverage. Approximately one-half of the Company's business is written in the
State of Florida. As such, a significant portion of agents' balances and
uncollected premiums is due from Florida policyholders.
The following is a description of the significant accounting policies and
practices employed:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts, after
intercompany eliminations, of the Company and its wholly owned subsidiaries as
follows: Superior American Insurance Company ("Superior American") and Superior
Guaranty Insurance Company ("Superior Guaranty").
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") which differ from statutory
accounting practices ("SAP") prescribed or permitted for insurance companies by
regulatory authorities in the following respects:
- Certain assets are included in the balance sheet that are excluded as
"Nonadmitted Assets" under statutory accounting.
- Costs incurred by the Company relating to the acquisition of new business
which are expensed for statutory purposes are deferred and amortized on a
straight-line basis over the term of the related policies. Commissions
allowed by reinsurers on business ceded are deferred and amortized with
policy acquisition costs.
- The investment in wholly owned subsidiaries is consolidated for GAAP
rather than valued on the statutory equity method. The net income or loss
and changes in unassigned surplus of the subsidiaries is reflected in net
income for the period rather than recorded directly to unassigned
surplus.
- Investments in bonds are designated at purchase as held to maturity,
trading, or available for sale. Held-to-maturity fixed maturity
investments are reported at amortized cost, and the remaining fixed
maturity investments are reported at fair value with unrealized holding
gains and losses reported in operations for those designated as trading
and as a separate component of stockholders' equity for those designated
as available for sale. All securities have been designated as available
for sale. For SAP, such fixed maturity investments would be reported at
amortized cost or market value based on their NAIC rating.
- The liability for losses and loss adjustment expenses and unearned
premium reserves are recorded net of their reinsured amounts for
statutory accounting purposes.
- Deferred income taxes are not recognized on a statutory basis.
- Credits for reinsurance are recorded only to the extent considered
realizable. Under SAP, credit for reinsurance ceded are allowed to the
extent the reinsurers meet the statutory requirements of the Insurance
Department of the State of Florida, principally statutory solvency.
F-33
<PAGE> 150
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
A reconciliation of statutory net income and capital and surplus to GAAP
net income and stockholders' equity for Superior Insurance Company is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------------------- ------------------- ------------------
CAPITAL CAPITAL NET CAPITAL
AND NET AND INCOME AND NET
SURPLUS INCOME SURPLUS (LOSS) SURPLUS INCOME
------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Statutory balance.................. $56,656 $10,597 $43,577 $ 201 $49,277 $5,639
Non-admitted assets................ 130 -- 225 -- 472 --
Investments market value
adjustment....................... 5,571 -- (1,988) -- 5,279 --
Deferred acquisition costs......... 8,926 (248) 9,004 78 7,574 (1,430)
Losses and loss adjustment
expense.......................... 2,677 59 (1,600) (4,822) -- 600
Deferred income tax................ (154) 615 3,785 1,030 44 (724)
Rent rebate........................ -- -- (333) (333) (277) 55
Pension and other postretirement
benefits......................... (50) 49 (548) (479) (667) (120)
Other.............................. -- (114) (244) (150) (86) 115
------- ------- ------- ------- ------- ------
GAAP balance....................... $73,756 $10,958 $51,878 $(4,475) $61,616 $4,135
======= ======= ======= ======= ======= ======
</TABLE>
PREMIUMS
Premiums are recognized as income ratably over the life of the related
policies and are stated net of ceded premiums. Unearned premiums are computed on
the semimonthly pro rata basis.
INVESTMENTS
During 1993, the Company adopted Financial Accounting Standards Board's
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Accordingly, investments are presented on the following bases:
- Fixed maturities and equity securities -- at market value -- all such
securities are classified as available for sale and are carried at market
value with the unrealized gain or loss as a component of stockholders'
equity.
- Short-term investments -- at amortized cost, which approximates market
- Other investment -- at cost
Realized gains and losses on sales of investments are recorded on the trade
date and are recognized in net income on the specific identification basis.
Other than temporary market value declines are recognized in the period in which
they are determined. Other changes in market values of debt and equity
securities are reflected as unrealized gain or loss directly in stockholders'
equity, net of deferred tax, and, accordingly, have no effect on net income.
Interest and dividend income are recognized as earned.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company includes in cash
and cash equivalents all cash on hand and demand deposits with original
maturities of three months or less.
F-34
<PAGE> 151
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs are comprised of agents' commissions,
premium taxes and certain other costs which are related directly to the
acquisition of new and renewal business, net of expense allowances received in
connection with reinsurance ceded, which have been accounted for as a reduction
of the related policy acquisition costs and are deferred and amortized
accordingly. These costs, to the extent that they are considered recoverable,
are deferred and amortized over the terms of the policies to which they relate.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. All additions to property and
equipment made in 1995 are depreciated based on the straight-line method over
their estimated useful lives. Additions made prior to 1995 are depreciated using
the declining balance method over their estimated useful lives ranging from five
to seven years. Asset and accumulated depreciation accounts are relieved for
dispositions, with resulting gains or losses reflected in net income.
LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for losses and loss adjustment expenses includes estimates
for reported unpaid losses and loss adjustment expenses and for estimated losses
incurred, but not reported. This liability has not been discounted. The
Company's losses and loss adjustment expense liability includes an aggregate
stop-loss program. The Company retains an independent actuarial firm to estimate
the liability. The liability is established using individual case-basis
valuations and statistical analysis as claims are reported. Those estimates are
subject to the effects of trends in loss severity and frequency. While
management believes the liability is adequate, the provisions for losses and
loss adjustment expenses are necessarily based on estimates and are subject to
considerable variability. Changes in the estimated liability are charged or
credited to operations as additional information on the estimated amount of a
claim becomes known during the course of its settlement. The liability for
losses and loss adjustment expenses is reported net of the receivables for
salvage and subrogation of approximately $1,622,000 and $2,242,000 at December
31, 1995 and 1994, respectively.
INCOME TAXES
During January 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. The Company adopted SFAS No. 109 during the year ended December
31, 1993. The Statement adopts the liability method of accounting for deferred
income taxes. Under the liability method, companies establish a deferred tax
liability or asset for the future tax effects of temporary differences between
book and taxable income. Changes in future tax rates result in immediate
adjustments to deferred taxes. (See Note 6.) Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and
liabilities.
REINSURANCE
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies and the terms of the reinsurance
contracts. Premiums ceded to other companies have been reported as a reduction
of premium income.
F-35
<PAGE> 152
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
OTHER INCOME
Other income consists of finance and service fees paid by policyholders in
relation to installment billings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In March 1995, SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, was issued. SFAS No. 121
requires that long-lived assets to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This Statement is effective
for financial statements for fiscal years beginning after December 31, 1995. The
Company intends to adopt SFAS No. 121 in 1996. Based upon management's review
and analysis, adoption of SFAS No. 121 is not expected to have a material impact
on the Company's results of operations in 1996.
VULNERABILITY FROM CONCENTRATION
At December 31, 1995, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
Also at December 31, 1995, the Company did not have a concentration of (1)
business transactions with a particular customer, lender or distributor, (2)
revenues from a particular product or service, (3) sources of supply of labor or
services used in the business, or (4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a serious
impact to the Company's financial condition, except for the market and
geographic concentration described in the following paragraph.
The Company writes nonstandard automobile insurance primarily in California
and Florida. As a result, the Company is always at risk that there could be
significant losses arising in certain geographic areas. The Company protects
itself from such events by purchasing catastrophe insurance.
USE OF ESTIMATES
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
F-36
<PAGE> 153
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS:
Investments are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
AMORTIZED ------------------ MARKET
COST GAIN LOSS VALUE
--------- ------ ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $ 25,312 $ 31 $ (767) $ 24,576
Obligations of states and political subdivisions. 30,567 380 (680) 30,267
Corporate securities............................. 39,969 292 (1,244) 39,017
-------- ------ ------- --------
Total fixed maturities................... 95,848 703 (2,691) 93,860
-------- ------ ------- --------
Equity securities:
Preferred stocks................................. 713 32 -- 745
Common stocks.................................... 5,616 1,201 (422) 6,395
-------- ------ ------- --------
6,329 1,233 (422) 7,140
Short-term investments............................. 5,538 -- -- 5,538
Other investments.................................. 808 -- -- 808
-------- ------ ------- --------
Total investments........................ $108,523 $1,936 $(3,113) $107,346
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
AMORTIZED ------------------ MARKET
COST GAIN LOSS VALUE
--------- ------ ------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $ 28,612 $1,057 $ -- $ 29,669
Obligations of states and political subdivisions. 24,595 1,251 (15) 25,831
Corporate securities............................. 41,070 2,988 (2) 44,056
-------- ------ ------- --------
Total fixed maturities................... 94,277 5,296 (17) 99,556
Equity securities:
Preferred stocks................................. 713 25 -- 738
Common stocks.................................... 5,193 2,370 (231) 7,332
-------- ------ ------- --------
5,906 2,395 (231) 8,070
Short-term investments............................. 8,462 -- -- 8,462
Other investments.................................. 274 -- -- 274
-------- ------ ------- --------
Total investments........................ $108,919 $7,691 $ (248) $116,362
======== ====== ======= ========
</TABLE>
F-37
<PAGE> 154
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED):
The amortized cost and estimated market value of fixed maturities at
December 31, 1995 and 1994, by contractual maturity, are shown in the table
which follows. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
--------------------- --------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED FAIR
COST FAIR VALUE COST VALUE
--------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Maturity:
Due in one year or less............. $ 5,514 $ 5,521 $ 2,508 $ 2,510
Due after one year through five
years............................ 20,403 20,086 31,166 32,164
Due after five years through ten
years............................ 33,522 32,550 33,012 35,338
Due after ten years................. 36,409 35,703 27,591 29,544
------- ------- ------- -------
Total............................ $95,848 $93,860 $94,277 $99,556
======= ======= ======= =======
</TABLE>
Gains and losses realized on sales of investments are as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Gross gains realized on fixed maturities......... $3,040 $ 779 $1,442
Gross losses realized on fixed maturities........ 95 1,270 322
Gross gains realized on equity securities........ 637 694 507
Gross losses realized on equity securities....... 28 457 256
</TABLE>
An analysis of net investment income for the years ended December 31, 1993,
1994, and 1995 follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Fixed maturities................................. $7,939 $6,691 $6,630
Equity securities................................ 461 538 603
Short-term investments........................... 141 106 68
------ ------ ------
Total investment income........................ 8,541 7,335 7,301
Investment expenses.............................. 371 311 208
------ ------ ------
Net investment income............................ $8,170 $7,024 $7,093
====== ====== ======
</TABLE>
Investments with an approximate market value of $17,384,000 and $2,366,000
(approximate amortized cost of $16,907,000 and $2,362,000) as of December 31,
1995 and 1994, respectively, were on deposit in the United States and Canada.
The deposits are required by law to support certain reinsurance contracts,
performance bonds and outstanding loss liabilities on assumed business.
In May 1990, Superior entered into a limited partnership agreement with
AMEV Venture Management ("AVM"), an AMEV affiliate. The Limited Partnership,
AMEV Venture III, is an investment pool which is managed by AVM as a general
partner. The purpose of the pool is to make speculative investments in small
business, with the partners sharing in the profits/losses resulting from the
pool. Superior committed to an investment of $2,000,000 which is approximately
8% of the total pool. This investment is carried at cost and included in, "other
investment". As of May, 1996, the Company had disposed of its remaining interest
in this investment.
F-38
<PAGE> 155
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DEFERRED POLICY ACQUISITION COSTS:
Policy acquisition costs are capitalized and amortized over the life of the
policies. Policy acquisition costs are those costs directly related to the
issuance of insurance policies including commissions and underwriting expenses
net of reinsurance commission income on such policies. Policy acquisition costs
deferred and the related amortization charged to income were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................. $ 9,174 $ 8,926 $ 9,004
Costs deferred during year................. 23,561 23,029 17,606
Amortization during year................... (23,809) (22,951) (19,036)
-------- -------- --------
Balance, end of year....................... $ 8,926 $ 9,004 $ 7,574
======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1995
1994 1995 ACCUMULATED 1995
NET COST DEPRECIATION NET
---- ------ ------------ ----
<S> <C> <C> <C> <C>
Office furniture and equipment... $ 62 $1,099 $ 723 $376
Automobiles...................... -- 20 20 --
Computer equipment............... 295 1,086 765 321
Leasehold improvements........... -- 6 6 --
---- ------ ------ ----
$357 $2,211 $1,514 $697
==== ====== ====== ====
</TABLE>
Accumulated depreciation at December 31, 1994 was approximately $1,370,000.
Depreciation expense related to property and equipment for the years ended
December 31, 1995, 1994 and 1993 was approximately $214,000, $185,000 and
$128,000, respectively.
F-39
<PAGE> 156
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES:
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Balance at January 1.......................... $57,164 $52,610 $54,577
Less reinsurance recoverables................. 361 68 1,099
------- ------- -------
Net balance at January 1.................... 56,803 52,542 53,478
------- ------- -------
Incurred related to:
Current year................................ 92,619 91,064 77,266
Prior years................................. (6,717) 1,314 (4,923)
------- ------- -------
Total incurred...................... 85,902 92,378 72,343
------- ------- -------
Paid related to:
Current year................................ 57,929 56,505 48,272
Prior years................................. 32,234 34,937 31,424
------- ------- -------
Total paid.......................... 90,163 91,442 79,696
------- ------- -------
Net balance at December 31.......... 52,542 53,478 46,125
Plus reinsurance recoverables on unpaid
losses...................................... 68 1,099 987
------- ------- -------
Balance at December 31........................ $52,610 $54,577 $47,112
======= ======= =======
</TABLE>
The foregoing reconciliation shows that redundancies of approximately
$4,923,000 and $6,717,000 in the liabilities at January 1, 1995 and at January
1, 1993, respectively, emerged during 1995 and 1993. These redundancies resulted
from lower than anticipated losses resulting from a change in settlement costs
relating to those estimates. The reconciliation shows that a deficiency of
approximately $1,314,000 in the liabilities at January 1, 1994 emerged during
1994. This deficiency resulted from higher than anticipated losses resulting
primarily from a change in the settlement cost of loss reported in 1990.
The anticipated effect of inflation is implicitly considered when
estimating liabilities for losses and loss adjustment expenses. While
anticipated price increases due to inflation are considered in estimating the
ultimate claim costs, the increase in average severities of claims is caused by
a number of factors that vary with the individual type of policy written. Future
average severities are projected based on historical trends adjusted for
implemented changes in underwriting standards, policy provisions, and general
economic trends. Those anticipated trends are monitored based on actual
development and are modified if necessary.
Case liabilities (and costs of related litigation) have been established
when sufficient information has been developed to indicate the involvement of a
specific insurance policy. In addition, incurred but not reported liabilities
have been established to cover additional exposure on both known and unasserted
claims. Those liabilities are reviewed and updated continually.
6. INCOME TAXES:
For the year ended December 31, 1995, the Company will file a consolidated
federal income tax return with its former subsidiaries owned by Fortis, Inc. An
intercompany tax sharing agreement between the Company and its subsidiaries
provided that income taxes will be allocated based upon the percentage that each
subsidiary's separate return tax liability bears to the total amount of tax
liability calculated for all members of the group in accordance with the
Internal Revenue Code of 1986, as amended. Intercompany tax payments are
remitted at such times as estimated taxes would be required to be made to the
Internal Revenue
F-40
<PAGE> 157
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED):
Service. A reconciliation of the differences between federal tax computed by
applying the federal statutory rate of 35% to income before income taxes and the
income tax provision is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------ ------- ------
<S> <C> <C> <C>
Computed income taxes at statutory rate......... $4,743 $(2,896) $2,024
Dividends received deduction.................... (118) (69) (53)
Tax-exempt interest............................. (1,136) (866) (538)
Proration....................................... 188 140 89
Other........................................... 304 (109) 127
------ ------- ------
Income tax expense (benefit).................... $3,981 $(3,800) $1,649
====== ======= ======
</TABLE>
As described in Note 1, the Company adopted SFAS No. 109 effective in 1993.
The effect on years prior to 1993 of changing to this method was a benefit of
approximately $1,389,000 and is reflected in the consolidated statement of
operations as the cumulative effect of a change in accounting principle. The
current or deferred tax consequences of a transaction are measured by applying
the provisions of enacted tax laws to determine the amount of taxes payable
currently or in future years. The method of accounting for income taxes prior to
SFAS No. 109 provided that deferred taxes, once recorded, were not adjusted for
changes in tax rates.
The net deferred tax asset at December 31, 1995 and 1994 is comprised of
the following (dollars in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Unpaid losses and loss adjustment expenses.............. $1,848 $1,454
Unearned premiums....................................... 3,122 2,873
Allowance for doubtful accounts......................... 109 175
Unrealized losses on investments........................ 412 --
Salvage and subrogation................................. 694 541
Other................................................... 751 257
------- -------
Net deferred tax asset.......................... 6,936 5,300
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs....................... 3,151 2,651
Unrealized gain on investments.......................... -- 2,605
------- -------
3,151 5,256
------- -------
Net deferred tax asset.......................... $3,785 $ 44
======= =======
</TABLE>
The Company is required to establish a "valuation allowance" for any
portion of its deferred tax assets which is unlikely to be realized. No
valuation allowance was established as of December 31, 1995 or 1994 on the
deferred tax assets, since management believes it is more likely than not that
the Company will realize the benefit of its deferred tax assets.
Federal income tax attributed to the Company has been examined through
1993. In the opinion of management, the Company has adequately provided for the
possible effects of future assessments related to prior years.
F-41
<PAGE> 158
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RETIREMENT AND OTHER EMPLOYEE BENEFITS:
As part of the sale of the Company, as described in Note 14, the Company
withdrew from all of the plans mentioned below and paid Fortis approximately
$557,000 to assume the related liabilities.
Superior participated in a non-contributory defined benefit pension plan
("the Pension Plan") administered by Fortis, Inc., covering substantially all
employees who were at least 21 years of age and who had one year of service with
Superior. The Pension Plan provided benefits payable to participants on
retirement or disability and to beneficiaries of participants in the event of
death. The benefits were based on years of service and the employee's
compensation during such years of service. The Company's funding policy was to
contribute annually at least the amount required to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974.
Contributions were intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. The net
periodic pension cost allocated to Superior under the Pension Plan for 1993,
1994 and 1995 was approximately $206,000, $186,000 and $119,000, respectively.
In 1993, pension expense includes a one-time accrual for implementation of SFAS
106 of approximately $81,000.
Superior also participated in a contributory profit sharing plan ("the
Profit Sharing Plan") sponsored by Fortis, Inc. This Profit Sharing Plan covered
all employees with one year of service to the Company and provided benefits
payable to participants on retirement or disability and to beneficiaries of
participants in the event of death. The amount expensed for the Profit Sharing
Plan for 1993, 1994 and 1995 was approximately $252,000, $381,000 and $146,000,
respectively.
In addition to retirement benefits, the Company participated in other
health care and life insurance benefit plans ("postretirement benefits") for
retired employees, sponsored by Fortis, Inc. Health care benefits, either
through a Fortis-sponsored retiree plan for retirees under age 65 or through a
cost offset for individually purchased Medigap policies for retirees over age
65, were available to employees who retired on or after January 1, 1993, at age
55 or older, with 15 or more years of service. Life insurance, on a retiree pay
all basis, was available to those who retired on or after January 1, 1993. Both
the retiree medical and retiree life programs were implemented in 1993. The
Company made contributions to these plans as claims were incurred; no claims
were incurred during 1993, 1994 or 1995. In 1993, the NAIC issued new rules that
required the projected future cost of providing postretirement benefits, such as
health care and life insurance, be recognized as an expense as employees render
service instead of when the benefits are paid.
As required, Superior complied with the new rules beginning in 1995 and
elected to record these costs on a prospective basis. The effect of this
accounting change on the financial statements of the Company was not material.
8. REINSURANCE:
The Company limits the maximum net loss that can arise from a large risk,
or risks in concentrated areas of exposure, by reinsuring (ceding) certain
levels of risks with other insurers or reinsurers. Superior has a casualty
excess of loss treaty which covers losses in excess of $100,000 up to a maximum
of $2,000,000. Superior maintains both auto and property catastrophe excess
reinsurance. Superior's first automobile casualty excess contains limits of
$200,000 excess of $100,000, its second casualty excess contains limits of
$700,000 excess of $300,000 and its third casualty excess has a limit of
$1,000,000 excess of $1,000,000. Further, Superior's first layer of property
catastrophe excess reinsurance covers 95% of $500,000 excess of $500,000 with an
annual limit of $1,000,000 and its second layer or property catastrophe excess
reinsurance covers 95% of $2,000,000 excess of $1,000,000 with an annual limit
of $4,000,000.
F-42
<PAGE> 159
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REINSURANCE (CONTINUED):
The Company remains contingently liable with respect to reinsurance, which
would become an ultimate liability of the Company in the event that such
reinsuring companies might be unable, at some later date, to meet their
obligations under the reinsurance agreements.
In 1993, 1994 and 1995, 100% of amounts recoverable from reinsurers are
with Prudential Re, which maintains an A.M. Best rating of A. Company management
believes amounts recoverable from reinsurers are collectible.
Amounts recoverable from reinsurers relating to unpaid losses and loss
adjustment expenses were approximately $1,099,000 and $987,000 as of December
31, 1994 and 1995, respectively.
Reinsurance activity for 1993, 1994 and 1995, which includes reinsurance
with related parties, is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
DIRECT ASSUMED CEDED NET
------- ------- ----- --------
<S> <C> <C> <C> <C>
1993
Premiums written..................................... $88,877 $26,783 $ 366 $115,294
Premiums earned.................................... 87,618 31,183 665 118,136
Incurred losses and loss adjustment expenses....... 64,228 21,896 222 85,902
Commission expenses................................ 13,700 4,570 -- 18,270
1994
Premiums written..................................... $92,540 $20,366 $ 391 $112,515
Premiums earned.................................... 89,755 23,437 355 112,837
Incurred losses and loss adjustment expenses....... 73,181 20,244 1,047 92,378
Commission expenses................................ 14,165 3,192 -- 17,357
1995
Premiums written..................................... $84,840 $ 9,916 $ 686 $ 94,070
Premiums earned.................................... 84,641 13,592 619 97,614
Incurred losses and loss adjustment expenses....... 63,462 8,777 (104) 72,343
Commission expenses................................ 12,314 1,324 -- 13,638
</TABLE>
The Company has entered into a quota share reinsurance arrangement with
Pafco General Insurance Company ("Pafco"), a wholly owned subsidiary of the
Company's ultimate parent, Symons International Group, Inc. ("Registrant"),
whereby Pafco shall cede 100% of its gross premiums written on or after May 1,
1996 that are in excess of three times outstanding capital and surplus. For
purposes of filing the Company's consolidated financial statements in the
Registration Statement of the Registrant, this transaction has not been
reflected in the Company's consolidated financial statements as of and for the
six-month period ended
F-43
<PAGE> 160
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REINSURANCE (CONTINUED):
June 30, 1996 since this transaction had no net impact on the Registrant's
consolidated financial position or results of operations. The amounts related to
this reinsurance are as follows (dollars in thousands):
<TABLE>
<S> <C>
BALANCE SHEET:
Receivables......................................................... $9,232
Reinsurance recoverables............................................ 4,972
Deferred policy acquisition costs................................... 1,820
Federal income tax receivable....................................... 406
Losses and loss adjustment expenses................................. 8,740
Unearned premiums................................................... 8,755
STATEMENT OF OPERATIONS:
Assumed premiums written............................................ 13,874
Assumed premiums earned............................................. 5,328
Loss and loss adjustment expenses................................... 3,768
Policy acquisition and general and administrative expenses.......... 2,625
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
The Company and its subsidiaries have entered into transactions with
various related parties including transactions with its affiliated companies and
Fortis, Inc. The following transactions occurred with related parties in the
years ended December 31, 1993, 1994, and 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Management fees charged by Fortis................... $ 832 $ 842 $ 729
Reinsurance with affiliated companies, net:
Assumed premiums earned........................... 8,321 9,092 7,786
Assumed losses and loss adjustment expenses
incurred....................................... 8,480 6,266 5,847
Assumed commissions............................... 1,337 1,755 1,112
</TABLE>
10. EFFECTS OF STATUTORY ACCOUNTING PRACTICES AND DIVIDEND RESTRICTIONS:
Under state of Florida insurance regulations, the maximum amount of
dividends Superior, Superior American and Superior Guaranty can pay to their
stockholders without prior approval of the Insurance Commissioner of the State
of Florida is limited. The maximum amount of dividends which Superior can pay to
its stockholders during 1996 is approximately $4,900,000. The maximum amount of
dividends which Superior American can pay to its stockholder during 1996 is
approximately $320,000. The maximum amount of dividends which Superior Guaranty
can pay to its stockholder during 1996 is approximately $277,000.
11. REGULATORY MATTERS:
Superior, Superior American and Superior Guaranty, domiciled in Florida,
prepare their statutory financial statements in accordance with accounting
practices prescribed or permitted by the Florida Department of Insurance
("FDOI"). Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. Superior, Superior American and Superior Guaranty utilize no
significant permitted practices.
F-44
<PAGE> 161
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. REGULATORY MATTERS (CONTINUED):
The NAIC has promulgated risk-based capital ("RBC") requirements for
property/casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks, such as asset
quality, asset and liability matching, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning tool to identify, for the purpose of initiating regulatory action,
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that will supplement the
current system of fixed minimum capital and surplus requirements on a
state-by-state basis. Regulatory compliance is determined by a ratio (the
"Ratio") of the enterprise's regulatory total adjusted capital, as defined by
the NAIC, to its authorized control level RBC, as defined by the NAIC.
Generally, a Ratio in excess of 200% of authorized control level RBC (the
"company action level") requires no corrective actions by Superior, Superior
American, Superior Guaranty, or regulators. As of December 31, 1995, all three
company's RBC level were in excess of the company action level.
12. LEASES:
The Company has certain commitments under long-term operating leases for
its home and sales offices. Rental expense under these commitments was $800,
$483 and $1,012 for 1993, 1994 and 1995, respectively. Future minimum lease
payments required under these noncancelable operating leases are as follows
(dollars in thousands):
<TABLE>
<S> <C>
1996........................................................ $ 948
1997........................................................ 921
1998........................................................ 440
1999........................................................ 350
2000 and thereafter......................................... 58
------
Total............................................. $2,717
======
</TABLE>
13. CONTINGENCIES:
The Company, and its subsidiaries, are named as defendants in various
lawsuits relating to their business. Legal actions arise from claims made under
insurance policies issued by the Company and its subsidiaries. These actions
were considered by the Company in establishing its loss liabilities. The Company
believes that the ultimate disposition of these lawsuits will not materially
affect the Company's operations or financial position.
The increase in number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments may
be partially recovered through a reduction in future premium taxes in certain
states. The Company recognizes its obligations for guaranty fund assessments
when it receives notice that an amount is payable to a guaranty fund. The
ultimate amount of these assessments may differ from that which has already been
assessed.
14. SUBSEQUENT EVENT (UNAUDITED):
On January 31, 1996, the Symons International Group, Inc. ("Symons")
entered into an agreement ("Agreement") with GS Capital Partners II, L.P. to
create a company, GGS Management Holdings, Inc. ("GGS Holdings") to be owned 52%
by Symons and 48% by investment funds associated with Goldman, Sachs & Co.
F-45
<PAGE> 162
SUPERIOR INSURANCE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED):
In connection with the above transaction, on April 30, 1996, GGS Holdings
acquired all of the outstanding shares of common stock of the Company and its
wholly owned subsidiaries, Superior American and Superior Guaranty, for cash of
approximately $66,389,000.
The acquisition of the Company was accounted for under the purchase method
of accounting and was recorded as follows:
<TABLE>
<S> <C>
Assets Acquired:
Invested Assets............................................. $118,665,000
Receivables................................................. 35,223,000
Deferred Acquisition Costs.................................. 7,925,000
Other Assets................................................ 1,981,000
------------
Total....................................................... 163,794,000
------------
Liabilities Assumed:
Unpaid Losses and Loss Adjustment Expenses.................. 44,423,000
Unearned Premiums........................................... 45,280,000
Other Liabilities........................................... 10,863,000
------------
Total....................................................... 100,566,000
------------
Net Assets Acquired........................................... 63,228,000
Purchase Price................................................ 66,389,000
------------
Goodwill...................................................... $ 3,161,000
============
</TABLE>
Goodwill is amortized over a 25 year period on a straight line basis based
upon management's estimate of the expected benefit period.
Symons' results from operations for the six months ended June 30, 1996
include the results of the Company subsequent to April 30, 1996 as follows:
<TABLE>
<S> <C>
Gross Premiums.................................................. $25,202,000
===========
Net Premiums Earned............................................. $23,429,000
Net Investment and Other Income................................. 2,060,000
-----------
Total Revenue................................................... 25,489,000
-----------
Losses and Loss Adjustment Expenses............................. 18,804,000
Policy Acquisition and General and Administration Expenses...... 6,149,000
-----------
Total Expenses.................................................. 24,953,000
-----------
Income Before Taxes and Minority Interest....................... 536,000
Income Taxes.................................................... 182,000
-----------
Income before Minority Interest................................. 354,000
Minority Interest............................................... 169,000
-----------
Net Income...................................................... $ 185,000
===========
</TABLE>
Amortization includes goodwill, as previously discussed, and deferred debt
and organizational costs of approximately $1,900,000 which are being amortized
by Symons over 5 to 6 years on the straight line basis. The impact on the net
income of Symons of the aforementioned items was a reduction of $265,000.
F-46
<PAGE> 163
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Organizational Structure of SIG and Its
Principal Subsidiaries.................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 8
The Company................................. 19
Use of Proceeds............................. 22
Dividend Policy............................. 23
Dilution.................................... 23
Capitalization.............................. 24
Unaudited Pro Forma Consolidated Statements
of Operations............................. 25
Selected Consolidated Historical Financial
Data of Symons International Group,
Inc....................................... 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Company................. 32
Selected Consolidated Historical Financial
Data of Superior Insurance Company........ 47
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Superior.................... 48
Business.................................... 53
Management.................................. 82
Certain Relationships and Related
Transactions.............................. 90
Securities Ownership of Management and
Goran..................................... 100
Description of Capital Stock................ 102
Shares Eligible for Future Sale............. 104
Underwriting................................ 105
Legal Matters............................... 106
Experts..................................... 107
Available Information....................... 107
Glossary of Selected Insurance and Certain
Defined Terms............................. 108
Index to Financial Statements............... F-1
</TABLE>
------------------------
UNTIL , 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
3,000,000 SHARES
SYMONS LOGO
SYMONS INTERNATIONAL
GROUP, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
ADVEST, INC.
MESIROW FINANCIAL, INC.
, 1996
---------------------------------------------------------
---------------------------------------------------------
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1).
<TABLE>
<S> <C>
Blue Sky Legal Services and Registration Fees................ $ 25,000
Nasdaq Listing Fee NASD Fee.................................. 4,640
Securities and Exchange Commission Registration Fee.......... 14,276
Legal Services and Disbursements -- Issuer's counsel......... 325,000
Auditing and Accounting Services............................. 500,000
Consultant's Fee............................................. 200,000
Transfer Agent Fee........................................... 2,000
Printing, engraving and postage costs........................ 300,000
Other expenses............................................... 29,024
----------
TOTAL(2)........................................... $1,400,000
==========
</TABLE>
- ---------------
(1) Costs represented by salaries and wages of regular employees and officers of
the Registrant are excluded.
(2) All the above items, except the SEC Registration Fee, Nasdaq Listing Fee and
NASD Fee, are estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Chapter 37 of the Indiana Business Corporation Law, as amended (the
"ICBL"), grants to each corporation broad powers to indemnify directors,
officers, employees or agents against liabilities and expenses incurred in
certain proceedings if the conduct in question was found to be in good faith and
was reasonably believed to be in the corporation's best interests. The
indemnification rights provided by the Registrant's articles of incorporation
and by-laws generally provide the maximum indemnification protection available
under law to the directors and officers of the Registrant, subject to certain
restrictions on such indemnification in the event of the occurrence of certain
changes of control and subject to restrictions on indemnification for
liabilities incurred by directors and officers who unsuccessfully defend actions
brought against them by or in right of the corporation. Directors, officers
employees or agents of the Registrant who also are directors, officers,
employees or agents of Goran receive similar indemnification protection under
Goran's by-laws. In addition, Goran carries directors and officers insurance
policies.
Pursuant to the provisions of the Underwriting Agreement among the
Registrant, Goran and the Underwriters, the Underwriters severally agree to
indemnify the Registrant, its directors, its officers who signed the
Registration Statement and its controlling persons against any and all loss,
liability, claim, damage or expense, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the Registration Statement and prospectus (or any amendment thereto),
including filings made under Rule 430A and Rule 434 of the Securities Act of
1933, if applicable, or any preliminary prospectus (or any amendment and
supplement thereto) (collectively, the "Documents") in reliance upon and in
conformity with written information furnished to the Registrant by such
Underwriter through Advest, Inc. or Mesirow Financial, Inc. expressly for use in
the Documents.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant was incorporated on March 30, 1987. The Registrant is a
wholly-owned, direct subsidiary of Goran Capital Inc. ("Goran") and will remain
so until consummation of the Offering. The original issuance of 1,000 shares of
Common Stock to Goran upon the Registrant's incorporation did not involve any
public offering and was exempt from registration under section 4(2) of the
Securities Act of 1933, as amended ("Securities Act").
S-1
<PAGE> 165
Effective immediately upon the filing of the Restated Articles of
Incorporation of the Registrant with the Secretary of State of the State of
Indiana on July 29, 1996, the Board of Directors of the Registrant declared a
7,000-to-1 stock split whereby each outstanding share of Common Stock will be
converted into 7,000 shares of Common Stock, such stock split to be payable to
Goran as the Registrant's sole shareholder immediately prior to consummation of
the Offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The exhibits furnished with this Registration Statement are listed
beginning on page E-l.
(b) The following financial statement schedules of the Registrant are
included in the Registration Statement beginning on page S-4:
Report of Independent Accountants
Schedule I -- Summary of Investments -- Other than Investments in Related
Parties
Schedule II -- Condensed Financial Information of Registrant
Schedule IV -- Reinsurance
Schedule V -- Valuation and Qualifying Accounts
Schedule VI -- Supplemental Information Concerning Property-Casualty
Insurance Operations
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of an action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(3) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
S-2
<PAGE> 166
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Indianapolis, State of
Indiana, on October 28, 1996.
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ ALAN G. SYMONS
--------------------------------------
Alan G. Symons,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------------------------- ------------------ -------------------
<S> <C> <C> <C>
(1) Principal Executive Officer:
/s/ ALAN G. SYMONS Chief Executive
----------------------------------------------- Officer
Alan G. Symons
(2) Principal Financial and Accounting Officer:
/s/ GARY P. HUTCHCRAFT* Vice President
----------------------------------------------- Chief Financial
Gary P. Hutchcraft Officer
(3) The Board of Directors:
/s/ G. GORDON SYMONS* Director
-----------------------------------------------
G. Gordon Symons
/s/ ALAN G. SYMONS Director
-----------------------------------------------
Alan G. Symons
/s/ DOUGLAS H. SYMONS* Director
-----------------------------------------------
Douglas H. Symons
/s/ JOHN J. McKEATING* Director
-----------------------------------------------
John J. McKeating
----------------------------------------------- Director
Robert C. Whiting
/s/ JAMES G. TORRANCE* Director
-----------------------------------------------
James G. Torrance
/s/ DAVID R. DOYLE*
----------------------------------------------- Director
David R. Doyle
*By: /s/ ALAN G. SYMONS
-----------------------------------------------
Alan G. Symons, Attorney-in-Fact
</TABLE>
October 28, 1996
S-3
<PAGE> 167
Board of Directors and Stockholder of
Symons International Group, Inc. and Subsidiaries
In connection with our audits of the consolidated balance sheets of Symons
International Group, Inc. and subsidiaries as of December 31, 1994 and 1995, and
the related consolidated statements of operations, changes in stockholder's
equity and cash flows for the three years in the period ended December 31, 1995,
which financial statements are included in the registration statement, we have
also audited the financial statement schedules listed in Item 16 herein.
In our opinion, these financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included herein.
/S/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 18, 1996
S-4
<PAGE> 168
SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS AT DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ESTIMATED
MARKET AMOUNT ON
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
- ------------------ ------- --------- -------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
Government and government agencies................ $10,978 $11,040 $11,040
States and municipalities......................... 1,142 1,198 1,198
Public utilities.................................. 328 328 328
All other corporate bonds......................... 364 365 365
------- ------- -------
Total fixed maturities....................... 12,812 12,931 12,931
Equity securities:
Common stocks........................................ 4,318 4,134 4,134
Preferred stocks..................................... 100 97 97
------- ------- -------
Total equity securities...................... 4,418 4,231 4,231
Mortgage loans on real estate........................ 2,920 2,920 2,920
Real estate.......................................... 487 487 487
Other long-term investments.......................... 50 50 50
Short-term investments............................... 5,283 5,283 5,283
------- ------- -------
Total investments............................ $25,970 $25,902 $25,902
======= ======= =======
</TABLE>
S-5
<PAGE> 169
SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
AS OF DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Assets:
Investments in and advances to related parties......................... $13,306 $18,589
Cash and cash equivalents.............................................. 0 0
Deferred income taxes.................................................. 0 52
Property and equipment................................................. 194 337
Other.................................................................. 274 57
Intangible Assets...................................................... 88 0
------- -------
Total Assets................................................... $13,862 $19,035
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Payables to affiliates................................................. $ 7,870 $ 8,671
Federal income tax payable............................................. 176 0
Line of credit and notes payable....................................... 1,250 0
Other.................................................................. 311 829
------- -------
Total Liabilities.............................................. 9,607 9,500
------- -------
Stockholder's equity:
Common Stock, no par, 7,000,000 shares authorized, issued and
outstanding......................................................... 1,000 1,000
Additional paid-in capital............................................. 3,130 3,130
Unrealized loss on investments (net of deferred taxes of $260 in 1994,
and $23 in 1995).................................................... (504) (45)
Retained Earnings...................................................... 629 5,450
------- -------
Total Stockholder's equity..................................... 4,255 9,535
------- -------
Total liabilities and stockholder's equity..................... $13,862 $19,035
======= =======
</TABLE>
S-6
<PAGE> 170
SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Net investment income............................................ $ 20 $ 37 $1,522
Net realized investment losses................................... -- (8) (52)
Other income..................................................... 8,873 8,533 7,626
------ ------ ------
Total revenue.......................................... 8,893 8,562 9,096
Expenses:
Policy acquisition and general and administrative expenses....... 7,935 7,528 7,891
Interest expense................................................. 763 874 621
------ ------ ------
Total expenses......................................... 8,698 8,402 8,512
Income before taxes and minority interest........................ 195 160 584
Provision for income taxes:
Current Year................................................... 220 176 293
Prior Year..................................................... 76 (70) --
------ ------ ------
Provision for income taxes....................................... 296 106 293
Net income before equity in net income of subsidiaries........... (101) 54 291
Equity in net income of subsidiaries............................. (222) 2,063 4,530
------ ------ ------
Net income for the period........................................ $ (323) $2,117 $4,821
====== ====== ======
</TABLE>
S-7
<PAGE> 171
SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Net income....................................................... $ (323) $ 2,117 $ 4,821
Cash flows from operating activities:
Adjustments to reconcile net cash provided by (used in)
operations:
Equity in net income (losses) of subsidiaries.................. 222 (2,063) (4,530)
Depreciation of property and equipment......................... 83 91 37
Net realized capital loss...................................... -- 8 (52)
Amortization of intangible assets.............................. 252 169 88
Net changes in operating assets and liabilities:
Federal income taxes recoverable (payable)..................... (122) 206 (176)
Other assets................................................... (120) (70) 216
Other liabilities.............................................. 326 (1,060) 518
------- ------- -------
Net cash provided from (used in) operations...................... 318 (602) 922
Cash flow used in investing activities:
Purchase of property and equipment............................... (139) (58) (179)
------- ------- -------
Net cash used in investing activities............................ (139) (58) (179)
Cash flows provided by (used in) financing activities:
Repayment of loans............................................... (2,000) (1,750) (1,250)
Contributed capital.............................................. 1,600 -- --
Loans from related parties....................................... 200 2,410 507
------- ------- -------
Net cash provided by (used in) financing activities.............. (200) 600 (743)
Increase (decrease) in cash and cash equivalents................. (21) -- --
------- ------- -------
Cash and cash equivalents -- beginning of year................... 21 -- --
------- ------- -------
Cash and cash equivalents -- end of year......................... $ -- $ -- $ --
======= ======= =======
</TABLE>
S-8
<PAGE> 172
SYMONS INTERNATIONAL GROUP, INC. -- CONSOLIDATED
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
BASIS OF PRESENTATION
The condensed financial information should be read in conjunction with the
consolidated financial statements of Symons International Group, Inc. The
condensed financial information includes the accounts and activities of the
Parent Company which acts as the holding company for the insurance subsidiaries.
S-9
<PAGE> 173
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
ASSUMED CEDED OF AMOUNT
PROPERTY AND LIABILITY DIRECT FROM OTHER TO OTHER NET ASSUMED
INSURANCE PREMIUMS AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- --------------------------------------------- -------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995................. $123,381 $1,253 $71,187 $53,447 2.3%
Year ended December 31, 1994................. $102,178 956 67,995 $35,139 2.7%
Year ended December 31, 1993................. $ 88,847 89 57,176 $31,760 0.3%
</TABLE>
S-10
<PAGE> 174
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT END
DESCRIPTION OF PERIOD EXPENSES(1) ACCOUNTS RESERVES OF PERIOD
- ---------------------------------------- ---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993
Allowance for doubtful accounts......... $ 345 $1,397 -- $ 563(2) $ 1,179
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts......... $1,179 (86) -- (116)(2) $ 1,209
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts......... $1,209 2,523 -- 2,805(2) $ 927
</TABLE>
- ---------------
(1) In 1993, the Company began to direct bill policyholders rather than agents
for premiums. Therefore, bad debt expenses in 1993 increased accordingly.
During late 1994 and into 1995, the Company experienced an increase in
premiums written. During 1995, the Company further evaluated the
collectibility of this business and incurred a bad debt expense of
approximately $2.5 million. The Company continually monitors the adequacy of
its allowance for doubtful accounts and believes the balance of such
allowance at December 31, 1993, 1994 and 1995 was adequate.
(2) Uncollectible accounts written off, net of recoveries.
S-11
<PAGE> 175
SYMONS INTERNATIONAL GROUP, INC., AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY -- CASUALTY INSURANCE OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
LOSSES AND LOSS
ADJUSTMENT
EXPENSES
RESERVES INCURRED PAID AMORTIZATION
DEFERRED FOR LOSSES RELATED TO LOSSES OF DEFERRED
POLICY AND LOSS NET ---------------- AND LOSS POLICY
ACQUISITION ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR ADJUSTMENT ACQUISITION PREMIUMS
COSTS EXPENSES PREMIUMS PREMIUMS INCOME YEARS YEARS EXPENSES COSTS WRITTEN
----------- ---------- -------- -------- ---------- ------- ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year
Ended
December
31,
1995... $ 2,379 $ 59,421 $17,497 $49,641 $1,173 $35,184 $ 787 $ 31,075 $7,150 $124,634
Year
Ended
December
31,
1994... $ 1,479 $ 29,269 $14,416 $32,126 $1,241 $26,268 $ 202 $ 26,995 $4,852 $103,134
Year
Ended
December
31,
1993... $ 752 $ 54,143 $ 8,060 $31,428 $1,489 $23,931 $1,149 $ 27,109 $8,962 $88,936
</TABLE>
Note: All amounts in the above table are net of the effects of reinsurance and
related commission income, except for net investment income regarding which
reinsurance is not applicable, premiums written, liabilities for losses and loss
adjustment expenses, and unearned premiums which are stated on a gross basis.
S-12
<PAGE> 176
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
1 Form of Underwriting Agreement, dated , 1996, among the
Registrant, Goran Capital Inc., Advest, Inc. and Mesirow Financial, Inc..... ***
3.1 Registrant's Restated Articles of Incorporation............................. ***
3.2 Registrant's Restated Code of Bylaws........................................ ***
4.1 Article V -- "Number, Terms and Voting Rights of Shares" of the Registrant's
Restated Articles of Incorporation, incorporated by reference to the
Registrant's Articles of Incorporation filed hereunder as Exhibit 3.1.
4.2 Article I -- "Shareholders" and Article VI -- "Stock Certificates, Transfer
of Shares, Stock Records" of the Registrant's Restated Code of Bylaws,
incorporated by reference to the Registrant's Restated Code of Bylaws filed
hereunder as Exhibit 3.2
5 Opinion of Barnes & Thornburg re legality of the securities being
registered.................................................................. -----
10.1 Stock Purchase Agreement among Goran Capital Inc., Registrant, Fortis, Inc. *
and Interfinancial, Inc. dated January 31, 1996.............................
10.2(1) Stock Purchase Agreement among GGS Management Holdings, Inc., GS Capital
Partners II, L.P., Goran Capital Inc. and Registrant dated January 31, *
1996........................................................................
10.2(2) First Amendment to Stock Purchase Agreement by and among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Goran Capital, Inc. and ***
Registrant dated March 28, 1996.............................................
10.2(3) Second Amendment to Stock Purchase Agreement by and among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Goran Capital, Inc. and ***
Registrant dated April 30, 1996.............................................
10.2(4) Third Amendment to Stock Purchase Agreement by and among GGS Management
Holdings, Inc., GS Capital Partners II, L.P., Goran Capital, Inc., ***
Registrant and Pafco General Insurance Company dated September , 1996.....
10.3(1) Stockholder Agreement among GGS Management Holdings, Inc., GS Capital
Partners II, L.P., Registrant and Goran Capital Inc. dated April 30, *
1996........................................................................
10.3(2) Amended and Restated Stockholder Agreement among GGS Management Holdings,
Inc., GS Capital Partners II, L.P., Registrant and Goran Capital Inc. and ***
Registrant dated September , 1996.........................................
10.4 Registration Rights Agreement among GGS Management Holdings, Inc., GS
Capital Partners II, L.P., Goran Capital Inc. and Registrant dated April 30, *
1996........................................................................
10.5 Management Agreement among Superior Insurance Company, Superior American
Insurance Company, Superior Guaranty Insurance Company and GGS Management, ***
Inc. dated April 30, 1996...................................................
10.6 Management Agreement between Pafco General Insurance Company and Registrant
dated May 1, 1987, as assigned to GGS Management, Inc. effective April 30, ***
1996........................................................................
10.7 Administration Agreement between IGF Insurance Company and Registrant dated ***
February 26, 1990, as amended...............................................
10.8 Agreement between IGF Insurance Company and Registrant dated November 1, ***
1990........................................................................
***
10.9 Subordinated Promissory Note of IGF Holdings, Inc. dated April 29, 1996.....
***
10.10(1) Promissory Note of IGF Holdings, Inc. dated April 29, 1996..................
10.10(2) Commercial Guaranty of Symons International Group, Ltd. dated April 29, ***
1996........................................................................
10.10(3) Intercreditor and Subordination Agreement between IGF Holdings, Inc. and ***
Union Federal Savings Bank of Indianapolis dated April 29, 1996.............
10.10(4) Commercial Pledge and Security Agreement between IGF Holdings, Inc. and ***
Union Federal Savings Bank of Indianapolis dated April 29, 1996.............
</TABLE>
E-1
<PAGE> 177
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
10.10(5) Pledge Agreement between IGF Holdings, Inc. and Pafco General Insurance
Company dated April 29, 1996................................................ ***
10.11(1) Credit Agreement between GGS Management, Inc., various Lenders and The Chase
Manhattan Bank (National Association), as Administrative Agent, dated April
30, 1996.................................................................... *
10.11(2) Pledge Agreement between GGS Management Holdings, Inc. and Chase Manhattan
Bank., N.A. dated April 30, 1996............................................ ***
10.11(3) Pledge Agreement between GGS Management, Inc. and Chase Manhattan Bank.,
N.A. dated April 30, 1996................................................... ***
10.12(1) Promissory Note of Registrant to Goran Capital Inc.......................... -----
10.12(2) Promissory Note of Registrant to Granite Reinsurance Company Ltd............ -----
10.13 Registration Rights Agreement between Goran Capital, Inc. and Registrant
dated May 29, 1996.......................................................... -----
10.14(1) License, Improvement and Support Agreement between Tritech Financial
Systems, Inc. and Registrant dated August 30, 1995.......................... -----
10.14(2) License of Computer Software between Tritech Financial Systems, Inc. and
Registrant dated August 30, 1995............................................ -----
10.15(1) Agreement among Cliffstan Investments, Inc., Pafco General Insurance Company
and Gage North Holdings, Inc. dated September 1, 1989....................... -----
10.15(2) Purchase of Promissory Note and Assignment of Security Agreement between
Pafco General Insurance Company and Granite Reinsurance Company, Ltd., dated
September 30, 1992.......................................................... -----
10.15(3) Guarantee of Alan G. Symons dated April 22, 1994............................ -----
10.15(4) Share Pledge Agreement between Symons International Group, Ltd. and Pafco
General Insurance Company dated April 22, 1994.............................. -----
10.16(1) Employment Agreement between GGS Management Holdings, Inc. and Alan G.
Symons dated January 31, 1996............................................... -----
10.16(2) Employment Agreement between GGS Management Holdings, Inc. and Douglas H.
Symons dated January 31, 1996............................................... -----
10.17(1) Employment Agreement between IGF Insurance Company and Dennis G. Daggett
effective February 1, 1996.................................................. ***
10.17(2) Employment Agreement between IGF Insurance Company and Thomas F. Gowdy
effective February 1, 1996.................................................. ***
10.18 Employment Agreement between Superior Insurance Company and Roger C.
Sullivan, Jr. dated May 9, 1996............................................. -----
10.19 Employment Agreement between Goran Capital, Inc. and Gary P. Hutchcraft
effective June 30, 1996..................................................... -----
10.20 Goran Capital, Inc. Stock Option Plan....................................... -----
10.21 GGS Management Holdings, Inc. 1996 Stock Option Plan........................ ***
10.22 Registrant's 1996 Stock Option Plan......................................... -----
10.24 Registrant's Retirement Savings Plan........................................ -----
10.25 Insurance Service Agreement between Mutual Service Casualty Company and IGF
Insurance Company dated May 20, 1996........................................ -----
10.26 Amended and Restated Trust Indenture between Goran Capital Inc. and Montreal
Trust Company of Canada dated December 29, 1992 and supplemented April 30,
1996........................................................................ -----
</TABLE>
E-2
<PAGE> 178
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
10.27(1) Automobile Third Party Liability and Physical Damage Quota Share Reinsurance
Contract between Pafco General Insurance Company and Superior Insurance
Company..................................................................... -----
10.27(2) Crop Hail Quota Share Reinsurance Contract and Crop Insurance Service
Agreement between Pafco General Insurance Company and IGF Insurance
Company..................................................................... -----
10.27(3) Automobile Third Party Liability and Physical Damage Quota Share Reinsurance
Contract between IGF Insurance Company and Pafco General Insurance
Company..................................................................... -----
10.27(4) Multiple Line Quota Share Reinsurance Contract between Pafco General
Insurance Company and Granite Reinsurance Company........................... -----
10.27(5) Standard Revenue Agreement between Federal Crop Insurance Corporation and
IGF Insurance Company....................................................... -----
10.28 Commitment Letter, effective October 24, 1996, between Fifth Third Bank of
Central Indiana and the Registrant.......................................... -----
21 Subsidiaries of the Registrant.............................................. ***
23.1 Consent of Coopers & Lybrand L.L.P.......................................... -----
23.2 Consent of Barnes & Thornburg (contained in Exhibit 5).
24 Power of Attorney (included on page S-3 of the Registration Statement).
27 Financial Data Schedules (to be filed electronically)....................... ***
</TABLE>
- ---------------
* Incorporated by reference as an Exhibit to the Current Report on Form 8-K of
Goran Capital Inc. originally filed as of May 14, 1996 and amended as of
July 15, 1996.
** To be filed by amendment.
*** Previously filed as an Exhibit to this Registration Statement.
E-3
<PAGE> 1
EXHIBIT 5
October 29, 1996
Board of Directors
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Gentlemen:
You have requested our opinion in connection with the Form S-1
Registration Statement (the "Registration Statement") to be filed by Symons
International Group, Inc., an Indiana corporation (the "Corporation"), with
respect to the offer and sale by the Corporation of up to 3,450,000 shares of
Common Stock, no par value, of the Corporation (the "Shares") of which
3,000,000 Shares are being sold by the Corporation and 450,000 Shares are
subject to over-allotment options granted to the underwriters by the
Corporation. We have examined such records and documents and have made such
investigation of law as we have deemed necessary in the circumstances.
Based on that examination and investigation, it is our opinion that the
Shares are duly authorized and will be, when sold in the manner described in
the Securities Act of 1933, as amended, and applicable state blue sky laws,
validly issued, fully paid and non-assessable.
The foregoing opinion is limited to the application of the internal
laws of the State of Indiana and applicable federal law, and no opinion is
expressed herein as to any matter governed by the laws of any other
jurisdiction.
We consent to the use of our name under the caption "Legal Matters" in
the Prospectus included in the Registration Statement and to the filing of this
opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
/s/ Barnes & Thornburg
BARNES & THORNBURG
<PAGE> 1
EXHIBIT 10.12(1)
T E R M S H E E T - A M E N D E D
----------------------------------
LENDER: GORAN CAPITAL INC.
BORROWER: SYMONS INTERNATIONAL GROUP, INC.
PRINCIPAL AMOUNT AND $500,000.00 DATED JANUARY 30, 1992
ORIGINAL LOAN DATE: $500,000.00 DATED APRIL 3, 1992
$500,000.00 DATED JUNE 30, 1992
$160,000.00 DATED OCTOBER 1, 1992
$150,000.00 DATED DECEMBER 31, 1992
$140,000.00 DATED APRIL 19, 1993
INTEREST: 10% PER ANNUM, COMPOUNDED SEMI-ANNUALLY
PRINCIPAL AND INTEREST
REPAYMENT: PAYABLE UPON DEMAND
SYMONS INTERNATIONAL GROUP, INC. GORAN CAPITAL, INC.
PER: /s/ DOUGLAS H. SYMONS PER /s/ BRUCE K. DWYER
--------------------- ------------------------------
DOUGLAS H. SYMONS BRUCE K. DWYER, VICE PRESIDENT
DATE: 1-5-96 DATE: 1-5-96
--------------------- -----------------------
<PAGE> 2
TERM SHEET
LENDER: Goran Capital Inc.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $500,000.00 U.S.
DATE OF LOAN: January 30, 1992
TERM: 41 months; Expiry June 30, 1995
INTEREST: 10% per annum; payable monthly in
arrears; first payment July 31, 1992,
interest to be accrued until then.
PRINCIPAL REPAYMENT: 11 quarterly payments of $25,000.00
U.S. each due on the last day of each
quarter commencing September, 30, 1992,
to and including March 30, 1995 and one
payment of $225,000.00 U.S. due June
30, 1995.
WITHHOLDING TAX: Borrower shall withhold appropriate
amount for taxes.
MISCELLANEOUS: Formal agreement to be executed.
DATED the 19th day of May, 1992.
GORAN CAPITAL INC. SYMONS INTERNATIONAL GROUP, INC.
per: /s/ Douglas Symons per: /s/ Donald J. Goodenow
-------------------- ----------------------------------
VICE PRESIDENT/COO EXECUTIVE VICE PRESIDENT/SECRETARY
<PAGE> 3
TERM SHEET
----------
LENDER: Goran Capital Inc.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $500,000.00 U.S.
DATE OF LOAN: April 3, 1992
TERM: 39 months; Expiry March 31, 1995
INTEREST: 10% per annum; payable monthly in
arrears; first payment July 31, 1992,
interest to be accrued until then.
PRINCIPAL REPAYMENT: 11 quarterly payments of $25,000.00
U.S. each due on the last day of each
quarter commencing September, 30, 1992,
to and including March 30, 1995 and one
payment of $225,000.00 U.S. due June
30, 1995.
WITHHOLDING TAX: Borrower shall withhold appropriate
amount for taxes.
MISCELLANEOUS: Formal agreement to be executed.
DATED the 19th day of May, 1992.
GORAN CAPITAL INC. SYMONS INTERNATIONAL GROUP, INC.
per: /s/ Douglas Symons per: /s/ Donald J. Goodenow
-------------------- ----------------------------------
VICE PRESIDENT/COO EXECUTIVE VICE PRESIDENT/SECRETARY
<PAGE> 4
TERM SHEET
LENDER: Goran Capital Inc.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $500,000 U.S.
DATE OF LOAN: June 30, 1992
INTEREST: 10% per annum; payable on demand compounded
semiannually
PRINCIPAL REPAYMENT: Payable on demand
REFERENCE: Chemical Bank
GORAN CAPITAL INC. SYMONS INTERNATIONAL GROUP, INC.
PER: /s/ Bruce K. Dwyer PER: /s/ Douglas Symons
----------------------------- ------------------------------
DATE: Feb. 3, 1993 DATE: 2/10/93
---------------------------- -----------------------------
<PAGE> 5
TERM SHEET
LENDER: Goran Capital Inc.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $160,000 U.S.
DATE OF LOAN: October 1, 1992
INTEREST: 10% per annum; payable on demand compounded
semiannually
PRINCIPAL REPAYMENT: Payable on demand
REFERENCE: Chemical Bank
GORAN CAPITAL INC. SYMONS INTERNATIONAL GROUP, INC.
PER: /s/ Bruce K. Dwyer PER: /s/ Douglas Symons
--------------------------- -----------------------------
DATE: Feb. 3, 1993 DATE: 2/10/93
-------------------------- ----------------------------
<PAGE> 6
TERM SHEET
LENDER: Goran Capital Inc.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $150,000 U.S.
DATE OF LOAN: December 31, 1992
INTEREST: 10% per annum; payable on demand
compounded semiannually
PRINCIPAL REPAYMENT: Payable on demand
REFERENCE: Chemical Bank
GORAN CAPITAL INC. SYMONS INTERNATIONAL GROUP, INC.
PER: /s/ Bruce K. Dwyer PER: /s/ Douglas Symons
-------------------------- ------------------------------
DATE: Feb. 3, 1993 DATE: 2/10/93
------------------------- -----------------------------
<PAGE> 7
T E R M S H E E T
------------------
LENDER: GORAN CAPITAL INC.
BORROWER: SYMONS INTERNATIONAL GROUP, INC.
PRINCIPAL AMOUNT: $140,000.00 (U.S.)
DATE OF LOAN: APRIL 19, 1993
INTEREST: 10% PER ANNUM, COMPOUNDED SEMI-ANNUALLY
PRINCIPAL AND INTEREST
REPAYMENT: PAYABLE UPON DEMAND
SYMONS INTERNATIONAL GROUP, INC. GORAN CAPITAL, INC.
PER: /s/ Douglas H. Symons PER: /s/ Bruce K. Dwyer
---------------------------- ---------------------------------
DOUGLAS H. SYMONS, PRESIDENT BRUCE K. DWYER, VICE PRESIDENT
DATE: 4-19-93 DATE: 4-19-93
---------------------------- ---------------------------------
<PAGE> 1
EXHIBIT 10.12(2)
T E R M S H E E T - A M E N D E D
LENDER: GRANITE REINSURANCE COMPANY, LTD.
BORROWER: SYMONS INTERNATIONAL GROUP, INC.
PRINCIPAL AMOUNT AND $2,500,000.00 DATED MARCH 26, 1992
ORIGINAL LOAN DATE: $200,000.00 DATED JUNE 29, 1995
INTEREST: 10% SIMPLE ANNUAL INTEREST RATE.
PRINCIPAL AND INTEREST
REPAYMENT: PAYABLE UPON DEMAND
WITHHOLDING TAX: BORROW SHALL WITHHOLD APPROPRIATE AMOUNT FOR TAXES.
SYMONS INTERNATIONAL GROUP, INC. GRANITE REINSURANCE COMPANY, LTD
PER: /s/ Donald J. Goodenow PER: /s/ Douglas H. Symons
----------------------------- ------------------------------
DONALD J. GOODENOW, EXECUTIVE V.P. DOUGLAS H. SYMONS, VICE PRESIDENT
DATE: 1-5-96 DATE: 1-5-96
----------------------------- ------------------------------
<PAGE> 2
TERM SHEET
LENDER: Granite Reinsurance Company Ltd.
BORROWER: Symons International Group, Inc.
PRINCIPAL AMOUNT: $2,500,000.00 U.S.
DATE OF LOAN: March 26th, 1992
TERM: 39 months; Expiry June 30, 1995
INTEREST: 10% per annum; payable monthly in
arrears; first payment July 31, 1992,
interest to be accrued until then.
PRINCIPAL REPAYMENT: 11 quarterly payments of $125,000.00
U.S. each due on the last day of each
quarter commencing September, 30, 1992,
to and including March 30, 1995 and one
payment of $1,125,000.00 U.S. due June
30, 1995.
WITHHOLDING TAX: Borrower shall withhold appropriate
amount for taxes.
MISCELLANEOUS: Formal agreement to be executed.
Consent of Manufacturers Hanover Trust to
be obtained.
DATED the 19th day of May, 1992.
GRANITE REINSURANCE COMPANY LTD. SYMONS INTERNATIONAL GROUP, INC.
per: /s/ Douglas Symons per: /s/ Donald J. Goodenow
-------------------- ----------------------------------
VICE PRESIDENT EXECUTIVE VICE PRESIDENT/SECRETARY
<PAGE> 3
TERM SHEET
LENDER: GRANITE REINSURANCE COMPANY LTD.
BORROWER: SYMONS INTERNATIONAL GROUP, INC.
PRINCIPAL AMOUNT: $200,000.00 (U.S.)
DATE OF LOAN: JUNE 29, 1995
INTEREST; 10% PER ANNUM.
PRINCIPAL AND INTEREST
REPAYMENT: PAYABLE UPON DEMAND
WITHHOLDING TAX: BORROW SHALL WITHHOLD APPROPRIATE AMOUNT FOR
TAXES.
SYMONS INTERNATIONAL GROUP, INC. GRANITE REINSURANCE COMPANY LTD.
PER: /s/ Donald J. Goodenow PER: /s/ Douglas H. Symons
--------------------------- -----------------------------
DONALD J. GOODENOW, EXECUTIVE V.P. DOUGLAS H. SYMONS, VICE PRESIDENT
DATE: 6-29-95 DATE: 6-29-95
---------------------------- ------------------------------
<PAGE> 1
EXHIBIT 10.13
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement ("Agreement"), dated as of May 29,
1996, is between Goran Capital Inc., a Canadian federally chartered corporation
("Goran"), and Symons International Group, Inc., an Indiana corporation (the
"Company").
WHEREAS, Goran is the owner of all of the Company's issued and
outstanding shares of common stock, no par value ("Common Stock") at the date
hereof, and Goran and the Company have determined to cause the Company to offer
to the public (the "Public Offering") up to an aggregate of 3,450,000 new
shares of the Common Stock, in a primary offering.
WHEREAS, following completion of the Public Offering, Goran will
continue to own approximately 70% of the outstanding shares of Common Stock
(approximately 67% if the over allotment option granted to the underwriters of
the Public Offering is exercised in full).
WHEREAS, the parties hereto desire to enter into this Agreement which
sets forth the terms of certain registration rights applicable to the
Registrable Securities (as defined below) subsequent to the Public Offering.
NOW, THEREFORE, upon the terms and conditions, and the mutual promises
herein contained, and for good and valuable consideration, the receipt and
adequacy of which are acknowledged, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following
initially capitalized terms shall have the following meanings:
(a) "Affiliate" means, with respect to any person, any other person
who, directly or indirectly, is in control of, is controlled by
or is under common control with the former person.
(b) "Holder" means Goran and any "transferee" (as such term is
defined in Section 11 hereof) which is the record holder of
Registrable Securities.
(c) "Registrable Securities" means the Common Stock (as presently
constituted), any stock or other securities into which or for
which such Common Stock may hereafter be changed, converted or
exchanged, and any other securities issued to holders of such
Common Stock (or such shares into which or for which such shares
are so changed, converted or exchanged) upon any
reclassification, share combination, share subdivision, share
dividend, merger, consolidation or similar transactions or
events, provided that any such securities shall cease to be
Registrable Securities (i) if a registration statement with
respect to the sale of such securities shall have become
effective under the Securities Act and such securities shall
have been disposed of in accordance with the plan of
distribution set forth in such registration statement,
-1-
<PAGE> 2
(ii) if such securities shall have been distributed pursuant to Rule 144
or Rule 144A, or (iii) if such securities are held by a Holder other
than Goran, unless such Holder shall furnish the Company an opinion of
counsel, which opinion shall be reasonably satisfactory to the Company,
to the effect that all of such securities are not permitted to be
distributed by such Holder in one transaction pursuant to Rule 144 or
Rule 144A.
(d) "Registration Expenses" means all reasonable expenses in connection with
any registration of securities pursuant to this Agreement including,
without limitation, the following: (i) SEC filing fees, (ii) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Registrable Securities to be
disposed of under the Securities Act, (iii) all expenses in connection
with the preparation, printing and filing of the registration statement,
any preliminary prospectus or final prospectus and amendments and
supplements thereto and the mailing and delivering of copies thereof to
any Holders, underwriters and dealers and all expenses incidental to
delivery of the Registrable Securities, (iv) the cost of producing blue
sky or legal investment memoranda, (v) all expenses in connection with
the qualification of the Registrable Securities to be disposed of for
offering and sale under state securities laws, including the fees and
disbursements of counsel for the underwriters or Holders in connection
with such qualification and in connection with any blue sky and legal
investments surveys, (vi) the filing fees incident to securing any
required review by the National Association of Securities Dealers, Inc.
of the terms of the sale of the Registrable Securities to be disposed
of, (vii) transfer agents', depositories' and registrars' fees and the
fees of any other agent appointed in connection with such offering,
(viii) all security engraving and security printing expenses, (ix) all
fees and expenses payable in connection with the listing of the
Registrable Securities on each securities exchange or inter-dealer
quotation system on which a class of common equity securities of the
Company is then listed, (x) courier, overnight, delivery, word
processing and duplication expenses and (xi) any one-time payment for
directors and officers insurance directly related to such offering,
provided the insurer provides a separate statement for such payment.
(e) "Rule 144" means Rule 144 promulgated under the Securities Act, or any
successor rule to similar effect.
(f) "Rule 144A" means Rule 144A promulgated under the Securities Act, or any
successor rule to similar effect.
(g) "SEC" means the United States Securities and Exchange Commission.
(h) "Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
-2-
<PAGE> 3
2. Demand Registration.
(a) At any time after the closing date of the Public Offering, upon
written notice from a Holder in the manner set forth in Section
12(h) hereof requesting that the Company effect the registration
under the Securities Act of any or all of the Registrable
Securities held by such Holder, which notice shall specify the
intended method or methods of disposition of such Registrable
Securities, the Company shall use its best efforts to effect, in
the manner set forth in Section 5, the registration under the
Securities Act of such Registrable Securities for disposition in
accordance with the intended method or methods of disposition
stated in such request, provided that:
(i) if, within five business days of receipt of a
registration request pursuant to this Section 2(a), the
Company is advised in writing (with a copy to the Holder
requesting registration) by the managing underwriter of
the proposed offering described below that, in such
firm's good faith opinion, a registration at the time
and on the terms requested would materially and
adversely affect any immediately planned offering of
securities by the Company that had been contemplated by
the Company prior to receipt of notice requesting
registration pursuant to this Section 2(a) (a
"Transaction Blackout"), the Company shall not be
required to effect a registration pursuant to this
Section 2(a) until the earliest of (A) the abandonment
of such offering, (B) the termination of any "hold back"
period obtained by the underwriter(s) of such offering
from any person in connection therewith or (C) one
hundred eighty days after receipt by the Holder
requesting registration of the managing underwriter's
written opinion referred to above in this Subsection
(i));
(ii) if, while a registration request is pending pursuant to
this Section 2(a), the Company has determined in good
faith that (A) the filing of a registration statement
would require the disclosure of material information
that the Company has a bona fide business purpose for
preserving as confidential or (B) the Company then is
unable to comply with SEC requirements applicable to the
requested registration, the Company shall not be
required to effect a registration pursuant to this
Section 2(a) until the earlier of (1) the date upon
which such material information is otherwise disclosed
to the public or ceases to be material or the Company is
able to so comply with applicable SEC requirements, as
the case may be, and (2) forty-five days after the
Company makes such good-faith determination, provided
that the Company shall not be permitted to delay a
requested registration in reliance on this Subsection
(ii) more than once in any twenty-four month period; and
(iii) the Company shall not be obligated to file a
registration statement relating to a registration
request pursuant to this Section 2: (A) within a period
of twelve months after the effective date of any other
registration statement of
-3-
<PAGE> 4
the Company demanded pursuant to this Section 2(a), (B)
if such registration request is for a number of
Registrable Securities less than 10% of the common
equity of the Company then owned in the aggregated by
the Holders, or (C) if Holders in the aggregate own
less than 10% of the common equity of the
Company.
(b) Notwithstanding any other provision of this Agreement to the
contrary:
(i) a registration requested by a Holder pursuant to this
Section 2, shall not be deemed to have been effected
(and, therefore, not requested for purposes of
subsection 2(a)), (A) unless the registration statement
filed in connection therewith has become effective, (B)
if after it has become effective such registration is
interfered with by any stop order, injunction or other
order or requirement of the SEC or other governmental
agency or court for any reason other than a
misrepresentation or an omission by such Holder and, as
a result thereof, not less than 90% of the Registrable
Securities requested to be registered cannot be
completely distributed in accordance with the plan of
distribution set forth in the related registration
statement or (C) if the conditions to closing specified
in the purchase agreement or underwriting agreement
entered into in connection with such registration are
not satisfied (other than by reason of some act or
omission by such Holder) or waived by the underwriters;
(ii) a registration requested by a Holder pursuant to this
Section 2 and later withdrawn at the request of such
Holder shall be deemed to have been effected (and,
therefore, requested for purposes of Section 2(a)),
whether withdrawn by the Holder prior to or after the
effectiveness of such requested registration, except
that if such request is withdrawn by a Holder prior to
the filing of a registration statement with the SEC,
such Holder can require the Company to disregard for
purposes of Section 2(a)(iii) one such requested
registration in any twelve month period; and
(iii) nothing herein shall modify Holder's obligation to pay
the Registration Expenses incurred in connection with
any withdrawn registration.
(c) In the event that any registration pursuant to this Section 2
shall involve, in whole or in part, an underwritten offering, a
Holder shall have the right to designate an underwriter
reasonably satisfactory to the Company as the lead managing
underwriter of such underwritten offering and the Company shall
have the right to designate one underwriter reasonably
satisfactory to the Holder as a co-manager of such underwritten
offering.
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<PAGE> 5
(d) The Company shall have the right to cause the registration of
additional securities for sale for the account of any person
(including the Company) in any registration of Registrable
Securities requested by a Holder pursuant to Section 2(a);
provided that the Company shall not have the right to cause the
registration of such additional securities if such Holder is
advised in writing (with a copy to the Company) by the managing
underwriter that, in such firm's good faith opinion,
registration of such additional securities would materially and
adversely affect the offering and sale of the Registrable
Securities then contemplated by such Holder.
3. Piggyback Registration. If the Company at any time proposes to register
any of its Common Stock or any other of its common equity securities
(collectively, "Other Securities") under the Securities Act (other than
a registration on Form S-4 or S-8 or any successor form thereto),
whether or not for sale for its own account, in a manner which would
permit registration of Registrable Securities for sale for cash to the
public under the Securities Act, it will each such time give prompt
written notice to each Holder of its intention to do so at least ten
business days prior to the anticipated filing date of the registration
statement relating to such registration. Such notice shall offer each
such Holder the opportunity to include in such registration statement
such number of Registrable Securities as each such Holder may request.
Upon the receipt of the Company's notice (which request shall specify
the number of Registrable Securities intended to be disposed of and the
intended method of disposition thereof), the Company shall effect, in
the manner set forth in Section 5, in connection with the registration
of the Other Securities, the registration under the Securities Act of
all Registrable Securities which the Company has been so requested to
register, to the extent required to permit the disposition (in
accordance with such intended methods thereof) of the Registrable
Securities so requested to be registered, provided that:
(a) If at any time after giving written notice of its intention to
register any securities and prior to the effective date of such
registration, the Company shall determine for any reason not to
register or to delay registration of such securities, the
Company may, at its election, give written notice of such
determination to the Holder and, thereupon, (i) in the case of a
determination not to register, the Company shall be relieved of
its obligation to register any Registrable Securities in
connection with such registration and (ii) in the case of a
determination to delay such registration, the Company shall be
permitted to delay registration of any Registrable Securities
requested to be included in such registration for the same
period as the delay in registering such other securities.
(b) (i) If the registration referred to in the first sentence of
this Section 3 is to be an underwritten primary
registration on behalf of the Company, and the managing
underwriter advises the Company in writing that, in such
firm's opinion, such offering would be materially and
adversely affected by the inclusion therein of the
Registrable Securities requested to be included therein,
the Company shall include in such registration: (A)
first, all securities the
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<PAGE> 6
Company proposes to sell for its own account ("Company
Securities"), (B) second, up to the full number of
Registrable Securities held by Goran and requested to be
included in such registration by Goran ("Goran
Securities") in excess of the number or dollar amount of
securities the Company proposes to sell which, in the
good faith opinion of such managing underwriter, can be
so sold without so materially and adversely affecting
such offering, (C) third, up to the full number of
Registrable Securities (other than Goran Securities) in
excess of the number or dollar amount of Company
Securities and Goran Securities, which, in the good
faith opinion of such managing underwriter, can be sold
without materially and adversely affecting such offering
(and, if less than the full number of such Registrable
Securities, allocated pro-rata among the Holders of such
Registrable Securities (other than Goran Securities) on
the basis of the number of securities requested to be
included therein by each such Holder, and (D) fourth, an
amount of Other Securities, if any, requested to be
included therein in excess of the number or dollar
amount of Company Securities, Goran Securities and other
Registrable Securities which, in the opinion of such
underwriter(s), can be sold without materially and
adversely affecting such offering (allocated pro-rata
among the Holders of such other securities in such
proportions as such Holders and the Company may agree).
(ii) if the registration referred to in the first sentence of
this Section 3 is to be an underwritten secondary
registration on behalf of Holders of securities (other
than Registrable Securities) of the Company (the "Other
Holder"), and the managing underwriter advises the
Company in writing that in its good faith opinion such
offering would be materially and adversely affected by
the inclusion therein of the Registrable Securities
requested to be included therein, the Company shall
include in such registration the amount of securities
(including Registrable Securities) that such managing
underwriter advises allocated among the Other Holders
and the Holders on the basis of the number of securities
(including Registrable Securities) requested to be
included therein by each Other Holder and each Holder.
(c) The Company shall not be required to effect any registration of
Registrable Securities under this Section 3 incidental to the
registration of any of its securities in connection with
mergers, acquisitions, exchange offers, subscription offers,
dividend reinvestment plans or stock option or other executive
or employee benefit or compensation plans.
(d) No registration of Registrable Securities effected under this
Section 3 shall relieve the Company of its obligation to effect
a registration of Registrable Securities pursuant to Section 2
hereof.
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<PAGE> 7
4. Expenses. Each Holder, by accepting Registrable Securities, agrees to
pay all Registration Expenses with respect to an offering pursuant to
Section 2 hereof, pro-rata based on each Holder's number of Registrable
Securities included in such offering, except to the extent the Company
causes shares to be registered for itself or another party pursuant to
Section 2(d), in which event the Company or such other party shall pay
the incremental expenses of including such shares in the offering. The
Company agrees to pay all Registration Expenses with respect to an
offering pursuant to Section 3 hereof, except for the incremental
expenses of including a Holder's Registrable Securities in such
offering, which incremental expenses shall be paid by such Holder. All
Registration Expenses to be paid by the Holder shall be paid within
thirty days of the delivery of a statement, such statements to be
delivered not more frequently than once every thirty days.
5. Registration and Qualifications. If and whenever the Company is required
to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act as provided in Section 2 or 3
hereof, the Company, subject to Section 4 hereof, shall:
(a) Prepare and file a registration statement under the Securities
Act relating to the Registrable Securities to be offered as soon
as practicable, but in no event later than forty-five days
(sixty days if the applicable registration form is other than
Form S-3) after the date notice is given, and use its best
efforts to cause the same to become effective within ninety days
after the date notice is given (one hundred twenty days if the
applicable registration form is other than Form S-3).
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in
connection therewith as may be necessary to keep such
registration statement effective for sixty days (or, in the case
of an underwritten offering, such shorter time period as the
underwriters may require).
(c) furnish to the Holders and to any underwriter of such
Registrable Securities such number of conformed copies of such
registration statement and of each such amendment and supplement
thereto (in each case including all exhibits), such number of
copies of the prospectus included in such registration statement
(including each preliminary prospectus and any summary
prospectus), in conformity with the requirements of the
Securities Act, and such other documents, as the Holders or such
underwriter may reasonably request in order to facilitate the
public sale of the Registrable Securities, and a copy of any and
all transmittal letters or other correspondence to, or received
from the SEC or any other governmental agency or self-regulatory
body or other body having jurisdiction (including any domestic
or foreign securities exchange) relating to such offering.
(d) Use its best efforts to register or qualify all Registrable
Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the Holders
or any underwriter of such Registrable Securities shall request,
and use its
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<PAGE> 8
best efforts to obtain all appropriate registration, permits and
consents required in connection therewith, and do any and all
other acts and things which may be necessary or advisable to
enable the Holders or any such underwriter to consummate the
disposition in such jurisdictions of its Registrable Securities
covered by such registration statement; provided that the
Company shall not for any such purpose be required to register
or qualify generally to do business as a foreign corporation in
any jurisdiction wherein it is not so qualified, or to subject
itself to taxation in any such jurisdiction, or to consent to
general service of process in any such jurisdiction.
(e) (i) Use its best efforts to furnish an opinion of counsel for
the Company addressed to the underwriters and each Holder of
Registrable Securities included in such registration (each a
"Selling Holder") and dated the date of the closing under the
underwriting agreement (if any) (or if such offering is not
underwritten, dated the effective date of the registration
statement), and (ii) use its best efforts to furnish a "cold
comfort" letter addressed to each Selling Holder, if permissible
under applicable accounting practices, and signed by the
independent public accountants who have audited the Company's
financial statements included in such registration statement, in
each such case covering substantially the same matters with
respect to such registration statement (and the prospectus
included therein) as are customarily covered in opinions of
issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities and
such other matters as the Selling Holders may reasonably request
and, in the case of such accountants' letter, with respect to
events subsequent to the date of such financial statements;
(f) immediately notify the Selling Holders in writing (i) at any
time when a prospectus relating to a registration pursuant to
Section 2 or 3 hereof is required to be delivered under the
Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of any material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading,
and (ii) of any request by the SEC or any other regulatory body
or other body having jurisdiction for any amendment of or
supplement to any registration statement or other document
relating to such offering, and in either such case (i) or (ii)
at the request of the Selling Holders, subject to Section 4
hereof, prepare and furnish to the Selling Holders a reasonable
number of copies of a supplement to or an amndement of such
prospectus as may be necessary so that, as thereafter delivered
to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated
there in or necessary to make the statements therein, in light
of the circumstances under which they are made, not misleading.
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<PAGE> 9
(g) Use its best efforts to list all such Registrable Securities
covered by such registration on each securities exchange and
inter-dealer quotation system on which a class of common equity
securities of the Company is then listed, with expenses in
connection therewith (not including any future periodic
assessments or fees for such additional listing) to be paid in
accordance with Section 4 hereof.
(h) Furnish unlegended certificates representing ownership of the
Registrable Securities being sold in such denominations as shall
be requested by the Selling Holders or the underwriters with
expenses therewith to be paid in accordance with Section 4
hereof.
6. Conversion Of Other Securities, Etc. If Goran offers any options,
rights, warrants or other securities issued by it or any other person
that are offered with, convertible into or exercisable or exchangeable
for any Registrable Securities, the Registrable Securities underlying
such Option, rights, warrants or other securities shall be eligible for
registration pursuant to Section 2 and Section 3 of this Agreement.
7. Underwriting: Due Diligence.
(a) If requested by the underwriters for any underwritten offering
of Registrable Securities pursuant to a registration requested
under this Agreement, the Company shall enter into an
underwriting agreement with such underwriters for such offering,
such agreement to contain such representations and warranties by
the Company and such other terms and provisions as are
customarily contained in underwriting agreements with respect to
secondary distribution, including, without limitation,
indemnities and contribution substantially to the effect and to
the extent provided in Section 8 hereof and the provision of
opinions of counsel and accountants' letters to the effect and
to the extent provided in Section 5(e) hereof. The Selling
Holders on whose behalf the Registrable Securities are to be
distributed by such underwriters shall be parties to any such
underwriting agreement and the representations and warranties
by, and the other agreements on the part of, the Company to and
for the benefit of such underwriters, shall also be made to and
for the benefit of such Selling Holders. Such underwriting
agreement shall also contain such representations and warranties
by the Selling Holders on whose behalf the Registrable
Securities are to be distributed as are customarily contained in
underwriting agreements with respect to secondary distributions.
Selling Holders may require that any additional securities
included in an offering proposed by a Holder be included on the
same terms and conditions as the Registrable Securities that are
included therein.
(b) In the event that any registration pursuant to Section 3 shall
involve, in whole or in part, an underwritten offering, the
Company may require the Registrable Securities requested to be
registered pursuant to Section 3 to be included in such
underwriting on the same terms and conditions as shall be
applicable to the other securities being sold through
underwriters under such registration. If requested by the
underwriters
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<PAGE> 10
for such underwritten offering, the Selling Holders on whose
behalf the Registrable Securities are to be distributed shall
enter into an underwriting agreement with such underwriters,
such agreement to contain such representations and warranties by
the Selling Holders and such other terms and provisions as are
customarily contained in underwriting agreement with respect to
secondary distributions, including without limitation,
indemnities and contribution substantially to the effect and to
the extent provided in Section 8 hereof Such underwriting
agreement shall also contain such representations and warranties
by the Company and such other person or entity for whose account
securities are being sold in such offering as are customarily
contained in underwriting agreements with respect to secondary
distributions.
(c) In connection with the preparation and filing of each
registration statement registering Registrable Securities under
the Securities Act, the Company shall give the Holders of such
Registrable Securities and the underwriters, if any, and their
respective counsel and accountants, such reasonable and
customary access to its books and records and such opportunities
to discuss the business of the Company with its officers and the
independent public accountants who have certified the Company's
financial statements as shall be necessary, in the opinion of
such Holder and such underwriters or their respective counsel,
to conduct a reasonable investigation within the meaning of the
Securities Act.
8. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities made
pursuant to this Agreement, the Company agrees to indemnify and
hold harmless each Holder, its officers and directors, each
underwriter or Registrable Securities so offered and each
person, if any, who controls any of the foregoing persons within
the meaning of the Securities Act, from and against any and all
claims, liabilities, losses, damages, expenses and judgments,
joint or several, to which they or any of them may become
subject, under the Securities Act or otherwise, including any
amount paid in settlement of any litigation commenced or
threatened, and shall promptly reimburse them, as and when
incurred, for any reasonable legal or other expenses incurred by
them in connection with investigating any claims and defending
any actions, insofar as such losses, claims, damages,
liabilities or actions shall arise out of, or shall be based
upon, any untrue statement or alleged untrue statement of a
material fact contained in the registration statement (or in any
preliminary or final prospectus included therein, or any
amendment thereto or supplement thereto, or in any document
incorporated by reference therein, or any omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading; provided, however, that the Company shall not be
liable to a particular Holder in any such case to the extent
that any such loss, claim, damage, liability or action arises
out of, or is based upon, any untrue statement or alleged untrue
statement, or any omission, if such statement or omission shall
have
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<PAGE> 11
been made in reliance upon and in conformity with information
relating to such Holder furnished to the Company in writing by
or on behalf of such Holder specifically for use in the
preparation of the registration statement (or in any preliminary
or final prospectus included therein) or any amendment thereof
or supplement thereto. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf
of a Holder and shall survive the transfer of such securities.
The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to each Holder,
its officers and directors, underwriters of the Registrable
Securities or any controlling person of the foregoing; provided,
further, that, as to any underwriter or any person controlling
any underwriter, this indemnity does not apply to any loss,
liability, claim, damage or expense arising out of or based upon
any untrue statement or alleged untrue statement or omission or
alleged omission in any preliminary prospectus if a copy of a
prospectus was not sent or given by or on behalf of an
underwriter to such person asserting such loss, claim, damage,
liability or action at or prior to the written confirmation of
the sale of the Registrable Securities as required by the
Securities Act and such untrue statement or omission had been
corrected in such prospectus.
(b) In the case of each offering made pursuant to this Agreement,
each Holder of Registrable Securities, included in such
offering, by exercising its registration rights hereunder,
agrees to indemnify and hold harmless the Company, its officers
and directors and each person, if any, who controls any of the
foregoing within the meaning of the Securities Act, from and
against any and all claims, liability, losses, damages, expenses
and judgments, joint or several, to which they or any of them
may become subject, under the Securities Act or otherwise,
including any amount pale in settlement of any litigation
commenced, or threatened, and shall promptly reimburse them, as
and when incurred, for any legal or other expenses incurred by
them in connection with investigating any claims and defending
any actions, insofar as any such losses, claims, damages,
liabilities or actions shall arise out of, or shall be based
upon, any untrue statement or alleged untrue statement of a
material fact contained in the registration statement (or in any
preliminary original prospectus included therein) or any
amendment thereof or supplement thereto, or any omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, but in each case only to the extent that such
untrue statement of a material fact is contained in, or such
material fact is omitted from, information relating to such
Holder furnished in writing to the Company by or on behalf of
such Holder specifically for use in the preparation of such
registration statement (or in any preliminary or final
prospectus included therein). The foregoing indemnity is in
addition to any liability which such Holder may otherwise have
to the Company, or any of its directors, officers or controlling
persons; provided, however, that, as to any underwriter or any
person controlling any underwriter, this indemnity does not
apply to any loss, liability, claim, damage or expense arising
out of or based upon any untrue statement or alleged untrue
statement or omission or
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<PAGE> 12
alleged omission in any preliminary prospectus if a copy of a
prospectus was not sent or given by or on behalf of an
underwriter to such person asserting such loss, claim, damage,
liability or action at or prior to the written confirmation of
the sale of the Registrable Securities as required by the
Securities Act and such untrue statement or omission had been
corrected in such prospectus.
(c) Procedure for Indemnification. Each party indemnified under
Paragraph (a) or (b) of this Section 8 shall, promptly after
receipt of notice of any claim or the commencement of any action
against such indemnified party in respect of which indemnity may
be sought, notify the indemnifying party in writing of the claim
or the commencement thereof, provided that the failure to notify
the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party on account of the
indemnity agreement contained in paragraph (a) or (b) of this
Section 8, except to the extent the indemnifying party was
prejudiced by such failure, and in no event shall relieve the
indemnifying party from any other liability which it may have to
such indemnified party. If any such claim or action shall be
brought against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be
entitled to participate therein, and, to the extent that it
wishes, jointly with any other similarly notified indemnifying
party to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to
assume the defense of such claim or action, the indemnifying
party shall not be liable to the indemnified party under this
Section 8 for any legal or other expenses subsequently incurred
by the indemnified party in connection with the defense thereof
other than reasonable costs of investigation; provided that each
indemnified party, its officers and directors, if any, and each
person, if any, who controls such indemnified lead party within
the meaning of the Securities Act, shall have the right to
employ separate counsel reasonably approved by the indemnifying
party to represent them if the named parties to any action
(including any impleaded parties) include both such indemnified
party and an indemnifying party or an affiliate of an
indemnifying part, and such indemnified party shall have been
advised by counsel either (i) that there may be one or more
legal defenses available to such indemnified party that are
different from or additional to those available to such
indemnifying party or such affiliate or (ii) a conflict may
exist between such indemnified party and such indemnifying party
or such affiliate, and in that event the fees and expenses of
one such separate counsel for a such indemnified parties shall
be paid by the indemnifying party. As indemnified party will not
enter into any settlement agreement which is not approved by the
indemnifying party, such approval not to be unreasonably
withheld. The indemnifying party may not agree to any settlement
of any such claim or action which provides for any remedy or
relief other than monetary damages for which the indemnifying
party shall be responsible hereunder, without the prior written
consent of the indemnified party, which shall not be
unreasonably withheld. In any action hereunder as to which the
indemnifying party
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<PAGE> 13
has assumed the defense thereof with counsel reasonably
satisfactory to the indemnified party, the indemnified party
shall continue to be entitled to participate in the defense
thereof, with counsel of its own choice, but, except as set
forth above, the indemnifying party shall not be obligated
hereunder to reimburse the indemnified part; for the costs
thereof. In all instances, the indemnified party shall
cooperate fully with the indemnifying party or its counsel in
the defense of each claim or action.
If the indemnification provided for in this Section 8 shall for
any reason be unavailable to an indemnified party in respect
of any loss, claim, damage or liability, or any action in
respect thereof, referred to herein, then each indemnifying
party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim, damage or liability,
or action in respect thereof, in such proportion as shall be
appropriate to reflect the relative fault of the indemnifying
party on the one hand and the indemnified party on the other
with respect to the statements or omissions which resulted
in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable
considerations. The relative fault shall be determined by
reference to whether the untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a
material fact relates to information supplied by the
indemnifying party on the one hand or the indemnified party on
the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or
prevent such statement or omission, but not by reference to
any indemnified party's stock ownership in the Company. In no
event, however, shall a Holder be required to contribute in
excess of the amount of the net proceeds received by such Holder
in connection with the sale of Registrable Securities in the
offering which is the subject of such loss, claim, damage or
liability. The amount paid or payable by an indemnified party
as a result of the loss, claim, damage or liability, or action
in respect thereof, referred to above in this Paragraph
shall be deemed to include, for purposes of this Paragraph,
any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or
defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
9. Rule 144. The Company shall take such measures and file such
information, documents and reports as shall be required by the SEC as
a condition to the availability of Rule 144 (or any successor
provision).
10. Holdback.
(a) Each Holder agrees by acquisition of Registrable Securities, if
so required by the managing underwriter, not to sell, make any
short sale of, loan, grant any Option for the purchase of,
effect any public sale or distribution of or otherwise
dispose of any
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<PAGE> 14
securities of the Company, during the thirty days prior to and the
ninety days after any underwritten registration pursuant to Section 2
or 3 hereof has become effective (or such shorter period as may be
required by the underwriter), except as part of such underwritten
registration. Notwithstanding the foregoing sentence, each Holder
subject to the foregoing sentence shall be entitled to sell during the
foregoing period securities in a private sale. The Company may legend
and may impose stop transfer instructions on any certificate
evidencing Registrable Securities relating to the restrictions
provided for in this Section 10.
(b) The Company agrees, if so required by the managing underwriter, not to
sell, make any short sale of, loan, grant any option for the purchase
of (other than pursuant to employee benefit plans) effect any public
sale or distribution of or otherwise dispose of its equity securities
or securities convertible into or exchangeable or exercisable for any
such securities during the thirty days prior to and the ninety days
after any underwritten registration pursuant to Section 2 or 3 hereof
has become effective, except as part of such underwritten registration
and except pursuant to registrations on Form S-4, S-8 or any successor
or similar forms thereto.
11. TRANSFER OF REGISTRATION RIGHTS.
(a) Goran may transfer all or any portion of its rights under this
Agreement to any transferee of the lesser of (i) at least 20% of
Goran's initial holdings of Registrable Securities and (ii) all of
Goran's remaining Registrable Securities (each, a "transferee"). No
transfer of registration rights pursuant to this Section shall be
effective unless the Company has received written notice from Goran of
an intention to transfer at least thirty days prior to Goran entering
into a binding agreement to transfer Registrable Securities ten
business days in the event of an unsolicited offer. Such notice need
not contain proposed terms or name a proposed transferee. On or before
the time of the transfer, the Company shall receive a written notice
stating the name and address of any transferee and identifying the
amount of Registrable Securities with respect to which the rights
under this Agreement are being transferred and the nature of the
rights so transferred. In connection with any such transfer, the term
"Goran" as used in this Agreement (other than in this Section 11,
Section 3(a)(1)(2) and Section (1)(c)(iii) hereof shall, where
appropriate to assign the rights and obligations of Goran hereunder to
such direct transferee, be deemed to refer to the transferee holder of
such Registrable Securities. Goran and such transferees may exercise
the registration rights hereunder in such proportion and upon the
demand of such Holder as they shall agree among themselves, provided
that in no event shall the Company be required to effect more Than one
registration pursuant to Section 2 of this Agreement in any twelve
month period and that each such registration shall be at the request
of not more than one Holder.
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<PAGE> 15
(b) After any such transfer, Goran shall retain its rights under
this Agreement with respect to all other Registrable Securities
owned by Goran.
(c) Upon the request of Goran, the Company shall execute a
Registration Rights Agreement with such transferee or a proposed
transferee substantially similar to this Agreement, and any
demand registrations granted to such transferee shall limit the
demand registrations to which Goran is entitled under Section
2(a) hereof.
12. Miscellaneous.
(a) Injunctions. Each party acknowledges and agrees that
irreparable damage would occur in the event that any of the
provisions of this Agreement was not performed in accordance
with its specific terms or was otherwise breached. Therefore,
each party shall be entitled to an injunction or injunctions to
prevent breaches of the provisions of this Agreement and to
enforce specifically the terms and provisions hereof in any
court having jurisdiction, such remedy being in addition to any
other remedy to which such party may be entitled at law or in
equity.
(b) Severability. If any term or provision of this Agreement held
by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms and provisions set
forth herein shall remain in full force and effect and shall in
no way be affected, impaired or invalidated, and each of the
parties shall use its best efforts to find and employ an
alternative means to achieve the same or substantially the same
result as that contemplated by such term or provision.
(c) Further Assurances. Subject to the specific terms of this
Agreement, each of the parties hereto shall make, execute,
acknowledge and deliver such other instruments and documents,
and take all such other actions, as may be reasonably required
in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby.
(d) Waivers, etc. No failure or delay on the part of either party
(or the intended third party beneficiaries referred to herein)
in exercising any power or right hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or
power. No modification or waiver of any provision of this
Agreement nor consent to any departure therefrom shall in any
event be effective unless the same shall be in writing and
signed by an authorized officer of each of the parties, and then
such waiver or consent shall be effective only in the specific
instance and for the purpose for which given.
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<PAGE> 16
(e) Entire Agreement. This Agreement contains the final and complete
understanding of the parties with respect to its subject matter. This
Agreement supersedes all prior agreements and understandings between the
parties, whether written or oral, with respect to the subject matter
hereof. The paragraph headings contained in this Agreement are for
reference purposes only, and shall not affect in any manner the meaning
or interpretation of this Agreement.
(f) Counterparts. For the convenience of the parties, this Agreement may be
executed in any number of counterparts, each of which shall be deemed to
be an original but all of which together shall be one and the same
instrument.
(g) Amendment. This Agreement may be amended only by a written instrument
duly executed by an authorized officer of each of the parties.
(h) Notices. Unless expressly provided herein, all notices, claims,
certificates, requests, demands and other communications hereunder shall
be in writing and shall be deemed to be duly given (i) when personally
delivered, or (ii) if mailed registered or certified mail, postage
prepaid, return receipt requested, on the date the return receipt is
executed or the letter is refused by the addressee or its agent, or
(iii) if sent by overnight courier which delivers only upon the signed
receipt of the addressee, on the date the receipt acknowledgment is
executed or refused by the addressee or its agent.
(i) if to Goran, to:
Alan G. Symons
President and CEO
Goran Capital Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
(ii) if to the Company, to:
David L. Bates
Vice President, General Counsel and Secretary
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
and
(iii) if to a Holder of Registrable Securities, to the name and
address as the same appear in the security transfer books of the
Company,
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<PAGE> 17
or to such other address as the party (or Holder of
Registrable Securities) to whom notice is to be given
may have previously furnished to the other party (or, in
the case of a Holder of Registrable Securities, to the
Company) in writing in the manner set forth above.
(i) Governing Law. This agreement and the rights and obligations of
the parties hereunder shall be construed in accordance with and
be governed by the internal laws of the state of Indiana.
(j) Assignment. Except as provided herein, the parties may not
assign their rights under this Agreement. The Company may not
delegate its obligations under this Agreement.
IN WITNESS WHEREOF, Goran Capital Inc. and Symons International Group,
Inc. have caused this Agreement to be duly executed by their authorized
representative as of the date first above written.
GORAN CAPITAL INC.
By: /s/ Alan G. Symons
--------------------
ALAN G. SYMONS
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ Alan G. Symons
--------------------
ALAN G. SYMONS
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<PAGE> 1
EXHIBIT 10.14(1)
LICENCE, IMPROVEMENT & SUPPORT AGREEMENT
THIS AGREEMENT is dated this 30 day of August, 1995.
BETWEEN:
TRITECH FINANCIAL SYSTEMS INC.,
a Corporation with a place of business at:
2 Eva Road, Suite 201
Etobicoke, Ontario M9C 2A8
(hereinafter referred to as the "Vendor")
AND:
SYMONS INTERNATIONAL GROUP INC.
a Corporation with a place of business at:
4720 Kingsway Drive
Indianapolis, Indiana, 46205
(hereinafter referred to as the "Client")
1. DEFINITIONS
GROSS ANNUAL PREMIUM means the Gross written insurance premiums of the
Client's business for the latest year end, processed through the GIMS
Application Programs, excluding sales taxes and service charges.
LICENCE OF COMPUTER SOFTWARE means that certain licence agreement
between the parties hereto dated the same date as herewith.
CONFIDENTIAL INFORMATION of one party means any information including
information on documents or magnetic media which is disclosed to or
known by the other as a result of the negotiation or performance of this
Agreement and which is of a confidential nature and is not generally known
to the trade or industry in which the parties are engaged and including
information the dissemination of which might prove prejudicial to the
other party about the party's products, proposed products, activities,
affairs, methods, proposed methods, customers, contracts, plans, policies
and Services including research, development, purchasing, finance,
marketing, merchandising and selling; and corresponding information of
associates of that party and including the specifications, material and
information developed during performance of this Agreement.
FUNCTIONAL SPECIFICATIONS means the GIMS System specifications as
described in the Licence of Computer Software Agreement.
<PAGE> 2
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GIMS means the General Insurance Management System software provided by
Tritech.
HOTLINE SUPPORT means the Services described in subsection 2. 1. (a) of
this Agreement.
GIMS APPLICATION PROGRAM means any computer programming in
machine readable or interpreted form which constitutes a part of GIMS.
LISA means this LICENCE, IMPROVEMENT & SUPPORT AGREEMENT.
SERVICES means the Services described in Section 2 hereof.
ZIM means the 4th Generation Language/DBMS Software provided by
Sterling Software International (Canada) Inc.
The initial three year term will commence on JANUARY 1, 1996.
2. SERVICES
The Services identified in this section shall be made available to the
Client by the Vendor in respect of each unaltered GIMS Application Program
or GIMS Application Program altered by the Vendor.
The level of Services and fees associated therewith are indicated in
the Schedule contained in Exhibit A. The selection of Services chosen may
be changed at any time by the Client upon six (6) months prior written
notice.
I. OPTIONAL SERVICES
(a) Hotline Support
The Client shall have access to specialist assistance related to:
(i) questions related to the operational use of GIMS by the Client;
<PAGE> 3
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(ii) assistance in identifying and verifying the causes of suspected
errors or malfunctions in GIMS;
(iii) advice on detours for such identified errors or malfunctions, where
reasonably possible;
(iv) advice on the features and capabilities of GIMS; and
(v) basic ZIM queries related to the GIMS application are supported by
the Vendor. The Vendor is responsible for communicating any ZIM "bugs"
or problems to Sterling Software International (Canada) Inc., and shall
forward all ZIM updates and intra-version updates to the Client.
This HotLine Service shall be available to the Client during the
Vendor's normal business hours (8:00 a.m. to 8:00 p.m. Eastern time Monday
through Friday, save and except for statutory and civic holidays), and is
intended to provide answers to basic queries. More complex questions requiring
lengthy in-depth advice and analysis may also be accommodated via the HotLine
wherever reasonably possible.
II. ANNUAL LICENCE IMPROVEMENT AND UPGRADE
(a) Correction of Reported Errors or Malfunctions
(i) The Vendor shall make every reasonable effort to provide a detour
or code correction to GIMS for errors or malfunctions reported.
Each detour or code correction shall be made available in the form
of either a written correction notice, by remote telephone support
or machine documentation adequate to inform the Client of the
resolution of the problem and any significant operational
differences resulting from the correction which are known to the
Vendor.
(ii) All errors or malfunctions of GIMS as defined by the accepted
Functional Specifications shall be corrected by the Vendor. For
any other errors or malfunctions, the Vendor shall provide the
<PAGE> 4
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Client with its best recommendation or an explanation. As part
of the error or malfunction correction process the Vendor
shall update the applicable documentation and GIMS' source
code to reflect the changes.
(iii) Upon the Client notifying the Vendor that the Client cannot, due
to an error or malfunction of the GIMS software:
- input or produce insurance policies;
- process insurance claims; or
- update its sub-ledgers or General Ledger;
(collectively, a "Critical Error"), the Vendor shall have two (2)
business days (the "Critical Error Correction Period") to remedy
the GIMS software so that the Client may resume using the
system. Should the Vendor not remedy the Critical Error within
the Correction Period, the Vendor will have failed to perform its
support services and the Vendor agrees to waive the next three
payments of monthly "LISA" support fees as a penalty to the
Client.
(iv) Upon the Client notifying the Vendor of an error or malfunction
of the GIMS software, other than a Critical Error as set forth in
subparagraph (iii) (a "Non-Critical Error"), the Vendor shall
have two (2) months (the "Non-Critical Error Correction Period")
to remedy the Non-Critical Error. Should the Vendor not remedy
the Non-Critical Error within the Correction Period, the Vendor
will have failed to perform its support services and the Vendor
agrees to waive the next three payments of monthly "LISA" support
fees as a penalty to the Client.
(b) New Feature Requests/Documentation Changes
(i) Client Requests shall be reviewed according to the Vendor's
established procedures. Any new features specific to the
Client will be quoted and if accepted, a separate document
will be signed between the parties, detailing the cost and
implementation schedule.
(ii) New Features that are created by the Vendor and are made part of
the GIMS product will be offered to the Client at no additional
costs except for implementation and/or installation fees at the
Vendor's then current fee schedule. Out of pocket expenses will
<PAGE> 5
- 5 -
also be billed to the client to cover media, transportation,
telephone and other sundry expenses.
(iii) The Vendor shall provide a quarterly review of new features and
or improvements that are available to its Clients.
(iv) The Vendor agrees to provide a copy of the latest version of
GIMS during the period of this agreement, upon receiving a
written request from the Client.
(c) Regulatory Changes
(i) Changes to GIMS that are required to satisfy future regulatory
requirements will be provided to the Client at no additional
costs except for implementation and/or installation fees at the
Vendor's then current fee schedule. Out of pocket expenses will
also be billed.
(ii) Regulatory requirements that will be covered by this service shall
include Federal or State laws, Insurance Bureau filling as
mandated by a recognised governing body.
(iii) The Vendor and the Client shall establish an implementation date
for the modified programs. Should the Vendor not provide the
modified programs by the implementation date, the Vendor will have
failed to perform its support services and the Vendor agrees to
waive the next three payments of monthly "LISA" support fees as a
penalty to the Client.
(d) Performance and System Tuning
(i) The Vendor will periodically analyse the Clients system and
determine if it is running optimally. The Vendor will then
make any required changes to the system parameters or files that
will increase system performance. This will be provided at no
additional costs to the client, except for out of pocket expenses
which will be billed to the client.
<PAGE> 6
- 6 -
(ii) The Client will be notified in advance when this
activity is due for analysis, the Client will have
the final say in when this activity will be conducted.
(e) NEW HARDWARE AND SOFTWARE ENVIRONMENTS
(i) The Vendor will evaluate and test new environments as
they become available on the market. When a new
environment has proven itself to be commercially
attractive and desirable the Vendor will port GIMS
to this new environment.
(ii) If the Client wishes to convert from their existing
environment to one of the Vendor's other supported
environments, the Vendor will provide the Client with
a suitable version of GIMS that works in this new
environment at no additional costs except that the
Client will be subject to the Vendor's fees for
converting the Client to the new environment.
3. CLIENT RESPONSIBILITIES
(a) The Client shall undertake the proper supervision, control
and management of its use of GIMS including, but not limited
to:
- assuring proper configuration of the System,
being the configuration appropriate for
GIMS as contemplated by the License of Computer
Software Agreement as it may be modified or
enhanced from time to time to reflect changed
conditions, including without limitation
increases in client volumes;
- program installation, verification, audit
controls, and operating methods; and
- ensuring proper procedures for the security
of data, accuracy of input and output, and
backup plans including restart and recovery
in the event of hardware or software error
or malfunction.
(b) The Client is responsible for ensuring that its staff is
properly trained in the operation and usage of GIMS and that
they shall undertake its operation in accordance with any
reasonable advice given by the Vendor.
<PAGE> 7
- 7 -
(c) The Client shall apply its best efforts within a reasonable amount of
time to apply error corrections and install update releases upon receipt
from the Vendor.
(d) The Client is responsible for notifying the Vendor of all identified
errors or malfunctions on GIMS.
(e) The Client shall ensure that only properly trained and suitable
personnel are made available to implement the corrections suggested by the
Vendor.
(f) When a significant problem occurs, which after reasonable investigation
the Client believes to be an error or malfunction which affects the
operation of GIMS and which the Client cannot adequately resolve, then
the Client should contact the Vendor using the HotLine Service. The
Client shall perform the problem diagnostic activities and routines
requested by the Vendor. The Client must also keep a log of all GIMS
System problems whether they are resolved in-house by the Client or by
the Vendor.
4. CHARGES
The Client shall pay the Vendor the amounts set forth in Exhibit "A"
attached, any invoices for expenses incurred shall be payable within
thirty (30) days of Client's receipt of invoice. Out of pocket expenses
are subject to Exhibit "B" attached.
The Vendor may change its LISA Charges at the end of each contract renewal
period. Unless mutually agreed, any increases in charges shall not exceed
the immediately preceding period charges by more than the lesser of 20% or
the increase in payroll costs of computer software programmers and
analysts as documented in the Metro Toronto Board of Trade Annual "Data
Processing Compensation Survey". Any increase in payroll costs in excess
of the 20% can be recovered in the next renewal period.
Expenses incurred by the Vendor for media (such as disks, cartridge tapes,
floppy disks, magnetic tapes, etc.) and their delivery, which are provided
by the Vendor under this Agreement, shall be reimbursed by the Client and,
in addition, the Client shall reimburse the Vendor for any costs the
Vendor must pay based on this Agreement, the Services or charges rendered
under it (such as long
<PAGE> 8
- 8 -
distance charges, out-of-pocket expenses, etc.), provided that once the
aggregate of the aforesaid outstanding costs and expenses has reached
$1,000, the Vendor must seek and receive the Client's written approval
before incurring any additional costs and expenses. The charges do not
include, and the Vendor shall invoice for, and the Client shall pay, as
hereinafter stated, all taxes lawfully levied against or upon the Software
or its use, or arising out of this Agreement, exclusive, however, of taxes
based on the Vendor's income, and franchise taxes, or taxes on any
withholding at the source obligation of the Vendor which taxes shall be
paid by the Vendor.
5. PERFORMANCE OF SERVICES
The Vendor reserves the right to assign personnel or to subcontract ZIM
maintenance to Sterling Software International (Canada) Inc., and
otherwise to retain consultants working under the direction of the Vendor
who are, in the Vendor's judgement, qualified to render the Services
requested, however, the Vendor retains final responsibility for the
quality of Services rendered.
6. TERM
This Agreement shall commence upon acceptance of the GIMS system by the
Client as defined in Section 5 of the Licence of Computer Software
Agreement and shall continue for an initial term of three years. At the
end of the initial three year term, unless terminated or cancelled by
paragraph 7, the Agreement shall automatically renew for successive three
year terms.
7. TERMINATION/CANCELLATION
In the event of any material breach of this Agreement by either party
hereto, the other party may (reserving cumulatively all other
remedies and rights under this Agreement and in law and in equity)
terminate this Agreement in whole or in part by giving thirty (30) days'
prior written notice hereof; provided, however, that this Agreement shall
not terminate at the end of said thirty (30) days' notice period if the
party in breach has cured the breach of which it has been notified prior
to the expiration of said thirty (30) days.
Cancellation or termination of this Licence, Improvement & Support
Agreement due to any material breach of this Agreement does not constitute
the
<PAGE> 9
- 9 -
cancellation or termination of the overall Licence of Computer Software
Agreement.
Should the Client voluntarily wish to terminate this agreement, the Client
may do so by providing ninety (90) days written notice to the
Vendor. In which case the termination of this Agreement will also
terminate the Licence of Computer Software Agreement.
8. DISCLAIMER
The Vendor does not make and expressly disclaims, all representations and
warranties other than those expressly made herein or in the "Licence of
Computer Software Agreement", whether oral or written, express or implied,
by statute or otherwise, included without limitation any warranties of
merchantability or fitness for purpose. The Vendor shall in no event be
liable for economic, incidental, consequential, indirect, special,
punitive or exemplary damages, whether claimed under contract, tort or any
other legal remedy or theory or for any loss of or damage to the Client
data or programming. Any action against the Vendor by the Client must be
brought within six (6) months after the cause of action accrues.
9. LIMITATION
The Services to be supplied hereunder are limited to the Programs
specified in the LICENCE OF COMPUTER SOFTWARE agreement between the
parties hereto dated the same date herewith, and shall not include or
extend to any other Software or other programs of the Vendor or any part
thereof, whether released by the Vendor before or after the date of this
Agreement. Any Services which are performed by the Vendor at the request
of the Client, in addition to the grant of the License expressly provided
for herein, including, without limitation, Programming Services, Training
Services, Data Conversion Services or products shall require the payment
of additional fees to the Vendor. Such fees shall be calculated utilizing
the Vendor's then current fees. Any such Services or products provided by
the Vendor to the Client shall be provided subject to the disclaimers and
limitations on liability provided for herein.
10. CONFIDENTIALITY
(a) Neither party shall:
<PAGE> 10
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(i) use or disclose Confidential Information of the other for any
purpose other than the performance of this Agreement;
(ii) disclose Confidential Information of the other to any person who
is not bound by suitable non-disclosure arrangements made with the
party so disclosing which adequately protect Confidential
Information;
(iii) copy any Confidential Information of the other without the prior
written consent of that other party unless otherwise provided in
this Agreement; or
(iv) directly or indirectly induce or attempt to induce any employee or
consultant of the other to terminate his or her employment with the
other party; nor shall either party, without prior written consent
of the other, offer employment to any employee or consultant of
the other, or to terminated employees and consultants of the other
during the six (6) month period immediately following the
employee's or consultant's termination. For purposes of this
paragraph, the Client and the Vendor agree that the terms
"employee" and "consultant" shall mean only those employees and
consultants of either party who are substantially involved in the
development, marketing, servicing, distribution or use of any of
the Vendor's Systems. The parties agree that the sum of Ten
Thousand Dollars ($10,000.00) shall become payable forthwith upon
breach of this paragraph by the party in breach to the other, as a
reasonable pre-estimate of damages and not as a penalty.
(b) Confidential Information of either party in the possession of the other
shall be returned forthwith on written request after use thereof has been
completed for purposes of performance of this Agreement.
(c) This paragraph does not apply to information that was or later becomes
generally known or available to the public or the trade or industry in
which either party is engaged by means other than breach of this
Agreement by the other party.
(d) The terms and conditions of this Agreement are the Confidential
Information of both parties.
<PAGE> 11
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11. GOVERNING LAW
This Agreement shall be construed and interpreted solely in accordance
with the laws of the State of Indiana.
12. HEADINGS
The Headings to the Articles of this Agreement are solely for the
convenience of the parties and shall in no way be held to explain,
modify, amplify or aid in the interpretation of any of the
provisions hereof.
13. NOTICES
Any notices or other communications required or permitted to be given
or delivered under this Agreement shall be in writing (unless otherwise
specifically provided herein) and shall be sufficiently given if
delivered personally or mailed by first-class mail, postage prepaid
or sent by electronic facsimile with satisfactory evidence of
transmission together with a confirmation copy by first class mail,
postage prepaid, to the addresses on page one (1) of this agreement
or to such other address or addressee as either party may from time
to time designate to the other by written notice.
Any such notice or other communications shall be deemed to be given
when personally delivered or transmitted electronically or as of the
fourth business day after it is placed in the mail in the manner
specified. In the event of disruption of postal Services or the
reasonably anticipated disruption thereof, notice shall be given by
personal delivery or electronic facsimile.
14. ASSIGNMENT
Neither party may assign this Agreement, or any of its rights and
obligations hereunder, without the prior written consent of the other
party.
15. SEVERABILITY
In the event any one or more of the provisions of this Agreement shall
for any reason be held to be invalid, illegal or unenforceable, the
remaining provisions of this Agreement shall be unimpaired, and
the invalid, illegal or unenforceable
<PAGE> 12
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provisions shall be replaced by a mutually acceptable provision, which,
being valid, legal and enforceable, comes closest to the intention of
the parties underlying the invalid, illegal or unenforceable
provisions."
16. FORCE MAJEURE
Delay or failure of either party to fulfil or perform any of its
obligations hereunder shall be excused by any cause beyond the
reasonable control of the party so delaying or failing including
without limitation, sabotage, fire, flood, differences with employees,
riot, insurrection, war, inability to obtain components at competitive
prices, act of governmental authority, interruption of or delay in
transportation, communication line failure, power failure and acts of
God. The party so delaying or failing shall promptly notify the other
of any such event, the expected duration thereof and its anticipated
effects and make reasonable efforts to remedy the effects of such
event.
<PAGE> 13
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18. ENTIRE AGREEMENT
This Agreement together with all appendices, schedules, Amendment and
other attachments hereto, constitutes the entire agreement between
the parties hereto and any waiver, amendment or modification hereto is
not binding unless in writing and signed by an authorized
representative of the parties.
IN WITNESS WHEREOF, the parties hereto each acting under due and proper
authority have executed this Amendment as of the day, month and year
written below.
TRITECH FINANCIAL SYMONS INTERNATIONAL
SYSTEMS INC. GROUP INC.,
Per: /s/ Cannot read signature Per: /s/ Douglas H. Symons
------------------------- -----------------------
Title Chairman Title President
-------------------- -----------------------
Date June 12, 1995 Date August 30, 1995
------------------- ----------------------
Affixed with Corporate Seal Affixed with Corporate Seal
<PAGE> 14
EXHIBIT A
SCHEDULE OF FEES
The on-going ANNUAL "LISA" payments are:
MANDATORY - Base annual licence and upgrade fee - as per BASE
ANNUAL FEE on table below. (Includes one State).
OPTIONAL - Additional States - to be determined.
OPTIONAL - Hot Line Support, includes the first site, Additional sites will
be quoted.
GROSS BASE HOT LINE
ANNUAL ANNUAL SUPPORT
PREMIUM FEE FEE
------- -------- -------
1 - 5,000,000 15,000 15,000
$ 5,000,001 - 15,000,000 20,000 16,000
$ 15,000,001 - 20,0001000 25,000 17,000
$ 20,000,001 - 25,000,000 30,000 19,000
$ 25,000,001 - 35,000,000 35,000 21,000
$ 35,000,001 - 50,000,000 40,000 24,000
$ 50,000,001 - 75,000,000 50,000 27,000
$ 75,000,001 - 100,000,000 60,000 30,000
$100,000,001 - 150,000,000 70,000 45,000
$150,000,001 - 200,000,000 80,000 60,000
$200,000,001 - 350,000,000 110,000 90,000
$350,000,001 - 500,000,000 150,000 120,000
$500,000,001 - 750,000,000 200,000 145,000
GROSS ANNUAL PREMIUM of Client: 55 million
BASE ANNUAL FEE: $ 50,000.00
ADDITIONAL Sates supported: Based on time and materials
HOT LINE support: $ 27,000.00
ADDITIONAL SITES supported: One $ 6,000.00
TOTAL ANNUAL LISA PAYMENTS: $ 83,000.00
-----------
Paid in monthly instalments of: $ 6,916.67
-----------
It is understood and agreed that the Client's Gross Annual Premium for the
term shall be calculated based on Fifty five Million dollars ($55,000,000).
<PAGE> 15
EXHIBIT B
GUIDELINES FOR OUT-OF-POCKET EXPENSES
BASIC POLICY
When the Vendor has to incur out of pocket expenses on behalf of the Client,
then the Client shall reimburse for reasonable, actual and necessary
out-of-pocket expenses in connection with the performance of the consulting
Services. Reasonable expenses are those that are not lavish or extravagant.
It is the responsibility of the Client and the Vendor to ensure that these
guidelines are followed. Should a site visit be required, the Vendor will
obtain a written authorization from the Client before any travel plans shall be
made.
OUT-OF-POCKET EXPENSES GUIDELINES
Travel
a) Air Transportation
All air transportation is to be at discounted coach fares or as
approved by the client.
b) Transportation To/From Airports
Hotel courtesy shuttles should be used whenever possible. After
that, airport limousine Services and airport buses should be
used. Taxis should be used as a last choice and shared as
appropriate.
c) Other Ground Transportation
Use of personal cars shall be reimbursed at the rate of 25 cents per
kilometre. Car rental shall be reimbursed for a compact or
mid-size car. Reimbursement shall be made for tolls and parking.
Lodging
Reimbursement shall be made for standard rooms. No reimbursement
shall be made for deluxe or upgraded rooms or for suites.
Meals
A daily allowance of $30 should be followed unless agreed to
otherwise.
<PAGE> 1
EXHIBIT 10.14(2)
LICENCE OF COMPUTER SOFTWARE
THIS AGREEMENT is dated this 30 day of August, 1995.
BETWEEN: TRITECH FINANCIAL SYSTEMS INC.,
a Corporation with a place of business at:
2 Eva Road, Suite 201
Etobicoke, Ontario M9C 2A8
(hereinafter referred to as the "Vendor")
AND:
Symons International Group Inc.
a Corporation with a place of business at:
4720 Kingsway Drive
Indianapolis, Indiana, 46205
(hereinafter referred to as the "Client")
WHEREAS the Vendor is the owner of the right, title and interest in a
General Insurance Management System (GIMS) as more specifically
described hereinafter;
AND WHEREAS the Client is desirous of obtaining a licence for the use
of GIMS;
NOW THEREFORE in consideration of the mutual covenants herein
contained the parties hereto agree as follows:
A. DEFINITIONS
In this Agreement:
(a) ACCEPTANCE TEST means the Tests of the GIMS Application
Programs on the Hardware to be conducted in accordance with
Section 5 hereof in order to: (1) verify that the GIMS Application
Programs meet the Functional Specifications and (ii) verify that
adequate performance of the System running the GIMS Application
Programs against appropriate data sets under a variety of conditions.
(b) GIMS APPLICATION PROGRAMS mean the GIMS programs
(together with the source code) described in Exhibit A.
<PAGE> 2
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(c) CLIENT MODIFICATIONS means modifications made to the Software at any time
hereafter by other than the Vendor and without the assistance or
supervision of the Vendor.
(d) DOCUMENTATION means the documentation outlined in Exhibit A.
(e) FUNCTIONAL SPECIFICATIONS means the GIMS System specifications attached
hereto as Exhibit A.
(f) HARDWARE means the computer hardware approved by the Vendor and as
described in Exhibit C.
(g) INSTALLATION SITE means the location where the System will first be
installed.
(h) SOFTWARE means collectively the GIMS Application Programs, and any other
software provided in this Agreement and any and all additions, enhancements
and modifications thereto provided by Vendor, any and all custom software
developed by Vendor for use in connection with any of the foregoing and any
and all adaptions, and derivatives thereof provided by Vendor, whether in
source code, object code, tangible, intangible or any other form, and any
portion or copy of any of the foregoing.
(i) LICENCE, IMPROVEMENT & SUPPORT AGREEMENT (LISA) means the agreement so
named between the parties hereto.
(j) SYSTEM means the Hardware and Software working together.
(k) VENDOR MAINTENANCE means maintenance provided by the Vendor pursuant to the
LISA.
(l) ZIM means 4th Generation Language/DBMS as provided by Sterling Software
International (Canada) Inc..
(m) GROSS ANNUAL PREMIUM means the Gross written insurance premiums of the
Client's business for the latest year end, processed through the GIMS
Application Programs, excluding sales taxes and service charges.
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(n) COPIES, means the number of licenced copies referred to in this
agreement. Each copy can only be used on one computer system
at a time. The Client is licenced for Two copies under this
agreement, any changes to the number of copies used by the
Client must be authorized by the Vendor.
(o) SITES, means the locations where GIMS is to be installed on the
Client's computers. The Vendor will install GIMS at Two of the
Client's sites, Indianapolis, Indiana and Ft. Lauderdale, Florida.
(p) Initial three year term shall commence on January 1, 1996
1. LICENCE
If the Client accepts the GIMS Application Programs, the Client shall receive a
non-exclusive, perpetual, non-transferable, except as provided herein, licence
for the GIMS Application Programs provided pursuant to the terms of this
Agreement.
At no additional cost to the Client, the Client may transfer the use of the
GIMS Application Programs to an alternate computer system of any size and/or
transfer the GIMS Application Programs to another location upon written notice
to the Vendor. However, in no event shall the client use more than the
licenced number of copies of the GIMS Application Programs without the payment
of additional consideration to the Vendor.
The GIMS software licence fees hereto shall be based on the Gross Annual
Premium as per Schedule B.
2. RESPONSIBILITIES
In consideration of the fees stated in Exhibit D hereto the Vendor shall:
(a) design and program the GIMS Applications Programs to meet the
Functional Specifications attached hereto as Exhibit A approved
by the Client including Quality and Functional Assurance
testing;
(b) develop plans for each Acceptance Test as well as a plan for
conversion from the present procedures to the proposed system.
The conversion will be accomplished by a mutually agreed upon
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method. The Client will be expected to verify the information being
converted;
(c) assist the Client in conducting Acceptance Tests. The Vendor shall
install all of the Software on the hardware provided by the Client at the
sites defined herein and shall make the Software ready for use;
(d) train the Client's key personnel in the initial use of each of the
GIMS Application Programs as well as in the use of ZIM as related
to GIMS. Training will be performed at the beginning of each phase
of the Client's delivery schedule; and
(e) be available for problem resolution during the Acceptance Test and
conversion of the System.
The Client shall:
(a) approve the Functional Specifications once satisfied with the contents;
(b) approve the Acceptance Test plan once satisfied with the contents;
(c) work with the Vendor and approve each Acceptance Test when the
corresponding GIMS Application Programs meet the respective
Functional Specifications;
(d) develop comprehensive Acceptance Test Data for the System and
prepare the test data, the transactions and files to perform the
Acceptance Tests;
(e) provide the Hardware in proper operating condition;
(f) provide qualified personnel to operate the system; and
(g) perform the Acceptance Tests.
3. CONFIDENTIALITY
The Client shall keep confidential and not disclose or permit access to the GIMS
Application Programs or Documentation to any person except those
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persons permitted to have access to the GIMS Application Programs and
Documentation under this Section 3. The Client shall grant access to the
GIMS Application Programs and Documentation only to such limited number of
employees and other persons providing services to the Client as is
necessary for purposes specifically related to a use of the GIMS
Application Programs or Documentation permitted by this Agreement. The
Client shall advise all persons who are permitted by this Agreement to have
access to the GIMS Application Programs or Documentation of the
confidential and proprietary nature of the GIMS Application Programs and
Documentation, and of the restrictions imposed by this Agreement. The
Vendor shall have the right, upon reasonable notice, and during business
hours, to enter upon the premises of the Client to make such examination as
it deems necessary to ensure compliance by the Client with the terms of
this Agreement.
4. IMPLEMENTATION SCHEDULE
The Client and the Vendor shall perform each party's assigned
responsibilities in accordance with the implementation Schedule attached
hereto as Exhibit D.
5. ACCEPTANCE TEST
At no additional cost, the Vendor shall install the Software on the
hardware provided by the Client at the sites defined herein. After the
completion of installation, the Vendor shall perform a verification test to
validate that all components of the Software have been installed and have
been made ready for productive use.
The Acceptance Tests of the System shall be conducted and approved by the
Client. Each module capable of standalone operation shall be tested on a
standalone basis and all modules shall be tested operating together as an
integrated whole. During the Acceptance Tests, comprehensive and
representative sets of transactions supplied by the Client and associated
with the GIMS Application Programs under testing are processed and results
are verified for all components of each of the GIMS Application Programs
under testing. The tests will be completed and the Vendor informed in
writing of errors. Any errors or modifications will be corrected by the
Vendor for re-testing at no additional cost to the Client.
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Following the date of completion of installation of the GIMS Application
Programs by the Vendor on the Hardware provided by the Client, the Client
shall conduct Acceptance Tests for the GIMS Application Programs as
developed by the Vendor under Section 2, for the period of sixty (60)
consecutive calendar days including two (2) month end processing cycles,
several Daily and Weekly cycles, commencing on the implementation date of
the last accepted module of the GIMS Application Programs, for the purpose
of determining if, the GIMS Application Programs conforms to the Functional
Specifications and that the GIMS Application Programs performs
satisfactorily under production conditions. During the Acceptance Test the
Client shall notify the Vendor in writing specifying in reasonable detail
in what respects, if any, the GIMS Application Programs are failing to
perform. The Vendor shall immediately correct any GIMS Application
Programs deficiencies disclosed by the Acceptance Test at no additional
cost to the Client. At the end of the sixty (60) consecutive calendar day
period, the Client shall inform the Vendor of either its acceptance or
rejection of the GIMS Application Programs. In the event that the GIMS
Application Programs are rejected by the Client, the Client may choose to
advise the Vendor of the deficiency and give a further sixty (60) day
period to remedy the deficiency. In the event that the GIMS Application
Programs are rejected by the Client, the Client may immediately terminate
the Agreement as provided by the Agreement.
6. DOCUMENTATION
At no additional cost to the Client, the Vendor shall supply all
Documentation to the Client as outlined in the Functional Specifications
attached hereto in Exhibit A.
7. COPIES
The Client shall have the right to (i) use the licenced number of machine
readable copies of the GIMS Application Programs in object code form for
the internal information processing needs of the Client in connection with
its business; (ii) use one machine readable copy of the GIMS Application
Programs in source code form solely for purposes of enabling the Client to
make modifications to the GIMS Application Programs; and (iii) make and use
additional machine readable copies of the GIMS Application Programs in
object code form and one visually readable copy of the GIMS Application
Programs in source code form solely for backup and archival
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purposes. The Client may make such limited number of copies of the
Documentation as is necessary solely for purposes of enabling the Client
to use the GIMS Application Programs in the manner permitted by this
Agreement.
8. PAYMENT FOR ADDITIONAL COPIES OF GIMS
Upon Payment to the Vendor of licence fees as outlined in Exhibit "B"
attached hereto (plus then current implementation and customization costs
if applicable), the Client shall have the right to a licence of an
additional copy of the GIMS Application Programs in object code form and
shall have the right to use such copy, pursuant to the terms hereof, for
the internal information processing needs of the Client in connection with
its business as an additional copy or alternate modified version of any of
all such GIMS Application Programs on the Hardware or on other hardware
subject to written consent of the Vendor which consent shall not be
unreasonably withheld and advance written notice to the Vendor of the
purpose and business for which such copy is to be used and the model,
serial number and location for the central processing unit on which such
copy is to be used (if other than on the Hardware designated herein).
9. MODIFICATIONS
The Client shall have the right to modify the GIMS Application Programs for
any purpose consistent with the terms of this Agreement provided that, upon
the request of the Vendor, the Client shall promptly supply such
modifications in object code and source code form to the Vendor; provided
however that Vendor hereby agrees that any such modifications created by
Client shall remain the property of Client, irrespective of any right
Client shall grant Vendor for the use of such modifications. Vendor hereby
agrees that, in the event such Client modifications are integrated into the
GIMS Application Programs which Vendor shall market, sell or licence to
third parties, Client shall receive just compensation, as determined by
Client and Vendor in good faith, for that portion(s) of such Client
modifications, as shall be included in the GIMS Application Programs sold
to others. The Vendor will use all reasonable efforts to ensure that
future modifications, enhancements and upgrades to the GIMS Application
Programs will be compatible with the Client Modifications provided to the
Vendor hereunder.
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10. COMPUTER PROGRAMS DEVELOPED BY THE CLIENT
Computer programs and knowhow developed by the Client which are not
modified versions of GIMS Application Programs supplied by the Vendor
will remain in the possession and ownership of the Client and are not to
be included in the terms and conditions of this Agreements relating to the
GIMS Application Programs.
11. PROTECTION OF CLIENT INFORMATION
During the term of this Agreement and for a period of five (5) years from
either the date of expiration or date of termination of this Agreement,
whichever occurs later, the Vendor will regard and preserve as confidential
all the Client files and all information related to the business of the
Client, its parent, their subsidiary and affiliated companies, or its or
their clients, that may be obtained by the Vendor from any source as a
result of this Agreement. The Vendor will not, without first obtaining the
Client's written consent, disclose to any person, firm, or enterprise, or
use for its benefit, any information relating to the pricing, methods,
processes, financial data, lists, apparatus, statistics, programs,
research, development or related information of the Client, its parent,
their subsidiary or affiliated companies, or its or their clients,
concerning past, present or future business activities of said entities.
The Vendor shall keep confidential and not disclose or permit access to the
GIMS Application Programs or Documentation modified by the Client or by the
Vendor exclusively on behalf of the Client, to any person except those
persons permitted to have access to the GIMS Application Programs and
Documentation under this Section. The Vendor shall grant access to the
GIMS Application Programs and Documentation only to such limited number of
employees and other persons providing services to the Vendor as is
necessary for purposes specifically related to a use of the modified GIMS
Application Programs or Documentation permitted by this Agreement. The
Vendor shall advise all persons who are permitted by this Agreement to have
access to the modified GIMS Application Programs or Documentation of the
confidential and proprietary nature of the modified GIMS Application
Programs and Documentation, and of the restrictions imposed by this
Agreement. The Client shall have the right, upon reasonable notice, and
during business hours, to enter upon the premises of the Vendor to make
such examination as it deems necessary to ensure compliance by the Vendor
with the terms of this Agreement.
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12. LICENCE, IMPROVEMENT AND SUPPORT
A Licence, Improvement and Support Agreement must be executed between the
parties as an integral part of this "Licence of Computer Software" Agreement.
13. LIABILITY
Subject to the limitations and disclaimers herein, the Client shall be liable
for and shall indemnify and hold the Vendor harmless against any loss or damage
caused by the fault or negligence of the Client, its officers, employees, agents
and representatives. The Vendor shall be liable for and shall indemnify and
hold the Client harmless against any loss or damage caused by the fault or
negligence of the Vendor, its officers, employees, agents and representatives.
14. DISCLAIMER
The Vendor does not make and expressly disclaims, all representations and
warranties other than those expressly made herein, whether oral or written,
express or implied, by statute or otherwise, including without limitation any
warranties of merchantability or fitness for purpose. The Vendor shall in no
event be liable for economic, incidental, consequential, indirect, special,
punitive or exemplary damages, whether claimed under contract, tort or any other
legal remedy or theory or for any loss of or damage to the Client data or
programming. Any action under this Agreement against the Vendor by the Client
must be brought within one (1) year after the cause of action accrues.
15. LICENCE LIMITATION
Except as and only to the extent expressly permitted in this Agreement, the
Client shall not permit any third party to use, sub-licence, sell, assign,
convey, transfer, disclose, publish, display, copy, duplicate, adapt, merge,
embed, disassemble or otherwise deal with any of the GIMS Application Programs
or Documentation and, without limiting the foregoing, shall not use the GIMS
Application Programs to provide information processing, computer service bureau
or computer time sharing or similar services to
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any other person or entity or use the GIMS Application Programs or Documentation
for any purpose other than as expressly provided herein.
16. OWNERSHIP
As between the Vendor and the Client herein, title ownership rights to the GIMS
Application Programs, supplied by the Vendor, remain with the Vendor. No rights
or title of any kind whatsoever to any Software shall be acquired by the client
as a result of the transactions contemplated by this Agreement. The GIMS
Application Programs are agreed to be the Vendor's proprietary information and
trade secrets whether or not any portion is copyrighted or patented. The
Client's use of the GIMS Application Programs as a result of this Agreement may
not be assigned, licenced or otherwise transferred voluntarily, by operation of
law (including by amalgamation), or otherwise without the prior written consent
of the Vendor. In addition the GIMS Application Programs cannot be reproduced
or used by head offices, branch offices, or sister companies, however branch
offices may use the system online within the Client's database. The Client may
develop, on its own initiative, certain procedures and programs which are not
covered in this Agreement. These procedures and/or programs shall remain the
property of the Client. The Vendor shall not be responsible for support of
Client modifications.
17. PROPRIETARY RIGHTS
The Client acknowledges that the GIMS Application Programs and Documentation
have been developed or acquired by the Vendor at great expense to the Vendor,
that the GIMS Application Programs and Documentation are confidential and that
the Vendor has exclusive proprietary and other rights in the GIMS Application
Programs and Documentation including, without limitation, patent, copyright,
trademark, service mark, trade secret, and trade name rights (collectively the
"Proprietary Rights").
18. LIMITED RIGHTS
The rights granted to the Client under this Licence are only the rights of a
licencee and shall be narrowly construed. The Client acknowledges and
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agrees that (i) no title or ownership of the GIMS Application Programs or
Documentation is transferred to the Client hereby, (ii) the GIMS
Application Programs and Documentation and all Proprietary Rights are and
shall remain the exclusive property of the Vendor, and (iii) except for the
Licence, the Client shall not have any right or interest in the GIMS
Application Programs or Documentation. The Client shall not make any
claim or representation of ownership, or act as the owner, of any of the
GIMS Application Programs or Documentation or permit or facilitate the
performance of any act that is inconsistent with or in violation of this
Agreement or which might jeopardize the Proprietary Rights.
19. REPRODUCTION OF NOTICES
All copies of the GIMS Application Programs and Documentation shall remain
the exclusive property of the Vendor. The Client shall reproduce and
include all proprietary, confidentiality, trade secret and other notices on
all copies of the GIMS Application Programs and Documentation or on any
portion thereof and will not remove, alter, cover or obfuscate, nor permit
to be removed, altered, covered or obfuscated, any such notice from the
GIMS Application Programs or Documentation.
20. UNAUTHORIZED USE
The Client shall notify the Vendor immediately on becoming aware of the
possession, use, or knowledge of the GIMS Application Programs or
Documentation by any person or entity not authorized by this Agreement
to have such possession, use or knowledge, shall assist the Vendor in
stopping and preventing the recurrence of such possession, use or
knowledge, and shall cooperate with the Vendor, at the expense of the
Vendor, in any litigation deemed necessary by the Vendor to protect the
Proprietary Rights. Compliance by the Client with this Section shall not
be construed in any way as a waiver of the rights of the Vendor to recover
damages or obtain other relief against the Client in connection with any
such unauthorized possession, use and knowledge.
21. KNOW-HOW
The Client acknowledges that the performance of this Agreement may result
in the development of new concepts, methods, techniques, know-
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how, processes, adaptations, ideas and expressions of ideas. Any such
concepts, methods, techniques, know-how, processes, adaptations, ideas and
expressions of ideas which become part of or in any manner whatsoever
relate to the GIMS Application Programs or Documentation shall be and
remain the exclusive property of the Vendor and are hereby assigned by the
Client to the Vendor and the Client shall assist the Vendor, at the expense
of the Vendor, in obtaining evidence of title or ownership therein.
22. ADDITIONAL SERVICES
Any services which are performed by the Vendor at the request of the
Client, in addition to the grant of the Licence expressly provided for
herein, including, without limitation, programming services, training
services, data conversion services or products shall require the payment
of additional fees to the Vendor. Such fees shall be calculated utilizing
the Vendor's then current fees as agreed at that time. Any such services
or products provided by the Vendor to the Client shall be provided subject
to the disclaimers and limitations on liability provided for herein.
23. INVOICING AND PAYMENT
The Vendor shall invoice the Client for the payments as stated in the
payment and implementation schedule attached hereto as Exhibit D and such
invoices, shall be payable by the Client within thirty (30) days of the
Client's receipt of each said invoice.
Any additional fees for services provided by the Vendor to the Client
hereunder or under any other arrangement or agreement between the Vendor
and the Client shall be invoiced to the Client on a regular basis as work
is performed by the Vendor. The Vendor will provide sufficient invoicing
detail such that the Client may determine the particular tasks performed
and invoiced for by the Vendor. All such invoices shall be due upon
issuance and shall be paid in full within 30 days of the date of their
issuance together with interest in the event of non-payment within such 30
day period at the rate of 18% per annum, calculated daily from the date of
receipt of the relevant invoice to the date of receipt of payment.
24. WARRANTY
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The Vendor warrants to the Client that:
(a) the Client shall quietly and peacefully posses the Software and/or
materials covered hereunder subject to and in accordance with the
provisions of this Agreement;
(b) the Client's use and possession of such Software and/or materials will
not be interrupted or otherwise disturbed by any person asserting a claim
under or through the Vendor;
(c) the Vendor has the right to licence or sub-licence to the Client on the
terms provided herein all of the GIMS Application Programs provided in this
Agreement;
(d) the GIMS source and object code provided by the Vendor pursuant to this
Agreement shall be virus free when delivered to the Client; and
(e) the GIMS source and object code provided by the Vendor pursuant to the
agreement shall be free of all intentionally programmed devices which, when
activated or if not re-set, would have a detrimental effect on the
performance of the GIMS Application Programs or the Client's computers or
the integrity of the Client's data, including data unrelated to the GIMS
Application Programs.
(f) the GIMS Application Programs will enable the Client to satisfy
applicable Laws and Regulations governing Insurance and the Insurance
Industry, to the extent relevant to the Functionality of the GIMS
Applications Programs. Regulatory requirements that will be covered by
this agreement relate to statutory obligations of the Client as well as
industry mandated requirements, and shall include, but not be limited to,
Federal or State Laws, Insurance bureau filing as mandated by a
recognized legislative body.
25. TAXES
The charges do not include, and the Vendor shall invoice for, and the
Client will pay, as hereinafter stated, all taxes lawfully levied against
or upon the GIMS Application Programs or its use, or arising out of this
Agreement, exclusive, however, of taxes based on the Vendor's income, and
franchise taxes, or taxes on any withholding at the source obligations of
the Vendor which taxes shall be paid by the Vendor or, where required
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by law, by the Client remitting to the appropriate taxing authority on the
Vendor's behalf.
26. PATENT AND COPYRIGHT INDEMNITY
Provided the Client's use of the GIMS Application Programs is in compliance with
the provisions of this Agreement, the Vendor agrees to defend and/or handle at
its own expense any claim or action against the Client, its parent, their
subsidiary and affiliated companies, for actual or alleged infringement of any
patent, copyright or similar property right (including but not limited to
misappropriation of trade secrets) based upon any item of GIMS Application
Programs, Documentation, and/or any other materials furnished hereunder by the
Vendor or the use thereof by the Client. The Vendor shall have the sole right
to conduct the defence of any such claim or action and all negotiations for its
settlement or compromise, unless otherwise mutually agreed to in writing by the
parties hereto.
The Vendor further agrees to indemnify and hold the Client, its parent, their
subsidiary and affiliated companies, harmless from and against any and all
liabilities, losses, damages, costs and expenses (including reasonable
attorneys' fees) associated with any such claim or action incurred by the Client
in accordance with this Section.
In the event any item of GIMS Application Programs and/or any other materials
furnished hereunder is involved in such claim or action and is held to
constitute infringement and the use thereof is permanently enjoined, the Vendor
shall at its own expense, either: (a) obtain for the Client the right to
continue using said GIMS Application Programs and/or any other material; (b)
modify such GIMS Application Programs and/or any other materials as contemplated
hereunder; or (c) replace said GIMS Application Programs and/or any other
materials with equally suitable, non-infringing GIMS Application Programs and/or
any other materials.
27. TERMINATION, MODIFICATION AND PRECEDENCE OF THIS AGREEMENT
(a) The Client shall have the right to terminate this agreement at any time.
At such time the Client must return to the Vendor all copies of the GIMS
Application Programs and Documentation and must
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erase any copies of the Software from the Client's computers. The Client
must also destroy or erase any backup copies of the Software. The Client
will pay the Vendor for any outstanding invoices owed as provided in the
attached Exhibit D. The Vendor will reimburse the Client for any fees paid
by the Client not yet earned by the Vendor.
(b) In the event of any material breach of this Agreement by either party
hereto, the other party may (reserving cumulatively all other remedies and
rights under this Agreement and in law and in equity) terminate this
Agreement in whole or in part by giving thirty (30) days' prior written
notice thereof; provided, however, that this Agreement shall not terminate
at the end of said thirty (30) days' notice period if the party in breach
has cured the breach of which it has been notified prior to the expiration
of said thirty (30) days. Notwithstanding anything in this Agreement to the
contrary, either party hereto shall have the right to immediately terminate
this Agreement, upon notice to the other, in the event of the other's
insolvency; receivership; or voluntary or involuntary bankruptcy; in the
event of an assignment for the benefit of creditors; or in the event any
substantial part of the other's property is or becomes subject to any levy,
seizure, assignment or sale for or by any creditor or governmental agency
without being released or satisfied within thirty (30) days thereafter. If
the Client terminates the Agreement in accordance with this paragraph such
termination will be without the Client's financial liability or penalty of
any kind.
(c) The terms of this Agreement shall apply and take equal precedence with
any and all conditions of exhibits or schedules attached as part of this
Agreement. This Agreement, together with all Appendices, Schedules and
other Attachments hereto, constitutes the entire agreement between the
parties and supersedes all previous agreements, promises, representations,
understandings and negotiations, whether written or oral, between the
parties with respect to the subject matter hereof. In the event of any
inconsistency between the Agreement and any exhibit, attachment or schedule
the exhibit, attachment or schedule shall govern.
(d) All notices to be given by one party to the other herein shall be given
by registered letter, postage prepaid, addressed to the Vendor and Client
as per page one (1) of this agreement or such
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other address as the Vendor and the Client may respectively from time to
time appoint in writing, and any such notice shall be deemed to be given
and received by the addressee three days after the mailing thereof.
(e) The invalidity in whole or in part of any portion of this Agreement
shall not affect the validity of the remaining portion, and the invalid,
illegal or unenforceable provisions shall be replaced by a mutually
acceptable provision, which, being valid, legal and enforceable, comes
closest to the intention of the parties underlying the invalid, illegal or
unenforceable provisions.
28. FORCE MAJEURE
If the performance of either party hereunder is delayed or prevented at any
time due to circumstances beyond the control of such party, including without
limitation those resulting from, labour disputes, fire, floods, riots, civil
disturbances, weather conditions, control exercised by a governmental entity,
unavoidable casualties or acts of God or a public enemy, the nonperformance of
such party shall be excused until such condition no longer exists, save and
except that the non-performing party shall immediately advise the other party
of the condition and of the anticipated duration of any delay and, in the event
such delay extends beyond ten (10) days, the performing party shall be at
liberty to mitigate any damages it may suffer by taking any reasonable means of
mitigation including the employment of its own forces, and the non-performing
party shall do all reasonable things to cooperate.
29. INSURANCE
The Vendor shall acquire and maintain in full force and effect insurance
coverage with carriers authorized to do business in Canada throughout the
term of this Agreement. Coverage is required in the following categories to
the limits shown.
Category of Insurance Limit
A. Worker's Compensation Statutory Compliance
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B. Comprehensive General
Liability $1,000,000.00
(Bodily Injury and
Property Damage)
C. Comprehensive Auto
Liability $1,000,000.00
(Bodily Injury and
Property Damage)
(Owned and Non-Owned)
The Vendor shall provide the Client with proof of insurance by furnishing
the Client with Certificates of Insurance, or in the alternative, the Vendor
may provide a verified copy of the declaration page and/or endorsements of the
relevant policy(ies).
30. NO RECRUITMENT OF EMPLOYEES
During the term of this Agreement and for a period of one year thereafter,
neither party shall employ, or engage, directly or indirectly, any employee or
consultant of the other or any person formerly employed by the other, if such
employee or consultant was in any way involved in connection with this
Agreement or the utilization of the GIMS Application Programs without the
express written consent of the other party.
31. ASSIGNMENT
The Client shall not sell, convey, sub-license, delegate, assign or
otherwise transfer the GIMS Application Programs or Documentation, any
component thereof, any right therein or this Agreement, to any other person,
either voluntarily or involuntarily, directly or indirectly, whether by
operation of law or otherwise without the prior written consent of the Vendor,
such consent not to be unreasonably withheld. Any merger, consolidation or
other reorganization shall be deemed an assignment hereunder. Notwithstanding
the foregoing, the Licence and all of the Client's rights therein may be
assigned in whole but not in part: (a) to any person or entity acquiring
substantially all of the assets and business of the Client or (b) to any person
or entity merging or consolidating with the Client, provided that prior to any
such assignment any such assignee becomes a party to this Agreement and agrees
to be bound hereby to the
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same extent as if such assignee were the Client hereunder and provided
that the GIMS Application Programs and Documentation is only used in
respect of the business and locations for which it was originally
licensed. Any sale, conveyance, sub-license, delegation, assignment of
other transfer in violation of the terms hereof shall be void and of no
force or effect.
Neither party may assign this agreement, or any of its rights and
obligations hereunder, without the prior written consent of the other
party.
32. NON-COMPETITION
During the term of this Agreement and for a period of one year
thereafter, the Client shall not enter into or engage in any business
which directly or indirectly competes with the business carried on by the
Vendor or promote or assist, financially or otherwise, any person, firm,
association, partnership, venture or corporation engaged in any business
which directly or indirectly competes with the business of the Vendor,
except as agreed to in a separate agreement.
33. ARBITRATION
Any controversy or claim arising out of or related to this Agreement,
or in the event of breach of this Agreement may at the option of either
party be referred for settlement by arbitration pursuant to the rules of
Arbitration attached as Exhibit E hereto.
34. INJUNCTIVE RELIEF
The Client acknowledges that because of the confidential and proprietary
nature of the GIMS Application Programs and Documentation neither
termination of this Agreement, arbitration, nor an action at law would be
an adequate remedy for a breach by the Client of this Agreement.
Accordingly the Client agrees and consents that in the event of any such
breach, in addition to all other remedies which the Vendor may have, the
Vendor shall be entitled to relief in equity, including a temporary
restraining order, temporary or preliminary injunction, and permanent,
mandatory or prohibitory injunction to restrain the continuance of any
such breach or to compel compliance with the provisions of this
Agreement.
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35. INDEMNIFICATION
Except as provided for in Section 26, Patent and Copyright Indemnity, the
Client shall indemnify and hold harmless the Vendor, its agents,
employees, directors, officers, shareholders, successors and assigns from
and against any and all liabilities, losses, damages, claims, suits and
expenses, including, without limitation, attorneys' fees, of whatsoever kind
and nature imposed on, incurred by, or asserted against the Vendor, its
agents, employees, directors, officers, shareholders, successors and
assigns relating to or arising out of (1) any action, claim or suit against the
Vendor by a third party relating to or arising out of the possession or use
of the GIMS Application Programs or Documentation by the Client or (ii)
any failure on the part of the Client to perform or comply with the terms of
this Agreement.
36. COOPERATION
The Client shall reasonably cooperate with the Vendor in connection
with the performance by the Vendor hereunder and the Client acknowledges that
such performance depends in part on such cooperation and that the Client's
failure to so cooperate may hinder, impede or excuse the Vendor's performance
hereunder.
37. GOVERNING LAW
This Agreement shall be construed and interpreted solely in accordance
with the laws of the State of Indiana.
<PAGE> 20
- 20 -
38. HEADINGS
The headings to the Articles of this Agreement are solely for the
convenience of the parties and shall in no way be held to explain,
modify, amplify or aid in the interpretation of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto each acting under due and
proper authority have executed this Agreement as of the day, month and
year written below.
TRITECH FINANCIAL SYMONS INTERNATIONAL
SYSTEMS INC. GROUP INC.
Per: /s/ Cannot read signature Per: /s/ Douglas H. Symons
-------------------------- --------------------------
Title Chairman Title President
------------------------- -------------------------
Date June 12, 95 Date Aug. 30, 1995
------------------------- -------------------------
Affixed with Corporate Seal Affixed with Corporate Seal
<PAGE> 21
- 21 -
LIST OF EXHIBITS
EXHIBIT A : FUNCTIONAL SPECIFICATIONS
Attachment 1 : Modification Requirements
Attachment 2 : Documentation Listing
EXHIBIT B : PRICING SCHEDULE
EXHIBIT C : COMPUTER HARDWARE AND
OPERATING SYSTEM
EXHIBIT D : IMPLEMENTATION AND PAYMENT
SCHEDULE
EXHIBIT E : RULES OF PROCEDURE OF
ARBITRATION
EXHIBIT F : GUIDELINE FOR OUT OF POCKET
EXPENSES
<PAGE> 22
EXHIBIT "A"
FUNCTIONAL SPECIFICATIONS
To be attached to this agreement.
<PAGE> 23
ATTACHMENT "1" TO EXHIBIT "A"
MODIFICATION REQUIREMENTS
To be described in the Functional Specification Document and attached to this
agreement.
<PAGE> 24
ATTACHMENT "2" TO EXHIBIT "A"
DOCUMENTATION LISTING OF ALL GIMS APPLICATION PROGRAMS
To be provided to the Client and to be attached to this agreement.
<PAGE> 25
EXHIBIT "B"
PRICING SCHEDULE
<TABLE>
<CAPTION>
G.I.M.S. Perpetual Licence LICENCE SERVICE
Gross Annual Premium FEES FEES
<S> <C> <C>
$ 1 - 5,000,000 $ 75,000
$ 5,000,001 - 15,000,000 $ 100,000
$ 15,000,001 - 20,000,000 $ 125,000
$ 20,000,001 - 25,000,000 $ 150,000
$ 25,000,001 - 35,000,000 $ 175,000
$ 35,000,001 - 50,000,000 $ 200,000
$ 50,000,001 - 75,000,000 $ 250,000
$ 75,000,001 - 100,000,000 $ 300,000
$100,000,001 - 150,000,000 $ 350,000
$150,000,001 - 200,000,000 $ 400,000
$200,000,O01 - 350,000,000 $ 550,000
$350,000,001 - 500,000,000 $ 750,O00
$500,000,001 - 750,000,000 $1,000,000
</TABLE>
Initial Licence Fee: $ 250,000
Based on up to $75 Million in GWP
SIG Florida $ 6 Million
Pafco General $ 49 Million
Functional Study Time and Materials
Conversion Study Time and Materials
Point and Shoot Executive Query incl
Laser Printing - First Print Site incl
- - Each additional Print Site $ 5,000
- - Customization as defined in Exhibit A Time and Materials
ACCORD- Integration To be determined
- IVANS Communications To be determined
Conversion Time and Materials
GIMS Customization as defined in Exhibit A Time and Materials
Testing incl
Implementation Time and Materials
Documentation as described in Exhibit A incl
Training - GIMS/ZIM (5 Weeks) incl
- Additional Training @ $600 per day
TOTAL FEES $ 255,000 $ Time and Materials
Note: The Vendor has the right to adjust the Licence fees due from the Client
at the end of each three (3) year term in co-ordination with the LISA
agreement, based on the Client's then current Gross Annual Premium Volume. The
Client's Initial Gross Annual Premium Volume is agreed to be Fifty five (55)
Million dollars.
<PAGE> 26
EXHIBIT "C"
COMPUTER HARDWARE and OPERATING SYSTEM
COMPUTER HARDWARE: DATA GENERAL AVION, HP 9000,
IBM RISC 6000, DEC ALPHA
INTEL based Lan OS, or
INTEL based SCO Unix
as determined by the Client
(to be suitably configured)
OPERATING SYSTEM: Unix, MS Workgroups
STERLING Answer Zim
<PAGE> 27
EXHIBIT "D"
IMPLEMENTATION and PAYMENT SCHEDULE
1. PROPOSED IMPLEMENTATION SCHEDULE
Client's approval of Functional Specifications: To be determined
Support file construction: To be determined
Software Customization: To be determined
Conversion of Policy, Claims and AP/GL data: To be determined
Installation of the Software on the client hardware: To be determined
The Client tests the modified Software: To be determined
Training for GIMS (Policy, Claims and AP/GL): To be determined
The Client's acceptance testing of Software: To be determined
The Client has the exclusive right to terminate this agreement if the GIMS
system is not installed and live by January 1, 1996, and the Vendor agrees to
refund any license fees paid within 30 days.
2. PAYMENT SCHEDULE
The Client shall pay to the Vendor after invoicing the following amounts for
the licences granted in this Agreement:
(i) One third of the Licence fee at time of signing this agreement.
(ii) One third of the Licence fee upon the client testing and accepting the
GIMS software.
(iii) One third of the Licence fee, three months after the client uses the
software live.
(iv) Invoices for services are due within 30 days of receipt of invoice. All
services on a Time and materials basis will be subject to authorization
by the client.
(v) Out of pocket expenses are subject to Exhibit "F" attached.
<PAGE> 28
EXHIBIT "E"
RULES OF PROCEDURE OF ARBITRATION
l. Initiation of Arbitration Proceedings
(a) If any Party to this Agreement wishes to have any matter under this
Agreement arbitrated in accordance with the provisions of this Agreement,
it shall give notice to the other Party hereto specifying particulars of
the matter or matters in dispute and proposing the name of the person it
wishes to be the single arbitrator. Within 15 days thereafter, the other
Party to this Agreement shall give notice to the first Party advising
whether such Party accepts the arbitrator proposed by the first Party. If
such notice is not given within such 15 day period, the other Party shall
be deemed to have accepted the arbitrator proposed by the first Party.
Failing agreement of the Parties on a single arbitrator within such 15 day
period, either Party may apply to a judge of the Ontario Court of Justice,
General Division under the Arbitrations Act (Ontario) for the appointment
of a single arbitrator on two clear days notice to the other Party. The
arbitrator, whether agreed on by the parties or appointed by Court, shall
have the qualifications set out in subparagraph (b) below and is
hereinafter referred to as the "Arbitrator".
(b) The Arbitrator shall be a person who is legally trained and who has
experience in the computer field in Canada and is independent of either
Party. Without limiting the generality of the foregoing, the Arbitrator
shall be arm's length from both Parties and shall not be a member of the
audit or legal firm or firms who advise either Party, not shall the
Arbitrator be a person who is otherwise regularly retained by such Parties.
2. Submission of Written Statements
(a) Within 30 days of the establishment of the Arbitrator, the Party
initiating the arbitration (the "Claimant") shall send the other Party (the
"Respondent") a Statement of Claim setting out in sufficient detail the
facts and any contentions of law on which it relies, and the relief that it
claims.
(b) Within 30 days of the receipt of the Statement of Claim, the Respondent
shall send the Claimant a Statement of Defence stating in sufficient detail
which of the facts and contentions of law in the Statement of Claim it
admits or denies, on what grounds, and on what other fact and contentions
of law he relies.
(c) Within 30 days of receipt of the Statement of Defence,, the Claimant may
send the Respondent a Statement of Reply.
(d) All Statements of Claim, Defence and Reply shall be accompanied by copies
(or, if they are especially voluminous, lists) of all essential documents
on which the party concerned relies and which have not previously been
submitted by any which they any party, and (where practicable) by any
relevant samples.
<PAGE> 29
RULES OF PROCEDURE OF ARBITRATION Cont'd
(e) After submission of all the Statements, the Arbitrator will give
directions for the further conduct of the arbitration.
3. Meetings and Hearings
(a) Meetings and hearings of the Arbitrator shall take place in the City of
Toronto, Ontario or in such other place as the Claimant and the
Respondent shall agree upon in writing and such meetings and hearings
shall be conducted in the English language unless otherwise agreed by
such parties and the Arbitrator. Subject to the foregoing, the
Arbitrator may at any time fix the date, time and place of meeting sand
hearings in the arbitration, and will give all the parties adequate
notice of these. Subject to any adjournments which the Arbitrator
allows, the final hearing will be continued on successive working
days until it is concluded.
(b) All meetings and hearings will be in private unless the parties
otherwise agree.
(c) Any Party may be represented at any meetings or hearing by a legal
practitioner.
4. The Decision
(a) The Arbitrator will make its decision in writing and, unless both the
Parties otherwise agree, its reasons will be set out in the decision.
(b) The Arbitrator will send its decision to the Parties as soon as
practicable after the conclusion of the final hearing.
(c) The decision shall be final and binding on the Parties and shall not be
subject to any appeal or review procedure provided that the Arbitrator
has followed the rules provided herein in good faith and has
proceeded in accordance with the principles of natural justice.
5. Jurisdiction and Powers of the Arbitrators.
(a) By submitting to arbitration under the foregoing Rules, the Parties
shall be taken to have conferred on the Arbitrator the following
jurisdiction and powers, to be exercised by it so far as the relevant
law allows, and in its absolute and unfettered discretion, if it
shall judge it to be expedient for the purpose of ensuring the just,
expeditious, economical and final determination of the dispute referred
to it.
(b) The Arbitrator shall have jurisdiction to:
(i) determine any question of law arising in the arbitration;
(ii) determine any question as to- its own jurisdiction;
<PAGE> 30
RULES OF PROCEDURE OF ARBITRATION Cont'd
(iii) determine any question of good faith, dishonesty or fraud
arising in the dispute;
(iv) order any party to furnish such further details of the Party's
case, in fact or in law, as it may require;
(v) proceed in the arbitration notwithstanding the failure or
refusal of any Party to comply with these Rules or with its
orders or directions, or to attend any meeting or hearing, but
only after giving that Party written notice that it intends to
do so;
(vi) receive and take into account such written or oral evidence as
it shall determine to be relevant, whether or not strictly
admissible in law;
(vii) hold meetings and hearings, and make its decision (including
the final decision) in Ontario or elsewhere with the concurrence
of the parties thereto; and
(viii) order the Parties to produce to it, and to each other for
inspection, and to supply copies of, any documents or classes of
documents in their possession or power which it determines to be
relevant.
(c) In addition, the Arbitrator shall have such further jurisdiction and
powers as may be allowed to it by the laws of Indiana, the contract
between the parties, the arbitration agreement, the submission or
reference to arbitration, and the laws of any place in which it holds
hearings or in which witnesses attend before it, and of any place in
which it gives any directions or makes any orders or any award.
(d) Notwithstanding the Parties' intention that the Arbitrator be able to
act free of Court proceedings as set forth herein, the Parties consent
to the decision of the Arbitrator being entered in any Court having
jurisdiction for the purposes of enforcement. In addition, any Party
may apply to an appropriate Court for such relief by a Court shall not
be deemed to be in derogation of the Parties' intention that the
dispute be the subject of final and binding arbitration as set forth
herein.
<PAGE> 31
EXHIBIT F
GUIDELINES FOR OUT-OF-POCKET EXPENSES
BASIC POLICY
When the Vendor has to incur out of pocket expenses on behalf of the Client,
then the Client shall reimburse for reasonable, actual and necessary
out-of-pocket expenses in connection with the performance of the consulting
Services. Reasonable expenses are those that are not lavish or extravagant.
It is the responsibility of the Client and the Vendor to ensure that these
guidelines are followed. Should a site visit be required, the Vendor will
obtain a written authorization from the Client before any travel plans shall be
made.
OUT-OF-POCKET EXPENSES GUIDELINES
TRAVEL
a) AIR TRANSPORTATION
All air transportation is to be at discounted coach fares or as
approved by the client.
b) TRANSPORTATION TO/FROM AIRPORTS
Hotel courtesy shuttles should be used whenever possible. After that,
airport limousine Services and airport buses should be used. Taxis
should be used as a last choice and shared as appropriate.
c) OTHER GROUND TRANSPORTATION
Use of personal cars shall be reimbursed at the rate of 25 cents per
kilometre. Car rental shall be reimbursed for a compact or mid-size
car. Reimbursement shall be made for tolls and parking.
LODGING
Reimbursement shall be made for standard rooms. No reimbursement
shall be made for deluxe or upgraded rooms or for suites.
MEALS
A daily allowance of $30 should be followed unless agreed to otherwise.
<PAGE> 1
EXHIBIT 10.15(1)
THIS AGREEMENT made this 1st day of September, 1989 between CLIFFSTAN
INVESTMENTS, INC., a corporation existing under the laws of the State of Nevada
and having its principal place of business at 3320 West Sahara Avenue, Suite
380, Las Vegas, Nevada, ("Cliffstan") and PAFCO GENERAL INSURANCE COMPANY, a
corporation existing under the laws of the State of Indiana and having its
principal place of business at 4720 Kingsway Drive, Indianapolis, Indiana,
("Pafco General") and GAGE NORTH HOLDINGS INC., an Ontario corporation having
its head office at 20 Warrington Street, Hamilton, Ontario, ("Gage North");
WHEREAS Pafco General has loaned to Cliffstan the sum of One Million
Seven Hundred Thousand Dollars ($1,700,000.00) (U.S.) in consideration of
which Cliffstan has executed a certain Promissory Note dated September 1, 1989,
("Promissory Note"), a copy of which is attached hereto as Schedule "A";
AND WHEREAS Gage North has agreed for valuable consideration, including
the transfer to it from Symons International Group Ltd. of 4,000 shares of the
common stock of Pafco Financial Holdings Ltd., with Pafco General to guarantee
the repayment by Cliffstan of all amounts owed by it to Pafco General;
NOW THEREFORE for good and valuable consideration, the receipt of which
is hereby acknowledged by each of the parties hereto, the parties hereto agree
as follows:
1. (a) Gage North unconditionally guarantees to Pafco General due
payment by Cliffstan of any and all principal amounts and
interest which are presently owing or which may become owing by
Cliffstan to Pafco General pursuant to the Promissory Note;
<PAGE> 2
2
(b) As between Pafco General and Gage North, Gage North is and
shall continue liable as principal debtor under all of the
covenants contained in the Promissory Note notwithstanding any
transaction which may take place between Pafco General and
Cliffstan or any neglect or default of Pafco General which might
otherwise operate as a discharge for the partial or absolute of
Gage North if he were surety only of Cliffstan and without
restricting the generality of the foregoing notwithstanding the
granting of time or other indulgences to Cliffstan;
(c) Pafco General, in its absolute discretion and without
diminishing the liability of Gage North, may grant time or other
indulgences to Cliffstan or any other person or persons now or
hereafter liable to Pafco General in respect to the principal
sum and interest under the Promissory Note and may give up,
modify, vary, exchange, renew or abstain from perfecting or
taking advantage of the benefits of the Promissory Note in whole
or in part and may discharge any part or parts of or accept any
composition or arrangements or realize upon the Promissory Note
and when and in such manner as Pafco General may think expedient
and in no case shall Pafco General be responsible for any
neglect or omission with respect to the Promissory Note. Any
account settled or stated by or between Pafco General and
Cliffstan or admitted by or on behalf of Cliffstan may be
adduced by Pafco General and shall in that case be accepted by
Gage North as conclusive evidence that the balance or amount
thereof thereby appearing is due by Cliffstan to Pafco General;
<PAGE> 3
3
(d) Gage North will not at any time claim to be subrogated in any
manner to the position of Pafco General under the Promissory
Note and will not claim the benefit of any security at any time
held by Pafco General; provided, however, that in any event of
Gage North's paying to Pafco General all of the monies remaining
unpaid under the Promissory Note then Gage North, upon making
such payment, shall be entitled to exercise its rights
pursuant to the assignment as hereinafter described in paragraph
3;
(e) Pafco General shall not be bound to exhaust its resources
against Cliffstan or other parties or any security it may hold
before requiring payment from Gage North and Pafco General may
enforce the various remedies available to it and may realize
upon the various securities held by it or any part thereof in
such order as Pafco General may determine;
(f) If default shall occur or demand is made but not satisfied by
Cliffstan under the Promissory Note, Gage North shall forthwith
upon demand being made upon it by Pafco General in writing
served on Gage North or sent by prepaid registered mail at the
address hereinabove indicated pay to Pafco General all
principal, interest, costs and expenses due by virtue of this
Guarantee or the Promissory Note;
(g) In the event that Gage North shall become bankrupt or insolvent
or shall be subject to the provisions of the Bankruptcy Act or
any other act for the benefit of creditors either voluntarily or
under a
<PAGE> 4
4
court of competent jurisdiction, or make a general assignment
for the benefit of creditors or otherwise acknowledge
insolvency, then and in any and every such case Pafco General
may demand from Gage North the principal sum owed by Cliffstan
and at such time outstanding, together with all interest, costs,
expenses and administration fees and all sums of money which may
be added or become due to Pafco General by virtue of the
provisions of this Guarantee notwithstanding that the principal
sum and interest may not be otherwise due and payable under the
Promissory Note;
(b) This Guarantee shall extend to and shall enure to the benefit
of Pafco General and its successors and assigns and reference
herein to Gage North is a reference to and shall be construed
as including Gage North, its heirs, executors, administrators
and assigns.
2. As security for the obligations of Gage North pursuant to paragraph 1
hereof, Gage North agrees to provide to Pafco General a mortgage substantially
in the form annexed hereto as Schedule "B", which mortgage shall be registered
on title.
3. As security for the obligations of Cliffstan to reimburse Gage North in
the event that Gage North has paid Pafco General as set out in subparagraph
1(f) (which payment is also referred to in subparagraph 1(d)), Cliffstan hereby
assigns, transfers and otherwise conveys to Gage North all of its rights, title
and interest in a certain promissory note in favour of Cliffstan from Symons
International Group Ltd. dated September 1, 1989 in the principal amount of
$1,700,000.00 (U.S.), a copy of which is annexed hereto as Schedule C, subject
to the terms of the Subordination Agreement in favour of Fleet National Bank;
<PAGE> 5
5
provided that it is a condition of this assignment that so long as Cliffstan
performs its obligations to Pafco General pursuant to the Promissory Note then
this assignment shall be null and void, otherwise it shall be in full force and
effect.
4. In the event of Gage North paying to Pafco General all of the monies
remaining unpaid under the Promissory Note being entitled thereby to exercise
its rights under the assignment referred to in paragraph 3 then immediately upon
such event occurring Pafco General and Gage North each agree with Cliffstan
that Cliffstan is released and absolved of any and all liability for payment
of any monies under the Promissory Note and Pafco General and Gage North each
hereby forever release and discharge Cliffstan from any and all claims, demand,
actions, suits or proceedings of whatsoever kind or nature against
Cliffstan by reason of the Promissory Notes and the money advanced in
accordance therewith.
5. This Agreement shall be binding upon and shall enure to the benefit of
the parties hereto and their respective successors and assigns.
6. Each reference in this Agreement to payment of the Promissory Note in
full shall mean final payment of the full amount thereof through receipt thereof
by Pafco General of immediately available lawful money of the United States to
the extent that such payments are retained by Pafco General.
7. This Agreement was delivered in the State of Indiana and for all
purposes shall be governed by and construed in accordance with the local laws of
said state without regard to said state's conflict of laws rules.
<PAGE> 6
IN WITNESS WHEREOF the parties hereto have executed this Agreement as
of the date first written above.
CLIFFSTAN INVESTMENTS, INC.
By: /s/ Robert Amira
----------------------------
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas Symons
----------------------------
GAGE NORTH HOLDINGS INC.
By: /s/ Cannot read signatures
---------------------------
ACKNOWLEDGED and the assignment in
paragraph 3 is hereby consented to
this 7th day of September, 1989.
SYMONS INTERNATIONAL GROUP LTD.
By: /s/ G. Symons
---------------------------
By: /s/ cannot read signature
----------------------------
<PAGE> 1
EXHIBIT 10.15(2)
THE PURCHASE or PROMISSORY NOTE AND ASSIGNMENT OF SECURITY AGREEMENT
made as of the 30th day of September 1992
BY AND BETWEEN PAFCO GENERAL INSURANCE COMPANY, a corporation duly
constituted pursuant to the laws of the State of
Indiana having its head office in the City of
Indianapolis (hereinafter referred to as "Pafco")
AND GRANITE REINSURANCE COMPANY LTD. a corporation duly
constituted pursuant to the laws of Barbados having its
head office in the City of Bridgetown, Barbados
(hereinafter referred to as "Granite Re")
WHEREAS Cliffstan Investments, Inc. is a corporation duly incorporated
under the laws of the State of Nevada with offices situated in the City of Las
Vegas, State of Nevada (hereinafter referred to as "Cliffstan");
AND WHEREAS Pafco did on or about the first day of September 1989 lend
to Cliffstan the sum of $1,700,000 U.S. funds, the whole as evidenced by
promissory note dated September 1, 1989 a copy of which is attached hereto as
Schedule "A";
AND WHEREAS the above mentioned loan has been renewed from time to time to
expire the 30th day of September 1992, the whole as evidenced by copies of two
letters of renewal dated September 15, 1990 and June 25, 1991, respectively,
attached hereto as Schedule "B", the said Promissory Note and renewals being
collectively referred to as the "Pafco Promissory Note";
<PAGE> 2
- 2 -
AND WHEREAS as security for the above loan, Pafco received from Gage North
Holdings Inc., a corporation incorporated pursuant to the laws of Ontario
having its head office in the City of Hamilton, Ontario (hereinafter referred
to as "Gage North") an unconditional guarantee of all amounts due to Pafco from
Cliffstan and as security for the said guarantee Pafco received a mortgage on
real property owned by Gage North, the whole as evidenced by a copy of the said
guarantee and mortgage attached hereto as Schedule "C", the said guarantee and
mortgage being hereinafter collectively referred to as the "Collateral
Security";
AND WHEREAS Granite Re now wishes to purchase the Pafco Promissory Note
together with the Collateral Security and Pafco wishes to sell same on the
terms and conditions outlined hereinbelow;
NOW THEREFORE this agreement witnesses that in consideration of the premises
and the covenants contained herein the parties hereto agree as follows:
Preamble
1. The preamble shall form part hereof as if fully recited at length.
Cliffstan Acknowledgment
2. The addendum attached hereto as Schedule "D" shall be
executed by Cliffstan acknowledging, inter alia, that the
Pafco Promissory Note is now payable on written demand in
the principal amount of $2,045,201 U.S. funds, being the
original principal amount plus accrued and outstanding
interest of $345,201.00 U.S.
<PAGE> 3
- 3 -
Purchase and Sale
3. Granite Re hereby purchases from Pafco and Pafco hereby without
recourse sells, transfers and assigns to Granite Re the Pafco
Promissory Note as amended and acknowledged by Cliffstan (Schedules
A and B and D), hereinafter collectively referred to as the "Promissory
Note", subject to the terms and conditions hereof.
Purchase Price
4. The purchase price payable by Granite Re to Pafco for the Promissory
Note is the principal amount of $2,045,201 plus interest commencing
October 1, 1992 on the outstanding principal amount accruing at the
simply interest rate of 7.8% per annum, all of which shall be paid in
accordance with the following schedule of payments:
(i) On or about September 30, 1992, Granite Re shall pay to Pafco the sum
of $345,201.00;
(ii) Interest shall be paid quarterly in arrears with the first such payment
due December 31, 1992; and
(iii) Principal payments shall be paid quarterly in the amount of
$200,000.00 per quarter, the first such payment to be made December
31, 1992, which payments shall continue until the full amount of the
principal has been paid (the last principal payment being adjusted
accordingly).
(iv) In the event that Granite Re fails to make any payment as required by
this paragraph 4 within sixty days from the date on which said payment
is due, Pafco may, at its option, declare the entire principal
balance then outstanding, together with all accrued and unpaid
interest, to be due and payable upon written notice to Granite Re that
it is making such declaration.
<PAGE> 4
- 4 -
Collateral security
5. Pafco shall retain title to the Promissory Note and
Collateral Security until such time as the full amount of the purchase
price has been paid by Granite Re. Until that time, Pafco acknowledges
and agrees that Granite Re has a beneficial interest in the Promissory
Note and Collateral Security to the extent and in the amount of the
payments made by Granite Re at any time.
6. At such time as the full amount of the purchase price has been paid,
Pafco agrees to transfer and assign to Granite Re the Promissory Note
and the Collateral Security held by Pafco.
Beneficial Interest
7. During the interim period until Granite Re has paid in full for the
Promissory Note, Pafco agrees that it will at all times recognize and
protect Granite Re's beneficial interest in the Collateral Security.
Granite Re hereby appoints Pafco, and Pafco accepts such appointment,
as trustee to act on its behalf in respect to its interest in the
Collateral Security until such time as the purchase price has been
paid in full.
Right of Action
8. Pafco shall have the right to initiate and maintain any demand,
claim, action, suit, cause of action or other right available to it in
law in respect to the Promissory Note and the Collateral Security for
the full amount of the Promissory Note as remains outstanding from
time to time (plus outstanding interest, fees and expenses),
<PAGE> 5
- 5 -
regardless of how much of the purchase price has been paid by Granite
Re, until such time as the purchase price has been paid in full,
subject to distribution of any proceeds from any realization in
accordance with the provisions hereof.
Proceeds of Realization
9. In the event of any realization in respect to the Collateral Security
held by Pafco, then the parties agree that Pafco is to first use the
proceeds from any such realization to pay in full the outstanding
principal and interest due to it and fees and expenses incurred in the
said realization and then any surplus shall be paid to Granite Re to
the extent of all payments made by Granite Re to Pafco to the date of
such realization. Any funds remaining thereafter shall be paid to
Cliffstan or Gage North as the case may be.
Payments by Cliffstan
10. In the event that Cliffstan makes any payments pursuant to its
obligations under the Promissory Note, then such payments shall be
made to Pafco until such time as the purchase price has been paid in
full and shall first be applied by Pafco to satisfy outstanding
interest due and thereafter to reduce the outstanding principal amount
owed. The purchase price to be paid by Granite Re shall be adjusted
accordingly and at such time as the full amount of the purchase price
has been paid, the parties agree that the Promissory Note and
Collateral Security shall be duly assigned to Granite Re and all
further payments from Cliffstan shall be made to Granite Re, first to
be applied in reduction of outstanding interest.
<PAGE> 6
- 6 -
Covenants by Pafco
11. Pafco hereby covenants, represents and warrants to
Granite Re as follows:
a) The Pafco Promissory Note is owned by Pafco with good and marketable
title, free and clear of all charges and encumbrances and restrictions
whatsoever.
b) There are no claims, actions, suits, requests, investigations or
proceedings outstanding regarding the Pafco Promissory Note.
c) The sale, transfer and assignment of the Promissory Note by Pafco will
not violate or result in any default under any agreement or any
statute, regulation, order or law to which Pafco is a party or subject
to which Pafco is bound.
d) The mortgage charge on Gage North real property and the Assignment of
Mortgage are and will be valid obligations in favour in Pafco and
Granite Re, respectively, and Pafco has all the power, capacity and
authority to transfer and assign same.
Covenants by Granite Re
12. Granite Re hereby covenants, represents and warrants to Pafco as
follows:
a) Granite Re is a corporation duly incorporated and validly existing
under the laws of Barbados and has the requisite corporate capacity
and authority to purchase the Promissory Note from Pafco and to enter
into this agreement and to carry out the transactions contemplated
herein;
b) No consent, approval or authorization under any applicable law or any
governmental authority having
<PAGE> 7
- 7 -
jurisdiction is required in respect to the purchase of the Promissory
Note from Pafco and to enter into this agreement and to carry out the
transactions contemplated herein;
Survival of Covenants
13. The covenants, representations and warranties of Pafco and Granite Re
contained in this agreement and contained in any document given
pursuant hereto shall be true and correct, valid and enforceable after
this date and shall survive hereafter.
Entire Agreement
14. This agreement shall constitute the entire agreement between the
parties hereto pertaining to the subject matter hereof. This
agreement supersedes any prior or contemporaneous contracts,
negotiations and discussions, of the parties in respect to the subject
matter hereof. No amendment, waiver or termination of this agreement
shall be binding unless executed in writing by the party to be bound
thereby and no such amendment or waiver shall extend to anything other
than the specific subject matter thereof.
Governing Law
15. This agreement shall be governed by and construed in accordance with
the laws of the State of Indiana.
Notice
16. Any notice provided for in this agreement shall be in writing directed
to the party to whom it is delivered and shall be delivered or given
at the following addresses:
<PAGE> 8
- 8 -
To Pafco
Pafco General Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana
46205
Attention: Douglas H. Symons
To Granite Re
Granite Reinsurance Company
Collymore Rock
St. Michael, Barbados
West Indies
Attention: G. Gordon Symons
Each party may change its address for the purposes of this section
from time to time by giving written notice of such change to the other
parties in accordance with this section.
Other Actions
17. The parties hereto shall do all such things and provide all such
reasonable assurances as may be required to consummate the transaction
contemplated hereby and each party shall provide such further
documents or instruments required by the other party as may reasonably
be necessary or desirable to effect the purpose of this agreement and
carry out its provisions.
Execution in Counterparts
18. This agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts
<PAGE> 9
- 9 -
shall together constitute one and the same instrument. Execution by
facsimile transmission or other such electronic means shall be deemed
to be equivalent to the execution of the documents in their original
form, subject to the ultimate delivery and receipt of signed
originals.
IN WITNESS WHEREOF this agreement has been executed by the parties hereto by
their authorized representatives as of the date indicated hereinabove.
PAFCO GENERAL INSURANCE COMPANY GRANITE REINSURANCE COMPANY LTD.
Per: /s/ Douglas Symons Per: /s/ G. Symons
---------------------------- -----------------------
This agreement and the terms and provisions hereof are hereby acknowledged and
accepted by the underesigned effective as of September 30, 1992. Gage North
hereby agrees that its guarantee dated September 1, 1989 shall continue in full
force and effect with respect to the Pafco Promissory Note as amended by the
Addendum which is attached-hereto as Schedule "D".
CLIFFSTAN INVESTMENTS INC. GAGE NORTH HOLDINGS INC.
Per: /s/ Cannot read signatures Per: /s/ Cannot read signatures
-------------------------- --------------------------
<PAGE> 1
EXHIBIT 10.15(3)
1
GUARANTEE OF ALAN G. SYMONS
TO: PAFCO GENERAL INSURANCE COMPANY
WHEREAS Pafco General Insurance Company, a corporation incorporated
pursuant to the laws of the State of Indiana ("Pafco"), lent the sum of
$1,700,000 U.S. to Cliffstan Investments, Inc., a corporation incorporated
pursuant to the laws of the State of Nevada ("Cliffstan"), as evidenced by a
Note dated September 1, 1989 as amended (the "Note");
AND WHEREAS Pafco obtained as security for the above loan a guarantee of the
amounts due under the Note in the amount of $1,700,000 U.S. from Gage North
Holdings Inc., a corporation incorporated pursuant to the laws of Ontario,
which guarantee was supported by a collateral mortgage in the principal amount
of $1,700,000 U.S.;
AND WHEREAS Pafco sold the Note and the security to Granite Reinsurance Company
Ltd., a corporation incorporated pursuant to the laws of Barbados ("Granite
Re"), pursuant to a Purchase Agreement dated September 30, 1992 (the "Purchase
Agreement");
AND WHEREAS by an agreement dated on or about September 1, 1989, Symons
International Group Ltd. ("SIG Ltd.") agreed to discharge the obligations of
Cliffstan under the Note;
AND WHEREAS Pafco and Granite Re wish to obtain additional security from
Cliffstan or SIG Ltd. for the repayment of their respective interests in the
Note as they may be from time to time;
AND WHEREAS SIG Ltd. has agreed to provide additional security to Pafco and
Granite Re in the form of a pledge of common shares owned by SIG Ltd. in the
capital of Goran Capital Inc., a corporation incorporated pursuant to the laws
of Ontario (the "Additional Security").
<PAGE> 2
2
AND WHEREAS the Additional Security granted To Pafco is collateral to the
obligations of Alan G. Symons contained in this guarantee;
NOW THEREFORE, in consideration of the premises the undersigned hereby
absolutely and unconditionally guarantees: (a) the due payment and discharge
of the indebtedness and liability to Pafco of Granite Re incurred pursuant to
the Purchase Agreement including, without limitation thereto, the repayment of
all liabilities, direct or indirect, to which Pafco may become subject as a
result of making advances to or dealing with Cliffstan and also payment of all
moneys which are now or shall at any time or from time to time hereafter become
due or owing from Granite Re and Cliffstan to Pafco pursuant to the Purchase
Agreement and/or the Note; and (b) the due payment and discharge of the
indebtedness and liability to Granite Re of Cliffstan and/or SIG Ltd. under the
Note, provided that no sum in excess of $350,000 Dollars U.S. together with
interest at the rate payable by Granite and Cliffstan (and/or SIG Ltd.)
accruing from date of demand on the undersigned shall be recoverable hereunder.
THE UNDERSIGNED HEREBY DECLARES THAT:
(1) Regardless of whether any other person or persons now or hereafter
responsible to Pafco for the indebtedness and liability hereby guaranteed
or any part thereof whether under this guarantee or otherwise shall cease to be
so liable, this guarantee shall be a CONTINUING GUARANTEE and shall be
operative and binding.
(2) This guarantee shall be construed in accordance with the laws of the
State of Indiana and in any action thereon the undersigned shall be
estopped from denying the same; any judgement recovered in the Courts of such
State against the undersigned or his personal representatives shall be binding
on him and on them.
(3) The principal amount of this guarantee shall be reduced upon payment of
the obligations of Granite Re to Pafco under the Purchase Agreement on a dollar
for dollar basis except that payments received from Gage North Holdings
Inc., if any, will not receive any credit. Once the obligations of Granite Re
to Pafco under the Purchase Agreement are less than $1,000,000 U.S., this
guarantee shall be null and void.
(4) Upon written demand being made by Pafco under the Purchase Agreement,
Pafco shall allow the undersigned a period of 60 days after delivery of such
written demand, to determine whether the undersigned wishes to purchase the
Additional Security from Pafco and/or Granite Re. Should Pafco not receive a
definite written response from the undersigned within such 60 days, or if the
undersigned shall fail to tender the purchase price for the Additional Security
with five (5) days after such response, Pafco may sell the security as provided
for in the Share Pledge Agreement.
<PAGE> 3
3
If such purchase is made, the same shall not relieve the undersigned's
obligations under this guarantee. The undersigned acknowledges receipt of a
copy of the within guarantee.
(5) The undersigned expressly waives presentment for payment, demand, notice
of demand and of dishonour and non-payment of any indebtedness secured hereby,
protest and notice of protest, diligence in collecting and in bringing suit
against any other party. The undersigned further waives all defenses given to
sureties or guarantors at law or in equity other than actual payment and
waives, to the full extent allowed by applicable law, all defenses based upon
questions as to the validity, legality or enforceability of the indebtedness
intended to be guaranteed hereby. The liability of the undersigned hereunder
shall continue, notwithstanding the death, incapacity, disability, dissolution
or termination of the undersigned and/or any other person or entity.
Dated this 22 day of April 1994.
WITNESS the hand and seal of the party executing this guarantee.
SIGNED, SEALED AND DELIVERED SIGNATURE AND SEAL
in the presence of
/s/ cannot read signature
----------------------------
WITNESS
/s/ Alan G. Symons
----------------------------
Alan G. Symons
<PAGE> 1
EXHIBIT 10.15(4)
1
SHARE PLEDGE AGREEMENT
TO: PAFCO GENERAL INSURANCE COMPANY
WHEREAS Pafco General Insurance Company, a corporation incorporated pursuant to
the laws of the State of Indiana ("Pafco"), lent the sum of $1,700,000 U.S. to
Cliffstan Investments, Inc., a corporation incorporated pursuant to the laws of
the State of Nevada ("Cliffstan"), as evidenced by a note dated September 1,
1989 as amended (the "Note");
AND WHEREAS Pafco obtained as security for the above loan a guarantee of the
amounts due under the note in the amount of $1,700,000 U.S. from Gage North
Holdings Inc., a corporation incorporated pursuant to the laws of Ontario, which
guarantee was supported by a collateral mortgage in the principal amount of
$1,700,000 U.S.;
AND WHEREAS Pafco assigned the note and the security to Granite Reinsurance
Company Ltd., a corporation incorporated pursuant to the laws of Barbados
("Granite Re"), pursuant to an agreement dated September 30, 1992 (the
"Purchase Agreement");
AND WHEREAS by an agreement dated on or about September 1, 1989, Symons
International Group Ltd. ("SIG Ltd.") agreed to discharge the obligations of
Cliffstan under the note;
AND WHEREAS Pafco and Granite Re wish to obtain additional security from
Cliffstan or SIG Ltd. for the repayment of their respective interests in the
Note as they may be from time to time;
AND WHEREAS SIG Ltd. has agreed to provide additional security to Pafco and
Granite Re in the form of a pledge of common shares owned by SIG Ltd. in the
capital of Goran Capital Inc., a corporation incorporated pursuant to the laws
of Ontario.
<PAGE> 2
2
NOW THEREFORE, the parties hereto agree as follows:
SIG Ltd. (the "Pledgor"), grants to Pafco and Granite Re (the "Pledgee") a
pledge of and a security interest in those securities described in the
"Schedule" attached hereto or which may be described in any supplemental
Schedule which hereafter may be delivered by the Pledgor to the Pledgee, which
supplemental Schedule contains a reference to this Pledge Agreement (the
"Pledged Securities" or "Securities").
1 . Obligations Secured. This Pledge Agreement has been executed by the
Pledgor and delivered to the Pledgee to secure the prompt payment and
performance of:
(i) all of the obligations of Granite Re pursuant to the Purchase
Agreement, whereby Granite Re purchased the Note; and
(ii) all of the obligations of Cliffstan and Cliffstan's successors and
assigns under the Note.
2. Perfection of Pledge. The Pledgor shall deliver to Pledgee a
certificate or certificate representing all of the Pledged Securities. In
addition, the Pledgor shall execute and deliver to the Pledgee any "stock
power", "bond power", or other instrument of assignment and any financing
statement, or other instrument deemed necessary by the Pledgee to further
evidence or perfect the Pledgee's security interest. The Pledgee may file any
financing statement to perfect its security interest signed by the Pledgee or by
the Pledgor alone. The Pledgor appoints and constitutes the Pledgee as its
agent and any officer of the Pledgee as the Pledgor's attorney-in- fact for the
purposes of: (i) executing instruments of assignment of any Pledged Security
including "stock powers" and "bond powers", and (ii) taking any action necessary
to cause the Pledgee's security interest to be registered on the books of the
issuer of such Securities. Such appointment and such power are irrevocable so
long as the Purchase Agreement and the Note are secured by the pledge and
security interest evidenced by this Pledge Agreement.
3. Proceeds - Dividends. The Pledgee's security interest will extend to
the proceeds of any Pledged Securities and any Securities which may be acquired
by the Pledgor by reason of any reinvestment of such proceeds. The Pledgee's
security interest will also extend to any cash, securities or any other property
which may be or become payable or distributable to the Pledgor an account of any
Pledged Securities. The Pledgor will deliver to the Pledgee any certificate
which the Pledgor may receive, as a dividend with respect to the Pledged
Securities, representing any Securities which are subject to the Pledgee's
security interest, together with appropriate "stock powers" or "bond powers" or
other appropriate instruments of assignment.
<PAGE> 3
3
4. Warranty of Ownership. The Pledgor represents, warrants and
covenants that the Pledgor is the owner of all the Pledged Securities and will
be the owner of any Pledged Securities hereafter delivered to the Pledgee or
which may otherwise be subjected to the Pledgee's security interest under this
Pledge Agreement, free of any other security interests or any interest
whatsoever of any other party. and that the Pledgor has and will continue to
have full power, right and authority to grant to the Pledgee a pledge of and a
security interest in all Pledged Securities.
5. Voting Rights. Unless a default shall have occurred and be
continuing under the Purchase Agreement and/or the Note, the Pledgor shall be
entitled to exercise all voting rights with respect to the Pledged Securities
and to execute consents, in respect thereof, and to consent to, ratify or waive
notice of any or all meetings of the holders of Securities of a class of which
any of the Pledged Securities are a part, with the same force and effect as if
this Pledge Agreement had not been executed and delivered. If necessary and
upon the receipt of the written request from the Pledgor, the Pledgee shall from
time to time execute and deliver appropriate proxies to enable the Pledgor to
exercise the voting and similar rights reserved to the Pledgor.
6. Remedies. Upon the occurrence of a default under the Purchase
Agreement and/or the Note, the Pledgee shall have all the rights, remedies and
options in respect to the Pledged Securities of a secured party under the
Uniform Commercial Code, and all other rights and remedies provided by law. In
exercising any such remedies, the Pledgee may sell all the Pledged Securities as
a unit, even though the price obtained may be in excess of the amount remaining
unpaid under the Purchase Agreement and the Note. The Pledgee is authorized at
any sale or other disposition of the Pledged Securities, if it deems it
advisable so to do, to restrict the prospective bidders or purchasers to persons
who will represent and agree that they are purchasing for their own accounts,
for investment and not with a view to the distribution or resale of any of the
Pledged Securities. The Pledgee may purchase the Pledged Securities or any part
thereof at any sale or sales. Any requirements of the Uniform Commercial Code
as to reasonable notice shall be met by giving notice to the Pledgor sixty (60)
days prior to such sale or other event giving rise to the requirement for
notice.
7. Application of Proceeds. The proceeds of any sale of all or any part
of the Pledged Securities, and any other cash at the time held by the Pledgee
under this Pledge Agreement, shall be applied by the Pledgee in the following
order:
a. to the payment of costs and expenses of any such sale,
including reasonable compensation to the Pledgee and its agents and
counsel, and all other expenses, liabilities and advances made or incurred
by the Pledgee in
<PAGE> 4
4
connection herewith;
b. to the payment of any such sums owing to Pledgee pursuant to the
Purchase Agreement in such order as the Pledgee may determine, and
c. to the payment of any such sums owing to Pledgee pursuant to the
Note in such order as Pledgee may determine; and
d. after all obligations under the Note and Purchase Agreement
have been satisfied, to the payment to the Pledgor or the Pledgor's
successors or assigns, or as a court of competent jurisdiction may direct,
of any surplus then remaining from such proceeds.
8. Pledge Absolute. This Pledge Agreement and the pledge and
security interest provided for hereunder shall be absolute and unconditional,
irrespective of the irregularity, invalidity or unenforceability of the Purchase
Agreement and/or the Note.
9. Miscellaneous. This Pledge Agreement shall be binding upon the
Pledgor and upon Pledgor's legal representatives, successors and assigns. If
any provision of this Pledge Agreement is determined to be illegal or
unenforceable, such provision shall be deemed to be severable from the balance
of the provisions of this Pledge Agreement and the remaining provisions shall be
enforceable in accordance with their terms. This Pledge Agreement is made under
and will be governed by the laws of the State of Indiana, except to the extent
that Indiana's conflicts of law rules would require the substantive rules of law
of any other jurisdiction to be applied.
Dated: April 22, 1994.
---------------------------
SYMONS INTERNATIONAL GROUP LTD.
Per: /s/ Alan G. Symons
------------------------------
Printed: President Alan G. Symons
--------------------------
Title:
----------------------------
<PAGE> 1
EXHIBIT 10.16 (1)
EMPLOYMENT AGREEMENT
WHEREAS, GGS Management Holdings, Inc. (the "Company") has entered into a
Stock Purchase Agreement dated as of January 31, 1996 by and among the Company,
GS Capital Partners II, L.P. ("GSCP"), Symons International Group, Inc. ("SIG")
and Goran Capital Inc. ("Goran") (the "Stock Purchase Agreement"), and it is a
condition to the Closing (all capitalized terms used and not defined herein
shall have the meanings ascribed to them in the Stock Purchase Agreement) that
(i) the Company and Alan G. Symons ("you" or the "Executive") enter into this
Employment Agreement and (ii) the Company, GSCP, SIG and Goran enter into a
Stockholder Agreement substantially in the form of Exhibit B to the Stock
Purchase Agreement (the "Stockholder Agreement").
WHEREAS, the Company considers it essential to its best interests and the
best interests of its stockholders to employ the Executive, upon the terms and
conditions hereinafter set forth; and
WHEREAS, the Executive desires to be employed by the Company, upon the
terms and conditions contained herein.
NOW, THEREFORE,in consideration of the covenants and agreements set forth
below, the parties agree as follows:
1. Term of Agreement. This Agreement shall commence as of the Closing Date
and shall continue in effect until the fifth anniversary of the Closing
Date (the "Initial Term"); provided, however, that unless terminated
earlier pursuant hereto, the term of this Agreement shall automatically
be extended without further action of either party for additional one
year periods (each such one year period, a "Renewal Period") unless, not
later than six months prior to the end of the then effective term, either
the Company or the Executive shall have given written notice that such
party does not intend to extend this Agreement (the period beginning on
the Closing Date and ending on expiration or termination of the
Executive's employment hereunder being referred to herein as the
"Employment Period").
2. Terms of Employment. During the Initial Term and any Renewal Period, you
agree to be a full-time employee of the company serving in the position
of Chief Executive Officer and President of the Company and further agree
to devote substantially all of your working time and attention to the
business and affairs of the Company and, to the extent necessary to
discharge the responsibilities associated with your position as Chief
Executive Officer and President of the Company, to use your best efforts
to perform faithfully and efficiently such responsibilities. In
addition, you agree to serve in such other capacities or offices to which
you may be duly assigned, appointed or elected from time to time (but not
in diminution of your status as a senior executive officer of the
Company). Nothing herein shall prohibit you from devoting your time to
civic and community activities or managing personal investments, as long
as the foregoing do not interfere with the performance of your duties
hereunder. You shall be entitled to serve on the Board of Directors of
the Company until removed from such office pursuant to the Stockholder
Agreement.
<PAGE> 2
3. Compensation.
(i) Base Salary. Executive shall receive base salary pursuant to
this Agreement during the Employment Period in bi-weekly
installments in an amount which shall be mutually agreed to
by and between Executive and the Company; provided, however,
that Company shall, at all times during the Initial Term,
agree that Executive's Base Salary shall be at an
annualized rate of at least $200,000 per annum (as such sum is
mutually agreed to from time to time, "Base Salary").
Executive shall receive bi-weekly installments of Base Salary
during the Initial Term and any Renewal Period (in each case on
a pro-rated basis if employment pursuant to this Agreement is
for less than a full calendar year during any portion of the
Initial Term or a Renewal Period). Executive's Base Salary
shall be reviewed at least annually by the Board of Directors
of the Company during the first calendar quarter of each year
and in the event that Executive's Base Salary shall be
increased, Executive shall receive a lump sum catch-up payment
(subjective to all applicable withholdings) in an amount
necessary to compensate Executive as if the increased Base
Salary had become effective on January 1 of the applicable
year; provided, however, that no catch-up payment shall be
made to Executive for any increase in Base Salary occurring
during 1996. Notwithstanding any other provision of this
Agreement, Executive's Base Salary shall be increased during
each year of this Agreement by a percentage which shall be at
least equal to or greater than the increase in the Consumer
Price Index applicable for such year.
(ii) Bonus. The bonus paid to Executive shall be determined in
accordance with the terms contained in Exhibit A hereto
and any bonus due Executive for any calendar year or any
portion of a year ending on December 31, shall be paid no later
than April 15 of the next succeeding year.
(iii) Other Expenses. The Company shall reimburse you for all
reasonable travel, entertainment and other business
expenses incurred by you during the Employment Period in the
performance of your responsibilities under this Agreement
promptly upon receipt of written substantiation of such
expenses in accordance with the policies of the Company in
respect thereto. You shall be entitled to reimbursement of all
reasonable travel expenses incurred by you for your spouse to
accompany you on any business trip where it is expected or
appropriate that spouses will accompany the participants.
-2-
<PAGE> 3
(iv) Benefits. You shall be entitled, at the expense of
the Company, to participate in employee benefit and fringe benefit
plans and programs (including life, health, disability and officer
indemnity insurance and retirement plans) generally made
available by the Company to other senior executives and shall be
entitled to paid vacation in an amount which is commensurate with
other chief executive officers of similarly situated property and
casualty companies. Nothing in this Agreement shall restrict the
right of the Company to amend, modify or terminate any such
benefits.
(v) Automobile. The Company shall furnish Executive (at no
cost to Executive) with an automobile (including all maintenance
therefore) which is in keeping with automobiles historically
driven by Executive.
4. Termination of Employment. Unless earlier terminated, the Executive's
employment pursuant to this Agreement shall terminate upon the earliest
to occur of any of the following:
(i) The Executive and the Company mutually agree that the employment
of the Executive shall terminate;
(ii) The Executive's retirement;
(iii) The Executive's death or Disability ("Disability" means any
physical or mental impairment, infirmity or incapacity
rendering the Executive substantially unable to perform his
duties hereunder for any 120 days in the aggregate out of any
365 day period); or
(iv) The Company terminates the Executive's employment for Cause
("Cause" means (a) the Executive being convicted in the United
States of America, any state therein, or the District of
Columbia, or in Canada or any Province therein (each, a "Relevant
Jurisdiction"), of a crime for which the maximum penalty may
include imprisonment for one year or longer (a "felony") or the
Executive having had entered against him or consenting to any
judgment, decree or order (whether criminal or otherwise) based
upon fraudulent conduct or violation of securities laws, (b) the
Executive being indicted for, charged with or otherwise the
subject of any formal proceeding (criminal or otherwise) in
connection with any felony, fraudulent conduct or violation of
securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction, (c) any consolidated balance sheet of
Goran, a Canadian insurance holding company, is required by the
independent certified public accountants of Goran to be restated
in a manner that results in the reported consolidated
shareholders' equity of Goran and its subsidiaries being reduced
by an amount equal to 10% or more of such reported consolidated
shareholders' equity, (d) the Executive engaging in fraud, or
engaging in any unlawful conduct relating to the Company or its
business, in either case as determined under the laws of any
Relevant Jurisdiction, (e) the Executive breaching any provision
of this
-3-
<PAGE> 4
Agreement of (f) gross negligence or willful misconduct by the
Executive in the performance of his duties hereunder).
5. Compensation Upon Termination. Upon termination of your employment with
the Company, payments of base salary, bonus, or other compensation and/or
benefits provided to the Executive by the Company pursuant to this
Agreement or otherwise, shall be paid in accordance with the Company's
policies then in effect; provided, however, that upon termination by reason
of death, you shall also be entitled to have your then base salary continue
to be paid (on the regular payment dates) for a period of six months after
the Date of Termination.
6. Location. Your services shall be performed at the Company's current
headquarters location in Indianapolis, Indiana, or at such other place
within a fifty-mile radius of such current location as the Board may from
time to time deem appropriate. If you shall be otherwise temporarily
relocated in connection with an acquisition by the Company or its
subsidiaries, you shall be reimbursed for reasonable expenses for housing
at such location and for your spouse to visit such location from time to
time. If you shall be otherwise permanently relocated, you shall be
reimbursed for your reasonable moving expenses. Notwithstanding the
foregoing, you shall be required to travel to the extent necessary to the
performance of your responsibilities under this Agreement.
7. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to
the respective addresses set forth on the signature page of this Agreement,
provided, that all notices to the Company shall be directed to the
attention of the Board with copies to the Secretary of the Company, or to
such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
8. Noncompetition. In consideration of the Company's entering into this
Agreement and the compensation and benefits to be provided by the Company
to you hereunder, and further in consideration of your exposure to
proprietary information of the Company, you agree as follows:
(i) Until the date of termination or expiration of your employment for any
reason (the "Date of Termination"), you agree not to enter into
competitive endeavors and not to undertake any commercial activity
which is contrary to the best interests of the Company or its
affiliates, including, directly or indirectly, becoming an employee,
consultant, owner (except for passive investments of not more than one
percent of the outstanding shares of, or any other equity interest in,
any company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market), officer, agent
or director of, or otherwise participating in the management,
operation,
-4-
<PAGE> 5
control or profits of (a) any firm or person engaged in the operation of
a business engaged in the acquisition of insurance businesses engaging
in the business of providing insurance, including reinsurance, relating
to nonstandard automobile insurance and related forms of insurance or
(b) any firm or person which either directly competes with a line or
lines of business of the Company accounting for five percent (5%) or
more of the Company's gross sales, revenues or earnings before taxes or
derives five percent (5%) or more of such firm's or person's gross
sales, revenues or earnings before taxes from a line or lines of
business which directly compete with the Company. Notwithstanding any
provision of this Agreement to the contrary, you agree that your
breach of the provisions of this Section 8(i) shall permit the Company
to terminate your employment for Cause.
(ii) If your employment is terminated by you, or by reason of your
Disability, or by the Company for Cause, then, for two years after the
Date of Termination, you agree not to become, directly or indirectly an
employee, consultant, owner (except for passive investments of not more
than one percent of the outstanding shares of, or any other equity
interest in, any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities market),
officer, agent or director of, or otherwise to participate in the
management, operation, control or profits of, any firm or person which
directly competes with a business of the Company which at the Date of
Termination produced any class of products accounting for five percent
(5%) or more of the Company's gross sales, revenues or earnings before
taxes or which at the Date of Termination derived five percent (5%) or
more of such firm's or person's gross sales, revenues or earnings before
taxes.
(iii) You acknowledge and agree that damages for breach of the covenant not to
compete in this Section 8 will be difficult to determine and will not
afford a full and adequate remedy, and therefore agree that the Company
shall be entitled to an immediate injunction and restraining order
(without the necessity of a bond) to prevent such breach or threatened
or continued breach by you and any persons or entities acting for or
with you, without having to prove damages, and to all costs and expenses
(if a court or arbitrator determines that the Executive has breached the
covenant not to compete in this Section 8), including reasonable
attorneys' fees and court costs, in addition to any other remedies to
which the Company may be entitled at law or in equity; provided,
however, that in the event that a court or arbitrator finally determines
that the Executive has not breached the covenant not to compete in this
Section 8 after an action or suit is brought by the Company with respect
thereto, the Company shall pay all costs and expenses, including
reasonable attorney's fees and court costs, incurred by the Executive in
defending against such action or suit. You hereby waive any and all
defenses you may have on the ground of lack of jurisdiction or
competence of the court to grant such injunction, restraining order or
other equitable relief you and the Company agree that the provisions of
this covenant not to compete are reasonable and necessary for the
operation of the Company and its
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<PAGE> 6
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to
compete is unreasonable, either in period of time, geographical
area, or otherwise, the parties agree that this covenant not to
compete should be interpreted and enforced to the maximum
extent which such court or arbitrator deems reasonable.
9. Non-solicitation. During the Employment Period and for a period of two
years thereafter, the Executive shall not interfere with the
Company's or any of its subsidiaries' relationships with, or endeavor
to entice away from the Company or any of its subsidiaries, or hire,
any person who at any time during the Employment Period was an employee
or customer of the Company or any of its subsidiaries or otherwise had
a material business relationship with the Company or any of its
subsidiaries.
10. Confidentiality.
(i) You agree and understand that as a result of your position with
the Company, you have been and will be exposed to and
have received and will receive information relating to the
confidential affairs of the Company, including but not limited
to, technical information, business and marketing plans,
strategies, customer information, other information concerning
the Company's products, promotions, development, financing,
expansion plans, business policies and practices, information
concerning the principals of any of the businesses of the
Company, and other forms of information considered by the
Company to be confidential and in the nature of trade secrets.
You agree that during the Employment Period and thereafter, you
will keep such information confidential and not disclose such
information, either directly or indirectly, to any third person
or entity without the prior written consent of the Company and
you confirm that such information is the exclusive property of
the Company and its affiliates. You agree to hold as the
Company's property all memoranda, books, papers, letters and
other data and all copies thereof or therefrom, in any way
relating to the business of the Company and its affiliates,
whether made by you or otherwise coming into your possession
and, on termination or expiration of your employment, or on
demand of the Company at any time, to deliver the same to the
Company.
(ii) Any ideas, processes, characters, productions, schemes, titles,
names, formats, policies, adaptations, plots, slogans,
catchwords, incidents, treatment, and dialogue which you may
conceive, create, organize, prepare or produce during the
period of your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned
by the Company and its affiliates whether or not you should in
fact execute an assignment thereof to the Company, but you
agree to execute any assignment thereof or other instrument or
document which may be reasonably necessary to protect and
secure such rights to the Company.
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<PAGE> 7
11. Arbitration.
(i) Except as contemplated by Section 8(iii) hereof, any dispute or
controversy arising under or in connection with this Agreement
that cannot be mutually resolved by the parties to this Agreement
and their respective advisors and representatives shall be
settled exclusively by arbitration in Indianapolis, Indiana
before one arbitrator of exemplary qualifications and stature,
who shall be selected jointly by an individual to be designated
by the Company and an individual to be selected by you, or if
such two individuals cannot agree on the selection of the
arbitrator, who shall be selected by the American Arbitration
Association.
(ii) The parties agree to use their best efforts to cause (a) the two
applicable individuals set forth in the preceding Section 11(i),
or, if applicable, the American Arbitration Association, to
appoint the arbitrator within thirty days of the date that a
party hereto notifies the other party that a dispute or
controversy exists that necessitates the appointment of an
arbitrator, and (b) any arbitration hearing to be held within
thirty days of the date of selection of the arbitrator and, as a
condition to his or her selection, such arbitrator must consent
to be available for a hearing at such time.
12. Stock Options. The Executive shall be granted options for shares of
capital stock of the Company pursuant to the Company's 1996 Stock
Option Plan (the "Option Plan").
(i) With respect to any shares issued pursuant to such options in
accordance with the Option Plan, the Executive will be entitled
to unlimited piggyback registration rights in connection with any
offering of shares by the Company pursuant to an effective
registration statement under the Securities Act of 1933, on a
pari passu basis with any other stockholders of the Company
having piggyback registration rights (other than Symons
International Group, Inc. and GS Capital Partners II, L.P., and
their respective affiliates and transferees, who will have
priority over the Executive), subject to the Executive entering
into appropriate agreements relating to hold-back periods, legal
opinions and similar issues.
(ii) The options granted to the Executive pursuant to the Option Plan
shall become Vested Options (as defined in the Option Plan)
automatically upon a Company Sale (as defined in the Stock
Purchase Agreement).
(iii) Immediately prior to an Initial Public Offering (as defined in
the Option Plan), the Executive shall be entitled to purchase the
shares of capital stock of the Company subject to any option that
is an Unvested Option held by the Executive at a price per share
equal to the exercise price set forth with respect to such option
in the Option Plan; provided however, that all shares purchased
pursuant to such options shall be restricted shares, subject to
the same provisions, restrictions and limitations, including,
without limitation, the provisions, restrictions and limitations
relating to vesting,
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<PAGE> 8
forfeiture and transferability, to which such options that are
Unvested Options are subject pursuant to the Option Plan not
taking into account this Section 12(iii).
13. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officers as may be specifically
designated by the Board. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements
or representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement (or in the Stockholder
Agreement). The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of
Indiana. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Company under Sections 5 and 11 and your obligations
under Sections 8, 9, 10 and 11 hereof shall survive the expiration or
termination of the Employment Period and this Agreement.
14. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
15. Enforceability. The covenants set forth in Sections 8, 9, and 10 shall
be construed as independent of any of the other provisions contained in
this Agreement and shall be enforceable as aforesaid, notwithstanding the
existence of any claim or cause of action of the Executive against the
Company or any of its subsidiaries, whether based on this Agreement or
otherwise. In the event that any of the provisions of Sections 8, 9, or
10 should ever be adjudicated to exceed the time or other limitations
permitted by applicable law, then such provisions shall be deemed
reformed in any jurisdiction to the time or other limitations permitted
by applicable law.
16. Board Action. In the case of any provision of this Agreement which
requires or is subject to any action, approval or policy of, or
determination or notice by, (i) the Board, such action, approval, policy,
determination or notice may be effected by the GSCP Designees (as defined
in the Stockholder Agreement) or (ii) the Company, shall be subject, in
addition, to the consent of the GSCP Designees.
17. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which together
will constitute one and the same instrument.
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<PAGE> 9
18. Entire Agreement. This Agreement (and the Stockholder Agreement)
contain the entire agreement by the parties with respect to the matters
covered herein and supersede any prior agreement (including, without
limitation, any prior employment agreement), condition, practice,
custom, usage and obligation with respect to such matters insofar as any
such prior agreement, condition, practice, custom, usage, or obligation
might have given rise to any enforceable right.
IN WITNESS WHEREOF, the parties have executed this Agreement this
____day of __________, 1996.
Address: GGS MANAGEMENT HOLDINGS, INC.
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
Address: By: /s/ Alan G. Symons
-------------------------------
Alan G. Symons
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<PAGE> 10
EXHIBIT A
BONUS PLAN FOR ALAN G. SYMONS
The Bonus Plan will be based on the following criteria:
1. GGS must make all interest and principal payments on a timely basis and
shall not allow any material breach of a material credit agreement covenant
to remain uncured beyond the applicable cure period.
2. If all interest and principal interest payments are met and covenant tests
passed, the following payment schedule will be used:
<TABLE>
<CAPTION>
% of GGS Plan* % of Bonus Bonus Total Compensation
-------------- ---------- ----- ------------------
<S> <C> <C> <C>
<=80% 25% $50,000 $250,000
85% 30% $60,000 $260,000
90% 35% $70,000 $270,000
95% 50% $100,000 $300,000
96% 60% $120,000 $320,000
97% 70% $140,000 $340,000
98% 80% $160,000 $360,000
99% 90% $180,000 $380,000
100% 100% $200,000 $400,000
</TABLE>
*Note: Plan refers to operating income (excluding realized gains on fixed
income portfolio and any realized gains on the equity securities in excess
of a 7.5% return on the equity portfolio including dividends) in the GGS
projections as shown below.
<TABLE>
<CAPTION>
4/30/96-
12/31/96 1997 1998 1999 2000 2001 2002
-------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating $8,982 $23,793 $28,730 $33,167 $38,397 $43,924 $49,948
Income
</TABLE>
3. Performance exceeding plan will be rewarded at the Board's discretion.
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<PAGE> 1
EXHIBIT 10.16(2)
EMPLOYMENT AGREEMENT
WHEREAS, GGS Management Holdings, Inc. (the "Company") has entered into a
Stock Purchase Agreement dated as of January 31, 1996 by and among the Company,
GS Capital Partners II, L.P. ("GSCP"), Symons International Group, Inc. ("SIG")
and Goran Capital Inc. ("Goran") (the "Stock Purchase Agreement"), and it is a
condition to the Closing (all capitalized terms used and not defined herein
shall have the meanings ascribed to them in the Stock Purchase Agreement) that
(i) the Company and Douglas H. Symons ("you" or the "Executive") enter into this
Employment Agreement and (ii) the Company, GSCP, SIG and Goran enter into a
Stockholder Agreement substantially in the form of Exhibit B to the Stock
Purchase Agreement (the "Stockholder Agreement").
WHEREAS, the Company considers it essential to its best interests and the
best interests of its stockholders to employ the Executive, upon the terms and
conditions hereinafter set forth; and
WHEREAS, the Executive desires to be employed by the Company, upon the
terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set forth
below, the parties agree as follows:
1. Term of Agreement. This Agreement shall commence as of the Closing Date
and shall continue in effect until the fifth anniversary of the Closing
Date (the "Initial Term"); provided, however, that unless terminated
earlier pursuant hereto, the term of this Agreement shall automatically be
extended without further action of either party for additional one year
periods (each such one year period, a "Renewal Period") unless, not later
than six months prior to the end of the then effective term, either the
Company or the Executive shall have given written notice that such party
does not intend to extend this Agreement (the period beginning on the
Closing Date and ending on expiration or termination of the Executive's
employment hereunder being referred to herein as the "Employment Period").
2. Terms of Employment. During the Initial Term and any Renewal Period, you
agree to be a full-time employee of the Company serving in the position of
Executive Vice President of the Company and further agree to devote
substantially all of your working time and attention to the business and
affairs of the Company and, to the extent necessary to discharge the
responsibilities associated with your position as Executive Vice President
of the Company, to use your best efforts to perform faithfully and
efficiently such responsibilities. In addition, you agree to serve in such
other capacities or offices to which you may be duly assigned, appointed or
elected from time to time (but not in diminution of your status as a senior
executive officer of the Company). Nothing herein shall prohibit you from
devoting your time to civic and community activities or managing personal
investments, as long as the foregoing do not interfere with the performance
of your duties hereunder. You shall be entitled to serve on the Board of
Directors of the Company until removed from such office pursuant to the
Stockholder Agreement.
<PAGE> 2
3. Compensation.
(i) Base Salary. Executive shall receive base salary pursuant to
this Agreement during the Employment Period in bi-weekly
installments in an amount which shall be mutually agreed to by
and between Executive and the Company; provided, however, that
Company shall, at all times during the Initial Term, agree that
Executive's Base Salary shall be at an annualized rate of at
least $150,000 per annum (as such sum is mutually agreed to from
time to time, "Base Salary"). Executive shall receive bi-weekly
installments of Base Salary during the Initial Term and any
Renewal Period (in each case on a pro-rated basis if employment
pursuant to this Agreement is for less than a full calendar year
during any portion of the Initial Term or a Renewal Period).
Executive's Base Salary shall be reviewed at least annually by
the Board of Directors of the Company during the first calendar
quarter of each year and in the event that Executive's Base
Salary shall be increased, Executive shall receive a lump sum
catch-up payment (subjective to all applicable withholdings) in
an amount necessary to compensate Executive as if the increased
Base Salary had become effective on January 1 of the applicable
year; provided, however, that no catch-up payment shall be made
to Executive for any increase in Base Salary occurring during
1996. Notwithstanding any other provision of this Agreement,
Executive's Base Salary shall be increased during each year of
this Agreement by a percentage which shall be at least equal to
or greater than the increase in the Consumer Price Index
applicable for such year.
(ii) Bonus. The bonus paid to Executive shall be determined in
accordance with the terms contained in Exhibit A hereto and any
bonus due Executive for any calendar year or any portion of a
year ending on December 31, shall be paid no later than April 15
of the next succeeding year.
(iii) Other Expenses. The Company shall reimburse you for all
reasonable travel, entertainment and other business expenses
incurred by you during the Employment Period in the performance
of your responsibilities under this Agreement promptly upon
receipt of written substantiation of such expenses in accordance
with the policies of the Company in respect thereto. You shall
be entitled to reimbursement of all reasonable travel expenses
incurred by you for your spouse to accompany you on any business
trip where it is expected or appropriate that spouses will
accompany the participants.
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<PAGE> 3
(iv) Benefits. You shall be entitled, at the expense of the
Company, to participate in employee benefit and fringe benefit
plans and programs (including life, health, disability and
officer indemnity insurance and retirement plans) generally made
available by the Company to other senior executives and shall be
entitled to paid vacation in an amount which is commensurate
with other executive vice presidents of similarly situated
property and casualty companies. Nothing in this Agreement
shall restrict the right of the Company to amend, modify or
terminate any such benefits.
(v) Automobile. The Company shall furnish Executive (at no cost to
Executive) with an automobile (including all maintenance
therefore) which is in keeping with automobiles historically
driven by Executive.
4. Termination of Employment. Unless earlier terminated, the Executive's
employment pursuant to this Agreement shall terminate upon the earliest
to occur of any of the following:
(i) The Executive and the Company mutually agree that the employment
of the Executive shall terminate;
(ii) The Executive's retirement;
(iii) The Executive's death or Disability ("Disability" means any
physical or mental impairment, infirmity or incapacity rendering
the Executive substantially unable to perform his duties
hereunder for any 120 days in the aggregate out of any 365 day
period); or
(iv) The Company terminates the Executive's employment for Cause
("Cause" means (a) the Executive being convicted in the United
States of America, any state therein, or the District of
Columbia, or in Canada or any Province therein (each, a "Relevant
Jurisdiction"), of a crime for which the maximum penalty may
include imprisonment for one year or longer (a "felony") or the
Executive having had entered against him or consenting to any
judgment, decree or order (whether criminal or otherwise) based
upon fraudulent conduct or violation of securities laws, (b) the
Executive being indicted for, charged with or otherwise the
subject of any formal proceeding (criminal or otherwise) in
connection with any felony, fraudulent conduct or violation of
securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a Relevant
Jurisdiction, (c) any consolidated balance sheet of Goran, a
Canadian insurance holding company, is required by the
independent certified public accountants of Goran to be restated
in a manner that results in the reported consolidated
shareholders' equity of Goran and its subsidiaries being reduced
by an amount equal to 10% or more of such reported consolidated
shareholders' equity, (d) the Executive engaging in fraud, or
engaging in any unlawful conduct relating to the Company or its
business, in either case as determined under the laws of any
Relevant Jurisdiction, (e) the Executive breaching any provision
of this
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<PAGE> 4
Agreement or (f) gross negligence or willful misconduct by the
Executive in the performance of his duties hereunder).
5. Compensation Upon Termination. Upon termination of your employment with
the Company, payments of bases salary, bonus, or other compensation
and/or benefits provided to the Executive by the Company pursuant to this
Agreement or otherwise, shall be paid in accordance with the Company's
policies then in effect; provided however, that upon termination by
reason of death, you shall also be entitled to have your then base salary
continue to be paid (on the regular payment dates) for a period of six
months after the Date of Termination.
6. Location. Your services shall be performed at the Company's current
headquarters location in Indianapolis, Indiana, or at such other place
within a fifty-mile radius of such current location as the Board may from
time to time deem appropriate. If you shall be otherwise temporarily
relocated in connection with an acquisition by the Company or its
subsidiaries, you shall be reimbursed for reasonable expenses for housing
at such location and for your spouse to visit such location from time to
time. If you shall be otherwise permanently relocated, you shall be
reimbursed for your reasonable moving expenses. Notwithstanding the
foregoing, you shall be required to travel to the extent necessary to the
performance of your responsibilities under this Agreement.
7. Notice. For the purpose of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the signature page of
this Agreement, provided, that all notices to the Company shall be
directed to the attention of the Board with copies to the Secretary of
the Company, or to such other address as either party may have furnished
to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
8. Noncompetition. In consideration of the Company's entering into this
Agreement and the compensation and benefits to be provided by the Company
to you hereunder, and further in consideration of your exposure to
proprietary information of the Company, you agree as follows;
(i) Until the date of termination or expiration of your employment
for any reason (the "Date of Termination"), you agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its affiliates, including, directly or indirectly,
becoming an employee, consultant, owner (except for passive
investments of not more than one percent of the outstanding
shares of, or any other equity interest in, any company or entity
listed or traded on a national securities exchange or in an
over-the-counter securities market), officer, agent or director
of, or otherwise participating in the management, operation,
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<PAGE> 5
control or profits of (a) any firm or person engaged in the
operation of a business engaged in the acquisition of insurance
businesses engaging in the business of providing insurance,
including reinsurance, relating to nonstandard automobile
insurance and related forms of insurance or (b) any firm or
person which either directly competes with a line or lines of
business of the Company accounting for five percent (5%) or more
of the Company's gross sales, revenues or earnings before taxes
or derives five percent (5%) or more of such firm's or person's
gross sales, revenues or earnings before taxes from a line or
lines of business which directly compete with the Company.
Notwithstanding any provision of this Agreement to the contrary,
you agree that your breach of the provisions of this Section
8(i) shall permit the Company to terminate your employment for
Cause.
(ii) If your employment is terminated by you, or by reason of your
Disability, or by the Company for Cause, then, for two years
after the Date of Termination, you agree not to become, directly
or indirectly, an employee, consultant, owner (except for
passive investments of not more than one percent of the
outstanding shares of, or any other equity interest in, any
company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market), officer,
agent or director of, or otherwise to participate in the
management, operation, control or profits of, any firm or person
which directly competes with a business of the Company which at
the Date of Termination produced any class of products
accounting for five percent (5%) or more of the Company's gross
sales, revenues or earnings before taxes or which at the Date of
Termination derived five percent (5%) or more of such firm's or
person's gross sales, revenues or earnings before taxes.
(iii) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 8 will be difficult to
determine and will not afford a full and adequate remedy, and
therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by you and any persons or entities acting for
or with you, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 8), including reasonable attorneys' fees and court
costs, in addition to any other remedies to which the Company
may be entitled at law or in equity; provided, however, that in
the event that a court or arbitrator finally determines that the
Executive has not breached the covenant not to compete in this
Section 8 after an action or suit is brought by the Company with
respect thereto, the Company shall pay all costs and expenses,
including reasonable attorney's fees and court costs, incurred
by the Executive in defending against such action or suit. You
hereby waive any and all defenses you may have on the ground of
lack of jurisdiction or competence of the court to grant such
injunction, restraining order or other equitable relief you and
the Company agree that the provisions of this covenant not to
compete are reasonable and necessary for the operation of the
Company and its
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<PAGE> 6
subsidiaries. However, should any court or arbitrator determine
that any provision of this covenant not to compete is
unreasonable, either in period of time, geographical area, or
otherwise, the parties agree that this covenant not to compete
should be interpreted and enforced to the maximum extent which
such court or arbitrator deems reasonable.
9. Non-solicitation. During the Employment Period and for a period of two
years thereafter, the Executive shall not interfere with the Company's
or any of its subsidiaries' relationships with, or endeavor to entice
away from the Company or any of its subsidiaries, or hire, any person
who at any time during the Employment Period was an employee or
customer of the Company or any of its subsidiaries or otherwise had a
material business relationship with the Company or any of its
subsidiaries.
10. Confidentiality.
(i) You agree and understand that as a result of your position with
the Company, you have been and will be exposed to and have
received and will receive information relating to the
confidential affairs of the Company, including but not limited
to, technical information, business and marketing plans,
strategies, customer information, other information concerning
the Company's products, promotions, development, financing,
expansion plans, business policies and practices, information
concerning the principals of any of the businesses of the
Company, and other forms of information considered by the
Company to be confidential and in the nature of trade secrets.
You agree that during the Employment Period and thereafter,
you will keep such information confidential and not disclose
such information, either directly or indirectly, to any third
person or entity without the prior written consent of the
Company and you confirm that such information is the exclusive
property of the Company and its affiliates. You agree to hold
as the Company's property all memoranda, books, papers,
letters and other data and all copies thereof or therefrom, in
any way relating to the business of the Company and its
affiliates, whether made by you or otherwise coming into your
possession and, on termination or expiration of your
employment, or on demand of the Company at any time, to
deliver the same to the Company.
(ii) Any ideas, processes, characters, productions, schemes, titles,
names, formats, policies, adaptations, plots, slogans,
catchwords, incidents, treatment, and dialogue which you may
conceive, create, organize, prepare or produce during the
period of your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned
by the Company and its affiliates whether or not you should in
fact execute an assignment thereof to the Company, but you
agree to execute any assignment thereof or other instrument or
document which may be reasonably necessary to protect and
secure such rights to the Company.
-6-
<PAGE> 7
11. Arbitration.
(i) Except as contemplated by Section 8(iii) hereof, any dispute or
controversy arising under or in connection with this Agreement
that cannot be mutually resolved by the parties to this
Agreement and their respective advisors and representatives
shall be settled exclusively by arbitration in Indianapolis,
Indiana before one arbitrator of exemplary qualifications and
stature, who shall be selected jointly by an individual to be
designated by the Company and an individual to be selected by
you, or if such two individuals cannot agree on the selection of
the arbitrator, who shall be selected by the American
Arbitration Association.
(ii) The parties agree to use their best efforts to cause (a) the two
applicable individuals set forth in the preceding Section 11(i),
or, if applicable, the American Arbitration Association, to
appoint the arbitrator within thirty days of the date that a
party hereto notifies the other party that a dispute or
controversy exists that necessitates the appointment of an
arbitrator, and (b) any arbitration hearing to be held within
thirty days of the date of selection of the arbitrator and, as a
condition to his or her selection, such arbitrator must consent
to be available for a hearing at such time.
12. Stock Options. The Executive shall be granted options for shares of
capital stock of the Company pursuant to the Company's 1996 Stock Option
Plan (the "Option Plan").
(i) With respect to any shares issued pursuant to such options in
accordance with the Option Plan, the Executive will be entitled
to unlimited piggyback registration rights in connection with
any offering of shares by the Company pursuant to an effective
registration statement under the Securities Act of 1933, on a
pari passu basis with any other stockholders of the Company
having piggyback registration rights (other than Symons
International Group, Inc. and GS Capital Partners II, L.P., and
their respective affiliates and transferees, who will have
priority over the Executive), subject to the Executive entering
into appropriate agreements relating to hold-back periods, legal
opinions and similar issues.
(ii) The options granted to the Executive pursuant to the Option Plan
shall become Vested Options (as defined in the Option Plan)
automatically upon a Company Sale (as defined in the Stock
Purchase Agreement).
(iii) Immediately prior to an Initial Public Offering (as defined in
the Option Plan), the Executive shall be entitled to purchase
the shares of capital stock of the Company subject to any option
that is an Unvested Option held by the Executive at a price per
share equal to the exercise price set forth with respect to such
option in the Option Plan; provided, however, that all shares
purchased pursuant to such options shall be restricted shares,
subject to the same provisions, restrictions and limitations,
including, without limitation, the provisions, restrictions and
limitations relating to vesting,
-7-
<PAGE> 8
forfeiture and transferability, to which such options that are
Unvested Options are subject pursuant to the Option Plan not
taking into account this Section 12(iii).
13. Miscellaneous. No provision of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by you and such officers as may be specifically
designated by the Board. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements
or representations, oral or otherwise, express or implied, with respect
to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement (or in the Stockholder
Agreement). The validity, interpretation, construction and performance
of this Agreement shall be governed by the laws of the State of Indiana.
Any payments provided for hereunder shall be paid net of any applicable
withholding required under federal, state or local law. The obligations
of the Company under Sections 5 and 11 and your obligations under
Sections 8, 9, 10 and 11 hereof shall survive the expiration or
termination of the Employment Period and this Agreement.
14. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and
effect.
15. Enforceability. The covenants set forth in Sections 8, 9 and 10 shall
be construed as independent of any of the other provisions contained in
this Agreement and shall be enforceable as aforesaid, notwithstanding
the existence of any claim or cause of action of the Executive against
the Company or any of its subsidiaries, whether based on this Agreement
or otherwise. In the event that any of the provisions of Sections 8, 9
or 10 should ever be adjudicated to exceed the time or other limitations
permitted by applicable law, then such provisions shall be deemed
reformed in any jurisdiction to the time or other limitations permitted
by applicable law.
16. Board Action. In the case of any provision of this Agreement which
requires or is subject to any action, approval or policy of, or
determination or notice by, (i) the Board, such action, approval,
policy, determination or notice may be effected by the GSCP Designees
(as defined in the Stockholder Agreement) or (ii) the Company, shall be
subject, in addition, to the consent of the GSCP Designees.
17. Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
-8-
<PAGE> 9
18. Entire Agreement. This Agreement (and the Stockholder Agreement) contain
the entire agreement by the parties with respect to the matters covered
herein and supersede any prior agreement (including, without limitation,
any prior employment agreement), condition, practice, custom, usage and
obligation with respect to such matters insofar as any such prior
agreement, condition, practice, custom, usage, or obligation might have
given rise to any enforceable right.
IN WITNESS WHEREOF, the parties have executed this Agreement this
________ day of _______________________, 1996.
Address: GGS MANAGEMENT HOLDINGS, INC.
By: -------------------------
Name: -----------------------
Title: ----------------------
Address: By: -------------------------
Alan G. Symons
-9-
<PAGE> 10
EXHIBIT A
BONUS PLAN FOR ALAN G. SYMONS
The Bonus Plan will be based on the following criteria:
1. GGS must make all interest and principal payments on a timely basis and pass
all covenant tests during the fiscal year for any bonus payment to be made.
2. If all interest and principal interest payments are met and covenant tests
passed, the following payment schedule will be used:
<TABLE>
<CAPTION>
% of GGS Plan* % of Bonus Bonus Total Compensation
-------------- ---------- ----- ------------------
<S> <C> <C> <C>
less than 80% 0% $0 $150,000
80% 25% $18,750 $168,750
85% 30% $22,500 $172,500
90% 35% $26,250 $176,250
95% 50% $37,500 $187,500
96% 60% $45,000 $195,000
97% 70% $52,500 $202,500
98% 80% $60,000 $210,000
99% 90% $67,500 $217,500
100% 100% $75,000 $225,000
</TABLE>
* Note: Plan refers to operating income (excluding realized gains on fixed
income portfolio and any realized gains on the equity securities in excess
of a 7.5% return on the equity portfolio including dividends) in the GGS
projections as shown below.
<TABLE>
<CAPTION>
4/30/96-
12/31/96 1997 1998 1999 2000 2001 2002
-------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Operating $8,982 $23,793 $28,730 $33,167 $38,397 $43,924 $49,948
Income
</TABLE>
3. Performance exceeding plan will be rewarded at the Board's discretion.
-10-
<PAGE> 1
EXHIBIT 10.18
[SUPERIOR INSURANCE COMPANY LETTERHEAD]
May 9, 1996
Mr. Roger Sullivan
Superior Insurance Company
280 Interstate North Parkway
Atlanta, Georgia 30339
Dear Roger:
Following our meeting the other day, I am very pleased that you have agreed to
take on administrative leadership of the Superior organization, which includes
Atlanta, Tampa and California.
In recognition of the foregoing, I am pleased to promote you to Executive Vice
President and in addition provide you with a company car or an allowance.
Currently we are paying $600 per month for an executive at your level and I am
pleased to authorize this to be added to your compensation.
Attached are the goals that we want to see this company hit, and as discussed,
your bonus will be modified from your current contract to be 10% based on
hitting 75% to 99% of the target, 20% based on hitting the target up to 124%
of target, and 30% for exceeding target by 125%. The percentages are
percentages of basic gross salary. The bonus would be awarded after the
audited reports have been completed. Should we be well into the range by
year-end, I would be more than happy to make an advance toward the ultimate.
In addition, we are currently working on stock options. I am not at liberty to
give you an exact calculation but you will be included in the stock option
program.
I have enjoyed working with you and hope that you and I can build this into a
fantastic organization. I realize it will require an awful lot of hard work
and dedication, and you can be certain that as we see these things take place,
I will be more than happy to look after those who contributed.
Thank you very much.
Yours sincerely,
/s/ Alan G. Symons
President and Chief Executive Officer
ALG:jat
Attachment
<PAGE> 2
GGS MANAGEMENT INC.
PROJECTED STATEMENT OF OPERATIONS
SUPERIOR AND PGIC - GAAP BASIS
Years Ended December 31,
(Dollars in thousands)
<TABLE>
<CAPTION>
1996
Superior
<S> <C>
Revenues
Gross premium written 120,000
Net premium written 119,362
Net premium earned 112,665
Net investment income 6,686
Finance & service fee income 4,837
-------
Total revenues 124,188
-------
Expenses
Claims incurred (incl ulse) 81,146
Commission expenses (on written) 16,800
Reinsurance commission income 0
Operating expenses 14,819
Less DPAC (1,050)
-------
Total expenses 111,715
-------
EBIT 12,473
Debt service 4,200
-------
Income before taxes 8,273
Taxes 2,411
-------
NET INCOME 5,861
=======
NET BOOK VALUE
loss ratio 72.0%
comm exp ratio 14.9%
operating exp ratio 12.2%
Finance & service fee income
-------
total expense ratio 27.1%
-------
combined ratio 99.2%
-------
less finance & service fee income -4.3%
-------
modified combined ratio 94.9%
-------
loss ratio 72.0%
stat expense ratio (excl bill fees & dpac) on gross 26.3%
-------
98.4%
=======
</TABLE>
<PAGE> 3
[SUPERIOR INSURANCE COMPANY LETTERHEAD]
May 9, 1995
Mr. Roger Sullivan
8925 Bayview Court
Gainesville, GA 30506
Dear Roger:
This will confirm my offer and your acceptance of employment with Superior
Insurance Company as Vice-President of Claims, effective June 5, 1995.
Outlined below are the major items we discussed regarding your compensation and
benefits.
1. Your monthly salary will be $10,416.66 and you will receive
annual salary reviews commencing February 1, 1996.
2. You will participate in the Executive Bonus Program and be
eligible for a bonus target at twenty percent of annual
compensation for competent performance beginning with the Plan
Year 1995. The actual bonus amount will vary based upon your
performance and Company profitability and will be prorated
based upon your starting date in 1995.
3. The Company has a 401(k) Profit Sharing Plan which allows you
to defer income and invest up to seven percent of your salary.
The Company matches the first three percent of your
contributions at the rate of two dollars for every dollar you
invest. You will be eligible for participation in the Plan
beginning July 1, 1996.
You will automatically be enrolled in Superior's Pension Plan
when you meet the eligibility requirement, which is July 1,
1996.
4. All benefits except dental, profit and pension plans become
effective on your hire date. Dental becomes effective in the
month following enrollment. Also, as a matter of Company
policy, you will be required to pass a pre-employment
physical, including drug testing, as a condition of
employment.
S. You will be entitled to receive three weeks paid vacation per
year to be prorated based on your date of hire in 1995.
<PAGE> 4
6. Superior agrees that if the Company is sold, liquidated, or
merged with another company within four years from your date
of employment and as a result of that event your employment is
terminated and no other Atlanta-based Fortis Company offers
you a comparable position at comparable pay, you will receive
one year's severance pay at current base salary. No severance
will be paid if your employment is discontinued due to
unsatisfactory performance.
I believe this accurately summarizes the matter relating to
compensation and benefits which we discussed. I am looking forward
to working with you in what I am sure will be a satisfying career
with Superior.
Sincerely
/S/ Meril L. Joseph
Meril L. Joseph
Vice-President Claims
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
WHEREAS, Goran Capital Inc., and its subsidiaries (collectively, the
"Company") considers it essential to its best interests and the best interests
of its stockholders to foster the continuous employment of its key management
personnel and, accordingly, the Company desires to employ Gary, P. Hutchcraft
("You", "Your" or "Executive"), upon the terms and conditions hereinafter set
forth; and
WHEREAS, the Executive desires to continue to be employed by the
Company, upon the terms and conditions contained herein.
NOW, THEREFORE, in consideration of the covenants and agreements set
forth below, the parties agree as follows:
1. EMPLOYMENT
1.1 Term of Agreement. The Company agrees to employ Executive as
Vice President and Chief Financial Officer, effective as of June 30, 1996 and
continuing until December 31, 1996, unless such employment is terminated
pursuant to Section 3 below; provided, however, that the term of this
Agreement shall automatically be extended without further action of either
party for additional one (1) year periods thereafter unless, not later than six
(6) months prior to the end of the then effective term, either the Company or
the Executive shall have given written notice that such party does not intend
to extend this Agreement. If Company gives Executive such a notice of
non-renewal, Executive's employment shall terminate as of the expiration date
of this Agreement. It is expressly understood and agreed that a notice of
non-renewal issued by the Company shall not extinguish the Executive's
non-competition obligations pursuant to Section 4 herein.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of Vice President and Chief
Financial Officer of the Company and further agree to devote substantially all
of Your working time and attention to the business and affairs of the Company
and, to the extent necessary to discharge the responsibilities associated with
Your position as Vice President and Chief Financial Officer of the Company and
to use Your best efforts to perform faithfully and efficiently such
responsibilities. Executive shall perform such duties and responsibilities as
may be determined from time to time by the Chairman and/or Chief Executive
Officer of the Company and the Board of Directors of the Company, which duties
shall be consistent with the position of Vice President and Chief Financial
Officer of the Company, which shall grant Executive authority, responsibility,
title and standing comparable to that of the vice president and chief financial
officer of a stock insurance holding company of similar standing and which will
not require Executive to relocate his principal place of residence from the
metropolitan Indianapolis, Indiana area. Nothing herein shall prohibit You
from devoting Your time to civic and community activities or managing personal
investments, as long as the foregoing do not interfere with the performance of
Your duties hereunder.
-1-
<PAGE> 2
1.3 Appointment and Responsibility. The Boards of Directors of the
Company shall, following the effective date of this Agreement, elect and
appoint Executive as Vice President and Chief Financial Officer. Consistent
with Section 1.2 of this Agreement, Executive shall be primarily responsible
for the financial affairs of the Company.
2. COMPENSATION, BENEFITS AND PREREQUISITES
2.1 Salary. Company shall pay Executive a salary, in equal
bi-weekly installments, equal to an annualized salary rate of $120,000.
Executive's salary as payable pursuant to this Agreement may be increased from
time to time as mutually agreed upon by Executive and the Company.
Notwithstanding any other provision herein, the catch-up payment shall be paid
to Executive by April 1 of each year of this Agreement. For the calendar year
beginning January 1, 1997 and for each succeeding calendar year thereafter,
Company shall pay Executive the salary applicable to that calendar year in
twenty-six (26) bi-weekly installments. Notwithstanding any other provision of
this Agreement, Executive's salary paid by Company for any year covered by this
Agreement shall not be less than such salary paid to Executive for the
immediately preceding calendar year. All salary and bonus amounts paid to
Executive pursuant to this Agreement shall be in U.S. dollars.
2.2 Bonus. The Company and Executive understand and agree that the
Company expects to achieve significant growth during the term of this Agreement
and that Executive will make a material contribution to that growth which will
require certain personal and familial sacrifices on the part of Executive.
Accordingly, it is the desire and intention of the Company to reward Executive
for the attainment of that growth through bonus and other means (including, but
not limited to, stock options, stock appreciation rights and other forms of
incentive compensation). Therefore, the Company will pay Executive a lump-sum
bonus (subject to normal withholdings) within ten (10) business days from
receipt by Company of its consolidated, annual audited financial statements in
an amount which shall be determined in accordance with the following Bonus
Table. All amounts used for calculation purposes in this section shall be
based on the audited, consolidated financial statements of Goran Capital Inc.
(or any successor thereto), with such financial statements having been prepared
in accordance with applicable Generally Accepted Accounting Principles, applied
on a consistent basis with that of prior years.
BONUS TABLE
<TABLE>
<CAPTION>
If Audited Net % of Annual Salary
Income (as a % of Payable to Executive
Budgeted Net Income Is As Bonus
---------------------- ---------------------
<S> <C>
Less Than 75% -0-
75% or more, but less than 100% 10%
100% or more, but less than 125% 20%
125% or more 30%
</TABLE>
-2-
<PAGE> 3
It is expressly agreed and understood that if this Agreement is
terminated or fails to be renewed at the expiration thereof, that Company shall
pay Executive's Bonus as calculated in accordance with this Section 2.2 with
such Bonus to be prorated on a day's basis if Executive is not employed for a
full year in which such Bonus is earned.
2.3 Employee Benefits. Executive shall be entitled to receive all
benefits and prerequisites which are provided to other Executives of Company
under the applicable Company plans and policies, and to future benefits and
prerequisites made generally available to executive employees of the Company
with duties and compensation comparable to that of Executive upon the same
terms and conditions as other Company participants in such plans.
2.4 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than three (3) weeks paid vacation during each
calendar year.
(b) A vehicle commensurate with Executive's position.
2.7 Expenses. During the period of his employment hereunder,
Executive shall be entitled to receive reimbursement from the Company (in
accordance with the policies and procedures in effect for the Company's
employees) for all reasonable travel, entertainment and other business expenses
incurred by him in connection with his services hereunder.
3. TERMINATION OF EXECUTIVE'S EMPLOYMENT
3.1 Termination of Employment and Severance Pay. Executive's
employment under this Agreement may be terminated by either party at any time
for any reason; provided, however, that if Executive's employment is terminated
for any reason other than for cause, he shall receive, as severance pay, one
(1) month's current salary for each full and partial year of service. Further,
if Executive shall be terminated without cause, receipt of severance payments
described in the preceding sentence are conditioned upon execution by Executive
and the Company of that mutual Waiver and Release attached hereto as Exhibit A.
Further, Executive shall receive severance pay in accordance with this Section
3.1 if Executive shall terminate this Agreement due to a breach thereof by the
Company or if Executive is directed by the Company (including, if applicable,
any successor) to engage in any act or action constituting fraud or any
unlawful conduct relating to the Company or its business as may be determined
by application of applicable law.
3.2 Cause. For purposes of this Section 3, "cause" shall mean:
(a) the Executive being convicted in the United States of America,
any State therein, or the District of Columbia, or in Canada
or any Province therein (each, a "Relevant Jurisdiction"), of
a crime for which the maximum penalty may include imprisonment
for one year or longer (a "felony") or the Executive having
entered against him or
-3-
<PAGE> 4
consenting to any judgment, decree or order (whether criminal
or otherwise) based upon fraudulent conduct or violation of
securities laws;
(b) the Executive's being indicted for, charged with or otherwise
the subject of any formal proceeding (criminal or otherwise) in
connection with any felony, fraudulent conduct or violation of
securities laws, in a case brought by a law enforcement or
securities regulatory official, agency or authority in a
Relevant Jurisdiction;
(c) the Executive engaging in fraud, or engaging in any unlawful
conduct relating to the Company or its business, in either
case as determined under the laws of any Relevant Jurisdiction;
(d) the Executive breaching any provision of this Agreement; or
(e) gross negligence or willful misconduct by the Executive in the
performance of his duties hereunder.
3.3 Change of Control. Notwithstanding any other provisions of this
Agreement, if (i) a Change of Control shall occur; and (ii) within twelve (12)
months of any such Change of Control, Executive (a) receives a Notice of
Non-Renewal, (b) is terminated for any reason other than for cause, or (c)
Company (including its successors, if any) is in breach of this Agreement, then
Executive shall continue to receive his current salary (in bi-weekly payments)
until the earlier to occur of:
(a) Executive shall commence employment with a firm or entity other
than the Company such that his base salary is at or greater
than existing base salary pursuant to this Agreement; or
(b) The expiration of seventy-eight (78) weeks from Executive's
Date of Termination.
The receipt by Executive of payment pursuant to this Section 3.3 is
specifically conditioned, and no payments pursuant to this Section 3.3 shall
be made to Executive if he is, at the time of his Termination, in breach of any
provision (specifically including, but not limited to, the provisions of this
Agreement pertaining to non-competition and confidentiality) of this Agreement
and, further, if such payments have already begun, the continuation of payments
to Executive pursuant to this Section 3.3 shall cease at the time Executive
shall fail to comply with the non-competition and confidentiality provisions of
Article 4 herein. It is expressly understood and agreed that the amount of any
payment to Executive required pursuant to this Section 3.3 shall be reduced
(but not below zero) by any compensation received by Executive during the
period called for in this Section 3.3.
A Change of Control shall mean the inability of the Symons family to
cause the election of a majority of the members of the Board of Directors of
Goran Capital Inc., Symons International Group, Inc. or their respective
successors.
-4-
<PAGE> 5
3.4 Disability. So long as otherwise permitted by law, if
Executive has become permanently disabled from performing his duties under
this Agreement, the Company's Chairman of the Board, may, in his discretion,
determine that Executive will not return to work and terminate his employment
as provided below. Upon any such termination for disability, Executive shall
be entitled to such disability, medical, life insurance, and other benefits as
may be provided generally for disabled employees of Company during the period
he remains disabled. Permanent disability shall be determined pursuant to the
terms of Executive's long term disability insurance policy provided by the
Company. If Company elects to terminate this Agreement based on such permanent
disability, such termination shall be for cause.
3.5 Indemnification. Executive shall be indemnified by Company
(and, where applicable, its subsidiaries) to the maximum extent permitted by
applicable law for actions undertaken for, or on behalf of, the Company and its
subsidiaries.
4. NON-COMPETITION, CONFIDENTIALITY AND TRADE SECRETS
4.1 Noncompetition. In consideration of the Company's entering into
this Agreement and the compensation and benefits to be provided by the Company
to You hereunder, and further in consideration of Your exposure to proprietary
information of the Company, You agree as follows:
(a) Until the date of termination or expiration of this Agreement
for any reason (the "Date of Termination") You agree not to
enter into competitive endeavors and not to undertake any
commercial activity which is contrary to the best interests of
the Company or its affiliates, including, directly or
indirectly, becoming an employee, consultant, owner (except for
passive investments of not more than one percent (1%) of the
outstanding shares of, or any other equity interest in, any
company or entity listed or traded on a national securities
exchange or in an over-the-counter securities market), officer,
agent or director of, or otherwise participating in the
management, operation, control or profits of (a) any firm or
person engaged in the operation of a business engaged in the
acquisition of insurance businesses or (b) any firm or person
which either directly competes with a line or lines of business
of the Company accounting for five percent (5%) or more of the
Company's gross sales, revenues or earnings before taxes or
derives five percent (5%) or more of such firm's or person's
gross sales, revenues or earnings before taxes from a line or
lines of business which directly compete with the Company.
Notwithstanding any provision of this Agreement to the contrary, You
agree that Your breach of the provisions of this Section 4.1(a) shall permit
the Company to terminate Your employment for cause.
-5-
<PAGE> 6
(b) If Your employment is terminated by You, or by reason of Your
Disability, by the Company for cause, or pursuant to a notice
of non-renewal as outlined in Section 1.1, then for two (2)
years after the Date of Termination, You agree not to become,
directly or indirectly, an employee, consultant, owner
(except for passive investments of not more than one percent
(1%) of the outstanding shares of, or any other equity interest
in, any company or entity listed or traded on a national
securities exchange or in an over-the-counter securities
market), officer, agent or director of, or otherwise to
participate in the management, operation, control or profits
of, any firm or person which directly competes with a business
of the Company which at the Date of Termination produced any
class of products or business accounting for five percent (5%)
or more of the Company's gross sales, revenues or earnings
before taxes at which the Date of Termination derived five
percent (5%) or more of such firm's or person's gross sales,
revenues or earnings before taxes. It is expressly agreed and
understood that this Section 4.1(b) shall not apply to a public
accounting or consulting firm.
(c) You acknowledge and agree that damages for breach of the
covenant not to compete in this Section 4.1 will be difficult
to determine and will not afford a full and adequate remedy,
and therefore agree that the Company shall be entitled to an
immediate injunction and restraining order (without the
necessity of a bond) to prevent such breach or threatened or
continued breach by You and any persons or entities acting for
or with You, without having to prove damages, and to all costs
and expenses (if a court or arbitrator determines that the
Executive has breached the covenant not to compete in this
Section 4.1, including reasonable attorneys' fees and costs,
in addition to any other remedies to which the Company may be
entitled at law or in equity. You and the Company agree that
the provisions of this covenant not to compete are reasonable
and necessary for the operation of the Company and its
subsidiaries. However, should any court or arbitrator
determine that any provision of this covenant not to compete is
unreasonable, either in period of time, geographical area, or
otherwise, the parties agree that this covenant not to compete
should be interpreted and enforced to the maximum extent which
such court or arbitrator deems reasonable.
4.2 Confidentiality. You shall not knowingly disclose or reveal
to any unauthorized person, during or after the Term, any trade secret or other
confidential information (as outlined in the Indiana Uniform Trade Secrets Act)
relating to the Company or any of its affiliates, or any of their respective
businesses or principals, and You confirm that such information is the
exclusive property of the Company and its affiliates. You agree to hold as the
Company's property all memoranda, books, papers, letters and other data, and
all copies thereof or therefrom, in any way relating to the business of the
Company and its affiliates, whether made by You or otherwise coming into Your
possession and, on termination of Your employment, or on demand of the Company
at any time, to deliver the same to the Company.
-6-
<PAGE> 7
Any ideas, processes, characters, productions, schemes, titles, names,
formats, policies, adaptations, plots, slogans, catchwords, incidents,
treatment, and dialogue which You may conceive, create, organize, prepare or
produce during the period of Your employment and which ideas, processes, etc.
relate to any of the businesses of the Company, shall be owned by the Company
and its affiliates whether or not You should in fact execute an assignment
thereof to the Company, but You agree to execute any assignment thereof or
other instrument or document which may be reasonably necessary to protect and
secure such rights to the Company.
5. MISCELLANEOUS
5.1 Amendment. This Agreement may be amended only in writing, signed
by both parties.
5.2 Entire Agreement. This Agreement contains the entire
understanding of the parties with regard to all matters contained herein.
There are no other agreements, conditions or representations, oral or written,
expressed or implied, with regard to the employment of Executive or the
obligations of the Company or the Executive. This Agreement supersedes all
prior employment contracts and non-competition agreements between the parties.
5.3 Notices. Any notice required to be given under this Agreement
shall be in writing and shall be delivered either in person or by certified or
registered mail, return receipt requested. Any notice by mail shall be
addressed as follows:
If to the Company, to:
Goran Capital, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
If to Executive, to:
Gary P. Hutchcraft
or to such other addresses as one party may designate in writing to the other
party from time to time.
5.4 Waiver of Breach. Any waiver by either party of compliance with
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any other provision of this Agreement, or of any
subsequent breach by such party of a provision of this Agreement.
-7-
<PAGE> 8
5.5 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
5.6 Governing Law. This Agreement shall be interpreted and enforced
in accordance with the laws of the State of Indiana, without giving effect to
conflict of law principles.
5.7 Headings. The headings of articles and sections herein are
included solely for convenience and reference and shall not control the meaning
or interpretation of any of the provisions of this Agreement.
5.8 Counterparts. This Agreement may be executed by either of the
parties in counterparts, each of which shall be deemed to be an original, but
all such counterparts shall constitute a single instrument.
5.9 Survival. Company's obligations under Section 3.1 and Executive's
obligations under Section 4 shall survive the termination and expiration of
this Agreement in accordance with the specific provisions of those Paragraphs
and Sections and this Agreement in its entirety shall be binding upon, and
inure to the benefit of, the successors and assigns of the parties hereto.
5.10 Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by You and such officer as may be specifically designated
by the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior
subsequent time.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date set forth above.
GORAN CAPITAL INC. AND SUBSIDIARIES GARY P. HUTCHCRAFT
("COMPANY") ("EXECUTIVE")
By: /s/ Alan G. Symons /s/ Gary P. Hutchcraft
------------------------ ---------------------------
Title: Pres CEO
---------------------
-8-
<PAGE> 9
State of Indiana )
) SS:
County of Marion )
Before me the undersigned, a Notary Public for Johnson County, State
of Indiana, personally appeared Gary P. Hutchcraft, and acknowledged the
execution of this instrument this 12th day of July, 1996.
/s/ Pamela Sue Staal
---------------------------
PAMELA SUE STAAL, Notary Public
State of Indiana, County of Johnson
My Commission Expires: 6-18-99
-9-
<PAGE> 1
EXHIBIT 10.20
GORAN CAPITAL INC.
SHARE OPTION PLAN
1. PURPOSE
The purpose of this Plan is to aid the Company and its subsidiaries
and affiliates in attracting, retaining and motivating key employees.
2. DEFINITIONS
Whenever used herein, the following terms shall have the meaning set
forth below:
(a) "Company" shall mean Goran Capital Inc.;
(b) "Board" shall mean the Board of Directors of the Company;
(c) "Shares" shall mean the common shares of the share capital of
the Company which shares are without par value;
(d) "Fair Market Value" shall mean the value of the Shares as
determined by the Board in its absolute discretion, but in a
manner acceptable to regulatory authorities of competent
jurisdiction;
(e) "Plan" shall mean the Company's Share Option Plan as defined
herein;
(f) "Option" shall mean a right or rights granted by the Board to
individual(s) to purchase Shares under this Plan;
(g) "Participant" shall mean a selected (i) employee of the
Company, its subsidiaries and affiliates (including directors
only if they are full time employees of the Company, its
subsidiaries and affiliates), (ii) part-time employee and
(iii) other person who either performs services for the
Company on an ongoing basis or who has provided, or is
expected to provide, a service of value to Goran, to whom an
Option is granted under this Plan.
<PAGE> 2
-2-
3. SHARES AVAILABLE IN THE PLAN
The aggregate number of Shares that may be issued pursuant to the
exercise of Options shall not exceed 10% of the outstanding Shares, on a
non-diluted basis, which shall be made available from the authorized but
unissued Shares and which have been reserved for issuance upon exercise of
Options granted under the Plan. If an Option granted to a Participant in
accordance with this Plan expires, terminates, ceases to be exercisable or is
surrendered before being exercised without having been exercised in full, then
the Shares that were subject to the Option but which were not issued pursuant
to the exercise of the Option shall, unless this Plan has been terminated,
become available to other Participants for issuance pursuant to the exercise of
Options under the Plan, all within the maximum limitation stated above.
4. ADMINISTRATION
This Plan shall be administered by the Board. Subject to the terms
herein, the Board is authorized to approve grants of Options in accordance with
the Plan, to construe and interpret the Plan, to prescribe, amend, and rescind
rules and regulations relating to the Plan, and to make all determinations and
take all actions necessary or advisable for the Plan's administration. The
Board shall act by vote or written consent of a majority of its members.
Whenever the Plan authorizes or requires the Board to take any action, make any
determination or decision, or form any opinion, then any such action,
determination, decision, or form any opinion by or of the Board shall be in the
absolute discretion of the Board.
<PAGE> 3
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5. PARTICIPANTS
Individuals who are eligible to receive Options hereunder shall be
limited to selected employees of the Company, its subsidiaries and affiliates
(including directors only if they are full-time employees of the Company, its
subsidiaries or affiliates), part-time employees and other persons who either
perform services for the Company on an ongoing basis or who have provided, or
are expected to provide, a service of value to the Company (hereinafter
referred to as "employee" or "employees" as the case may be). The Board shall
in its sole and absolute discretion determine from time to time which employees
will be granted Options under this Plan and the size and terms and conditions
of the Option or Options to be granted to each such employee. The Board may
approve the grant of Options subject to differing terms and conditions to any
selected employee in any year. The Board's decision to approve the grant of an
Option to an employee in any year shall not require the Board to approve the
grant of an Option to that employee in any other year or to any other employee
in any year; nor shall its decision with respect to the size or terms and
conditions of the Option be granted to an employee in any year require it to
approve the grant of an Option of the same size or with the same terms and
conditions to that employee in any other year or to any other employee in any
year. The Board shall not be precluded from approving the grant of an Option
to any eligible employee solely on the basis that such employee may previously
have been granted an Option under this Plan.
6. OPTIONS
Each Option granted under this Plan shall be evidenced by an option
agreement which shall contain such terms and conditions not inconsistent with
the terms of this Plan as the Board shall determine; provided, however, that
each Option shall satisfy the following requirements:
<PAGE> 4
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a) Option Price - The option price for each Share purchasable under any
Option shall be specified in the agreement relating to such Option and, subject
to the provisions of Section 13, shall, in the discretion of the Board, not be
less than 90% of the Fair Market Value as of the date the Option is granted.
b) Option Period
(i) General - Subject to subparagraph (iii) below, the period in
which an Option may be exercised shall not exceed eight years from the
date the Option is granted; provided, however, that the Option may be
sooner terminated in accordance with the provisions of this paragraph
(b). Subject to the foregoing, the Board may provide that any Option
may be exercised, in whole or in part, at such time or times as the
Board may in its discretion determine.
(ii) Termination of Employment - Except as provided in
subparagraphs (iii) and (iv) below, if the Participant ceases to be an
employee of the Company, a subsidiary or affiliate, for any reason
whatsoever including retirement, resignation or termination with or
without cause, the Option may continue for such Shares and until such
period as the Board may approve, including that the Option may cease
upon termination; provided, that in no event may the Option be
exercised for more than the number of Shares for which the Participant
could have exercised the Option immediately prior to the Participant's
termination of employment or of services.
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(iii) Death - If a Participant dies while employed and at a time
when he has not fully exercised any then outstanding Option, or it a
Participant dies after retirement in accordance with subparagraph (ii)
above, without having fully exercised any then outstanding Option, the
Option shall be exercisable by the Participant's executors or personal
representatives within three months after the Participant's death
notwithstanding the expiration date of the Option but for not more
than that number of Shares for which the Participant could have
exercised, the Option shall terminate at the expiration of such
three-month period.
(iv) Leave of Absence - If a Participant is granted a leave of
absence for any reason, such leave of absence shall not constitute a
termination of employment for the purposes of this Plan.
7. EMPLOYMENT
No grant of an Option to a Participant under this Plan shall affect
any right of the Company, subsidiary or affiliate to terminate the
Participant's employment or services at any time.
In the event of termination of employment or services with or without
cause, the Participant shall have no right of recourse against the Company for
any reason whatsoever in respect to any unexercised portion as of the date of
termination of any Options previously granted to the Participant.
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8. NONASSIGNABILITY
Each Option shall not be transferable, other than by will or by the
laws of descent and distribution, and shall be exercisable during the
Participant's lifetime only by him.
9. PAYMENT FOR SHARES
Full payment for Shares purchased shall be made at the time of
exercising the Option in whole or in part. No Option shall be deemed to be
exercised and no certificates for Shares so purchased shall be issued until
full payment therefore has been made, and a Participant shall have none of the
rights of a shareholder until such certificates are issued to him.
10. USE OF PROCEEDS
The proceeds received by the Company from the sale of Shares pursuant
to this Plan will be used for general corporate purposes.
11. EFFECTIVE DATE
This Plan shall become effective on June 1, 1986 and shall remain in
effect until terminated by the Board. Termination of this Plan shall not
affect any Options previously granted, which Options shall remain in effect
until exercised, surrendered, or cancelled, or until they have expired, all in
accordance with their terms.
12. SHARE CAPITAL READJUSTMENTS
The Company shall make appropriate adjustments to each Option granted
<PAGE> 7
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hereunder in the event of a recapitalization, amalgamation, reorganization,
arrangement, stock dividends, issuance of rights, combinations or splits or
exchanges of Shares or similar events. Without limiting the generality of the
foregoing, the following adjustments shall be made:
a) If a dividend in Shares is paid on the Shares there shall be
added to the Shares subject to the Option the number of
Shares that would have been issuable to the Participant had
the Participant then been the holder of record of the number
of Shares then subject to the unexercised portion of the
Option. In such event, the Option price per Share shall be
reduced proportionately.
b) If the Shares shall be subdivided into a greater number of
Shares or consolidated into a lesser number of Shares or
changed into the same or a different number of Shares, the
number of Shares that my thereafter be acquired under the
Option shall be the number of Shares that would have been
received by the Participant on such subdivision,
consolidation, or change had the Participant then been the
holder of record of the number of the Shares then subject to
the unexercised portion of the Option. In such event, the
option price per Share be decreased or increased
proportionately.
c) If the Company grants to the holders of Shares rights to
subscribe for, purchase or receive any Shares or any other
shares or bonds convertible into Shares, the Company shall
extend to the Participant all such rights as if the
Participant were the holder of record of the number of Shares
represented by the unexercised portion of the Option.
<PAGE> 8
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d) If there is any capital reorganization, arrangement or
reclassification of the share capital of the Company, or any
amalgamation or a sale or distribution of all or
substantially all of the Company's assets to any other
corporation, adequate provisions shall be made by the Company
so that there shall be substituted under the Option the
shares, securities, or property that would have been issuable
or payable to the Participant had the Participant then been
the holder of record of the number of Shares then subject to
the unexercised portion of the Option.
Any shares or securities added to or substituted for the Shares under
an Option shall be subject to adjustment in the same manner and to the same
extent as the Shares originally covered by the Option.
No fractional Shares shall be issued upon the exercise of an Option.
Accordingly, if, as a result of any adjustment under this Section 12, the
Participant would become entitled to a fractional Share, the Participant shall
have the right to acquire only the adjusted number of full Shares and no
payment or other adjustment will be made with respect to the fractional shares
so disregarded.
13. RESTRICTIONS
The exercise of each Option granted under this Plan shall be subject
to the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration or qualification of any shares
otherwise deliverable
<PAGE> 9
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upon such exercise upon any securities exchange or under any law, or the consent
or approval of any regulatory body, is necessary or desirable as a condition of,
or in connection with, such exercise or the delivery or purchase of shares
thereunder, then in any such event such exercise shall not be effective unless
such withholding, listing, registration, qualification, consent or approval
shall have been effected or obtained free of any conditions not acceptable to
the Company.
14. AMENDMENT OR TERMINATION
The Board may, by resolution, amend or terminate this Plan at any
time; provided, however, that subject to the provisions of Section 12, the
Board may not, without approval by the holders of a majority of the outstanding
Shares, increase the maximum number of Shares that may be issued under this
Plan or reduce the option price per Share below the minimum price set forth in
Section 6. The Board may not, without the consent of the holder of the Option,
alter or impair any Options previously granted under this Plan except as
authorized herein.
<PAGE> 1
EXHIBIT 10.22
THE SYMONS INTERNATIONAL GROUP, INC.
1996 STOCK OPTION PLAN
1. Purpose. The purpose of the Symons International Group, Inc. ("SIG" or
the "Company") 1996 Stock Option Plan (the "Plan") is to provide to (i)
certain Officers (including Officers who are members of the Board of
Directors), other key employees, and non-employee Directors of SIG, (ii)
key employees of any direct or indirect Subsidiaries of the Company
(individually a "Subsidiary" and collectively the "Subsidiaries") who
are materially responsible for the management or operation of the
business of SIG or a Subsidiary and (iii) directors of Goran Capital,
Inc., the parent of the Company ("Goran"), a favorable opportunity to
acquire Common Stock, without par value, of the Company ("Common
Stock"), thereby providing them with an increased incentive to work for
the success of the Company and the Subsidiaries and better enabling the
Company and the Subsidiaries to attract and retain the services of
capable personnel. The two means by which an individual may acquire
Common Stock are:
(a) the grant to an individual of an Option to acquire Shares of
Common Stock (an "Option") in accordance with Section 5; and
(b) the grant to a member of the Board of Directors of the Company
(a "Director") of an Option to acquire Shares of Common Stock
(a "Director Option") in accordance with Section 7.
2. Administration of the Plan. The Plan shall be administered, construed
and interpreted by the Executive Committee of the Company's Board of
Directors (the "Committee"); provided, however, that either the
Compensation Committee of the Company's Board of Directors or the
entire Board of Directors of the Company shall approve all specific
transactions pursuant to this Plan upon the advice of the Committee.
The decision of a majority of the members of the Committee shall
constitute the decision of the Committee, and the Committee may act
either at a meeting at which a majority of the members of the Committee
is present or by a written consent signed by all members of the
Committee. The Committee shall determine, consistent with and subject
to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom Options or successive
Options shall be granted under the Plan;
(b) the time when Options shall be granted hereunder;
(c) the number of Shares of Common Stock of the Company to be
covered under each Option;
(d) the price to be paid upon the exercise of each Option;
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<PAGE> 2
(e) the period within which each Option may be exercised;
(f) the extent to which an Option is an Incentive Stock Option or a
Non-Qualified Stock Option;
(g) the extent to which stock appreciation rights shall be awarded in
conjunction with an Option; and
(h) the terms and conditions of the respective agreements by which
Options and stock appreciation rights granted shall be evidenced.
The Committee shall also have authority to prescribe, amend and rescind
rules and regulations relating to the Plan, and to make all other
determinations necessary or advisable in the administration of the Plan.
3. Eligibility. The Committee may, consistent with the purposes of the Plan,
grant Options (and/or related stock appreciation rights) to officers and
other key employees of the Company or of a Subsidiary who, in the opinion
of the Committee, are from time to time materially responsible for the
management or operation of the business of the Company or of a Subsidiary
or directors of Goran; provided, however, that in no event may any employee
of the Company or the Subsidiaries who owns (after application of the
ownership rules in Section 424(d) of the Internal Revenue Code of 1986, as
amended (the "Code")) Shares of Common Stock possessing more than 10% of
the total combined voting power of all classes of Common Stock of the
Company be granted an Incentive Stock Option hereunder unless at the time
such Option is granted the Option price is at least 110% of the fair market
value of the Common Stock subject to the Option and such Incentive Stock
Option by its terms is not exercisable after the expiration of five years
from the date such Option is granted. Subject to the provisions of Section
4 hereof, an individual who has been granted an Option under the Plan, if
he is otherwise eligible, may be granted an additional Option or Options if
the Committee shall so determine.
4. Stock Subject to the Plan. There shall be reserved for issuance upon the
exercise of Options and Director Options granted under the Plan, one
million of the authorized but unissued shares of the Company's Common Stock
(the "Shares"). Subject to Section 8 hereof, the Shares for which Options
and/or Director Options may be granted under the Plan shall not exceed that
number. If any Option and/or Director Option shall expire or terminate for
any reason without having been exercised in full, the unpurchased Shares
subject thereto shall (unless the Plan shall have terminated) become
available for other Options or Director Options under the Plan.
5. Terms of Option. Each Option granted under the Plan shall be subject to
the following terms and conditions and to such other terms and conditions
not inconsistent therewith as the Committee may deem appropriate in each
case:
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<PAGE> 3
(a) Option Price. The price to be paid for Shares upon the exercise of each
Option shall be the average between the high and the low of the Common
Stock on the date of grant (or, if the date of grant is not a trading
date, then on the last previous trading day), but such price in the case
of an Incentive Stock Option in no event shall be less than the fair
market value, as determined by the Committee consistent with the
requirements of Section 422 of the Code, of such Common Stock on the
date on which such Option is granted.
(b) Period for Exercise of Option. An Option shall not be exercisable after
the expiration of such period as shall be fixed by the Committee at the
time such Option is granted, but such period in no event shall
exceed ten years and one day from the date on which such Option is
granted; provided, however, that Incentive Stock Options shall have
terms not in excess of ten years; provided, further, that no Option
shall be exercisable prior to six months from the date of grant or, if
later, the date on which the Plan is approved by Shareholders of the
Company as required by Section 422 of the Code.
(c) Exercise of Options. The Option price of each Share of Common Stock
purchased upon exercise of an Option shall be paid in full (i) in cash
at the time of such exercise, (ii) if the Optionee may do so in
conformity with Regulation T (12 C.F.R. Section 220.3 (e)(4) and without
violating Section 16 (b) or (c) of the 1934 Act (to the extent
applicable) and to the extent permitted under the agreement entered into
by the Committee and the Optionee relating to the Option, by delivering
a properly executed exercise note together with irrevocable instructions
to a broker to deliver promptly to the Company the total Option price in
cash and, if desired, the amount of any taxes to be withheld from the
Optionee's compensation as a result of any withholding tax obligation of
the Company or any of its Subsidiaries, as specified in such notice, or
(iii) subject to the approval of the Board, by tendering to the Company
whole Shares of Common Stock owned by him for at least six (6) months or
any combination of whole Shares of Common Stock owned by him and cash,
having a fair market value equal to the cash exercise price of the
Shares with respect to which the Option is being exercised. For this
purpose, the fair market value of the Shares tendered by the Optionee
shall be computed as of the exercise date in such manner as determined
by the Committee, consistent with the requirements of Section 422 of the
Code. The Committee shall have the authority to grant Options
exercisable in full at any time during their term, or exercisable in
such installments, equal or non-equal, as the Committee shall determine.
An Option may be exercised at any time or from time to time during the
term of the Option as to any or all whole Shares which have become
subject to purchase pursuant to the terms of the Option (including,
without limitation, any quotas with respect to Option exercise) or the
Plan.
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(d) Termination of Option. If an Optionee ceases to be an employee of the
Company or one of the Subsidiaries or a director of Goram or if there is
a disposition of the subsidiary for which the Optionee performed the
majority of his services, any Option granted to him shall forthwith
terminate unless the Option grant to the Optionee provides otherwise.
Leave of absence approved by the Committee shall not constitute
cessation of employment. Notwithstanding the foregoing provisions of
this subsection (d), no Option shall in any event be exercisable after
the expiration of the period fixed by the Committee in accordance with
subsection (b) above. An Option shall also terminate if this Plan is not
approved by the Shareholders of the Company within the requisite time
period set forth in Section 422 of the Code.
(e) Transferability of Option. An Incentive Stock Option may not be
transferred by the Optionee otherwise than by will or the laws of
descent and distribution, and during the lifetime of the Optionee shall
be exercisable only by the Optionee. Any Non-Qualified Stock Options
granted hereunder may be transferred by an Optionee so long as such
transfer does not result in a purchase or sale for purposes of Section
16 of the Securities Exchange Act of 1934.
(f) Investment Representations. Unless the Shares of Common Stock subject
to an Option are registered under applicable federal and state
securities laws, each Optionee by accepting an Option shall be deemed to
agree for himself and his legal representatives that any Option granted
to him and any and all Shares of Common Stock purchased upon the
exercise of the Option shall be acquired for investment and not with a
view to, or for the sale in connection with, any distribution thereof,
and each notice of the exercise of any portion of an Option shall be
accompanied by a representation in writing, signed by the Optionee or
his legal representatives, as the case may be, that the Shares of
Common Stock are being acquired in good faith for investment and not
with a view to, or for sale in connection with, any distribution
thereof (except in case of the Optionee's legal representatives for
distribution, but not for sale, to his legal heirs, legatees and other
testamentary beneficiaries). Any shares issued pursuant to an exercise
of an Option may, but need not, bear a legend evidencing such
representations and restrictions. In addition, if the Options and
Shares of Common Stock issued pursuant to this Plan are issued in
reliance upon Rule 147, promulgated under the Securities Act of 1933,
as amended, the written representations required by such rule shall be
obtained from the Optionees prior to or at the time they are granted
Options, any and all legends required by Rule 147 shall be set forth on
the certificates representing Shares of Common Stock issued pursuant to
the exercise of such Options, and stop transfer instructions shall be
issued to the Company's recordkeeping transfer agent with respect to
such Shares.
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<PAGE> 5
(g) Maximum Incentive Stock Options. The aggregate fair market value
(determined as of the time the Option is granted) of Common Stock
subject to Incentive Stock Options that are exercisable for the first
time by an employee during any calendar year under the Plan or any
other plan of the Company or any Subsidiary shall not exceed $100,000.
For this purpose, the fair market value of such Shares shall be
determined as of the date the Option is granted and shall be computed
in such manner as shall be determined by the Committee, consistent
with the requirements of Section 422 of the Code. If the immediate
exercisability of Incentive Stock Options arising from the retirement,
death or permanent and total disability of an Optionee consistent with
the terms of the applicable Option agreement or arising from any
change of control of the Company in accordance with Section 7 hereof
would cause this $100,000 limitation to be exceeded for an Optionee,
such Incentive Stock Options shall automatically be converted into
Non-Qualified Stock Options as of the date on which such Incentive
Stock Options become exercisable, but only to the extent necessary to
comply with the $100,00 limitation.
(h) Agreement. Each Option shall be evidenced by an agreement between
the Optionee and the Company which shall provide, among other things,
that, with respect to Incentive Stock Options, the Optionee shall
advise the Company immediately upon any sale or transfer of the Shares
of Common Stock received upon exercise of the Option to the extent
such sale or transfer takes place prior to the later of (i) two years
from the date of grant or (ii) one year from the date of exercise.
The agreement shall include the Option term and exercise conditions
and may also provide for an additional cash payment from the Company
to the Grantee of such Non-Qualified Stock Option as soon as
practicable after the exercise date of such Non-Qualified Stock
Option equal to all or a portion of any tax savings to be received by
the Company attributable to the exercise of such Non-Qualified Stock
Option.
(i) Certificates. The certificate or certificates for the Shares
issuable upon an exercise of an Option shall be issued as promptly as
practicable after such exercise. An Optionee shall not have any
rights of a Shareholder in respect to the Shares of Common Stock
subject to an Option until the date of issuance of a stock
certificate to him for such Shares. In no case may a fraction of a
Share be purchased or issued under the Plan, but if, upon the exercise
of an Option, a fractional Share would otherwise be issuable, the
Company shall pay cash in lieu thereof.
(j) No Right to Continued Service. Nothing in this Plan or in any
agreement entered into pursuant hereto shall confer on any person any
right to continue in the employ of the Company or its Subsidiaries or
affect any rights of the Company or, a Subsidiary, or the Shareholders
of the Company to terminate his service at any time.
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<PAGE> 6
(k) Incentive Stock Options and Non-Qualified Stock Options. Options
granted under the Plan may be Incentive Stock Options under Section
422 of the Code or Non-Qualified Stock Options; provided, however,
that Incentive Stock Options may not be granted to any individual who
is not an employee of the Company or a Subsidiary. All Options
granted hereunder shall be clearly identified as either Incentive
Stock Options or Non-Qualified Stock Options. In no event shall the
exercise of an Incentive Stock Option affect the right to exercise any
Non-Qualified Stock Option, nor shall the exercise of any
Non-Qualified Stock Option affect the right to exercise any Incentive
Stock Option. Nothing in this Plan shall be construed to prohibit the
grant of Incentive Stock Options and Non-Qualified Stock Options to
the same person; provided, however, that Incentive Stock Options and
Non-Qualified Stock Options shall not be granted in a manner whereby
the exercise of one Non-Qualified Stock Option or Incentive Stock
Option affects the exercisability of the other.
6. Stock Appreciation Rights. The Committee may, in the event it determines it
to be necessary or desirable to create a reasonable opportunity for an
Optionee to acquire an increased ownership interest in the Company, award a
stock appreciation right in conjunction with either an Incentive Stock
Option or a Non-Qualified Stock Option. Under a stock appreciation right,
the Optionee may, subject to Board approval, surrender all or a part of a
Stock Option and receive in exchange payment of no more than 100% of the
excess of the fair market value of the Common Stock subject to the Option
on the date of exercise over the exercise price of the Option. The award of
a stock appreciation right shall be evidenced by an agreement between the
Company and the Optionee, the provisions of which shall be determined by
the Committee in accordance with the provisions of the Plan.
A stock appreciation right may be exercisable at any date with respect to
no more than the number of Shares for which the related Stock Option is
exercisable. A stock appreciation right may be exercisable only when the
per Share fair market value (as determined in accordance with Section 5(a)
hereof) of the Common Stock subject to the Option exceeds the per Share
exercise price of the Option. Each stock appreciation right shall terminate
no later than the termination date of the related Stock Option, and is
transferable only with and to the extent that the related Stock Option is
transferable.
The Committee may limit the payment on exercise of a stock appreciation
right to less than 100% of the increase in value, as aforesaid, or it may
set a maximum dollar amount of payment not to exceed 100% of the increase
in value. Payment may be made in cash, in Shares of Common Stock, or in a
combination of cash and Shares of Common Stock. Notwithstanding any other
provision in the Plan to the contrary, the Committee shall have the sole
discretion either to (i) determine the form in which payment for the stock
appreciation right will be made (i.e., cash, Shares of Common Stock or a
combination thereof), or (ii) to consent to or disapprove the election of
the Optionee to receive cash in full
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<PAGE> 7
of partial settlement of the stock appreciation right. Such consent or
disapproval must be given within seven calendar days after the date on
which the Optionee initially elects the form of payment. Upon exercise
of a stock appreciation right respecting a given number of Shares
subject to the Option, the right to exercise the related Option
respecting such Shares shall automatically terminate.
To the extent that stock appreciation rights shall be exercised, the
Option with respect to which the stock appreciation rights have been
granted shall be deemed to have terminated for a reason other than the
exercise thereof for the purpose of the limitation on the aggregate
number of Shares reserved under Section 4 of this Plan.
7. Director Options. Director Options shall be granted as of the first day
following the successful closing of the SIG Initial Public Offering
("IPO") ("Grant Date"). As of the Grant Date, each Director serving as
a Director of the Company on this Grant Date shall automatically be
granted a Director Option to purchase 5,000 Shares of Common Stock;
provided, however, that if on such Grant Date the number of remaining
Shares available for Director Option grants is not large enough to
grant each Director with a Director Option of 5,000 Shares, the number
of Shares covered by the final Director Option for each Director shall
be reduced proportionately to the nearest whole Share so that the
number of Shares granted under the Plan does not exceed the number of
Shares reserved under Section 4 hereof. Each Director Option granted
under the Plan shall be a Non-Qualified Stock Option and shall be
evidenced by a Director Stock Option Agreement between the Company and
the Director. The Director Stock Option Agreement shall specify the
number of Shares of Common Stock subject to the Director Option and
shall also be subject to the following terms and conditions.
(a) Director Option Price. The price to be paid for Shares of Common
Stock upon the exercise of each Director Option shall be the IPO
price of the Common Stock on the Grant Date.
(b) Period for Exercise of Director Option. A Director Option shall be
exercisable any time during the period that begins six months
after the Grant Date on which such Director Option is granted and
that ends on a ten year anniversary of that Grant Date.
(c) Exercise of Director Options. The Option price of each Share of
Common Stock purchased upon exercise of a Director Option shall
be paid in full in cash at the time of such exercise; provided,
however, that a Director may exercise a Director Option in whole
or in part by tendering to the Company whole Shares of Common
Stock or any combination of whole Shares of Common Stock and cash,
having a fair market value equal to the cash exercise price of
the Shares with respect to which the Director Option is being
exercised. For this purpose, the fair market value of the
Shares tendered by the Director shall be the average of the high
and low prices of the
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Common Stock as traded on the NASDAQ Stock Market's National
Market on the exercise date (or, if the Common Stock is not
traded on that date, the first preceding date on which the Common
Stock was traded on the NASDAQ Stock Market's National Market).
A Director Option may be exercised at any time or from time to
time during the term of the Director Option as to any or all
whole Shares which have become subject to purchase pursuant to
the terms of the Director Option or the Plan.
(d) Termination of Director Option. If a Director ceases to be a
Director of the Company for any reason other than death, any
Director Option granted to that Director may be exercised in
whole or in part at any time within the six year period
immediately following the date on which his or her status as a
Director terminated. Leave of absence approved by the Inside
Directors shall not constitute termination of status as Director.
In the event of the death of an Director while serving as a
Director of the Company, any Director Option granted to that
Director may be exercised in whole or in part by the executor or
administrator of the Director's estate or by the person or
persons entitled to the Director Option by will or by applicable
laws of descent and distribution within three years after the
date of the Director's death, whether or not the Director Option
was otherwise exercisable at such date of death. Notwithstanding
the foregoing provisions of this subsection (d), no Option shall
in any event be exercisable after the expiration of the period
set forth in Section 7(b) above.
(e) Certificates. The certificate or certificates for the Shares
issuable upon an exercise of a Director Option shall be issued as
promptly as practicable after such exercise. A Director shall
not have any rights of a Shareholder in respect to the Shares of
Common Stock subject to a Director Option until the date of
issuance of a stock certificate for such Shares. In no case may
a fraction of a Share be purchased or issued under the Plan, but
if, upon the exercise of a Director Option, a fractional Share
would otherwise be issuable, then the Company shall pay cash in
lieu thereof.
(f) No Right to Continued Service. Nothing in this Plan or in any
agreement entered into pursuant hereto shall confer on any person
any right to continue as a Director of the Company or affect any
rights the Company or the Shareholders of the Company may have to
terminate that person's status as a Director at any time.
8. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding Shares of Stock of the Company by
reason of any reorganization, recapitalization, stock split, stock
dividend, combination of Shares, exchange of Shares, merger or
consolidation, liquidation, or any other change after the effective date
of the Plan in the nature of the Shares of Stock of the Company, any
Options granted and outstanding hereunder, and the Exercise Price
thereof, shall be adjusted according to the change in the outstanding
shares of Stock of the Company so as not to cause any dilutive effect to
any Optionee.
8
<PAGE> 9
9. Tax Withholding. Whenever the Company proposes or is required to issue or
transfer Shares of Stock under the Plan, the Company shall have the right
to require the Optionee or his legal representative to remit to the Company
an amount sufficient to satisfy any federal, state and/or local tax
withholding requirements prior to the delivery of any certificate or
certificates for such Shares, and whenever under the Plan payments are to
be made in cash, such payments shall be net of an amount sufficient to
satisfy any federal, state and/or local tax withholding requirements;
provided, however, that notwithstanding the above and to the extent
permitted by the Committee, an employee Optionee may make a written
election to have Shares having an aggregate fair market value sufficient to
satisfy the applicable withholding taxes withheld from the Shares otherwise
to be received upon the exercise of the Option.
10. Amendment. The Board of Directors of the Company may amend the Plan from
time to time and, with the consent of the Optionee, the terms and
provisions of his Option or Director Option, except that without the
approval of the Company's Shareholders:
(a) the number of Shares of Common Stock which may be reserved for
issuance under the Plan may not be increased except as provided in
Section 8 hereof;
(b) the period during which an Option or Director Option may be exercised
may not be extended beyond ten years and one day from the date on
which such Option or Director Option was granted; and
(c) the class of employees to whom Options may be granted under the Plan
shall not be modified materially.
No other amendment to the Plan may be made which requires the approval of
the Company's shareholders under applicable law, the Code, or the Rules and
Regulations of NASDAQ.
No amendment of the Plan, however, may, without the consent of the
Optionees, make any changes in any outstanding Options or Director Options
theretofore granted under the Plan which would adversely affect the rights
of such Optionees.
11. Termination. The Board of Directors of the Company may terminate the Plan
at any time and no Option or Director Option shall be granted thereafter.
Such termination, however, shall not affect the validity of any Option or
Director Option theretofore granted under the Plan. In any event, no
Incentive Stock Option may be granted after the conclusion of a ten year
period commencing on the date the Plan is adopted or, if earlier, the date
the Plan is approved by the Company's Shareholders.
12. Successors. The Plan shall be binding upon the successors and assigns of
the Company.
9
<PAGE> 10
13. Governing Law. The terms of any Options granted hereunder and the
rights and obligations hereunder of the Company, the Optionees and
Directors and their successors in interest shall, except to the extent
governed by federal law, be governed by Indiana law without regard to
conflict of law rules.
14. Government and Other Regulations. The obligations of the Company to
issue or transfer and deliver Shares under Options or Director Options
granted under the Plan shall be subject to compliance with all
applicable laws, governmental rules and regulations, and administrative
action.
15. Effective Date. The Plan shall become effective when it shall have been
approved by the Company's Board of Directors.
10
<PAGE> 1
EXHIBIT 10.24
SYMONS INTERNATIONAL GROUP, INC.
RETIREMENT SAVING PLAN
SUMMARY PLAN DESCRIPTION
Effective: January 1, 1995
<PAGE> 2
SUMMARY PLAN DESCRIPTION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE DESCRIPTION PAGE
-------------- ----------------------------------------------------------------- ----
<S> <C> <C>
I INTRODUCTION..................................................... 1
II GENERAL INFORMATION ABOUT YOUR PLAN.............................. 2
III PARTICIPATION IN YOUR PLAN....................................... 4
IV EMPLOYEE CONTRIBUTIONS........................................... 5
V EMPLOYER CONTRIBUTIONS........................................... 8
VI VESTING.......................................................... 9
VII SERVICE RULES.................................................... 10
VIII COMPENSATION..................................................... 11
IX PARTICIPANTS' ACCOUNTS........................................... 12
X DISTRIBUTIONS AND BENEFITS UNDER YOUR PLAN....................... 14
XI BENEFIT PAYMENT OPTIONS.......................................... 19
XII TOP-HEAVY RULES.................................................. 21
XIII MISCELLANEOUS.................................................... 22
XIV STATEMENT OF ERISA RIGHTS........................................ 24
</TABLE>
<PAGE> 3
ARTICLE I
INTRODUCTION
In order to recognize the hard work and good efforts of its employees, your
Employer, SYMONS INTERNATIONAL GROUP, INC., (the "Employer") established the
SYMONS INTERNATIONAL GROUP, INC. RETIREMENT SAVING PLAN (the "Plan"), for the
exclusive benefit of all eligible employees and their beneficiaries. The
original effective date of the Plan was January 1, 1991. However, this Summary
Plan Description reflects the terms of the Plan under the most recent amendment,
effective January 1, 1995. The Plan allows eligible employees to defer part of
their income on a tax-favored basis into the Plan. The contributions which you
make to the Plan as 401(k) salary deferrals are also called "salary reduction"
contributions because your current taxable income is reduced for every dollar
you deposit into the Plan.
Also, the money in the Plan grows tax free until your retirement. However,
you must pay taxes when the money is paid out, unless it is transferred to
another retirement plan or an IRA. You may also be eligible for benefits in the
event of your death, total disability or other termination of your employment
with the Employer. This Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 (ERISA).
This Summary Plan Description is a brief description of your Plan and your
rights and benefits under the Plan. This Summary Plan Description is not meant
to interpret or change the provisions of your Plan. A copy of your Plan is on
file at your Employer's office and may be read by you, your beneficiaries, or
your legal representatives at any reasonable time. If you have any questions
regarding either your Plan or this Summary Plan Description, you should ask your
Plan Administrator, if any discrepancies exist between this Summary Plan
Description and the actual provisions of the Plan, the Plan shall govern.
1
<PAGE> 4
ARTICLE II
GENERAL INFORMATION ABOUT YOUR PLAN
<TABLE>
<S> <C>
Plan Name: SYMONS INTERNATIONAL GROUP, INC RETIREMENT SAVING PLAN
Employer: SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, IN 46206
(317) 259-6300
Employer I.D. No: 35-1707115
Plan Number: 001
Type of Plan: Cash or Deferred Arrangement (401(k) Plan)
Administration Type: Self-Administered
Plan Administrator: SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, IN 46206
(317) 259-6300
Legal Agent: SYMONS INTERNATIONAL GROUP, INC.
4720 KINGSWAY DRIVE
INDIANAPOLIS, IN 46206
(317) 259-6300
Trustees: DOUGLAS H. SYMONS
Trustees Address: 4720 KINGSWAY DRIVE
INDIANAPOLIS, IN 46206
(317) 259-6300
Funding Arrangement: Trust and Insurance
</TABLE>
2
<PAGE> 5
<TABLE>
<S> <C>
Plan Year: January 1 to December 31
Limitation Year: January 1 to December 31
Anniversary Date: December 31
</TABLE>
3
<PAGE> 6
ARTICLE III
PARTICIPATION IN YOUR PLAN
Before you become a Participant in the Plan, there are certain eligibility
and participation requirements which you must meet. These requirements are
explained in this section.
ELIGIBLE EMPLOYEES:
All of your Employer's employees are considered Eligible Employees and may
participate in the Plan, once they meet the Eligibility and Participation
Requirements, except members of a collective bargaining unit, and nonresident
aliens.
Employees of IGF INSURANCE and SYMONS INTERNATIONAL GROUP, INC. (FLORIDA)
are also considered as "employees" under this Plan.
ELIGIBILITY REQUIREMENTS:
To be eligible to enroll in the salary reduction portion of the Plan you
must have completed 6 months of service.
ENTRY DATES:
Participation in the Plan can begin only on an Entry Date. Your first Entry
Date will be the earlier of January 1st or July 1st coincident with or
immediately following the satisfaction of the Eligibility requirements.
REHIRED EMPLOYEES:
If you had satisfied the Eligibility requirements before you terminated
employment, you will become a Participant immediately on the date you are
rehired, if your rehire date is on or after your first Entry Date, as defined
above. Otherwise, you will be eligible to participate on the next Entry Date. If
you had not yet satisfied the Eligibility requirements at the time you
terminated employment, you must meet the Eligibility requirements as if you were
a new employee.
4
<PAGE> 7
ARTICLE IV
EMPLOYEE CONTRIBUTIONS
Your 401(k) Salary Deferral Plan offers you special tax advantages and
incentives to participate. First, every dollar you put into the Plan reduces
your income currently subject to Federal Income Tax. Thus, your deposits into
the 401(k) Plan are often called "salary reductions." (However, you must still
pay Social Security Taxes on your gross wages.)
Although you will have to pay income tax when you withdraw money from the
Plan, you may be able to defer taxes on a withdrawal by depositing the funds
into another Plan or an Individual Retirement Account (IRA). Because you defer
paying taxes until you receive payments form the Plan, 401(k) contributions are
sometimes called "salary deferrals".
The following chart illustrates the advantage of making deposits into the
401(k) Plan (saving on a tax-deferred basis) rather than savings on an after-tax
basis such as a bank passbook savings account or a money market fund.
<TABLE>
<CAPTION>
401(K) PLAN PASSBOOK
TAX-DEFERRED AFTER-TAX
SAVINGS SAVINGS
------------ ---------
<S> <C> <C>
Gross Wages......................................................... $ 20,000 $ 20,000
401(k) Deposit...................................................... 1,000 N/A
------- -------
Taxable Wages....................................................... 19,000 20,000
Estimated Taxes (25%)............................................... 4,750 5,000
Passbook Deposit.................................................... N/A 1,000
------- -------
Net Take-home Pay................................................... $ 14,250 $ 14,000
</TABLE>
In our example, net take-home pay (after paying taxes and after savings
$1,000) is $250 greater when the savings are deposited into the 401(k) Plan,
rather than an after-tax savings program like a money market or bank passbook
account. Saving $1,000 in the 401(k) Plan only "cost" our example person $750 in
take-home pay.
This is only a rough illustration of the advantages of tax-deferred
savings. Please discuss your situation with your tax advisor.
5
<PAGE> 8
TAX FREE ACCUMULATION:
Another big advantage your Plan offers is tax-deferred accumulation of the
earnings on your investments. All the earnings on the money you contribute to
your account compounds tax free. You pay taxes on this money only when you
retire or take distributions for some other reason, such as death or becoming
totally disabled. If you put your money into a savings account you are required
to pay income taxes on the interest each year. Thus, by contributing to your
401(k) Savings Plan, you'll have more money available at retirement.
SALARY REDUCTION AGREEMENT:
In order to enroll (or to refuse enrollment), your Employer will ask you to
complete a Salary Reduction Agreement. It is here that you tell your Employer
how much of your income you wish to defer to your Plan.
There are limits placed on the amount you can defer into this Plan. Your
salary deferrals cannot exceed a maximum dollar amount determined by the Federal
Government each year. For 1995, that amount is $9,240. Generally, if your total
deferrals from all cash or deferred arrangements for a calendar year exceed the
dollar amount set by the government, the excess must be included in your income
for the year. The IRS also requires that the combined contribution by you and
your Employer to your accounts not exceed the lesser of $30,000 or 25% of your
pay. Your Employer may also place restrictions on the amount you may defer in
order to meet IRS requirements.
Your Employer will deduct the amount you've elected from your paycheck in
accordance with procedures established by your Employer.
RESTRICTIONS:
In order to provide tax-advantaged savings, the Plan must place
restrictions on withdrawals from the Plan. Article X describes the circumstances
under which you may withdraw 401(k) deposits from the Plan.
6
<PAGE> 9
ELECTION NOT TO DEFER:
You may decide that you do not wish to make salary reduction contributions
on your first Entry Date. The Plan Administrator will explain the procedures for
delayed enrollment in the salary reduction portion of the Plan, if you decide to
enroll at a later date.
EXCESS DEFERRALS:
If you participate in two or more deferred compensation plans (which
include 401(k), Simplified Employee Pensions and 403(b) plans), your total
deferrals to all plans could exceed IRS limits for the year. To avoid paying
additional excise taxes if excess contributions have to be returned, you may
want to designate which plan is to return any excess contributions to you.
If you elect to have this Plan return any excess, you should notify the
Plan Administrator so that the excess can be returned to you, along with any
earnings, before April 15.
7
<PAGE> 10
ARTICLE V
EMPLOYER CONTRIBUTIONS
Your Employer does not anticipate making contributions to the Plan (other
than your salary deferral 401(k) contributions), at this time.
OTHER REQUIRED CONTRIBUTIONS:
In certain situations, your Employer may be required to make additional
contributions to the Plan. If the Plan is Top-Heavy (see Article XII) or if
highly paid participants contribute a higher percentage of pay to the Plan than
other participants, your Employer may have to take corrective action. This
action could result in either a reduction in the contributions for the highly
compensated participants or an additional Employer contribution, in the form of
Non-Elective or Qualified Non-Elective contributions.
8
<PAGE> 11
ARTICLE VI
VESTING
The term "vesting" refers to the percentage of your Employer contribution
accounts(s) (if any) other than your Qualified Non-Elective contributions
account, that you are entitled to receive in the event of your termination of
employment. You are always 100% vested in your Qualified Non-Elective account.
If you terminate employment before you meet the requirements for retirement
(see Article X), the distribution from the Employer discretionary accounts will
be limited to the vested portion. Your vesting percentage grows with your Years
of Service. Article VII explains how Years of Service are credited.
You will also become 100% vested at Normal Retirement, if you become
disabled or if you die. Refer to Article X for information on retirement,
disability or death.
9
<PAGE> 12
ARTICLE VII
SERVICE RULES
YEAR OF SERVICE:
You will earn a Year of Service for vesting if you are credited with 0
Hours of Service during a Plan Year. However, if you are credited with 0 hours
during your first year of employment, you'll earn a Year of Service. You cannot
earn more than one Year of Service credit during any Plan Year, though.
If you terminate employment and are later rehired by the Employer, your
Years of Service after reemployment may be added to the Years of Service you had
accumulated when you left. In order for the two periods of service to be added
together, you must return to work within 5 years of your termination date.
HOURS OF SERVICE:
You are credited with the actual number of hours you work and for hours for
which you are paid, but are not at work such as paid vacation or paid sick
leave.
BREAK IN SERVICE RULES:
When you fail to complete at least 501 hours during the Plan Year, you
incur a break in service. Thus, in any year in which you work less than 501
hours (approximately 3 months), you will incur a break in service.
However, in certain circumstances, your Plan is required to credit you with
501 hours, even though you didn't actually work 501 hours. This is primarily if
you take time off to have, adopt or care for a child for a period immediately
following the birth or adoption. You will receive this credit only for the
purpose of determining whether you have incurred a break in service and not for
receiving additional credit for a contribution or for vesting.
10
<PAGE> 13
ARTICLE VIII
COMPENSATION
Throughout this Summary Plan Description, the words "compensation" and
"pay" are used to define contribution amounts. "Pay" or "Compensation" means the
total wages paid to you by your Employer for the Plan Year.
Compensation includes deferred compensation which is not includable in your
gross taxable income due to SEP Deferrals, Cafeteria Benefits, 401(k) deferrals,
Tax Deferred Annuities and Governmental Deferred Compensation Plans.
However, Compensation will not include taxable employee benefits (such as
the value of life insurance in excess of $50,000).
In no event shall compensation in excess of $150,000 (as adjusted for
changes in the Consumer Price Index: $150,000 for 1995) be taken into account
for any Participant in this Plan.
Your compensation for the first Plan Year in which you participate shall be
your compensation from the Employer from the time you became a Participant
through the end of the Plan Year.
11
<PAGE> 14
ARTICLE IX
PARTICIPANTS' ACCOUNTS
Under the 401(k) Savings Plan, the money you deposit and any Employer
contributions are placed into investment accounts, which are credited with gains
and losses at each Valuation Date. Daily Separate accounts are set up for each
different type of money: 401(k) deposits, discretionary, rollover and Qualified
Non-Elective contributions because there are different Plan and IRS rules for
each type of contribution.
ROLLOVER AND VOLUNTARY ACCOUNTS:
Your Plan allows employees who had retirement accounts with a previous
Employer to transfer the previous account balance to your Plan even if you are
not a Participant in this plan. This is a segregated "Rollover" account and it
is always 100% vested. In order to avoid taxes on your "Rollover" money, you
must transfer the money from your old plan to this Plan within 60 days after
receiving the money.
INVESTMENTS:
Your Plan offers several investment options and you may instruct the
Trustees how you would like to invest the funds in your Rollover, 401(k),
Matching, Voluntary, Non-Elective and Qualified Non-Elective accounts.
If you choose not to select how your accounts are invested, the Trustee
will invest them for you. The Trustees are fiduciaries of the Plan, which means
that they have a responsibility to you to invest the Plan assets prudently.
Contact your Plan Administrator for information concerning the investment
options which are currently available.
12
<PAGE> 15
CREDITING YOUR ACCOUNTS WITH GAIN OR LOSS:
Each investment account is credited with investment gain or loss as of each
Valuation Date. Earnings or losses are allocated on the basis of the ratio your
account balance bears to the total account balances of all participants in the
same investment. You are then credited with that percentage of earnings or
losses.
If you receive a distribution from the Plan as of any date other than a
Valuation Date, the value of your account will be the value as of the prior
Valuation Date.
13
<PAGE> 16
ARTICLE X
DISTRIBUTIONS AND BENEFITS UNDER YOUR PLAN
You may request an In-Service Distribution in the event of financial
hardship. Financial hardship might result from your own, your spouse's or your
dependents' medical expenses, expenses in purchasing your primary residence or
in preventing eviction or foreclosure, or tuition for the next 12 months of
post-secondary education for you, your spouse or dependents. In addition, a
financial hardship only occurs when you have no other resources available to
you. For example, you may need to prove that you have been turned down for loans
or that you have sold other assets before you can receive a Hardship
Distribution.
The amount of your Hardship Distribution cannot exceed the amount needed to
meet the immediate financial hardship. In addition, the distribution will be
limited to the amount of your 401(k) contributions (no investment income) plus
the value of your Segregated and Voluntary accounts.
If you receive a Hardship Distribution, the Plan must impose restrictions
on the amount of your 401(k) salary deferrals in the future. First, you cannot
make any 401(k) contributions for the 12-month period following the date of your
Hardship Distribution. Secondly, the maximum amount of 401(k) contributions that
you can make for the calendar year that begins after the date of distribution is
reduced by the amount of your elective deferrals in the year you took the
hardship withdrawal.
For example, let's say that you took a hardship withdrawal on July 1, 1995,
and during 1995, you deposited $5,000 in elective deferrals. You can't make any
401(k) contributions until July 1, 1996. And, the maximum amount that you can
contribute for 1996 would be the legal limit minus $5,000. If the legal maximum
was $9,500 for 1996, you would be limited to $4,500.
Plan benefits are also paid when you retire, become permanently disabled,
or otherwise terminate employment. Benefit payments may also be made to your
beneficiary(ies) upon your death. Each of these events is discussed below.
14
<PAGE> 17
NORMAL RETIREMENT BENEFITS:
The Normal Retirement Age for the Plan is age 65.
Your Normal Retirement Date is the date you reach Normal Retirement Age.
At your Normal Retirement Date, you will be entitled to 100% of your
account balance. Payment of your benefits will begin as soon as practicable
following your retirement. (See Article XI, Benefit Payment Options.)
LATE RETIREMENT BENEFITS:
If you decide to work past your Normal Retirement Date, you can defer
payment of your benefits until your Retirement Date. Payment of your Retirement
benefits will commence as soon as practicable following your late retirement
date.
DEATH BENEFITS:
Should you die before retirement, your spouse or beneficiary will be
entitled to 100% of your account balance plus proceeds from Life Insurance
Contracts, if any.
If you are married at the time of your death, your spouse will be the
beneficiary of your death benefits, unless you otherwise elect in writing on a
form to be furnished to you by the Plan Administrator. IF YOU WISH TO DESIGNATE
A BENEFICIARY OTHER THAN YOUR SPOUSE AS YOUR BENEFICIARY, YOUR SPOUSE MUST
CONSENT TO WAIVE HIS/HER RIGHT TO RECEIVE DEATH BENEFITS UNDER THE PLAN. YOUR
SPOUSE'S CONSENT MUST BE IN WRITING AND WITNESSED BY A NOTARY OR A PLAN
REPRESENTATIVE.
If you are married and die before retiring, your spouse's benefits will
usually be paid in the form of a "Pre-Retirement Survivor Annuity," a life
annuity for your spouse. The amount of the annuity will depend on your account
balance at the time of your death. Also, your spouse may be able to select
another form of payment, depending on the options available at the time of your
death.
15
<PAGE> 18
If you want to designate someone other than your spouse as your
beneficiary, you have the option of waiving the Pre-Retirement Survivor Annuity,
with your spouse's consent. This waiver can be made at any time after the
beginning of the Plan Year in which you reach age 35. The Administrator will
provide you with a detailed explanation of the Pre-Retirement Survivor Annuity
before you reach age 35. This explanation will be given to you at some point
during the 3-year period beginning on the first day of the Plan Year in which
you reach age 32, or during your first 3 years of Participation if you enter the
Plan after age 32. In order to receive this information in a timely manner, you
should inform the Plan Administrator when you reach age 32.
If your spouse has consented to a valid waiver of any rights to the death
benefit; or your spouse cannot be located; or you are single at the time of your
death, then your death benefit will be paid to any beneficiary you may choose.
The Plan Administrator will supply you with a beneficiary designation form.
Since your spouse has certain rights under your Plan, you should
immediately inform the Plan Administrator of any changes in your marital status.
DISABILITY BENEFITS:
Should you become permanently disabled while a Participant under this Plan,
you will receive 100% of your account balance. "Disability" means a medically
determinable physical or mental impairment which may be expected to result in
death or to last at least a year and which renders you incapable of performing
your duties with your Employer. A determination of disability will be made by
the Plan Administrator in a uniform, nondiscriminatory manner on the basis of
medical evidence.
If it is determined you are disabled, your payments will begin as soon as
practicable following the date you were determined to be disabled.
BENEFITS UPON TERMINATION:
If your employment is terminated for any reason other than those set out
above, you will only be entitled to that portion of your Employer accounts in
which you are vested. (You are always entitled to 100% of the account balance of
any Salary Reduction or Voluntary contribution money you contributed to your
Plan.)
16
<PAGE> 19
"Vesting" refers to the percentage of your account balance you are entitled to
at any point in time. For each year you remain a Participant in the Plan, you
become vested with a higher percentage of your Employer account balance.
(See Vesting, Article VI.)
If your benefit is over $3,500, you may at your option, and with your
spouse's consent, request the Plan Administrator to distribute your benefit to
you before your retirement date. However, the value of your account will not be
determined earlier than as soon as practical following your termination if you
are not fully vested, or as soon as practical if you are 100% vested. You will
receive payment of your benefits as soon as practical after that date.
If your benefit is $3,500 or less, the Plan Administrator may distribute
your benefit early. No spousal consent is needed for distributions of $3,500 or
less.
DISTRIBUTIONS DUE TO A DOMESTIC RELATIONS ORDER:
In general, contributions made by you or your Employer for your retirement
are not subject to alienation. This means they cannot be sold, used as
collateral for a loan, given away or otherwise transferred. They are not subject
to the claims of your creditors. However, they may be subject to claims under a
Qualified Domestic Relations Order (QDRO).
The Administrator may be required by law to recognize obligations you incur
as a result of court ordered child support or alimony payments. The
Administrator must honor a "Qualified Domestic Relations Order" which is defined
as a decree or order issued by a court that obligates you to pay child support
or alimony, or otherwise allocates a portion of your assets in the Plan to your
spouse, child or other dependent. If a QDRO is received by the Administrator,
all or portions of your benefits may be used to satisfy the obligation. It is
the Plan Administrator's responsibility to determine the validity of a QDRO.
TAXATION OF DISTRIBUTIONS:
The benefits you receive from the Plan will be subject to ordinary income
tax in the year in which you receive the payment, unless you defer taxation by a
"rollover" of your distribution into another qualified plan or an IRA. Also, in
certain situations, your tax may be reduced by special tax treatment such as
"5-year forward averaging."
17
<PAGE> 20
VERY IMPORTANT NOTE: Under most circumstances, if you receive a
distribution from this Plan on or after January 1, 1993, twenty percent (20%) of
your distribution will be withheld for federal income tax purposes, unless you
instruct the trustees of this Plan to DIRECTLY transfer your distribution into
another qualified plan or an IRA. You must give these instructions to the
trustees no more than 90 days before the date you receive the payment. Also, the
trustees must wait at least 30 days after receiving you instructions before
making the payment, to allow you time to change your decision.
In addition to ordinary income tax, you may be subject to a 10% tax penalty
if you receive a "premature" distribution. If you receive a distribution upon
terminating employment before age 55 and you don't receive the payment as a life
annuity, you will be subject to the 10% penalty, unless you "rollover" your
payment. If you take a hardship withdrawal before age 59-1/2, the withdrawal
will usually be subject to the 10% penalty. But, there is no penalty for
payments due to your death or disability.
As the rules concerning "rollovers" and the taxation of benefits are
complex, please consult your tax advisor before making a withdrawal or
requesting a distribution from the Plan. As required by law the Plan
Administrator will provide you with a brief explanation of the rules concerning
"rollovers".
18
<PAGE> 21
ARTICLE XI
BENEFIT PAYMENT OPTIONS
There are several different payment options available under your Plan. The
method of payment you will receive depends on your marital status at the time
you receive payment, as well as the elections you and your spouse make. All
payments under your Plan are "equivalent". This means that, after making
adjustments for longer or shorter periods, or for payments continuing to a
beneficiary or spouse after your death, all payments are actuarially equal to
one another.
If you have been married for at least one year at the time of your
retirement, the normal payment option under your Plan is a joint and survivor
annuity where you select the percent that will continue to your spouse. That
means if you die before your spouse, your spouse will receive, after your death,
that percent of the benefit you were receiving at the time of your death. You
may elect another form of payment, with your spouse's consent. However electing
another option will affect the payments made to you and your spouse. You should
consult your tax advisor before making any election.
If you are not married (or have not been married for at least one year) at
the time of retirement, or if you and your spouse reject the joint and survivor
annuity, you may choose to receive payment in the form of a lump-sum
distribution of your total account balances, an annuity guaranteed for 10 years,
a life annuity, an annuity that will continue for 10 years or until your death
(whichever is later), an annuity for a period (that you select) which is less
than your life expectancy, or any other form of payment that may be permitted
under your Plan, at the time of your distribution.
When you are near retirement, the Plan Administrator will furnish you with
explanation of the joint and survivor and life annuities. You will be given the
option of waiving the joint and survivor annuity during the 90 day period before
the annuity payment is to begin. If you are married and decide to waive the
joint and survivor annuity, your spouse must consent to the waiver. Your
spouse's consent must be signed before a notary public or a plan representative.
Any waiver you make can be revoked later. However, your spouse cannot revoke
his/her consent to the waiver without your permission. The Plan Administrator
will provide you with the necessary forms to waive the joint and survivor
annuity.
19
<PAGE> 22
The Plan Administrator may delay payment to you for a reasonable time for
administrative convenience. However, unless you choose to defer receipt of your
distribution, the Plan must begin your payments within 60 days after the close
of the Plan Year following the latest of:
(a) the date on which you reached your Normal Retirement Age;
(b) the 10th anniversary of the year in which you became a Participant in
the Plan; or
(c) the date you terminated employment with the Employer.
In any event, the law requires that your distributions begin no later then
April 1 of the year following the date you reach age 70-1/2 (the date six months
after your 70th birthday.)
20
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ARTICLE XII
TOP-HEAVY RULES
A Plan becomes Top-Heavy when the total of the Key Employees' account
balances make up 60% or more of the total of all account balances in the Plan.
Key Employees are certain highly compensated officers or owners/shareholders.
If your Plan is Top-Heavy, Plan participants who are not "key" must receive
a minimum contribution. This minimum contribution is the smaller of the
percentage of pay contributed by the Employer to Key Employees, or 3% of your
compensation. If the Employer contribution allocated to your account for the
Top-Heavy year is equal to or more than this minimum contribution, no additional
Employer contribution would be needed to meet the Top-Heavy rules.
21
<PAGE> 24
ARTICLE XIII
MISCELLANEOUS
PROTECTION OF BENEFITS:
Except for the requirements of a Qualified Domestic Relations Order, your
Plan benefits are not subject to claims, indebtedness, execution, garnishment or
other similar legal or equitable process. Also, you cannot voluntarily (or
involuntarily) assign your benefits under this Plan. See Distributions due to a
Domestic Relations Order in Article X.
LOANS:
You are allowed to borrow a percentage of your vested benefits. There are
special circumstances that apply before you can borrow from your Plan. The Plan
Administrator will provide you with the "Loan Procedure" which explains the loan
provisions in detail.
AMENDMENT AND TERMINATIONS:
The Employer has reserved the right to amend or terminate your Plan.
However, no amendment can take away any benefits you have already earned. If
your Plan is terminated, you will be entitled to the full amount in your account
as of the date of termination, regardless of the percent you are vested at the
time of termination.
PENSION BENEFIT GUARANTY CORPORATION:
The Pension Benefit Guaranty Corporation (PBGC) provides plan termination
insurance for defined benefit pension plans. In your 401(k) Plan (a defined
contribution plan), all of the contributions and investment earnings are
allocated to Participants' accounts. PBGC insurance is not needed and does not
apply.
CLAIMS:
When you request a distribution of all or any part of your account, you
will contact the Plan Administrator who will provide you with the proper forms
to make your claim for benefits.
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Your claim for benefits will be given a full and fair review. However, if
your claim is denied, in whole or in part, the Plan Administrator will notify
you of the denial within 90 days of date your claim for benefits was received,
unless special circumstances delay the notification. If a delay occurs, you will
be given a written notice of the reason for the delay and a date by which a
final decision will be given (not more than 180 days after the receipt of your
claim.
Notification of a denial of claims will include:
(a) the specific reason(s) for the denial,
(b) reference(s) to the Plan provision(s) on which the denial is based,
(c) a description of any additional material necessary to correct your
claim and an explanation of why the material is necessary, and
(d) an explanation of the steps to follow to appeal the denial, including
notification that you (or your beneficiary) must file your appeal
within 60 days of the date you receive the denial notice.
If you or your beneficiary do not file an appeal within the 60-day period,
the denial will stand. If you do file an appeal within the 60 days, your
Employer will review the facts and hold hearings, if necessary, in order to
reach a final decision. Your Employer's decision will be made within 60 days of
receipt of the notice of your appeal, unless an extension is needed due to
special circumstances. In any event, your Employer will make a decision within
120 days of the receipt of your appeal.
Article XIV, STATEMENT OF ERISA RIGHTS, describes the protection you have
under ERISA and the steps you can take to enforce these rights.
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<PAGE> 26
ARTICLE XIV
STATEMENT OF ERISA RIGHTS
As a participant in SYMONS INTERNATIONAL GROUP, INC RETIREMENT SAVING PLAN
you are entitled to certain rights and protections under the Employee Retirement
Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants
shall be entitled to:
(a) examine, without charge, at the Plan Administrator's office copies of
all documents filed by the Plan with the U.S. Department of Labor,
such as detailed annual reports and Plan descriptions,
(b) obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator (the Administrator may
make a reasonable charge for the copies),
(c) receive a summary of the Plan's annual financial report. The Plan
Administrtor is required by law to furnish each participant with a
copy of this summary annual report.
(d) obtain a statement telling you whether you have a right to receive a
retirement benefit at Normal Retirement Age and if so, what your
benefits would be at Normal Retirement Age if you stop working under
the Plan now. If you do not have a right to a benefit, the statement
will tell you how many more years you have to work to get a right to a
benefit. This statement must be requested in writing and is not
required to be given more than once a year. The Plan must provide
the statement free of charge.
In addition to creating rights for Plan participants, ERISA imposes duties
upon the people who are responsible for the operation of the employee benefit
plan. The people who operate your Plan, called "fiduciaries" of the Plan, have a
duty to do so prudently and in the interest of you and other Plan participants
and beneficiaries. No one, including your Employer may fire you or otherwise
discriminate against you in any way to prevent you from obtaining a retirement
benefit or exercising your rights under ERISA.
If your claim for a retirement benefit is denied in whole or in part you
must receive a written explanation of the reason for the denial. You have the
right to have the Plan review and reconsider your claim.
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Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan and do not receive them within
30 days, you may file suit in a federal court. In such a case, the court may
require the Plan Administrator to provide the materials and pay you up to $100 a
day until you receive the materials, unless the materials were not sent because
of reasons beyond the control of the administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court.
If it should happen that Plan fiduciaries misuse the Plan's money, or if
you are discriminated against for asserting your rights, you may seek assistance
from the U.S. Department of Labor, or you may file suit in a federal court. The
court will decide who should pay court costs and legal fees. If you are
successful, the court may order the person you have sued to pay these costs and
fees. If you lose, the court may order you to pay these costs and fees, for
example, if it finds your claim is frivolous.
If you have any questions about your rights under ERISA, you should contact
the nearest Area Office of the U.S. Management Services Administration,
Department of Labor.
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DATAIR MASS-SUBMITTER PROTOTYPE
DEFINED CONTRIBUTION PLAN AND TRUST
<PAGE> 29
DATAIR MASS-SUBMITTER PROTOTYPE
DEFINED CONTRIBUTION PLAN AND TRUST
TABLE OF CONTENTS
PART 1
<TABLE>
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I INTRODUCTION.................................................................... 1
1.1.1 Creation and Title................................................... 1
1.1.2 Effective Date....................................................... 1
1.1.3 Purpose.............................................................. 1
II DEFINITIONS..................................................................... 2
I PARTICIPATION................................................................... 15
2.1.1 Eligibility Requirements............................................. 15
2.1.2 Commencement of Participation........................................ 15
2.1.3 Participation Upon Re-Employment..................................... 15
2.1.4 Termination of Participation......................................... 15
2.1.5 Employer's Determination............................................. 15
2.1.6 Omission of Eligible Employee........................................ 16
2.1.7 Inclusion of Ineligible Participation................................ 16
2.1.8 Election Not to Participate.......................................... 16
2.1.9 Change in Status..................................................... 16
2.1.10 Existing Participants................................................ 17
II CONTRIBUTIONS................................................................... 18
2.2.1 Employer Contributions............................................... 18
Elective Contributions by the Employer on Behalf of Electing
2.2.2 Employees............................................................ 19
2.2.3 Employee Contributions............................................... 21
2.2.4 Return of Contributions.............................................. 21
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<TABLE>
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III ALLOCATIONS..................................................................... 23
2.3.1 Profit Sharing and Money Purchase Pension Plans...................... 23
2.3.2 Cash or Deferred Plans............................................... 23
2.3.3 Integration with Social Security..................................... 23
2.3.4 Limitation........................................................... 25
2.3.5 Minimum Allocation................................................... 25
2.3.6 Fail-Safe Allocation................................................. 25
IV BENEFITS........................................................................ 27
2.4.1 Distributable Benefit................................................ 27
2.4.2 Vesting.............................................................. 27
2.4.3 Leave of Absence..................................................... 28
2.4.4 Re-Employment........................................................ 28
2.4.5 Distribution Date.................................................... 29
2.4.6 Forfeitures.......................................................... 29
V DISTRIBUTIONS................................................................... 31
2.5.1 Commencement of Distribution......................................... 31
2.5.2 Method of Distribution............................................... 37
2.5.3 Nature of Distributions.............................................. 47
2.5.4 Advance Distributions................................................ 48
2.5.5 Hardship Distributions............................................... 49
2.5.6 In Service Distributions............................................. 50
VI CONTINGENT TOP HEAVY PROVISIONS................................................. 52
2.6.1 Top Heavy Requirements............................................... 52
2.6.2 Top Heavy Provisions................................................. 53
2.6.3 Pairing Requirements................................................. 57
VII SPECIAL CODA LIMITATIONS........................................................ 58
2.7.1 Limitation on Deferral Percentage for Highly Compensated Employees... 58
2.7.2 Multiple Plan Limitations............................................ 59
2.7.3 Limitation on Matching Contributions................................. 60
2.7.4 Special Rules........................................................ 61
2.7.5 Distribution of Excess Elective Deferrals............................ 62
2.7.6 Distribution of Excess Contributions................................. 63
2.7.7 Distribution of Excess Aggregate Contributions....................... 63
2.7.8 Limitation on Distributions.......................................... 64
2.7.9 Limitation on Elective Deferrals..................................... 65
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<TABLE>
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PART III
I ACCOUNTING...................................................................... 66
3.1.1 Accounts............................................................. 66
3.1.2 Adjustments.......................................................... 66
II LIMITATIONS..................................................................... 69
3.2.1 Limitations on Annual Additions...................................... 69
3.2.2 Controlled Businesses................................................ 77
III FIDUCIARIES..................................................................... 79
3.3.1 Standard of Conduct.................................................. 79
3.3.2 Individual Fiduciaries............................................... 79
3.3.3 Disqualification from Service........................................ 79
3.3.4 Bonding.............................................................. 79
3.3.5 Prior Acts........................................................... 79
3.3.6 Insurance and Indemnity.............................................. 80
3.3.7 Expenses............................................................. 80
3.3.8 Agents, Accountants and Legal Counsel................................ 81
3.3.9 Investment Manager................................................... 81
3.3.10 Finality of Decisions or Acts........................................ 81
3.3.11 Certain Custodial Accounts and Contracts............................. 81
IV PLAN ADMINISTRATOR.............................................................. 82
3.4.1 Administration of Plan............................................... 82
3.4.2 Disclosure Requirements.............................................. 83
3.4.3 Information Generally Available...................................... 84
3.4.4 Statement of Accrued Benefit.........................................
3.4.5 Explanation of Rollover Treatment.................................... 84
V TRUSTEE......................................................................... 85
3.5.1 Acceptance of Trust.................................................. 85
3.5.2 Trustee Capacity -- Co-Trustee....................................... 85
3.5.3 Resignation, Removal and Successors.................................. 85
3.5.4 Consultations........................................................ 85
3.5.5 Rights, Powers and Duties............................................ 85
3.5.6 Trustee Indemnification.............................................. 88
3.5.7 Changes in Trustee Authority......................................... 88
VI TRUST ASSETS.................................................................... 89
3.6.1 Trustee Exclusive Owner.............................................. 89
3.6.2 Investments.......................................................... 89
3.6.3 Administration of Trust Assets....................................... 91
3.6.4 Segregated Funds..................................................... 92
3.6.5 Investment Control Option............................................ 93
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VII LOANS........................................................................... 95
3.7.1 Authorization........................................................ 95
3.7.2 Spousal Consent...................................................... 95
3.7.3 Limitations.......................................................... 96
3.7.4 Availability......................................................... 96
3.7.5 Prohibitions......................................................... 96
VIII BENEFICIARIES................................................................... 97
3.8.1 Designation of Beneficiaries......................................... 97
3.8.2 Absence or Death of Beneficiaries.................................... 97
3.8.3 Surviving Spouse Election............................................ 98
IX CLAIMS.......................................................................... 99
3.9.1 Claim Procedure...................................................... 99
3.9.2 Appeal............................................................... 99
X AMENDMENT AND TERMINATION....................................................... 101
3.10.1 Right to Amend....................................................... 101
3.10.2 Manner of Amending................................................... 101
3.10.3 Limitations on Amendments............................................ 102
3.10.4 Voluntary Termination................................................ 103
3.10.5 Involuntary Termination.............................................. 103
3.10.6 Withdrawal by Employer............................................... 103
3.10.7 Powers Pending Final Distribution.................................... 103
3.10.8 Delegation to Sponsor................................................ 103
XI PORTABILITY..................................................................... 104
3.11.1 Continuance by Successor............................................. 104
3.11.2 Merger With Other Plan............................................... 104
3.11.3 Transfer From Other Plans............................................ 104
3.11.4 Transfer To Other Plans.............................................. 105
</TABLE>
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XII MISCELLANEOUS........................................................ 106
3.12.1 No Reversion to Employer............................................. 106
3.12.2 Employer Actions..................................................... 106
3.12.3 Execution of Receipts and Releases................................... 106
3.12.4 Rights of Participants Limited....................................... 106
3.12.5 Persons Dealing With Trustee Protected............................... 106
3.12.6 Protection of Insurer................................................ 107
3.12.7 No Responsibility for Act of Insurer................................. 107
3.12.8 Inalienability....................................................... 107
3.12.9 Domestic Relations Orders............................................ 108
3.12.10 Authorization to Withhold Taxes...................................... 110
3.12.11 Missing Persons...................................................... 110
3.12.12 Notices.............................................................. 110
3.12.13 Governing Law........................................................ 110
3.12.14 Severability of Provisions........................................... 111
3.12.15 Gender and Number.................................................... 111
3.12.16 Binding Effect....................................................... 111
3.12.17 Qualification Under Internal Revenue Laws............................ 111
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PART I
ARTICLE I
INTRODUCTION
1.1.1 CREATION AND TITLE. The parties hereby create a Plan and Trust to
be known by the name set forth in the Adoption Agreement.
1.1.2 EFFECTIVE DATE. The provisions of this Plan and Trust shall be
effective as of the Effective Date set forth in the Adoption Agreement.
1.1.3 PURPOSE. This Plan and Trust is established for the purpose of
providing retirement benefits to eligible employees in accordance with the Plan
and the Adoption Agreement. If the Employer designates the Plan as a Cash or
Deferred Profit Sharing Plan in the Adoption Agreement, the Plan is also
intended to enable eligible Employees to supplement their retirement by electing
to have the Employer contribute amounts to the Plan and Trust in lieu of
payments to such Employees in cash and the Plan and Trust are intended to
satisfy the provisions of Section 401(k) of the Internal Revenue Code of 1986,
as amended.
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ARTICLE II
DEFINITIONS
As used in this Plan and the Adoption Agreement, the following terms shall
have the following meanings:
1.2.1 "ACCOUNT": The Employer Account, Controlled Account, Elective
Contribution Account, Matching Account, Qualified Non-Elective Contribution
Account, Voluntary Account or Segregated Account of a Participant, as the
context requires, established and maintained for accounting purposes.
1.2.2 "ACP": The average contribution percentage determined in accordance
with the provisions of Part II, Article VII.
1.2.3 "ACT": The Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.2.4 "ADP": The actual deferral percentage determined in accordance with
the provisions of Part II, Article VII.
1.2.5 "ANNIVERSARY DATE": Unless otherwise specified in the Adoption
Agreement, the last day of each Plan Year.
1.2.6 "BENEFICIARY": The person or persons entitled hereunder to receive
the benefits which may be payable upon or after a participant's death.
1.2.7 "BOARD OF DIRECTORS": The board of directors of an incorporated
Employer.
1.2.8 "BREAK IN SERVICE": The failure of a Participant to complete more
than five hundred (500) Hours of Service or such lesser number specified in the
Adoption Agreement during any 12 consecutive month computation period, beginning
with a Participant's first computation period after becoming a Participant. A
Year of Service and a Break in Service for vesting purposes shall be measured on
the same computation period. The Eligibility Computation Period and a Break in
Service for eligibility purposes shall be measured on the same computation
period.
1.2.9 "CODE": The Internal Revenue Code of 1986, as amended from time to
time.
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<PAGE> 36
1.2.10 "COMPENSATION": The compensation as defined in the Plan and as
specified in the Adoption Agreement (or Earned Income in the case of a
self-employed individual) which is actually paid to the Participant by the
Employer during the Compensation Computation Period; provided that if specified
by the Employer in the Adoption Agreement, compensation shall also include any
amount which is contributed by the Employer pursuant to a salary reduction
agreement and which is not includible in the gross income of the Employee under
Sections 125, 402(a)(8), 402(h), 403(b) or 457(b) of the Code; provided further
that for years beginning after December 31, 1988, the annual gross compensation
taken into account for purposes of the Plan shall not exceed $200,000, as such
amount may be adjusted by the Secretary of the Treasury at the same time and in
the same manner as under Section 415(d) of the Code, except that the dollar
increase in effect on January 1 of any calendar year is effective for years
beginning in such calendar year and the first adjustment to the $200,000
limitation is effected on January 1, 1990. If the plan determines compensation
on a period of time that contains less than twelve (12) calendar months, then
the annual compensation limit is an amount equal to the annual compensation
limit for the calendar year in which the compensation period begins multiplied
by the ratio obtained by dividing the number of full months in the period by 12.
For purposes of this dollar limitation, the rules of Section 414(q)(6) of the
Code requiring the aggregation of the compensation of family members shall
apply, except that in applying such rules, the term "family" shall include only
the spouse of the Participant and any lineal descendants of the Participant who
have not attained age nineteen (19) before the close of the year. If, as a
result of the application of such rules the adjusted $200,000 limitation is
exceeded, then (except for purposes of determining the portion of compensation
up to the Social Security Integration Level if this Plan provides for permitted
disparity), the limitation shall be prorated among the affected individuals in
proportion to each such individual's compensation as determined under this
Section prior to the application of this limitation. If compensation for any
prior plan year is taken into account in determining an employee's contributions
or benefits for the current year, the compensation for such prior year is
subject to the applicable annual compensation limit in effect for that prior
year. For this purpose, for years beginning before January 1, 1990, the
applicable annual compensation limit is $200,000.
1.2.11 "COMPENSATION COMPUTATION PERIOD": The period specified as the
Compensation Computation Period in the Adoption Agreement.
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1.2.12 "CONTROLLED ACCOUNT"; An account established and maintained for a
Participant to account for his interest in a Segregated Fund over which he
exercises investment control.
1.2.13 "DATE OF HIRE"; The date an Employee first completes an Hour of
Service for the Employer.
1.2.14 "DISTRIBUTABLE BENEFIT"; The benefit to which a Participant is
entitled following termination of his employment.
1.2.15 "DISTRIBUTION DATE"; The date as of which the Distributable Benefit
of a Participant is determined.
1.2.16 "EARLY RETIREMENT AGE"; The age specified as the Early Retirement
Age, if any, in the Adoption Agreement.
1.2.17 "EARLY RETIREMENT DATE"; The date specified as the Early Retirement
Date, if any, in the Adoption Agreement.
1.2.18 "EARNED INCOME"; The net earnings from self-employment in the trade
or business with respect to which the Plan is established for which personal
services of the Participant are a material income-producing factor. Net earnings
shall be determined without regard to items not included in gross income and the
deductions allocable to such items but, in the case of taxable years beginning
after 1989, with regard to the deduction allowed to the taxpayer by Section
164(f) of the Code. Net earnings shall be reduced by contributions to a
qualified plan to the extent deductible under Section 404 of the Code.
1.2.19 "ELECTIVE CONTRIBUTION ACCOUNT"; An Account established and
maintained for a Participant to account for the Elective Contributions made on
his behalf.
1.2.20 "ELECTIVE CONTRIBUTION"; A contribution to a cash or deferred
profit sharing plan by the Employer on behalf of an electing Employee.
1.2.21 "ELECTIVE DEFERRALS"; Any Employer contributions made to the Plan
at the election of the Participant, in lieu of cash compensation, including
contributions made pursuant to a salary reduction agreement or other deferral
mechanism.
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With respect to any taxable year, a Participant's Elective Deferral is the
sum of all Employer contributions made on behalf of the Participant pursuant to
an election to defer under any qualified CODA as described in Section 401(k) of
the Code, any simplified employee pension cash or deferred arrangement as
described in Section 402(h) (1) (B), any eligible deferred compensation plan
under Section 457, any plan as described under Section 501(c) (18), and any
employer contributions made on the behalf of a participant for the purchase of
an annuity contract under Section 403(b) pursuant to a salary reduction
agreement. Elective Deferrals shall not include any deferrals properly
distributed as excess annual additions.
1.2.22 "ELIGIBILITY COMPUTATION PERIOD": For purposes of determining Years
of Service and Breaks in Service for purposes of eligibility, the initial
eligibility computation period is the twelve (12) consecutive month period
beginning with the employment commencement date on which the Employee first
renders an Hour of Service for the Employer, and unless otherwise specified in
the Adoption Agreement, the subsequent eligibility computation periods are each
subsequent twelve (12) consecutive month period commencing on the annual
anniversary of such employment commencement date. If in accordance with the
election in the Adoption Agreement, the subsequent periods commence with the
first Plan Year which commences prior to the first anniversary of the Employee's
employment commencement date, an Employee who is credited with 1,000 Hours of
Service in both the initial eligibility computation period and the first Plan
Year which commences prior to the first anniversary of the Employee's initial
eligibility computation period shall be credited with two (2) years of service
for purposes of eligibility to participate.
1.2.23 "EMPLOYEE": A person who is currently or hereafter employed by the
Employer, or by any other employer aggregated under section 414(b), (c), (m) or
(o) of the Code and the regulations thereunder, including a Leased Employee
subject to section 414(n) of the Code and a self-employed owner of an
unincorporated Employer, but, unless otherwise provided in the Adoption
Agreement, excluding (a) an independent contractor; (b) an employee who is a
non-resident alien (within the meaning of section 7701(b) (1) (B) of the Code)
deriving no earned income (within the meaning of section 911(d) (2) of the Code)
from the Employer which constitutes income from sources within the United States
(within the meaning of section 861(a) (3) of the Code); and (c) employees who
are included in the unit of employees covered by a collective bargaining
agreement between the Employer and employee representatives, provided benefits
were the subject of good faith bargaining and two percent or less of the
employees of the Employer who are covered pursuant to that agreement are
professionals as defined in Treasury Regulation Section 1.410(b)-9(g).
5
<PAGE> 39
For this purpose, the term "employee representatives" does not include any
organization more than half of whose members are employees who are owners,
officers, or executives of the employer.
1.2.24 "EMPLOYER": The Employer that is a party to this Plan, or any of
its affiliates, successors or assigns which adopt the Plan; provided, however,
that no mere change in the identity, form or organization of the Employer shall
affect its status under the Plan in any manner, and, if the name of the Employer
is hereafter changed, a corresponding change shall be deemed to have been made
in the name of the Plan and references herein to the Employer shall be deemed to
refer to the Employer as it is then known.
1.2.25 "EMPLOYER ACCOUNT": An Account established and maintained for a
Participant for accounting purposes to which his share of Employer contributions
and forfeitures are added.
1.2.26 "EMPLOYER CONTRIBUTION": A contribution to a money purchase pension
or profit sharing plan other than a cash or deferred profit sharing plan by the
Employer.
1.2.27 "ENTRY DATE": The date or dates specified as the Entry Date in the
Adoption Agreement.
1.2.28 "EXCESS AGGREGATE CONTRIBUTIONS": With respect to any Plan Year,
the excess of:
(a) The aggregate contribution percentage amounts taken into account
in computing the numerator of the contribution percentage actually made on
behalf of Highly Compensated Employees for such Plan Year, over
(b) The maximum contribution percentage amounts permitted by the ACP
test (determined by reducing contributions made on behalf of Highly
Compensated Employees in order of their contribution percentages beginning
with the highest of such percentages). Such determination shall be made
after first determining Excess Elective Deferrals and then determining
Excess Contributions.
1.2.29 "EXCESS CONTRIBUTIONS": With respect to any Plan Year, the excess
of:
(a) The aggregate amount of Employer Contributions actually taken into
account in computing the ADP of Highly Compensated Employees for such Plan
Year, over
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<PAGE> 40
(b) The maximum amount of such contributions permitted by the ADP test
(determined by reducing contributions made on behalf of Highly Compensated
Employees in order of the ADPs, beginning with the highest of such
percentages.
1.2.30 "EXCESS ELECTIVE DEFERRALS": Those Elective Deferrals that are
includible in a Participant's gross income under section 402(g) of the Code to
the extent such participant's Elective Deferrals for a taxable year exceed the
dollar limitation under such Code section. Excess Elective Deferrals shall be
treated as annual additions under the Plan, unless such amounts are distributed
no later than the first April 15 following the close of the Participant's
taxable year.
1.2.31 "EXCESSIVE ANNUAL ADDITION": The portion of the allocation of
contributions and forfeitures that cannot be added to a Participant's Accounts
due to the limitations on annual additions contained in the Plan.
1.2.32 "FAMILY": The spouse and lineal ascendants or descendants of an
Employee and the spouses of such lineal ascendants and descendants.
1.2.33 "FIDUCIARY": The Plan Administrator, the Trustee and any other
person who has discretionary authority or control in the management of the Plan
or the disposition of Trust assets.
1.2.34 "HIGHLY COMPENSATED EMPLOYEE": A highly compensated active employee
and a highly compensated former employee. A highly compensated active employee
includes: any Employee who performs service for the Employer during the
determination year and who, during the look-back year: (i) received compensation
from the Employer in excess of $75,000 (as adjusted pursuant to Section 415(d)
of the Code); (ii) received compensation from the Employer in excess of $50,000
(as adjusted pursuant to Section 415(d) of the Code) and was a member of the
top-paid group for such year; or (iii) was an officer of the Employer and
received compensation during such year that is greater than 50 percent of the
dollar limitation as in effect under Section 415(b) (1) (A) of the Code.
7
<PAGE> 41
The term highly compensated employee also includes: (i) employees who are
both described in the preceding sentence if the term "determination year" is
substituted for the term "look-back year" and the employee is one of the 100
employees who received the most compensation from the Employer during the
determination year; and (ii) employees who are 5 percent owners at any time
during the look-back year or determination year. If no officer has satisfied the
compensation requirement of (iii) above during either a determination year or
look-back year, the highest paid officer for such year shall be treated as a
highly compensated employee.
For this purpose, the determination year shall be the Plan Year. The
look-back year shall be the twelve-month period immediately preceding the
determination year and compensation is as defined in Section 415(c)(3) of the
Code including amounts contributed by the Employer pursuant to a salary
reduction agreement and which is not includible in gross income under Sections
125, 402(a)(8), 402(h) or 403(b) of the Code.
A highly compensated former employee includes any employee who separated
from service (or was deemed to have separated) prior to the determination year,
performs no service for the employer during the determination year, and was a
highly compensated active employee for either the separation year or any
determination year ending on or after the employee's 55th birthday.
If an Employee is, during a Plan Year or the preceding Plan Year, a family
member of either a 5 percent owner who is an active or former employee or a
Highly Compensated Employee who is one of the 10 most highly compensated
employees ranked on the basis of compensation paid by the Employer during such
year, then the family member and the 5 percent owner or top-ten highly
compensated employee shall be aggregated. In such case, the family member and 5
percent owner or top-ten highly compensated employee shall be treated as a
single employee receiving compensation and plan contributions or benefits equal
to the sum of such compensation and contributions or benefits of the family
member and 5 percent owner or top-ten highly compensated employee. For purposes
of this section, family member includes the spouse, lineal ascendants and
descendants of the employee or former employee and the spouses of such lineal
ascendants and descendants.
An Employee is in the top-paid group of employees for any year if the
Employee is in the group consisting of the top twenty (20%) percent of the
employees when ranked on the basis of compensation paid during such year.
For purposes of determining whether an Employee is a highly compensated
employee, Sections 414(b), (c), (m), (n) and (o) of the Code shall be applied.
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The determination of who is a highly compensated employee, including the
determination of the number and identity of employees in the top-paid group, the
top 100 employees, the number of employees treated as officer and the
compensation that is considered, will be made in accordance with Section 414(g)
of the Code and the regulations thereunder.
1.2.35 "HOUR OF SERVICE"; An hour for which (a) the Employee is paid, or
entitled to payment by the Employer for the performance of duties, (b) the
Employee is paid or entitled to payment by the Employer during which no duties
are performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence, or (c) back
pay, irrespective of mitigation of damages, has been either awarded or agreed to
by the Employer. Hours of Service shall be credited to the Employee under (a),
above, for the period in which the duties are performed, under (b), above, in
the period in which the period during which no duties are performed occurs,
beginning with the first Hour of Service to which the payment relates, and under
(c), above, for the period to which the award or agreement pertains rather than
the period in which the award, agreement or payment is made; provided, however,
that Hours of Service shall not be credited under both (a) and (b), above, as
the case may be, and under (c) above. Notwithstanding the preceding sentences,
(i) no more than five hundred one (501) Hours of Service shall be credited under
(b), above, on account of any single continuous period during which the Employee
performs no duties whether or not such period occurs in a single computation
period, (ii) no Hours of Service shall be credited to the Employee by reason of
a payment made or due under a plan maintained solely for the purpose of
complying with applicable worker's compensation, or unemployment compensation or
disability insurance laws, and (iii) no Hours of Service shall be credited by
reason of a payment which solely reimburses an employee for medical or medically
related expenses incurred by the Employee. The determination of Hours of Service
for reasons other than the performance of duties and the crediting of Hours of
Service to computation periods shall be made in accord with the provisions of
Labor Regulation Sections 2530.200b-2(b) and (c) which are incorporated herein
by reference.
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Solely for the purposes of determining whether an Employee has incurred a Break
in Service, an Employee shall be credited with the number of Hours of Service
which would otherwise have been credited to such individual but for the absence
or in any case in which such Hours cannot be determined with eight (8) Hours of
Service for any day that the Employee is absent form work by reason of the
Employee's pregnancy, the birth of a child of the Employee, the placement of a
child with the Employee in connection with the adoption of such child by the
Employee or for purposes of caring for such child for a period beginning
immediately following such birth or placement. Such Hours of Service shall be
credited only in the computation period in which the absence form work begins if
the Employee would be prevented from incurring a Break in Service in such
computation period solely because credit is given for such period of absence
and, in any other case, in the immediately following computation period.
Notwithstanding the foregoing, no credit shall be given for such service unless
the Employee furnishes to the Plan Administrator information to establish that
the absence form work is for the reasons indicated and the number of days for
which there was such an absence.
In the event the Employer does not maintain records of the actual hours for
which an Employee is paid or entitled to payment, credit for service shall be
given in accordance with the method selected in the Adoption Agreement.
Service with another business entity that is, along with the Employer, a
member of a controlled group of corporations under Section 414(b) of the Code,
an affiliated service group under Section 414(m) of the Code or trades or
businesses under common control under Section 414(c) of the Code, or which is
otherwise required to be aggregated with the Employer pursuant to Section 414(o)
of the Code and the regulations issued thereunder shall be treated as service
for the Employer. Hours of Service shall be credited for any individual
considered an employee for purposes of this Plan under Section 414(n) or Section
414(o) of the Code and the regulations issued thereunder.
If the Employer maintains the plan of a predecessor employee, service with
such predecessor shall be treated as service for the Employer.
1.2.36 "INSURER": Any insurance company which has issued a Life Insurance
Policy.
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1.2.37 "JOINT AND SURVIVOR ANNUITY"; An immediate annuity for the life of
the Participant with a survivor annuity for the life of the spouse which is not
less than fifty (50%) percent and not more than one hundred (100%) percent of
the amount of the annuity which is payable during the joint lives of the
Participant and the spouse and which is the amount of benefit which can be
purchased with the Participant's vested Account balances. The percentage of the
survivor annuity shall be fifty (50%) percent unless a different percentage is
elected by the Employer in the Adoption Agreement.
1.2.38 "LEASED EMPLOYEE"; Any person (other than an employee of the
recipient) who pursuant to an agreement between the recipient and any other
person has performed services for the recipient (or for the recipient and
related persons determined in accordance with Section 414(n)(6) of the Code) on
a substantially full time basis for a period of at least one (1) year and such
services are of a type historically performed by employees in the business field
of the recipient employer; provided that any such person shall not be taken into
account if (a) such person is covered by a money purchase pension plan providing
(i) a nonintegrated employer contribution rate of at least ten (10%) percent of
compensation, as defined in Section 415(c)(3) of the Code and Section
3.2.1(h)(iii) of the Plan, but including amounts contributed by the employer
pursuant to a salary reduction agreement which are excludable from the person's
gross income under Sections 125, 402(a)(8), 402(h) or 403(b) of the Code; (ii)
immediate participation; and (iii) full and immediate vesting; and (b) leased
employees do not constitute more than twenty (20%) percent of the workforce of
the recipient who are not Highly Compensated Employees. Contributions or
benefits provided a leased employee by the leasing organization which are
attributable to services performed for the recipient employer shall be treated
as provided by the recipient employer.
1.2.39 "LIFE INSURANCE POLICY"; A life insurance, annuity or endowment
policy or contract which is owned by the Trust and is on the life of a
Participant.
1.2.40 "LIMITATION YEAR"; Unless otherwise specified in the Adoption
Agreement, the Plan Year; provided that all qualified plans maintained by the
Employer use the same Limitation Year.
1.2.41 "MASS SUBMITTER"; DATAIR Employee Benefits Systems Inc.
1.2.42 "MATCHING ACCOUNT"; An account established and maintained for a
Participant for accounting purposes to which his share of Matching Contributions
are added.
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1.2.43 "MATCHING CONTRIBUTION": A contribution to the Plan by the Employer
which matches in whole or in part an Elective Contribution on behalf of an
electing Employee.
1.2.44 "NON-ELECTIVE CONTRIBUTION": A contribution to a cash or deferred
profit sharing plan by the Employer which is neither a Qualified Non-Elective
Contribution, a Matching Contribution nor an Elective Contribution.
1.2.45 "NORMAL RETIREMENT AGE": The earlier of the date specified as the
Normal Retirement Age in the Adoption Agreement or the mandatory retirement age
enforced by the Employer.
1.2.46 "NORMAL RETIREMENT DATE": The date specified in the Adoption
Agreement as the Normal Retirement Date.
1.2.47 "OWNER-EMPLOYEE": An individual who is a sole proprietor or who is
a partner owning more than ten percent (10%) of either the capital or profits
interest of the partnership.
1.2.48 "PARTICIPANT": Any eligible Employee who becomes entitled to
participate in the Plan.
1.2.49 "PLAN": The defined contribution plan for Employees as set forth in
this Agreement and the Adoption Agreement, together with any amendments or
supplements thereto.
1.2.50 "PLAN ADMINISTRATOR": The person, persons or entity appointed by
the Employer to administer the Plan, or, if the Employer fails to make such
appointment, the Employer.
1.2.51 "PLAN SPONSOR": The Plan Sponsor specified in the Adoption
Agreement.
1.2.52 "PLAN YEAR" OR "YEAR": The 12 consecutive month period designated
by the Employer in the Adoption Agreement.
1.2.53 "PRERETIREMENT SURVIVOR ANNUITY": A survivor annuity for the life
of the surviving spouse of the Participant, the actuarial equivalent of which is
equal to the portion of the Account balance of the Participant as of the date of
death to which the Participant had a vested and nonforfeitable right, provided
that any security interest held by the Plan by reason of a loan outstanding to
the Participant for which a valid spousal consent has been obtained, if
necessary, shall be taken into account.
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1.2.54 "QUALIFIED NON-ELECTIVE CONTRIBUTION": A contribution to a cash or
deferred profit sharing plan by the Employer which is neither a Matching
Contribution nor an Elective Contribution, is one hundred percent (100%) vested
and nonforfeitable when made, which a Participant may not elect to have paid in
cash instead of being contributed to the Plan and which may not be distributed
from the Plan (except in the case of a hardship distribution) prior to the
termination of employment or death of the Participant, attainment of age 59-1/2
by the Participant or termination of the Plan without establishment of a
successor plan.
1.2.55 "QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT": An Account
established and maintained for a Participant to account for the Qualified
Non-Elective Contributions made on his behalf.
1.2.56 "QUALIFYING EMPLOYER SECURITIES OR REAL PROPERTY": Securities or
real property of the Employer which the Trustee may acquire and hold pursuant to
the applicable provisions of the Code and the Act.
1.2.57 "SEGREGATED ACCOUNT": An Account established and maintained for a
Participant to account for his interest in a Segregated Fund.
1.2.58 "SEGREGATED FUND": Assets held in the name of the Trustee which
have been segregated from the Trust Fund in accordance with any of the
provisions of the Plan.
1.2.59 "SELF-EMPLOYED INDIVIDUAL": An individual who has Earned Income for
the taxable year from the trade or business for which the Plan is established or
who would have had Earned Income but for the fact that the trade or business had
no net profits for the taxable year.
1.2.60 "SOCIAL SECURITY INTEGRATION LEVEL": The Social Security
Integration Level shall be equal to the taxable wage base or such lesser amount
specified in the Adoption Agreement. The "taxable wage base" is the contribution
and benefit base in effect under Section 230 of the Social Security Act on the
first day of the Plan Year for which allocations of Employer contributions and
forfeitures are made (referred to as the Social Security Wage Base). The Social
Security Integration Level shall be deemed to be the full amount of such Social
Security Integration Level, even though a Participant's Compensation may include
less than a full year's compensation because of either his participation
commencing after the first day of the Compensation Computation Period or his
service terminating prior to the end of the Compensation Computation Period.
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1.2.61 "TRUST FUND"; All money and property of every kind and character
held by the Trustee pursuant to the Plan, excluding assets held in Segregated
Funds.
1.2.62 "TRUSTEE"; The persons, corporations, associations or combination
of them who shall at the time be acting as such from time to time hereunder.
1.2.63 "VALUATION DATE"; The date or dates specified as the Valuation Date
in the Adoption Agreement.
1.2.64 "VOLUNTARY ACCOUNT"; An Account established and maintained for a
Participant for accounting purposes to which his voluntary Employee
contributions made prior to Plan Years beginning after 1986 have been added.
1.2.65 "YEAR OF SERVICE"; The 12 consecutive month period (computation
period) specified in the Adoption Agreement during which an employee completes
at least one thousand (1,000) Hours of Service or such lesser number specified
in the Adoption Agreement. Unless otherwise specified in the Adoption Agreement,
all Years of Service shall be taken into account.
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PART II
ARTICLE I
PARTICIPATION
2.1.1 Eligibility Requirements. Each Employee shall be eligible to
participate in this Plan and receive an appropriate allocation of contributions
upon satisfying the eligibility requirements set forth in the Adoption
Agreement.
2.1.2 Commencement of Participation. An eligible Employee shall
become a Participant in the Plan on the applicable Entry Date selected in the
Adoption Agreement.
2.1.3 Participation Upon Re-Employment. A Participant whose
employment terminates and who is subsequently re-employed shall re-enter the
Plan as a Participant immediately on the date of his reemployment. In the event
that an Employee completes the eligibility requirements set forth in the
Adoption Agreement, his employment terminates prior to becoming a Participant
and he is subsequently re-employed, such Employee shall be deemed to have met
the eligibility requirements as of the date of his re-employment and shall
become a Participant on the date of his re-employment; provided, however, that
if he is re-employed prior to the date he would have become a Participant if his
employment had not terminated, he shall become a Participant as of the date he
would have become a Participant if his employment had not terminated. Any other
Employee whose employment terminates and who is subsequently reemployed shall
become a Participant in accordance with the provisions of Sections 2.1.1 and
2.1.2.
2.1.4 Termination of Participation. An Employee who has become a
Participant shall remain a Participant until the entire amount of his
Distributable Benefit is distributed to him or his Beneficiary in the event of
death.
2.1.5 Employer's Determination. In the event any question shall arise
as to the eligibility of any person to become a Participant or the commencement
of participation, the Employer shall determine such question and the Employer's
decision shall be conclusive and binding, except to the extent of a claimant's
right to appeal the denial of a claim.
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2.1.6 Omission of Eligible Employee. If an Employee who should be
included as a Participant of the Plan is erroneously omitted and discovery of
the omission is made after the contribution by the Employer is made and
allocated, the Employer shall make an additional contribution on behalf of the
omitted Employee in the amount which the Employer would have contributed on his
behalf had he not been omitted.
2.1.7 Inclusion of Ineligible Participant. If any person is
erroneously included as a Participant in the Plan and discovery of the erroneous
inclusion is made after the contribution by the Employer is made and allocated,
the Employer may elect to treat the amount contributed on behalf of the
ineligible person plus any earnings thereon as a forfeiture for the Plan Year in
which the discovery is made and apply such amount in the manner specified in the
Adoption Agreement.
2.1.8 Election Not to Participate. With respect only to
nonstandardized plans and notwithstanding anything contained in the Plan to the
contrary, an Employee may elect with the approval of the Employer not to
participate in the Plan if the election does not jeopardize the qualified or
tax-exempt status of the Plan under section 401(a) and 501(a) of the Code,
respectively. The Employee shall sign such documents as may be reasonably
required by the Employer to evidence the election. If it is subsequently
determined that either the qualified or the tax-exempt status of the Plan has
been jeopardized, the Employer may elect to treat such Employee as having been
erroneously omitted. An Employee may revoke the election only with respect to
any subsequent Plan Year by written notice of revocation to the Employer prior
to the end of the Plan Year for which the revocation is effective.
2.1.9 Change in Status. If any Participant continues in the employ of
the Employer or an affiliate for which service is required to be taken into
account but ceases to be an Employee for any reason (such as becoming covered by
a collective bargaining agreement unless the collective bargaining agreement
otherwise provides) the Participant shall continue to be a Participant until the
entire amount of his benefit is distributed but the individual shall be deemed
not to have completed any "Years of Service" for purposes of Article V
("Benefits") during the period that the Participant is not an Employee for such
reason.
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Such Participant shall continue to receive credit for Years of Service completed
during the period for purposes of determining his vested and nonforfeitable
interest in his Accounts. In the event that the individual subsequently again
becomes a member of an eligible class of employees, the individual shall
participate immediately upon the date of such change in status. If such
Participant incurs a Break in Service and is subsequently reemployed,
eligibility to participate shall be determined in accordance with Section 2.1.3.
In the event that an individual who is not a member of an eligible class of
employees becomes a member of an eligible class, the individual shall
participate immediately if such individual has satisfied the eligibility
requirements and would have otherwise previously become a participant.
2.1.10 Existing Participants. An Employee who, on the Effective Date,
was a Participant under the provisions of the Plan as in effect immediately
prior to the Effective Date shall be a Participant on the Effective Date and the
provisions of Sections 2.1.1 and 2.1.2, pertaining to participation, shall not
be applicable to such Employee. The rights of a Participant whose employment
terminated prior to the Effective Date shall be determined under the provisions
of the Plan as in effect at the time of such termination.
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ARTICLE II
CONTRIBUTIONS
2.2.1 Employer Contributions.
(a) Amount of Contribution.
(1) Money Purchase Pension Plan. The Employer shall contribute
to the Trust Fund each Plan Year such amount, including any forfeitures
to be applied, set forth in the Adoption Agreement.
(2) Profit Sharing Plan. The Employer shall contribute to the
Trust Fund each Plan Year such amount as it may determine.
(3) Cash or Deferred Profit Sharing Plan.
(i) Amount of Non-Elective Contribution. The Employer shall
contribute to the Trust Fund each Plan Year such amount as a
Non-Elective Contribution as the Employer may determine.
(ii) Amount of Matching Contribution. Subject to applicable
limitations provided by the Plan, the Employer shall contribute to
the Trust Fund each Plan Year with respect to the amount of
Elective Contributions on behalf of each electing Employee a
Matching Contribution determined in the manner set forth in the
Adoption Agreement.
(iii) Amount of Qualified Non-Elective Contribution. The
Employer shall contribute to the Trust Fund each Plan Year such
amount as a Qualified Non-Elective Contribution as the Employer
may determine. In addition, in lieu of distributing Excess
Contributions or Excess Aggregate Contributions as provided in
Article VII, below, and to the extent elected by the Employer in
the Adoption Agreement, the Employer may make Qualified
Non-Elective Contributions on behalf of Employees who are not
Highly Compensated Employees that are sufficient to satisfy either
the ADP test or the ACP test, or both, pursuant to regulations
under the Code.
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(b) Limitation. The contribution for any Plan Year by the Employer
shall not exceed the maximum amount deductible from the Employer's income
for such Year for federal income tax purposes under the applicable sections
of the Code.
(c) Time of Contribution. All contributions by the Employer shall be
delivered to the Trustee not later than the date fixed by law for the
filing of the Employer's federal income tax return for the Year for which
such contribution is made (including any extensions of time granted by the
Internal Revenue Service for filing such return).
(d) Determination of Amount to be Final. The determination by the
Employer as to the amount to be contributed by the Employer hereunder shall
be in all respects final, binding, and conclusive on all persons or parties
having or claiming any rights under this agreement or under the Plan and
Trust created hereby. Under no circumstances and in no event shall any
Participant, Beneficiary, or other person or party have any right to
examine the books or records of the Employer.
(e) Rights of Trustee as to Contributions. The Trustee shall have no
duty to report any contribution to be made or to determine whether
contributions delivered to the Trustee by the Employer comply with the
provisions of this Agreement. The Trustee shall be accountable only for
funds actually received by the Trustee.
2.2.2 Elective Contributions by the Employer on Behalf of Electing
Employees.
(a) Amount of Contribution. If the Plan is designated in the Adoption
Agreement as a Cash or Deferred Profit Sharing Plan, each Employee may
elect to have the Employer contribute to the Trust on his behalf for any
Plan Year during which he is a Participant such amounts expressed either in
dollars or in whole percentages of his Compensation as he may elect which
would otherwise be payable by the Employer as Compensation (but not to
exceed the dollar limitation provided by Section 402(g) of the Code as in
effect at the beginning of the taxable year); provided that the Employer
may impose reasonable limitations in a uniform, nondiscriminatory manner on
the amounts which may be so contributed in order to satisfy applicable
legal requirements and to assure the deductibility of amounts contributed
by the Employer to the Plan and any other qualified plan of deferred
compensation.
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<PAGE> 53
(b) Election. The Plan Administrator shall determine the manner in
which a Participant may elect to have Elective Contributions made to the
Plan on his behalf. The Plan Administrator shall establish reasonable
periods during which the election may be made, modified or revoked. Unless
the Plan Administrator establishes another period during which the election
may be made, modified or revoked, any such election may be made, modified
or revoked during the first and last months of the Plan Year. An election
by an Employee may not be made retroactively and once made shall remain in
effect until modified or terminated.
(c) Payment of Contribution. Elective Contributions shall be remitted
by the Employer within a reasonable period after such amount would have
otherwise been payable to the Participant. The Employer shall designate,
in accordance with the Participant's election, the Plan Year to which any
such contributions which are made after the end of the Plan Year pertain.
(d) Segregated Fund. Unless an Elective Contribution on behalf of a
Participant is received by the Trustee within the time prescribed by the
Plan Administrator prior to a Valuation Date, the Plan Administrator shall
direct the Trustee to establish a Segregated Fund with respect to such
contribution. The funds contained in such Segregated Fund shall be
transferred to the Trust Fund in accordance with the instructions of the
Plan Administrator and such transfer shall be deemed to have been made as
of such next succeeding Valuation Date. If an Elective Contribution on
behalf of a Participant is received by the Trustee within the period
prescribed by the Plan Administrator, such contribution shall be added to
the Trust Fund. Notwithstanding the foregoing, if the Trust Fund is
invested in such a manner that the Plan Administrator can determine, with a
reasonable degree of certainty, that portion of the adjustment to fair
market value which is attributable to Elective Contributions received by
the Trustee other than within such period, then the Plan Administrator
shall direct the Trustee shall add any such Elective Contributions to the
Trust Fund at the time the Trustee receives such Elective Contributions.
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<PAGE> 54
(e) Hardship Distributions. An Employee may not have Elective
Contributions made on his or her behalf for the taxable year following
the taxable year of a hardship distribution in excess of the applicable
limit under Section 402(g) of the Code for such taxable year less the
amount of the Employee's Elective Deferrals for the taxable year of the
hardship distribution.
2.2.3 Employee Contributions.
(a) Amount of Contribution. An Employee is neither required nor
permitted to contribute to the Plan for any Plan Year beginning after the
Plan Year in which the prototype Plan is adopted by the Employer. Employee
contributions for Plan years beginning after 1986 shall be limited so as to
meet the nondiscriminatory test of Section 401(m) of the Code. The Plan
Administrator shall not accept deductible employee contributions which are
made for a taxable year beginning after December 31, 1986. Contributions
made prior to that date will be maintained in a separate account which will
be nonforfeitable at all times. The account will share in the gains and
losses of the trust in the same manner as provided in Section 3.1.2 of the
Plan. No part of the deductible voluntary contribution account will be
used to purchase life insurance.
(b) Withdrawal of Contributions. In accordance with the provisions of
the Plan as in effect prior to Plan Years beginning after 1986, all or any
portion of an Employee's contributions may be withdrawn by giving to the
Plan Administrator written notice of any proposed withdrawal. The Plan
Administrator may adopt such procedures with respect to such withdrawals as
may be necessary or appropriate. At the Plan Administrator's direction,
the Trustee shall distribute any such withdrawal to the Participant in
accordance with the procedures adopted by the Plan Administrator. Except
in the case of the voluntary deductible contribution account, such
withdrawals shall not include any interest or other increment earned on
such contributions. No forfeitures shall occur as a result of withdrawal
of an Employee's contributions. Notwithstanding the foregoing, a
withdrawal of an Employee's contributions must be consented to in writing
by the Participant's spouse.
2.2.4 Return of Contributions. Contributions by the Employer,
including Employer, Qualified Non-Elective, Non-Elective and Matching
Contributions shall be returned to the Employer in the following instances:
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<PAGE> 55
(a) If a contribution by the Employer, including an Employer,
Qualified Non-Elective, Non-Elective or Matching Contribution is made by
the Employer by mistake of fact, then the contribution shall be returned
within one year after its payment upon the Employer's written request.
(b) If a contribution by the Employer, including an Employer,
Qualified Non-Elective, Non-Elective or Matching Contribution is
conditioned on initial qualification of the Plan under the applicable
sections of the Code, and the Commissioner of Internal Revenue determines
that the Plans does not qualify, then the contribution made incident to the
initial qualification by the Employer shall be returned within one year
after the date of denial of initial qualification of the Plan; provided
that the application for initial qualification is made by the time
prescribed by law for filing the Employer's tax return for the taxable year
in which the Plan is adopted, or such later date as the Secretary of the
Treasury may prescribe.
(c) Each contribution by the Employer, including an Employer,
Qualified Non-Elective, Non-Elective and Matching Contribution is
conditioned upon the deductibility of the contribution under the applicable
sections of the Code and to the extent of a disallowance of the deduction
for part or all of the contribution, the contribution shall be returned
within one year after such disallowance upon the Employer's written
request.
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<PAGE> 56
ARTICLE III
ALLOCATIONS
2.3.1 Profit Sharing and Money Purchase Pension Plans. As of each
Anniversary Date, the Employer Contributions made by the Employer with respect
to the preceding Plan Year, and forfeitures shall be allocated among the
Employer Accounts of Participants during the Plan Year in the manner set forth
in the Adoption Agreement; provided that if a Profit Sharing Plan is integrated
with Social Security, Section 2.3.3 shall also apply.
2.3.2 Cash or Deferred Plans.
(a) Non-Elective Contributions. As of each Anniversary Date, the
Non-Elective Contributions made by the Employer with respect to the
preceding Plan Year, and forfeitures, shall be allocated among the Employer
Accounts of Participants during the Plan Year in the manner specified in
the Adoption Agreement; provided that if the Plan is integrated with Social
Security, Section 2.3.3 shall also apply.
(b) Matching Contributions. Unless otherwise specified in the
Adoption Agreement, as of each Anniversary Date, the Matching Contribution
made by the Employer with respect to the preceding Plan Year, and
forfeitures, shall be allocated to the Matching Accounts of Participants
for whom Elective Contributions were made in the manner specified in the
Adoption Agreement.
(c) Elective Contributions. The Elective Contributions by the
Employer on behalf of an electing Employee shall be allocated to the
Elective Contribution Account of such electing Employee as of each
Valuation Date of the Plan Year to which the Elective Contribution
pertains.
(d) Qualified Non-Elective Contributions. As of each Anniversary
Date, the Qualified Non-Elective Contributions made by the Employer with
respect to the preceding Plan Year shall be allocated to the Qualified
Non-Elective Contribution Account of Participants during the Plan Year in
the manner specified in the Adoption Agreement.
2.3.3 Integration with Social Security. If the Employer has
elected in the Adoption Agreement that the Plan shall be integrated with Social
Security, then the applicable contributions and forfeitures shall be allocated
on Participants' accounts as follows (provided that Steps One and Two, below,
shall apply only in years in which the Plan is Top-Heavy):
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<PAGE> 57
STEP ONE: Contributions and forfeitures shall be allocated to each
Participant's account in the ratio that each Participant's Compensation
bears to all Participant's Compensation, but not in excess of 3% of each
Participant's Compensation.
STEP TWO: Any contributions and forfeitures remaining after the
allocation in Step One will be allocated to each Participant's account
in the ratio that each Participant's Compensation for the Plan Year in
excess of the Social Security Integration Level bears to the excess
compensation of all Participants, but not in excess of 3%.
STEP THREE: Any contributions and forfeitures remaining after the
allocation in Step Two shall be allocated to each Participant's account
in the ratio that the sum of each Participant's Compensation and
Compensation in excess of the Social Security Integration Level bears to
the sum of all Participants' Compensation and Compensation in excess of
the Social Security Integration Level, but not in excess of the maximum
profit sharing disparity rate.
STEP FOUR: Any remaining contributions and forfeitures shall be
allocated to each Participant's account in the ratio that each
Participant's Compensation for the Plan Year bears to all Participants'
Compensation for that year.
The maximum profit sharing disparity rate is equal to the lesser of:
(a) 5.7% (minus the percentage of Compensation allocated in
Step One, if any); or,
(b) 5.4% (minus the percentage of Compensation allocated
in Step One, if any) if the Social Security Integration
Level (SSIL) is more than 80% but less than 100% of the
taxable wage base under Section 230 of the Social Security
Act at the beginning of the Plan Year (TWB); or 4.3%
(minus the percentage of Compensation allocated in Step
One, if any) if the SSIL is greater than 20% of the TWB,
but not more than 80% of the TWB; and greater than
$10,000.
If the Social Security Integration Level selected by the Employer in the
Adoption Agreement is the taxable wage base under Section 230 of the Social
Security in effect as of the first day of the Plan Year, the applicable
percentage shall be 5.7% (2.7% if the Plan is Top-Heavy).
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2.3.4 Limitation. The allocation of Employer contributions must
satisfy the requirements of Section 416 of the Code regardless of how the
Adoption Agreement is completed. Elective Contributions and Matching
Contributions allocated to key employees (as defined in Section 416(i) of the
Code) are taken into account for the purpose of determining the minimum
contribution under Code Section 416. However, Elective Contributions and
Matching Contributions made on behalf of non-key employees (as defined in Code
Section 416(i)) may not be taken into account for the purpose of satisfying the
minimum contribution requirement under Code Section 416.
2.3.5 Minimum Allocation. In the event the Plan becomes a Top-Heavy
Plan during any Plan Year, the provisions of Section 2.6.1(a) shall apply.
2.3.6 Fail-Safe Allocation. With respect only to nonstandardized
plans and notwithstanding any provision of the Plan or Adoption Agreement to the
contrary, for Plan Years beginning after December 31, 1989, if the Plan would
otherwise fail to satisfy the requirements of Section 401(a)(26), 410(b)(1) or
410(b)(2)(A)(i) of the Code and the regulations thereunder because Employer
contributions have not been allocated to a sufficient number or percentage of
Participants for the Plan Year, an additional contribution shall be made by the
Employer and shall be allocated to the Employer Accounts of affected
Participants subject to the following provisions:
(a) The Participants eligible to share in the allocation of the
Employer's contributions shall be expanded to include the minimum number of
Participants who are not otherwise eligible to the extent necessary to satisfy
the applicable test under the relevant Section of the Code. The specific
Participant who shall become eligible are those Participants who are actively
employed on the last day of the Plan Year who have completed the greatest number
of Hours of Service during the Plan Year.
(b) If the applicable test is still not satisfied, the Participants
eligible to share in the allocation shall be further expanded to include the
minimum number of Participants who are not employed on the last day of the Plan
Year as are necessary to satisfy the applicable test. The specific
Participants who shall become eligible are those Participants who have completed
the greatest number of Hours of Service during the Plan Year.
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(c) A Participant's accrued benefit shall not be reduced by any
reallocation of amounts that have previously been allocated. To the extent
necessary, the Employer shall make an additional contribution equal to the
amount such affected Participants would have received if they had originally
shared in the allocations without regard to the deductibility of the
contribution. Any adjustment to the allocations pursuant to this paragraph
shall be considered a retroactive amendment adopted by the last day of the Plan
Year.
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ARTICLE IV
BENEFITS
2.4.1 Distributable Benefit. At such time that the employment of a
Participant terminates for any reason, he or his Beneficiary shall be entitled
to a benefit equal to the vested and nonforfeitable interest in his Accounts as
of the Distribution Date. Such Accounts shall include the allocable share of
contributions and forfeitures, if any, which may be allocated to said Accounts
as of such Distribution Date and shall be determined after making the
adjustments for which provision is made in the Plan.
2.4.2 Vesting. A Participant shall at all times be one hundred percent
(100%) vested and have a nonforfeitable interest in his Elective Contribution
Account, Qualified Non-Elective Contribution Account, Voluntary Account and
Segregated Account. The vested and nonforfeitable interest of the Participant
in his Controlled Account shall be determined be reference to the Account from
which the funds were originally transferred. The vested and nonforfeitable
interest in a Participant's Employer Account and Matching Account shall be
determined as hereinafter provided.
(a) Normal Retirement. If a Participant terminates employment at
his Normal Retirement Age, he shall be one hundred percent (100%) vested
and have a nonforfeitable interest in his Employer Account and Matching
Account
(b) Deferred Retirement. If a Participant continues in active
employment following his Normal Retirement Age, he shall continue to
participate under the Plan. From and after his Normal Retirement Age, he
shall be one hundred percent (100%) vested and have a nonforfeitable
interest in his Employer Account and Matching Account.
(c) Disability. If the employment of a Participant is terminated
prior to his Normal Retirement Age as a result of a medically
determinable physical or mental impairment which may be expected to
result in death or to last for a continuous period of not less than
twelve (12) months and which renders him incapable of performing his
duties, he shall be one hundred percent (100%) vested and have a
nonforfeitable interest in his Employer Account and Matching Account.
All determinations in connection with the permanence and degree of such
disability shall be made by the Plan Administrator in a uniform,
nondiscriminatory manner on the basis of medical evidence.
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(d) Death. In the event of the death of a Participant, he shall be
one hundred percent (100%) vested and have a nonforfeitable interest in
his Employer Account and Matching Account.
(e) Termination of Plan. In the event of termination of the Plan
(including termination resulting from a complete discontinuance of
contributions by the Employer), each Participant shall be one hundred
percent (100%) vested and have a nonforfeitable interest in his Employer
Account and Matching Account. In the event of a partial termination of
the Plan, each Participant with respect to whom such partial termination
has occurred shall be one hundred percent (100%) vested and have a
nonforfeitable interest in his Employer Account and Matching Account.
(f) Early Retirement, Resignation or Discharge. If the employment
of a Participant terminates by reason of early retirement, resignation or
discharge prior to his Normal Retirement Age, he shall be vested and have
a nonforfeitable interest in a percentage of his Employer Account and
Matching Account determined by, except as provided below, taking into
account all of his Years of Service as of such termination date in
accordance with the schedule set forth in the Adoption Agreement.
2.4.3 Leave of Absence. A temporary cessation from active
employment with the Employer pursuant to an authorized leave of absence in
accordance with the nondiscriminatory policy of the Employer, whether occasioned
by illness, military service or any other reason shall not be treated as either
a termination of employment or a Break in Service provided that the Employee
returns to employment prior to the end of the authorized leave of absence.
2.4.4 Re-Employment. Unless otherwise elected by the Employer in
the Adoption Agreement, in the case of a Participant who has five (5) or more
consecutive Breaks in Service, all Years of Service after such Breaks in Service
shall be disregarded for the purposes of vesting the employer-derived account
balance that accrued before such breaks, but both pre-break and post-break
service shall count for the purposes of vesting the employer-derived account
balance that accrues after such breaks. Both accounts shall share in the
earnings and losses of the Trust Fund. In the case of a Participant who does not
have five (5) consecutive Breaks in Service, both the pre-break and post-break
service shall count in vesting both the pre-break and post-break
employer-derived account balance.
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2.4.5 Distribution Date. The Distribution Date shall be
determined as hereinafter provided.
(a) General. For purposes of determining the amount to be
distributed, the Distribution Date shall be determined in the manner
specified in the Adoption Agreement.
(b) Termination of Plan. In the event of termination of the Plan
(including termination resulting from a complete discontinuance of
contributions by the Employer), the Distribution Date shall be the date
of such termination. In the event of a partial termination of the Plan,
as to each Participant with respect to whom such partial termination has
occurred, the Distribution Date shall be the Anniversary Date coinciding
with or immediately following the date of such partial termination.
(c) Distributions following Distribution Date. Subject to the
necessity, if any, of obtaining the consent of a Participant and spouse,
distribution of a Participant's Distributable Benefit shall commence
within a reasonable period after the Distribution Date, unless otherwise
elected by the Participant in accordance with the provisions of the Plan
or as required by the provisions of the Plan.
2.4.6 Forfeitures. If an Employee terminates service, and the
value of the Employee's vested account balance derived from employer and
employee contributions is not greater than $3,500 and the Employee receives a
distribution of the value of the entire vested portion of such account balance,
the nonvested portion shall be treated as a forfeiture as of the last day of the
Plan Year in which the Participant's entire vested interest is distributed from
the Plan. If the value of an Employee's vested account balance is zero, the
Employee shall be deemed to have received a distribution of such vested account
balance. A participant's vested account balance shall not include accumulated
deductible employee contributions within the meaning of Section 72(o) (5) (B) of
the Code for plan years beginning prior to January 1, 1989.
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Unless otherwise elected in the Adoption Agreement, if an Employee terminates
service, and elects, in accordance with the provisions of the Plan, to receive
the value of the employee's vested account balance, the nonvested portion shall
be treated as a forfeiture. If the Employee elects to have distributed less than
the entire vested portion of the account balance derived from employer
contributions, the part of the nonvested portion that will be treated as a
forfeiture is the total nonvested portion multiplied by a fraction, the
numerator of which is the amount of the distribution attributable to employer
contributions and the denominator of which is the total value of the vested
employer derived account balance.
If an Employee receives a distribution and the Employee resumes employment
covered under the Plan, the Employee's employer-derived account balance shall be
restored to the amount on the date of distribution if the Employee repays to the
Plan the full amount of the distribution attributable to Employer contributions
before the earlier of five (5) years after the first date on which the
Participant is subsequently re-employed by the Employer, or the date the
Participant incurs five (5) consecutive Breaks in Service following the date of
the distribution. If an Employee is deemed to receive a distribution pursuant
to this section, and the Employee resumes employment covered under the Plan
before the date the Participant incurs five (5) consecutive Breaks in Service,
upon the reemployment of such Employee, the employer-derived account balance of
the Employee will be restored to the amount on the date of such deemed
distribution.
Unless otherwise elected in the Adoption Agreement, such forfeiture shall be
allocated in the same manner as a contribution by the Employer for the Year in
which said forfeiture occurred. Notwithstanding any provision herein to the
contrary, forfeitures resulting from contributions by an Employer shall not be
reallocated for the benefit of another adopting Employer.
If a Participant is re-employed following a Break in Service and is entitled to
restoration of any amount of his Accounts which was forfeited as a result of
such Break in Service, such amount shall be restored in the manner specified in
the Adoption Agreement.
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ARTICLE V
DISTRIBUTIONS
2.5.1 Commencement of Distribution.
(a) Immediate Distribution. A Participant whose employment is
terminated for any reason, other than resignation or discharge prior to his
Early Retirement Date or his Normal Retirement Date, may elect upon his
termination of employment to begin distribution of his Distributable Benefit
within a reasonable period after the Distribution Date as of which his
Distributable Benefit is determined, or as of the date determined under
subsection (b), below, if that date is earlier. If a Participant does not so
elect, distribution of the Participant's distributable Benefit shall in no event
begin later than the date determined under subsection (b), below.
(b) Deferred Distribution. Except in the case of amounts subject to
Section 2.5.2(h) for which a Participant's consent is not required, unless the
Employer elects in the Adoption Agreement to permit the Employee to elect
earlier commencement and the Employee so elects or the Employee elects to
further defer distribution, if the employment of a Participant is terminated by
reason of resignation or discharge prior to either his Early Retirement Date or
his Normal Retirement Date, distribution of his Distributable Benefit shall be
deferred and commenced on the sixtieth (60th) day after the close of the later
of the following Plan Years:
(i) The Plan Year during which the Participant attains the
earlier of age sixty-five (65) or the Normal Retirement Age;
(ii) The Plan Year during which the tenth (10th) anniversary of
the commencement of the Participant's participation in the Plan occurs;
or
(iii) The Plan Year during which the Participant terminates
service with the Employer.
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<PAGE> 65
For calendar years beginning
If, however, the Employer selects an Early Retirement Date in the Adoption
Agreement, a Participant who terminates employment before satisfying the age
requirement for early retirement but has satisfied any service requirement shall
be entitled to a distribution of his Distributable Benefit in accordance with
subsection (a) above upon attaining such age. If distribution is so deferred,
unless otherwise determined by the Plan Administrator, the Trustee at the Plan
Administrator's direction shall transfer the Distributable Benefit to a
Segregated Fund from which distribution shall thereafter be made. Such transfer
shall be made as of the Distribution Date. Notwithstanding the foregoing, the
failure of a Participant and spouse to consent to a distribution while a benefit
is immediately distributable, within the meaning of Section 2.5.2(j), shall be
deemed to be an election to defer commencement of payment of any benefit
sufficient to satisfy this section.
(c) Required Distribution. Notwithstanding anything herein to the
contrary, unless the Participant has made an appropriate election by December
31, 1983 to defer distribution which has not been revoked or modified, the
Participant's benefit shall be distributed to the Participant not later than
April 1 of the calendar year following the calendar year in which he attains age
70-1/2 (the required beginning date) or shall be distributed, commencing not
later than April 1 of such calendar year in accordance with regulations
prescribed by the Secretary of the Treasury over a period not extending beyond
the life expectancy of the Participant or the life expectancy of the Participant
and a beneficiary designated by the Participant. The amount required to be
distributed for each calendar year, beginning with distributions for the first
distribution calendar year, must at least equal the quotient obtained by
dividing the Participant's benefit by the applicable life expectancy. Unless
otherwise elected by the Participant (or spouse, if distributions begin after
death and the spouse is the designated beneficiary) by the time distributions
are required to begin, the life expectancy of the Participant and the
Participant's spouse shall be recalculated annually. Other than for a life
annuity, such election shall be irrevocable as to the Participant or spouse and
shall apply to the subsequent years. The life expectancy of a non-spouse
beneficiary may not be recalculated. Life expectancy and joint and last survivor
expectancy shall be computed by use of the expected return multiples in Tables V
and VI of Section 1.72-9 of the Treasury Regulations.
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For calendar years beginning after December 31, 1988, the amount to be
distributed each year, beginning with distributions for the first distribution
calendar year shall not be less than the quotient obtained by dividing the
Participant's benefit by the lesser of (1) the applicable life expectancy or
(2) if the Participant's spouse is not the designated beneficiary, the
applicable divisor then determined from the table set forth in Q&A-4 of Section
1.401(a)(9)-2 of the proposed regulations. Distributions after the death of
the Participant shall be distributed using the applicable life expectancy as
the relevant divisor without regard to Proposed Regulations Section
1.401(a)(9)-2. The minimum distribution for subsequent calendar years,
including the minimum distribution for the distribution calendar year in which
the Participant's required beginning date occurs, must be made on or before
December 31 of that distribution calendar year.
(d) Distribution After Death. Unless the Participant has made an
appropriate election by December 31, 1983 to extend the period of distribution
after his death and the election has not been revoked or modified, the
following provisions shall apply. If distribution of the Participant's benefit
has begun and the Participant dies before his entire benefit has been
distributed to him, the remaining portion of such benefit shall be distributed
at least as rapidly as under the method of distribution being used as of the
date of the Participant's death.
If the Participant dies before the distribution of his benefit has begun, the
entire interest of the Participant shall be distributed by December 31 of the
calendar year containing the fifth (5th) anniversary of the death of such
Participant, provided that if any portion of the Participant's benefit is
payable to or for the benefit of a designated beneficiary and such portion is to
be distributed in accordance with regulations issued by the Secretary of the
Treasury over the life of, or over a period not extending beyond the life
expectancy of such designated beneficiary, such distributions shall begin not
later than December 31 of the calendar year immediately following the calendar
year of the Participant's death or such later date as may be provided by
regulations issued by the Secretary of the Treasury. If the designated
beneficiary is the surviving spouse of the Participant the date on which the
distributions are required to begin shall not be earlier than the later of
December 31 of the calendar year immediately following the calendar year in
which the Participant had died and December 31 of the calendar year in which the
Participant would have attained age 70-1/2.
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If the surviving spouse thereafter dies before the distributions to
such spouse begin and any benefit is payable to a contingent
beneficiary, the date on which distributions are required to begin
shall be determined as if the surviving spouse were the Participant.
If the Participant has not specified the manner in which benefits are
payable by the time of his or her death, the Participant's designated
beneficiary must elect the method of distribution no later than the
earlier of (1) December 31 of the calendar year in which distributions
would be required to begin under this section, or (2) December 31 of
the calendar year which contains the fifth anniversary of the date of
death of the Participant. If the Participant has no designated
beneficiary, or if the designated beneficiary does not elect a method
of distribution, distribution of the Participant's entire interest must
be completed by December 31 of the calendar year containing the fifth
anniversary of the Participant's death.
(a) Payments to Children. In accordance with regulations issued
by the Secretary of the Treasury, any amount paid to a child shall be
treated as if it had been paid to the surviving spouse if such amount
shall become payable to the surviving spouse upon such child reaching
majority (or other designated event permitted under such regulations.
(f) Incidental Death Benefit Distributions. Any distribution
required by the rules applicable to incidental death benefits shall be
treated as a distribution required by this Section. All distributions
required under this Section shall be determined and made in accordance
with the proposed regulations under Section 401(a)(9) of the Code,
including the minimum distribution incidental benefit requirement of
Section 1.401(a)(9)-2 of the proposed regulations).
(g) Distributions. For the purposes of this section,
distribution of a Participant's interest is considered to begin
on the Participant's required beginning date or the date distribution
is required to begin to the surviving spouse. If distribution in the
form of an annuity irrevocably commences to the Participant before the
required beginning date, the date distribution is considered to begin
is the date distribution actually commences.
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<PAGE> 68
(h) Definitions.
(1) Applicable life expectancy. The life expectancy (or
joint and last survivor expectancy) calculated using the
attained age of the Participant (or designated beneficiary) as
of the Participant's (or designated beneficiary's) birthday, in
the applicable calendar year reduced by one for each calendar
year which has elapsed since the date life expectancy was first
calculated. If life expectancy is being recalculated, the
applicable life expectancy shall be the life expectancy as so
recalculated. The applicable calendar year shall be the first
distribution calendar year, and if life expectancy is being
recalculated such succeeding calendar year.
(2) Designated beneficiary. The individual who is
designated as the beneficiary under the Plan in accordance
with Section 401(a)(9) and the proposed regulations thereunder.
(3) Distribution calendar year. A calendar year for
which a minimum distribution is required. For distributions
beginning before the Participant's death, the first
distribution calendar year is the calendar year immediately
preceding the calendar year which contains the Participant's
required beginning date. For distributions beginning after the
Participant's death, the first distribution calendar year is
the calendar year in which distributions are required to
begin.
(4) Participant's benefit.
(i) The account balance as of the last
valuation date in the calendar year immediately
preceding the distribution calendar year (valuation
calendar year) increased by the amount of any
contributions or forfeitures allocated to the account
balance as of dates in the valuation calendar year
after the valuation date and decreased by
distributions made in the valuation calendar year after
the valuation date.
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(ii) Exception for second distribution
calendar year. For purposes of paragraph (i) above, if
any portion of the minimum distribution for the first
distribution calendar year is made in the second
distribution calendar year on or before the required
beginning date, the amount of the minimum distribution
made in the second distribution calendar year shall be
treated as if it had been made in the immediately
preceding distribution calendar year.
(5) Required beginning date.
(i) General rule. The required beginning date
of a Participant is the first day of April of the
calendar year following the calendar year in which the
Participant attains age 70 1/2.
(ii) Transitional rules. The required
beginning date of a Participant who attains age 70 1/2
before January 1, 1988, shall be determined in
accordance with (I) or (II) below:
(I) Non-5-percent owners. The
required beginning date of a Participant who is
not a 5-percent owner is the first day of April
of the calendar year following the calendar
year in which the later of retirement or
attainment of age 70 1/2 occurs.
(II) 5-percent owners. The required
beginning date of a Participant who is a
5-percent owner during any year beginning
after December 31, 1979, is the first day of
April following the later of:
(A) the calendar year in which
the Participant attains age 70 1/2, or
(B) the earlier of the calendar
year with or within which ends the
Plan Year in which the Participant
becomes a 5-percent owner, or the
calendar year in which the
Participant retires.
The required beginning date of a Participant
who is not a 5-percent owner who attains age
70 1/2 during 1988 and who has not retired as
of January 1, 1989, is April 1, 1990.
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<PAGE> 70
(iii) 5-percent owner. A Participant is treated
as a 5-percent owner for purposes of this section if
such Participant is a 5-percent owner as defined in
Section 416(i) of the Code (determined in accordance
with Section 416 but without regard to whether the
Plan is top-heavy) at any time during the Plan Year
ending with or within the calendar year in which such
owner attains age 66 1/2 or any subsequent Plan Year.
(iv) Once distributions have begun to a
5-percent owner under this section, they must continue
to be distributed, even if the Participant ceases to
be a 5-percent owner in a subsequent year.
(i) Transitional rule.
(1) Notwithstanding the other requirements of this
Section and subject to the requirements of Section 2.5.2,
distribution on behalf of any employee, including a 5-percent
owner, may be made in accordance with all of the following
requirements (regardless of when such distribution commences):
(a) The distribution by the trust is one which
would not have disqualified such trust under Section
401(a)(9) of the Internal Revenue Code as in effect
prior to amendment by the Deficit Reduction Act of 1984.
(b) The distribution is in accordance with a
method of distribution designated by the employee whose
interest in the trust is being distributed or, if the
employee is deceased, by a beneficiary of such employee.
(c) Such designation was in writing, was signed
by the employee or the beneficiary, and was made before
January 1, 1984.
2.5.2 Method of Distribution. Subject to the provisions of
Section 2.5.1 above and any security interest in a loan from the Plan for which
any necessary spousal consent has been obtained (to the extent such security
interest is used as repayment of the loan), distribution shall be made by one
of the following methods, as determined in accordance with the election of the
Participant (or in the case of death, his Beneficiary) with such spousal
consents as may be required by law:
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(a) In a single distribution, as designated by the Employer in
the Adoption Agreement;
(b) In substantially equal annual, quarterly or monthly
installments over a period of more than one year but which does not
exceed the period designated in the Adoption Agreement, as selected by
the Participant (provided that such period is not greater than the
Participant's life expectancy as of the annuity starting date), plus
accrued net income. If distribution is to be so made in installments,
the Plan Administrator shall cause the undistributed portion of the
Distributable Benefit to be transferred to a Segregated Fund, from
which installment payments shall thereafter be withdrawn from time to
time.
(c) By the purchase and delivery of a single premium,
nontransferable, fully refundable, annuity policy issued by a legal
reserve life insurance company providing for payments over such period
as may be designated in the Adoption Agreement as selected by the
Participant; provided, however, unless the Employer has designated a
life annuity distribution option in the Adoption Agreement, in the
event of distribution of such an annuity policy to a Participant, such
duration shall be for a fixed duration which is less than the
Participant's life expectancy as of the annuity starting date. The
refund feature under such annuity policy following the death of the
Participant shall inure to the benefit of the person or persons
designated by the Participant as his Beneficiary.
(d) Any alternative method of equivalent value contained in
the Plan at any time on or after the first day of the first Plan Year
beginning after 1988 to which the Participant consents.
(e) Annuity Payments
(1) Requirement of Annuity Payment. The provisions of
this Section 2.5.2(e) shall apply to any Participant who is
credited with at least one Hour of Service with the Employer on
or after August 23, 1984, and such other Participants as
provided in Section 2.5.2(k). Unless an optional form of
benefit is selected pursuant to a qualified election within the
90-day period ending on the annuity starting date, a married
Participant's vested Account balance will be paid in the form
of a Joint and Survivor Annuity and an unmarried Participant's
vested Account balance will be paid in the form of a life
annuity.
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Unless an optional form of benefit has been selected
within the election period pursuant to a qualified
election, if a Participant dies before the annuity starting
date then the Participant's vested Account balance shall be
applied toward the purchase of a Preretirement Survivor
Annuity.
Notwithstanding the other provisions of this Section
2.5.2(e), if the Plan is designated in the Adoption
Agreement as a Cash or Deferred Profit Sharing Plan or a
Profit Sharing Plan and the Employer does not designate a
life annuity distribution option in the Adoption Agreement,
the Qualified Joint and Survivor Annuity and Preretirement
Survivor Annuity forms of distribution shall not be
available. However, a Participant's surviving spouse shall
be entitled to elect distribution of the Participant's
vested Account balance in the manner provided by Section
3.8.3.
A Participant's vested Account balance is the aggregate
value of the Participant's vested account balances derived
from employer and employee contributions (including
rollovers), whether vested before or upon death, including
the proceeds of insurance contracts, if any, on the
Participant's life. The provisions hereof shall apply to a
Participant who is vested in amounts attributable to
employer contributions, employee contributions (or both) at
the time of death or distribution.
The Participant may elect to have such annuity distributed
upon attainment of the earliest retirement age under the
Plan. A surviving spouse may elect to have such annuity
distributed within the ninety (90) day period commencing on
the date of the Participant's death.
(2) Election to Waive Annuity Payment. A Participant
may elect at any time during the applicable election period to
waive the Joint and Survivor Annuity form of benefit or the
Preretirement Survivor Annuity form of benefit (or both) and may
revoke any such election at any time during the applicable
election period.
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(3) Spousal Consent Required. An election to waive any annuity
form of benefit shall not take effect unless the spouse of the
Participant consents in writing to the election, such election
designates a specific beneficiary, including any class of beneficiaries
or contingent beneficiaries, or, solely in the case of a waiver of a
Joint and Survivor Annuity, a form of benefits which may not be changed
without spousal consent (or the consent of the spouse expressly permits
designations by the Participant without any requirement of further
consent by the spouse), and the spouse's consent acknowledges the
effect of such election and is witnessed by a Plan representative or a
notary public, or it is established to the satisfaction of the Plan
Administrator that such consent cannot be obtained because there is no
spouse or because the spouse cannot be located. A spouse may not revoke
the consent without the approval of the Participant.
Any consent by a spouse obtained under this provision (or establishment
that the consent of a spouse may not be obtained) shall be effective
only with respect to such spouse. A consent that permits designations
by the Participant without any requirement of further consent by such
spouse must acknowledge that the spouse has the right to limit consent
to a specific beneficiary, and a specific form of benefit where
applicable, and that the spouse voluntarily elects to relinquish either
or both of such rights. A revocation of a prior waiver may be made by
a Participant without the consent of the spouse at any time before the
commencement of benefits. The number of revocations shall not be
limited. No consent obtained under this provision shall be valid
unless the Participant has received notice as provided in subsection
(4) below.
(4) Written Explanations. The Plan Administrator shall provide
each Participant no less than 30 days and no more than 90 days before
the annuity starting date a written explanation of -
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<PAGE> 74
(a) the terms and conditions of a Joint and Survivor Annuity;
(b) the Participant's right to make and the effect of an
election to waive the Joint and Survivor Annuity form of benefit;
(c) the rights of the Participant's spouse to consent to a
Participant's election;
(d) the right to make and the effect of a revocation of an
election.
The Plan Administrator shall provide to each Participant within the
applicable period a written explanation of a Preretirement Survivor
Annuity comparable to that provided with respect to a Joint and Survivor
Annuity.
(5) Applicable Period. The applicable period means with respect to a
Participant, whichever of the following periods ends last:
(a) The period beginning with the first day of the Plan Year in
which the Participant attains age 32 and ending with the close of the
Plan Year preceding the Plan Year in which the Participant attains age
35.
(b) A reasonable period ending after the individual becomes a
Participant.
(c) A reasonable period ending after the Plan ceases to fully
subsidize costs.
(d) A reasonable period ending after Section 401(a)(11) of the
Code first applies to the Participant.
(e) A reasonable period ending after separation from service in
case of a Participant who separates before attaining age 35.
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<PAGE> 75
For purposes of applying the foregoing, a reasonable period ending
after the enumerated events described in (b), (c) and (d) is the end of
the two-year period beginning one year prior to the date the applicable
event occurs and ending one year after that date. In the case of a
Participant who separates from service before the Plan Year in which
age 35 is attained, notice shall be provided within the two-year period
beginning prior to separation and ending one year after separation. If
such a Participant thereafter returns to employment with the Employer,
the applicable period for such Participant shall be redetermined.
(6) Applicable Election Period. The applicable election period means -
(a) in the case of an election to waive a Joint and Survivor
Annuity, the ninety (90) day period ending on the annuity starting
date; and
(b) in the case of an election to waive a Preretirement
Survivor Annuity, the period which begins on the first day of the Plan
Year in which the Participant attains age thirty-five (35) and ends on
the date of the Participant's death; provided that in the case of a
Participant who is separated from service, such period shall not begin
later than the date of such separation from service.
A Participant who will not yet attain age 35 as of the end of any
current Plan Year may make a special qualified election to waive the
Preretirement Survivor Annuity for the period beginning on the date of
such election and ending on the first day of the Plan Year in which the
Participant will attain age 35. Such election shall not be valid unless
the Participant receives a written explanation of the Preretirement
Survivor Annuity in such terms as are comparable to the explanation
required under subsection (4). Preretirement Survivor Annuity coverage
will be automatically reinstated as of the first day of the Plan Year
in which the Participant attains age 35. Any new waiver on or after
such date shall be subject to the full requirements of this section.
(7) Annuity Starting Date. The annuity starting date means the first
day of the first period for which an amount is payable as an annuity or any
other form.
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<PAGE> 76
(8) Marriage Requirement. Notwithstanding the foregoing, the
benefits under the Plan shall not be provided in the form of a
Joint and Survivor Annuity or a Preretirement Survivor Annuity
unless the Participant and his spouse have been married throughout
the one (1) year period ending on the earlier of the Participant's
annuity starting date or the date of the Participant's death. If a
Participant marries within a one (1) year before the annuity
starting date and the Participant and his spouse in such marriage
have been married for at least a one (1) year period ending on or
before the date of the Participant's death, the Participant and
such spouse shall be treated as having been married throughout the
required period. A former spouse shall be treated as the spouse or
surviving spouse and a current spouse will not be treated as the
spouse or surviving spouse to the extent provided under a qualified
domestic relations order as described in Section 414(p) of the
Code.
(f) Terms of Annuity Contracts. Any annuity contract distributed
from the Plan must be nontransferable. The terms of any annuity contract
purchased and distributed by the Plan to a Participant or spouse shall
comply with the requirements of the Plan. If the Participant's benefit
is distributed in the form of an annuity purchased from an insurance
company, distributions thereunder shall be made in accordance with the
requirements of Section 401(a)(9) of the Code and the proposed
regulations thereunder.
(g) Incidental Death Benefits. For calendar years beginning
before January 1, 1989, if the Participant's spouse is not the
designated Beneficiary, the method of distribution selected must assure
that at least fifty (50%) percent of the present value of the amount
available for distribution is paid within the life expectancy of the
Participant.
(h) Consents. If the value of a Participant's vested account
balance derived from Employer and Employee contributions does not exceed
(and at the time of any prior distribution did not exceed) $3,500, the
consent of the Participant and his or her spouse shall not be required;
provided that if such value exceeds $3,500, the Participant and spouse
(or where either has died, the survivor) must consent to any
distribution of such account balance.
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<PAGE> 77
The consent shall be obtained in writing within the 90 day period ending on the
annuity starting date. Neither the consent of the Participant nor the
Participant's spouse shall be required to the extent that a distribution is
required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition,
upon termination of the Plan if the Plan does not offer an annuity option
(purchased from a commercial provider) and if the Employer or any entity within
the same controlled group does not maintain another defined contribution plan
(other than an employee stock ownership plan as defined in Section 4975(e)(7)
of the Code), the Participant's account balance in the Plan will, without the
Participant's consent, be distributed to the Participant. However, if any entity
within the same controlled group as the Employer maintains another defined
contribution plan (other than an employee stock ownership plan as defined in
Section 4975(e)(7) of the Code), then the Participant's account balance will be
transferred, without the Participant's consent, to the other Plan if the
Participant does not consent to an immediate distribution.
(i) Zero Benefits. If the value of the Participant's vested and
nonforfeitable interest in the Plan at the time of his termination of employment
is zero, the Participant shall be deemed to have received a distribution of such
interest.
(j) Restrictions on Immediate Distributions. The Plan Administrator shall
notify the Participant and the Participant's spouse of the right to defer any
distribution until the Participant's account balance in the Plan is no longer
immediately distributable. Such notification shall include a general description
of the material features and an explanation of the relative values of the
optional forms of benefit available under the Plan in a manner that would
satisfy the notice requirements of Section 417(a)(3) of the Code and shall be
provided no less than 30 days and no more than 90 days prior to the annuity
starting date. Notwithstanding the foregoing, only the Participant need consent
to the commencement of a distribution in the form of a qualified joint and
survivor annuity while the Participant's account balance in the Plan is
immediately distributable. Furthermore, if payment in the form of a qualified
joint and survivor annuity is not required with respect to the Participant
pursuant to the Plan, only the Participant need consent to the distribution of
an account balance that is immediately distributable. The Participant's account
balance is immediately distributable if any part of the Participant's account
balance could be distributed to the Participant (or surviving spouse) before the
Participant attains (or would have attained if not deceased) the later of age 62
or the Normal Retirement Age.
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<PAGE> 78
(k) Transitional Rules.
(1) Any living Participant not receiving benefits on August 23, 1984,
who would otherwise not receive the benefits prescribed by the previous
sections of the article must be given the opportunity to elect to have the
prior sections of this article apply if such Participant is credited with at
least one hour of service under this Plan or a predecessor plan in a Plan Year
beginning on or after January 1, 1976, and such Participant has at least 10
years of vesting service when he or she separated from service.
(2) Any living Participant not receiving benefits on August 23, 1984,
who was credited with at least one hour of service under this Plan or a
predecessor plan on or after September 2, 1974, and who is not otherwise
credited with any service in a plan Year beginning on or after January 1, 1976,
must be given the opportunity to have his or her benefits paid in accordance
with Section (4) below.
(3) The respective opportunities to elect (as described above) must be
afforded to the appropriate Participants during the period commencing on August
23, 1984, and ending on the date benefits would otherwise commence to said
Participants.
(4) Any Participant who has elected pursuant to Section (2) above and
any Participant who does not elect under Section (1) or who meets the
requirements of Section (1) except that such Participant does not have at least
10 years of vesting service when he or she separates from service, shall have
his or her benefits distributed in accordance with all of the following
requirements if benefits would have been payable in the form of a life annuity:
(i) Automatic joint and survivor annuity. If benefits in the
form a life annuity become payable to a married Participant who:
(1) begins to receive payments under the Plan on or
after normal retirement age; or
(2) dies on or after normal retirement age while still
working for the Employer; or
(3) begins to receive payments on or after the
qualified early retirement age; or
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<PAGE> 79
(4) separates from service on or after
attaining normal retirement age (or the qualified
early retirement age) and after satisfying the
eligibility requirements for the payment of
benefits under the plan and thereafter dies before
beginning to receive such benefits;
then such benefits will be received under this
Plan in the form of a qualified joint and survivor
annuity, unless the Participant has elected
otherwise during the election period. The election
period must begin at least 6 months before the
Participant attains qualified early retirement age
and end not more than 90 days before the
commencement of benefits. Any election hereunder
will be in writing and may be changed by the
Participant at any time.
(ii) Election of early survivor annuity. A
Participant who is employed after attaining the
qualified early retirement age will be given the
opportunity to elect, during the election period, to
have a survivor annuity payable on death. If the
Participant elects the survivor annuity, payments
under such annuity must not be less than the payments
which would have been made to the spouse under the
qualified joint and survivor annuity if the
Participant had retired on the day before his or her
death. Any election under this provision will be in
writing and may be changed by the Participant at any
time. The election period begins on the later of (1)
the 90th day before the Participant attains the
qualified early retirement age, or (2) the date on
which participation begins, and ends on the date the
Participant terminates employment.
(iii) For purposes of this Section (4):
(1) Qualified early retirement age is the later
of:
(i) the earliest date, under the Plan, on
which the Participant may elect to receive
retirement benefits,
(ii) the first day of the 120th month
beginning before the Participant reaches normal
retirement age, or
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<PAGE> 80
(iii) the date the Participant begins
participation.
(2) Qualified joint and survivor annuity is an annuity
for the life of the Participant with a survivor annuity for the
life of the spouse as otherwise described in the Plan.
2.5.3 Nature of Distributions. The nature of the distribution of a
Participant's Distributable Benefit shall be as hereinafter provided.
(a) Trust Fund and Segregated Funds. Subject to the Joint and
Survivor Annuity requirements, except as provided in subsection (b)
with regard to Life Insurance Policies, distribution of a Participant's
Distributable Benefit shall consist of cash or property, or an annuity
contract as provided in Section 2.5.2 above.
(b) Insurance Policies. In the event that the Trustee has
purchased Life Insurance Policies on the life of the Participant, the
values and benefits available with respect to each such Policy shall be
distributed as follows:
(i) If the Participant's employment terminates for any
reason other than death, then the Trustee shall either
surrender the Life Insurance Policy for its available cash
value and distribute the proceeds as provided in subsection (a)
above or, at the election of the Participant, distribute the
Life Insurance Policy to the Participant, provided the
Participant has a vested and nonforfeitable interest in his
Accounts in an amount at least equal to the cash value thereof.
(ii) If the Participant's employment terminates by
reason of death, the beneficiary designated by the Participant
in accordance with the terms of the Plan shall be entitled to
receive from the Trustee the full amount of the proceeds
thereof.
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<PAGE> 81
The Trustee shall apply for and be the owner of any Policies
purchased under the terms of the Plan. The Policies must provide that
the proceeds are payable to the Trustee subject to the Trustee's
obligation to pay over the proceeds to the designated Beneficiary. A
Participant's spouse will be the designated beneficiary of the
proceeds of such Policies unless a qualified election has been
made in accordance with Section 2.5.2(e) of the Plan, if applicable.
Under no circumstances shall the trust retain any part of the proceeds.
In the event of any conflict between the terms of the Plan and the
terms of any Policies purchased hereunder, the Plan provisions shall
control.
2.5.4 Advance Distributions. If the Employer elects in the Adoption
Agreement to permit advance distribution to a Participant or his Beneficiary
after his employment has terminated and before he is otherwise entitled to
distribution of his Distributable Benefit but in no event earlier than a
reasonable period following the Distribution Date, the Trustee upon the request
of the Participant or Beneficiary shall make advance distributions to him or to
his Beneficiary. The aggregate of such an advance distribution shall not exceed
the sum of the vested and nonforfeitable interest in the Participant's Accounts.
If the Employer elects in the Adoption Agreement to forfeit nonvested
amounts immediately upon distribution of the Employee's entire vested account
balance on termination of service, an Employee who terminates service and
elects to receive the value of the Employee's vested account balance shall
forfeit the nonvested portion. If the Employee elects to have distributed less
than the entire vested portion of the account balance derived from Employer
contributions, the part of the nonvested portion that is treated as a
forfeiture is the total nonvested portion multiplied by a fraction, the
numerator of which is the amount of the distribution attributable to Employer
contributions and the denominator of which is the total value of the vested
Employer derived account balance.
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<PAGE> 82
Except as provided in the preceding paragraph, if a Participant receives a
distribution which reduces the balance in his Employer Account when he has less
than a one hundred percent (100%) vested and nonforfeitable interest in the
Account, the amount, if any, of the Participant's vested and nonforfeitable
interest in the undistributed balance of said Account on his Accrual Date shall
be transferred to a Segregated Account on his Accrual Date shall be transferred
to a Segregated Account and shall not be less than an amount ("X") determined
by the formula: X = P (AB + (R x D)) - (R x D). For purposes of applying the
formula: P is the vested percentage at the relevant time; AB is the account
balance at the relevant time; and D is the amount of the distribution; and R is
the ratio of the account balance at the relevant time to the account balance
after distribution.
2.5.5 Hardship Distributions. If the Plan is designated in the
Adoption Agreement as a Cash or Deferred Profit Sharing Plan or a Profit
Sharing Plan and the Employer elects in the Adoption Agreement to permit
hardship distributions, a Participant may request a distribution from the Plan
as a result of immediate and heavy financial needs of the Participant to the
extent that the distribution is necessary to satisfy such financial needs.
Hardship distributions are subject to the spousal consent requirements
contained in Sections 401(a)(11) and 417 of the Code. The determination of
whether a Participant has an immediate and heavy financial need shall be made
by the Plan Administrator on the basis of all relevant facts and circumstances.
A distribution shall be deemed to be made on account of an immediate and heavy
financial need if the distribution is on account of:
(a) Deductible medical expenses described in Section 213(d) of the Code
incurred or necessary for medical care of the Participant, his spouse or
dependents;
(b) Purchase (excluding mortgage payments) of a principal residence for
the Participant;
(c) Cost of tuition and related educational fees for the next 12 months
of post-secondary education for the Participant, his spouse, children or
dependents; or
(d) The need to prevent the eviction of the Participant from his
principal residence or foreclosure of the mortgage of the Participant's
principal residence.
A distribution shall be considered as necessary to satisfy an immediate and
heavy financial need of the Participant only if:
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<PAGE> 83
ARTICLE VI
(b) Profit Sharing Plans. If the Plan is designated in the Adoption
Agreement as a Profit Sharing Plan and if the Employer elects in the Adoption
Agreement to permit
(a) The Participant has obtained all distributions, other than hardship
distributions, and all nontaxable loans under all plans maintained by the
Employer;
(b) All plans maintained by the Employer provide that the Participant's
elective Deferrals and employee contributions shall be suspended for twelve
(12) months after the receipt of the hardship distribution;
(c) The distribution is not in excess of the amount of an immediate and
heavy financial need (including amounts necessary to pay any federal, state or
local income taxes or penalties reasonably anticipated to result from the
distribution); and
(d) All plans maintained by the Employer provide that the Participant may
not make Elective Deferrals for the Participant's taxable year immediately
following the taxable year of the hardship distribution in excess of the
applicable limit under Section 402(g) of the Code for such taxable year less
the amount of such Participant's Elective Deferrals for the taxable year of the
hardship distribution.
In the event of such distribution, when a Participant is less than one hundred
percent (100%) vested in his Employer Account or Matching Account, the vested
interest in the Employer Account or Matching Account shall thereafter be
determined in accordance with Section 2.5.4 of the Plan.
2.5.6 In Service Distributions.
(a) Cash or Deferred Profit Sharing Plans. If the Plan is designated in
the Adoption Agreement as a Cash or Deferred Profit Sharing plan and if the
Employer elects in the Adoption Agreement to permit distributions to a
Participant after attaining age 59 1/2 but prior to his termination of
employment, a Participant shall be entitled to receive a distribution of all or
a part of his interest in the Plan upon filing a written request with the Plan
Administrator; provided that no distribution shall be made unless the interest
of the Participant in the Account from which the distribution is to be made is
fully vested and nonforfeitable and the balance in the Account to be
distributed has accumulated for at least two (2) years or the individual has
been a Participant for five (5) or more Plan Years; and the distribution of
Elective Deferrals and Qualified Non-Elective Contributions satisfy the
limitations imposed by Part II, Article VII. Any distribution shall be subject
to the written consent of the Participant's spouse.
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<PAGE> 84
(b) Profit Sharing Plans. If the Plan is designated in the Adoption
Agreement as a Profit Sharing Plan and if the Employer elects in the Adoption
Agreement to permit distributions to a Participant prior to his termination of
employment, a Participant shall be entitled to receive a distribution of all or
part of his interest in the Plan upon filing a written request with the Plan
Administrator; provided that no distribution shall be made unless the interest
of the Participant in the Account from which the distribution is to be made is
fully vested and nonforfeitable and the balance in the Account to be distributed
has accumulated for at least two (2) years or the individual has been a
Participant for five (5) or more Plan Years; provided further that in-service
distributions shall be permitted subject to the terms of Section 2.5.5 if the
Employer elects in the Adoption Agreement to have such provision apply. Any
distribution shall be subject to the written consent of the Participant's
spouse.
(c) All Plans. Upon attainment of his Normal Retirement Date, a
Participant shall be entitled to receive a distribution of all or a part of his
interest in the Plan upon filing a written request with the Plan Administrator.
In service distributions are permitted at the election of the Participant for
amounts held in a Segregated Account attributable to a rollover from another
plan regardless of age or periods of participation. Any distribution shall be
subject to the written consent of the Participant's spouse.
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<PAGE> 85
ARTICLE VI
CONTINGENT TOP HEAVY PROVISIONS
2.6.1 Top Heavy Requirements. If the Plan becomes a Top Heavy Plan during
any Plan Year, the following provisions shall supersede any conflicting
provisions in the Plan or Adoption Agreement and apply for such Plan Year:
(a) Except as otherwise provided below, the Employer contributions
and forfeitures allocated on behalf of any Participant who is not a Key
Employee shall not be less than the lesser of three percent of such
Participant's Compensation or in the case where the Employer has no defined
benefit plan which designates this plan to satisfy Section 401 of the Code,
the largest percentage of Employer contributions and forfeitures, as a
percentage of the first $200,000 of the Key Employee's compensation,
allocated on behalf of any Key Employee for that year. The minimum
allocation is determined without regard to any Social Security
contribution. This minimum allocation shall be made even though, under
other plan provisions, the Participant would not otherwise be entitled to
receive an allocation, or would have received a lesser allocation for the
year because of (i) the Participant's failure to complete 1,000 Hours of
Service (or any equivalent provided in the plan), or (ii) the Participant's
failure to make mandatory employee contributions to the plan, or (iii)
compensation less than a stated amount.
Neither Elective Deferrals nor Matching Contributions may be taken
into account for the purpose of satisfying the minimum allocation.
For purposes of computing the minimum allocation, Compensation shall
mean a Participant's compensation as defined in Section 3.2.1(h) of the
Plan.
The minimum allocation provided above shall not apply to any Participant
who was not employed by the Employer on the last day of the Plan Year.
The minimum allocation provided above shall not apply to any Participant
to the extent the Participant is covered under any other plan or plans
of the Employer and Employer has provided in the Adoption Agreement that
the minimum allocation or benefit requirement applicable to top-heavy
plans will be met in the other plan or plans.
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<PAGE> 86
(b) References in Section 3.2.1(d), pertaining to combined plan
limitations, to "1.25" shall be applied by substituting "1.0" for "1.25"
therein. Reference in Section 3.2.1(e), pertaining to a special transition
rule to "$51,875" shall be applied by substituting "$41,500" for "$51,875"
therein.
(c) The vested and nonforfeitable interest of each Participant shall
be equal to the percentage determined under the vesting schedule specified
in the Adoption Agreement if the Plan becomes a Top Heavy Plan, or if no
vesting schedule is specified, the percentage determined under the
following schedule:
Years of Service Percentage
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
The top-heavy minimum vesting schedule applies to all benefits within the
meaning of Section 411(a)(7) of the Code, except those attributable to
employee contributions, including benefits accrued before the effective
date of Section 416 of the Code and benefits accrued before the Plan
becomes top-heavy.
No decrease in a Participant's nonforfeitable percentages may occur in the
event the Plan's status as top-heavy changes for any Plan Year. Any
minimum allocation required (to the extent required to be nonforfeitable
under Section 416(b)) may not be forfeited under Section 411(a)(3)(B)
or (D) of the Code.
2.6.2 Top Heavy Definitions. The following terms, as used in this
Plan, shall have the following meaning:
(a) "Key Employee": An Employee or former employee who, at any
time during the Determination Period is either:
(i) an officer of the Employer having an Annual Compensation
greater than fifty (50%) percent of the amount in effect under Section
415(b)(1)(A) of the Code;
(ii) an owner (or a person considered an owner under Section
318 of the Code) of one of the ten largest interests in the Employer if
such individual's Annual Compensation from the employer is more than the
limitation in effect under Section 415(c)(1)(A) of the Code;
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<PAGE> 87
(iii) any person who owns directly or indirectly more than five (5%)
of the outstanding stock of the Employer or stock possessing more than
five (5%) percent of the total combined voting power of all stock of the
Employer or, in the case of an incorporated Employer, the capital or
profits interest in the Employer;
(iv) any person who owns directly or indirectly more than one (1%)
percent of the outstanding stock of the Employer or stock possessing more
than one (1%) percent of the total combined voting power of all stock of
the Employer or, in the case of an unincorporatd Employer, the capital or
profits interest in the Employer and having an Annual Compensation from
the Employer of more than $150,000; or
(v) any beneficiary of a Key Employee. The determination of who is a
Key Employee shall be made in accordance with Section 416 (i) (1) of the
Code and the Regulations thereunder.
(b) "Aggregation Group": Each qualified retirement plan of the Employer
in which a Key Employee is a participant and each other qualified retirement
plan of the Employer which enables any plan in which a Key Employee is a
participant to meet the requirements of Section 401 (a) (4) or Section 410 of
the Code.
(c) "Annual Compensation": Compensation as defined in Section 415 (c) (3)
of the Code, but including amounts contributed by the Employer pursuant to a
salary reduction agreement which are excludable from the Employee's gross
income under Section 125, Section 402 (a) (8), Section 402 (h) or Section 403
(b) of the Code.
(d) "Top-Heavy Plan": For any Plan Year beginning after December 31,
1983, the plan is top-heavy if any of the following conditions exists:
(i) If the top-heavy ratio for the plan exceeds 60 percent and the
plan is not part of any required aggregation group or permissive
aggregation group of plans.
(ii) If the plan is a part of a required aggregation group of plans but
not part of a permissive aggregation group and the top-heavy ratio for the
group of plans exceeds 60 percent.
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<PAGE> 88
(iii) If the plan is a part of a required aggregation group and
part of a permissive aggregation group of plans and the top-heavy ratio for
the top-heavy ratio for the permissive aggregation group exceeds 60
percent.
(e) "Top-Heavy Ratio":
(i) If the Employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the Employer has
not maintained any defined benefit plan which during the 5-year period
ending on the Determination Date(s) has or has had accrued benefits, the
top-heavy ratio for this plan alone or for the required or permissive
aggregation group as appropriate is a fraction, the numerator of which is
the sum of the account balances of all Key Employees as of the
Determination Date(s) (including any part of any account balance
distributed in the 5-year period ending on the Determination Date(s)), and
the denominator of which is the sum of all account balances (including any
part of any account balance distributed in the 5-year period ending on the
Determination Date(s)), both computed in accordance with Section 416 of the
Code and the regulations thereunder. Both the numerator and denominator of
the top-heavy ratio are increased to reflect any contribution not actually
made as of the Determination Date, but which is required to be taken into
account on that date under Section 416 of the Code and the regulations
thereunder.
(ii) If the Employer maintains one or more defined contribution
plans (including any simplified employee pension plan) and the Employer
maintains or has maintained one or more defined benefit plans which during
the 5-year period ending on the Determination Date(s) has or has had any
accrued benefits, the top-heavy ratio for any required or permissive
aggregation group as appropriate is a fraction, the numerator of which is
the sum of account balances under the aggregated defined contribution plan
or plans for all Key Employees, determined in accordance with (i) above,
and the present value of accrued benefits under the aggregated defined
benefit plan or plans for all Key Employees as of the Determination
Date(s), and the denominator of which is the sum of the account balances
under the aggregated defined contribution plan or plans for all
Participants, determined in accordance with (i) above, and the present
value of accrued benefits under the defined benefit plan or plans for all
Participants as of the Determination Date(s), all determined in accordance
with Section 416 of the Code and the regulations thereunder.
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<PAGE> 89
ARTICLE VII
SPECIAL CODA LIMITATIONS
2.7.1 Limitation on Deferral Pecentage for Highly Compensated
Employees. Notwithstanding any provision herein to the contrary, the actual
deferral percentage for all Highly Compensated Employees eligible to
participate by more than the greater of.
(a) the actual deferral percentage of such other Employees multiplied by
1.25; or
(b) the actual deferral percentage of such other Employees multiplied
by 2.0, but in no event more than two (2) percentage points greater than the
actual deferral percentage of such other Employees.
The accrued benefits under a defined benefit plan in both the numerator
and denominator of the top-heavy ratio are increased for any
distribution of an accrued benefit made in the five-year period ending
on the Determination Date.
(iii) For purposes of (i) and (ii) above, the value of account
balances and the present value of accrued benefits will be determined
as of the most recent valuation date that falls within or ends with
the 12-month period and the regulations thereunder for the first and
second plan years of a defined benefit plan. The account balances and
accrued benefits of a Participant (1) who is not a Key Employee but
was a Key Employee in a prior year, or (2) who has not been credited
with at least one hour of service with any Employer maintaining the
plan at any time during the 5-year period ending on the Determination
Date will be disregarded. The calculation of the top-heavy ratio, and
the extent to which distributions, rollovers, and transfers are taken
into account will be made in accordance with Section 416 of the Code and
the regulations thereunder. Deductible employee contributions will
not be taken into account for purposes of computing the top-heavy
ratio. When aggregating plans, the value of account balances and
accrued benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
The accrued benefit of a Participant other than a Key Employee shall be
determined under (a) the method, if any, that uniformly applies for
accrual purposes under all defined benefit plans maintained by the
Employer, or (b) if there is no such method, as if such benefit accrued
not more rapidly than the slowest accrual rate permitted under the
fractional rule of Section 411 (b) (1) (C) of the Code.
(f) "Permissive Aggregation Group": The required aggregation group of
plans plus any other plan or plans of the Employer which, when considered as
a group with the required aggregation group, would continue to satisfy the
requirements of Sections 401 (a) (4) and 410 of the Code.
(g) "Required Aggregation Group":
(i) Each qualified plan of the Employer in which at least one Key
Employee participates or participated at any time during the
Determination Period (regardless of whether the plan has terminated)
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(ii) Any other qualified plan of the Employer which enables a
plan described in (i) to meet the requirements of Sections 401(a)(4)
or 410 of the Code.
(h) "Determination Date": For any plan year subsequent to the first
plan year, the last day of the preceding plan year. For the first plan year
of the plan, the last day of that year.
(i) "Valuation Date": The date elected by the Employer in the Adoption
Agreement as of which account balances or accrued benefits are valued for
purposes of calculating the top-heavy ratio.
(j) "Present Value": Present value shall be based only on the interest
and mortality rates specified in the Adoption Agreement.
(k) "Determination Period": The Plan Year containing the Determination
Date and the four (4) preceding Plan Year.
(l) "Non-Key Employee": An Employee who is not a Key Employee.
2.6.3 Pairing Requirements. If an Employer adopts two or more defined
contribution plans by executing Adoption Agreements pursuant to this Plan or
another prototype plan for which the Mass Submitter is the same, the following
provisions shall apply:
(a) Only one of the Adoption Agreements may provide for permitted
disparity by integration with Social Security.
(b) For each Plan Year in which the paired plans are top-heavy the
Employer shall provide a minimum contribution equal to three (3%) percent
of Compensation for each Non-Key Employee (i) under the paired plan
designated by the Employer in the Adoption Agreement if the plans benefit
the same Participants, or in the case of a plan subject to Code Section
401(k) or 401(m), the same Participants are eligible to make elective
deferrals or employee contributions, or (ii) under both paired plans if the
plans benefit the same participants. Note: The same eligibility
requirements in Section A of the Adoption Agreement must be selected.
(c) In any Plan Year in which the paired plans are top-heavy, i.e. the
top-heavy ratio exceeds sixty (60%) percent, the denominators of the
defined benefit fraction and defined contribution fraction in Section
3.2.1(d) shall be computed by multiplying the dollar limitation by 1.0
instead of 1.25.
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ARTICLE VII
SPECIAL CODA LIMITATIONS
2.7.1 Limitation on Deferral Percentage for Highly Compensated
Employees. Notwithstanding any provision herein to the contrary, the actual
deferral percentage for all Highly Compensated Employees for each Plan Year
must not exceed the actual deferral percentage for all other Employees eligible
to participate by more than the greater of:
(a) the actual deferral percentage of such other Employees
multiplied by 1.25; or
(b) the actual deferral percentage of such other Employees
multiplied by 2.0, but in no event more than two (2) percentage points
greater than the actual deferral percentage of such other Employees.
For purposes hereof, the actual deferral percentages for a Plan Year for all
Highly Compensated Employees and for all other Employees respectively are the
averages of the ratios, calculated separately for each Employee in the
respective group, of the amount of Elective Contributions and Qualified
Non-Elective Contributions paid under the Plan on behalf of each such Employee
for such Plan Year including Excess Elective Deferrals to the Employee's
Compensation for such Plan Year (whether or not the Employee was a Participant
for the entire Plan Year) but excluding Elective Deferrals that are taken into
account in the Contribution Percentage test (provided the ADP test is satisfied
both with and without exclusion of those Elective Deferrals). An Employee who
would be a Participant but for the failure to have Elective Contributions made
on his behalf shall be treated as a Participant on whose behalf no Elective
Contributions are made. For purposes of calculating the actual deferral
percentages of Highly Compensated Employees who are 5 percent owners or among
the ten most highly paid Employees, Elective Contributions and Qualified
Non-Elective Contributions on behalf of a member of the Family of such Highly
Compensated Employees shall be taken into account and Compensation of such
Employees shall include the Elective Deferrals and Qualified Non-Elective
Contributions and Compensation for the Plan Year of members of his Family (as
determined in Section 414(q)(6) of the Code). A member of the Family of such
Highly Compensated Employees shall be disregarded as a separate Employee in
determining the actual deferral percentage both for Participants who are Highly
Compensated Employees and for all other Employees.
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For purposes of determining the actual deferral percentage test, Elective
Contributions and Qualified Non-Elective Contributions must be made before the
last day of the twelve month period immediately following the Plan Year to which
the contributions relate.
The Employer shall maintain records sufficient to demonstrate satisfaction of
the actual deferral percentage test and the amount of Qualified Non-Elective
Contributions used in such test.
The determination and treatment of the actual deferral percentage amounts of
any Participant shall satisfy such other requirements as may be prescribed by
the Secretary of the Treasury.
2.7.2 Multiple Plan Limitations.
(a) The actual deferral percentage for any Participant who is a
Highly Compensated Employee for the Plan Year and who is eligible to have
Elective Contributions (and Qualified Non-Elective Contributions if treated
as Elective Deferrals for purposes of the actual deferral percentage test)
allocated to his or her Accounts under two or more arrangements described
in Section 401(k) of the Code, that are maintained by the Employer, shall
be determined as if such Elective Deferrals (and, if applicable, such
Qualified Non-Elective Contributions) were made under a single arrangement.
If a Highly Compensated Employee participates in two or more cash or
deferred arrangements that have different Plan Years, all cash or deferred
arrangements ending with or within the same calendar year shall be treated
as a single arrangement. Notwithstanding the foregoing, certain plans shall
be treated as separate if mandatorily disaggregated under regulations under
Section 401(k) of the Code.
(b) In the event that this Plan satisfies the requirements of
Section 401(k), 401(a)(4) or 410(b) of the Code only if aggregated with one
or more other plans, or if one or more other plans satisfy the requirements
of such sections of the Code only if aggregated with this Plan, then this
section shall be applied by determining the actual deferral percentage of
Employees as if all such plans were a single plan. For Plan Years beginning
after December 31, 1989, plans may be aggregated in order to satisfy
Section 401(k) of the Code only if they have the same Plan Year.
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2.7.3 Limitation on Matching Contributions. Notwithstanding any
provision herein to the contrary, the average contribution percentage for all
Highly Compensated Employees for each Plan Year must not exceed the average
contribution percentage for all other Employees eligible to participate by more
than the greater of:
(a) the average contribution percentage of such other Employees
multiplied by 1.25; or
(b) the average contribution percentage of such other Employees
multiplied by 2.0, but in no event more than two (2) percentage points
greater than the average contribution percentage of such other Employees.
For purposes hereof, the average contribution percentages for a Plan Year for
all Highly Compensated Employees and for all other Employees respectively are
the averages of the ratios, calculated separately for each Employee in the
respective group, of the amount of Matching Contributions paid under the Plan on
behalf of each such Employee for such Plan Year, to the Employee's Compensation
for such Plan Year whether or not the Employee was a Participant for the entire
Plan Year. Such contribution percentage amounts shall include forfeitures of
Excess Aggregate Contributions or Matching Contributions allocated to the
Participant's Accounts which shall be taken into account in the Plan Year in
which such forfeiture is allocated. Forfeitures of Matching Contributions shall
be included as contribution percentage amounts only to the extent such
forfeitures are used to reduce or supplement the Matching Contributions, as
specified in the Adoption Agreement. If so elected in the Adoption Agreement,
the Employer may include Qualified Non-Elective Contributions in the
contribution percentage amounts. The Employer may also elect to use Elective
Deferrals in the contribution percentage amounts so long as the ADP test is met
before the Elective Deferrals are used in the ACP test and continues to be met
following the exclusion of those Elective Deferrals that are used to meet the
ACP test. If an Elective Contribution or other contribution by an Employee is
required as a condition of participation in the Plan, any Employee who would be
a Participant if such Employee made such a contribution shall be treated as an
eligible Participant on behalf of whom no such contributions are made.
The Employer shall maintain records sufficient to demonstrate satisfaction of
the average contribution percentage test and the amount of Qualified
Non-Elective Contributions used in such test.
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The determination and treatment of the contribution percentage of any
Participant shall satisfy such other requirements as may be prescribed by the
Secretary of the Treasury.
2.7.4 Special Rules
(a) Multiple Use: If one or more Highly Compensated Employees
participate in both a CODA and a plan subject to the ACP test maintained
by the Employer and the sum of the ADP and ACP of those Highly
Compensated Employees subject to either or both tests exceeds the
Aggregate Limit, then the ACP of those Highly Compensated Employees who
also participate in a CODA shall be reduced (beginning with such Highly
Compensated Employee whose ACP is the highest) so that the limit is not
exceeded. The amount by which each Highly Compensated Employee's
contribution percentage amounts is reduced shall be treated as an Excess
Aggregate Contribution. The ADP and ACP of the Highly Compensated
Employees are determined after any corrections required to meet the ADP
and ACP tests. Multiple use does not occur if either the ADP or ACP of
the Highly Compensated Employees does not exceed 1.25 multiplied by the
ADP and ACP of the Employees who are not Highly Compensated Employees.
(b) The contribution percentage for any Participant who is a
Highly Compensated Employee and who is eligible to have contribution
percentage amounts allocated to his or her Accounts under two or more
plans described in Section 401(a) of the Code, or arrangements described
in Section 401(k) of the Code that are maintained by the Employer, shall
be determined as if the total of such contribution percentage amounts
was made under each plan. If a Highly Compensated Employee participates
in two or more cash or deferred arrangements that have different plan
years, all cash or deferred arrangements ending with or within the same
calendar year shall be treated as a single arrangement. Notwithstanding
the foregoing, certain plans shall be treated as separate if mandatorily
disaggregated under regulations under section 401(m) of the Code.
(c) In the event that this Plan satisfies the requirements of
Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with
one or more other plans, or if one or more other plans satisfy the
requirements of such Sections of the Code only if aggregated with this
plan, then this section shall be applied by determining the contribution
percentages of Employees as if all such plans were a single plan. For
Plan Years beginning after December 31, 1989, plans may be aggregated in
order to satisfy Section 401(m) of the Code only if they have the same
Plan Year.
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(d) For purposes of determining the contribution percentage of a
Participant who is a five-percent owner or one of the ten most highly-paid
Highly Compensated Employees, the contribution percentage amounts and
Compensation of such participant shall include the contribution percentage
amounts and Compensation for the Plan Year of members of the Family of such
Highly Compensated Employees. Family members, with respect to Highly
Compensated Employees, shall be disregarded as separate employees in
determining the contribution percentage both for Participants who are
Highly Compensated Employees and for all other Employees.
(e) For purposes of determining the contribution percentage test,
Employee Contributions are considered to have been made in the Plan Year in
which contributed to the trust. Matching Contributions and Qualified
Non-Elective Contributions shall be considered made for a Plan Year if made
no later than the end of the twelve month period beginning of the day after
the close of the Plan Year.
2.7.5 Distribution of Excess Elective Deferrals. A Participant may
assign to the Plan any Excess Elective Deferrals made during a taxable year of
the Participant by notifying the Plan Administrator on or before March 15 of
each calendar year of the amount of the Excess Elective Deferrals to be
assigned to the Plan. A Participant is deemed to notify the Plan Administrator
of any Excess Elective Deferrals that arise by taking into account only those
Elective Deferrals made to this Plan and any other plans of the Employer.
Notwithstanding any other provision of the Plan, Excess Elective Deferrals,
plus any income and minus any loss allocable thereto, shall be distributed no
later than April 15 to any Participant to whose account Excess Elective
Deferrals were assigned for the preceding year and who claims Excess Elective
Deferrals for such taxable year.
Excess Elective Deferrals distributed under this section shall be adjusted for
any income or loss based on a reasonable method of computing the allocable
income or loss. The method selected must be applied consistently to all
Participants and used for all corrective distributions under the Plan for the
Plan Year, and must be the same method that is used by the Plan for allocating
income or loss to Participants' Accounts. Income or loss allocable to the
period between the end of the taxable year and the date of distribution may be
disregarded in determining income or loss.
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2.7.6 Distribution of Excess Contributions. Notwithstanding any
other provision of this Plan, Excess Contributions, plus any income and
minus any loss allocable thereto, shall be distributed no later than the
last day of each Plan Year to Participants to whose Accounts such Excess
Contributions were allocated for the preceding Plan Year. If such excess
amounts are distributed more than 2 1/2 months after the last day of the
Plan Year in which such excess amounts arose, a ten (10) percent excise tax
will be imposed on the Employer maintaining the Plan with respect to such
amounts. Such distributions shall be made to Highly Compensated Employees
on the basis of the respective portions of the Excess Contributions
attributable to each of such Employees. Excess Contributions of
Participants who are subject to the family member aggregation rules shall
be allocated among the family members in proportion to the Elective
Deferrals (and any amounts treated as Elective Deferrals) of each family
member that is combined to determine the combined ADP.
Excess Contributions distributed under this section shall be adjusted
for any income or loss based on a reasonable method of computing the
allocable income or loss. The method selected must be applied consistently
to all Participants and used for all corrective distributions under the
Plan for the Plan Year, and must be the same method that is used by the
Plan for allocating income or loss to Participants' Accounts. Income or
loss allocable to the period between the end of the taxable year and the
date of distribution may be disregarded in determining income or loss.
Excess Contributions shall be distributed from the Participant's
Elective Contribution Account in proportion to the Participant's Elective
Deferrals for the Plan Year. Excess Contributions attributable to Qualified
Non-Elective Contributions shall be distributed from the Participant's
Qualified Non-Elective Contribution Account only to the extent that such
Excess Contributions exceed the balance in the Participant's Elective
Contribution Account.
2.7.7 Distribution of Excess Aggregate Contributions.
Notwithstanding any other provision of this Plan, Excess Aggregate
Contributions, plus any income and minus any loss allocable thereto, shall
be forfeited, if forfeitable, or if not forfeitable, distributed no later
than the last day of each Plan Year to Participants to whose accounts such
Excess Aggregate Contributions were allocated for the preceding Plan Year.
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Excess Aggregate Contributions of Participants who are subject to the family
member aggregation rules shall be allocated among the family members in
proportion to the Employee and Matching Contributions (or amounts treated as
Matching Contributions) of each family member that is combined to determine the
combined ACP. Such distributions shall be made to Highly Compensated Employees
on the basis of the respective portions of the Excess Aggregate Contributions
attributable to each of such Employees. If such Excess Aggregate Contributions
are distributed more than 2 1/2 months after the last day of the Plan Year in
which such excess amounts arose, a ten (10) percent excise tax will be imposed
on the Employer maintaining the Plan with respect to those amounts.
Excess Aggregate Contributions distributed under this section shall be adjusted
for any income or loss based on a reasonable method of computing the allocable
income or loss. The method selected must be applied consistently to all
participants and used for all corrective distributions under the Plan for the
Plan Year, and must be the same method that is used by the Plan for allocating
income or loss to Participants' Accounts. Income or loss allocable to the
period between the end of the taxable year and the date of distribution may be
disregarded in determining income or loss.
Forfeitures of Excess Aggregate Contributions may either be reallocated to the
accounts of Employees who are not Highly Compensated Employees or applied to
reduce Employer Contributions, as elected by the Employer in the Adoption
Agreement.
Excess Aggregate Contributions shall be forfeited, if forfeitable or
distributed on a pro-rata basis form the Participant's Matching Account and
Voluntary Account (and, if applicable, the Participant's Qualified Non-Elective
Contribution Account or Elective Contribution Account).
2.7.8. Limitation on Distributions. Except as otherwise provided in this
Article, Elective Deferrals and Qualified Non-Elective Contributions and income
allocable thereto are not distributable to a Participant or his or her
Beneficiary in accordance with such Participant's or Beneficiary's election
prior to separation from service, death or disability. Such amounts may,
however, be distributed upon:
(a) Termination of the Plan without the establishment of another
defined contribution plan, other than an employee stock ownership plan (as
defined in Section 4975(e) or Section 409 of the Code) or a simplified
employee pension plan as defined in Section 408(k) of the Code.
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(b) The disposition by a corporation to an unrelated corporation of
substantially all of the assets (within the meaning of Section 409(d)(2) of
the Code) used in a trade or business of such corporation if such
corporation continues to maintain this Plan after the disposition, but only
with respect to employees who continue employment with the corporation
acquiring such assets.
(c) The disposition by a corporation to an unrelated entity of such
corporation's interest in a subsidiary (within the meaning of Section
409(d)(3) of the Code) if such corporation continues to maintain this Plan,
but only with respect to employees who continue employment with such
subsidiary.
(d) The attainment of age 59 1/2.
(e) The Hardship of a Participant in accordance with Section 2.5.5.
All such distributions are subject to the spousal and Participant consent
requirements, if applicable, contained in Sections 401(a)(11) and 417 of the
Code. In addition, distributions after March 31, 1988 that are triggered by any
of the first three events enumerated above must be made in a lump sum.
2.7.9 Limitation on Elective Deferrals. No Participant shall be permitted
to have Elective Deferrals made under this Plan, or any other qualified plan
maintained by the Employer, during any taxable year, in excess of the dollar
limitation contained in Section 402(g) of the Code in effect at the beginning of
such taxable year.
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PART III
ARTICLE I
ACCOUNTING
3.1.1 Accounts. All income, profits, recoveries, contributions and any
and all monies, securities and properties of any kind at any time received or
held by the Trustee shall be held as a commingled Trust Fund, except to the
extent such assets are transferred to a Segregated Fund. For accounting
purposes, the Plan Administrator shall establish and maintain certain Accounts
for each Participant. An Employer Account shall be established and maintained
for each Participant to which shall be added the Participant's share of Employer
or Non-Elective Contributions and forfeitures. A Matching Account shall be
established and maintained for each Participant to which shall be added the
Participant's share of Matching Contributions and forfeitures. A Qualified
Non-Elective Contribution Account shall be established and maintained for each
Participant to which shall be added the Participant's share of Qualified
Non-Elective Contributions. If a Participant has previously made voluntary
nondeductible employee contributions, the Plan Administrator shall establish and
maintain a Voluntary Account for the Participant. If, in accordance with any of
the provisions of the Plan, assets are either deposited initially or transferred
to a Segregated Fund for the benefit of a Participant, the Plan Administrator
shall establish and maintain a Segregated Account for the Participant. If a
Participant elects to exercise investment control over all or a portion of his
Accounts, the Plan Administrator shall establish and maintain a Controlled
Account for the Participant.
3.1.2 Adjustments. As of each Valuation Date, each Participant's
Accounts shall be adjusted in the following order and manner.
(a) Distributions. Any distribution made to or on behalf of a Participant
since the last preceding Valuation Date shall be deducted from the
Participant's Account from which the distribution was made.
(b) Insurance Premiums. Payments made since the last preceding Valuation
Date for Life Insurance Policies on the life of a Participant (including
without limitation payments of premiums and interest on policy loans) shall
be deducted from the Account of the Participant from which the payment was
made.
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(c) Adjustment to Fair Market Value. The value of all monies, securities
and other property in the Trust Fund, excluding Life Insurance Policies, shall
be appraised by the Trustee at then fair market value. In determining such
value, all income and contributions, if any, received by the Trustee from the
Employer or Participants on account of such Year calculated under the method of
accounting of the Trust shall be included and there shall be deducted all
expenses determined in accordance with the method of accounting adopted by the
Plan Administrator.
If the total net value of the Trust Fund so determined exceeds (or is less
than) the total amount in the affected Accounts of all Participants, the excess
(or deficiency) shall be added to (or deducted from) the respective Accounts of
all Participants in the ratio that each such Participant's Account bears to the
total amount in all such Accounts.
(d) Adjustment of Segregated and Controlled Accounts. The value of all
monies, securities and other property in each Participant's Segregated Account
or Controlled Account, if any, but exclusive of Life Insurance Policies, shall
be appraised by the Trustee at the then fair market value. In determining such
value, all income calculated under the method of accounting of the Trust shall
be included and all expenses shall be deducted.
If the total net value of a Participant's Segregated Account or Controlled
Account, as the case may be, so determined exceeds (or is less than) the
previous balance in such Account, the excess (or deficiency) shall be added to
(or deducted from) the Participant's respective Account.
(e) Insurance Dividends. Dividends or credits received since the last
preceding Valuation Date on any Life Insurance Policy on the life of a
Participant shall be added to the Account of the Participant from which the
premiums for such Life Insurance Policy have been paid.
(f) Contributions and Forfeitures. Each Participant's Account shall be
increased by that portion of the contribution and forfeitures which is allocated
to him.
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(g) Transfers to Segregated Funds. To the extent that funds in the
Trust Fund attributable to a Participant's Accounts were transferred since the
last preceding Valuation Date or are to be transferred to a Segregated Fund
pursuant to any of the provisions of the Plan, the Account from which the funds
were transferred shall be decreased and the Account to which the funds were
transferred shall be increased.
(h) Transfers From Segregated Funds. To the extent that funds are
transferred from a Segregated Fund of a Participant to the Trust Fund pursuant
to any of the provisions of the Plan, the Account from which the funds were
transferred shall be decreased and the Account to which the funds were
transferred shall be increased.
(i) Time of Adjustments. Every adjustment to be made pursuant to this
Section shall be considered as having been made as of the applicable Valuation
Date regardless of the actual dates of entries, receipt by the Trustee of
contributions by the Participant or the Employer for such Year, or the
transfers of funds to or from Segregated Funds. The Trustee's determination as
to valuation of trust assets and charges or credits to the individual Accounts
of the respective Participants shall be conclusive and binding on all persons.
If funds are transferred from the Trust Fund to a Segregated Fund as of any
date other than a Valuation Date pursuant to the terms of the Plan, the
adjustment to be made pursuant to this Section shall be made as of the date as
of which such transfer is made, as if such date is a Valuation Date.
If any Participant receives a distribution pursuant to the terms of the Plan as
of any date other than a Valuation Date, then the adjustments to be made
pursuant to this Section shall be made in the manner specified in the Adoption
Agreement.
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ARTICLE II
LIMITATIONS
3.2.1 Limitations on Annual Additions. If the Participant does not
participate in, and has never participated in, another qualified plan maintained
by the Employer, or a welfare benefit fund, as defined in Section 419 (e) of
the Code, maintained by the Employer, or an individual medical account, as
defined in Section 415(1) (2) of the Code, maintained by the Employer, which
provides an annual addition, then subject to the adjustments hereinafter set
forth, the amount of annual additions which may be credited to a Participant's
Accounts during any Limitation Year shall not exceed the maximum permissible
amount, which shall equal the lesser of: (a) thirty thousand dollars
($30,000.00) or, if greater, one-fourth of the dollar limitation under Section
415(b) (1) (A) of the Code as in effect for the Limitation Year, or (b)
twenty-five percent (25%) of the Participant's Compensation for the Plan Year.
The compensation limitation referred to in (b) shall not apply to any
contribution for medical benefits (within the meaning of Section 401(h) or
Section 419A(f) (2) of the Code) which is otherwise treated as an annual
addition under Sections 415 (l) (1) or 419A(d) (2) of the Code.
If the Employer contribution that would otherwise be contributed or allocated
to the Participant's Account would cause the annual additions for the
Limitation Year to exceed the maximum permissible amount, the amount
contributed or allocated shall be reduced so that the annual additions for the
Limitation Year shall equal the maximum permissible amount.
(a) Annual Additions. The term "annual additions" shall mean the sum
of the following amounts credited to a Participant's Accounts for the
Limitation Year:
(i) Employer contributions;
(ii) Employee contributions;
(iii) Forfeitures;
(iv) Excess Elective Deferrals, Excess Contributions and Excess
Aggregate Contributions; and
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(v) Payments allocated after March 31, 1984, to an individual medical
account, as defined in section 415(l)(2) of the Code, which is part of a
pension or annuity plan maintained by the Employer and amounts derived from
contributions paid or accrued after December 31, 1985, in taxable years
ending after such date, which are attributable to post-retirement medical
benefits, allocated to the separate account of a key employee, as defined
in section 419A(d)(3) of the Code, under a welfare benefit fund as defined
in section 419(e) of the Code, maintained by the Employer.
Any excess amounts applied under subsections (b) and (c) below to reduce
Employer contributions are considered annual additions for such Limitation
Year.
(b) Excessive Annual Additions. Prior to determining a Participant's actual
Compensation for a Limitation Year, the Employer may determine the maximum
permissible Annual Addition for the Participant on the basis of a reasonable
estimation of the Participant's Compensation for the Limitation Year, uniformly
determined for all Participants similarly situated. As soon as is
administratively feasible after the end of the Limitation Year, the maximum
permissible amount for the Limitation Year shall be determined on the basis of
the Participant's actual Compensation for the Limitation Year. Any Excessive
Annual Addition attributable to nondeductible voluntary employee contributions
made by a Participant to the extent they reduce the excess amount shall be
returned to the Participant before any other adjustments are made. Any Excessive
Annual Addition attributable to a reasonable error in determining the amount of
Elective Deferrals that may be made on behalf of a Participant under the limits
of Section 415 of the Code shall next be returned to the Participant.
If an excess amount still exists, and the Participant is covered by the Plan at
the end of the Limitation Year, the excess amount in the Participant's Account
shall be used to reduce Employer contributions (including any allocation of
forfeitures) for such Participant in the next Limitation Year, and each
succeeding Limitation Year, if necessary. If an excess amount still exists, and
the Participant is not covered by the Plan at the end of a Limitation Year, the
excess amount shall be held unallocated in a suspense account. The suspense
account shall be applied to reduce future Employer contributions for all
remaining Participants in the next Limitation Year, and each succeeding
Limitation Year, if necessary.
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If a suspense account is in existence at any time during a particular
Limitation Year, all amounts in the suspense account must be allocated and
reallocated to Participant's Accounts before any Employer or any Employee
contributions may be made to the Plan for that Limitation Year. Excess amounts
may not be distributed to Participants or former Participants. If a suspense
account is in existence at any time during a Limitation Year, it shall not
participate in the allocation of the Trust's investment gains and losses.
(c) Participation in Certain Other Plans. If in addition to this Plan,
the Participant is covered under another qualified regional prototype defined
contribution plan maintained by the Employer, a welfare benefit fund, as defined
in Section 419(e) of the code maintained by the Employer, or an individual
medical account, as defined in Section 415(l)(2) of the Code, maintained by the
Employer, which provides an Annual Addition during any Limitation Year, the
annual additions which may be credited to a Participant's account under this
plan for any such Limitation Year shall not exceed the maximum permissible
amount reduced by the Annual Additions credited to a Participant's Account under
the other plans and welfare benefit funds for the same Limitation Year. If the
Annual Additions with respect to the Participant under other defined
contribution plans and welfare benefit funds maintained by the Employer are less
than the maximum permissible amount and the Employer contribution that would
otherwise be contributed or allocated to the Participant's Account under this
Plan would cause the Annual Additions for the Limitation Year to exceed this
limitation, the amount contributed or allocated shall be reduced so that the
Annual Additions under all such plans and funds for the Limitation Year shall
equal the maximum permissible amount. If the Annual Additions with respect to
the Participant under such other defined contribution plans and welfare benefit
funds in the aggregate are equal to or greater than the maximum permissible
amount, no amount will be contributed or allocated to the Participant's Account
under this Plan for the Limitation Year.
Prior to determining the Participant's actual Compensation for the Limitation
Year, the Employer may determine the maximum permissible amount for a
Participant in the manner described in subsection (b) above. As soon as is
administratively feasible after the end of the Limitation Year, the maximum
permissible amount for the Limitation Year shall be determined on the basis of
the Participant's actual Compensation for the Limitation Year.
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If a Participant's Annual Additions under this Plan and such other plans would
result in an excess amount for a Limitation Year, the excess amount shall be
deemed to consist of the Annual Additions last allocated, except that Annual
Additions attributable to a welfare benefit fund or individual medical account
will be deemed to have been allocated first regardless of the actual allocation
date.
If the excess amount was allocated to a Participant on an allocation date of
this Plan which coincides with an allocation date of another plan, the excess
amount attributed to this Plan will be the product of:
(i) the total excess amount allocated as of such date, times
(ii) the ratio of (I) the Annual Additions allocated to the
Participant for the Limitation Year as of such date under this Plan to
(II) the total Annual Additions allocated to the Participant for the
Limitation Year as of such date under this and all the other qualified
regional prototype defined contribution plans. Any excess amount
attributed to this Plan will be disposed in the manner described in
subsection (b), above
If the Participant is covered under another qualified defined contribution
plan maintained by the Employer which is not a regional prototype plan,
Annual Additions which may be credited to the Pariticipant's Account under
this Plan for any Limitation Year shall be limited as provided above as
though the other plan were a regional prototype plan unless the Employer
specifies other limitations in the Adoption Agreement.
For purposes hereof, the excess amount is the excess of the Participant's
annual additions for the Limitation Year over the maximum permissible
amount and a regional prototype plan is a plan the form of which is the
subject of a favorable opinion letter from the Internal Revenue Service.
If the Employer maintains, or at any time maintained, a qualified defined
benefit plan covering any Participant in this Plan, the sum of the
Participant's defined benefit plan fraction and defined contribution plan
fraction will not exceed 1.0 in any Limitation Year. The Annual Additions
which may be credited to the Participant's account under this Plan for any
Limitation Year shall be limited in the manner specified in the Adoption
Agreement.
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(d) Combined Plan Limitation. In the event that a Participant in this
Plan participates in a defined benefit plan (as defined in the applicable
sections of the Code) maintained by the Employer, the sum of the "defined
benefit plan fraction" plus the "defined contribution plan fraction" shall at
no time exceed 1.0 The "defined benefit plan fraction" for any year is a
fraction (i) the numerator of which is the projected annual benefit of the
Participant under all the defined benefit plans (whether or not terminated)
maintained by the Employer (determined as of the close of the year), and (ii)
the denominator of which is the lesser of (A) the product of 1.25 multiplied by
the dollar limitation determined for the Limitation Year under Sections 415(b)
and (d) of the Code, or (B) the product of 1.4 multiplied by one hundred (100%)
percent of the Participant's average compensation for the three (3) consecutive
Years of Service with the Employer that produces the highest average, including
any adjustments under Section 415(b) of the Code. Notwithstanding the above,
if the Participant was a Participant as of the first day of the first
Limitation Year beginning after December 31, 1986, in one or more defined
benefit plans maintained by the Employer which were in existence on May 6,
1986, the denominator of this fraction shall not be less than 125 percent of
the sum of the annual benefits under such plans which the Participant had
accrued as of the close of the last Limitation Year beginning before January 1,
1987, disregarding any changes in the terms and conditions of the Plan after
May 5, 1986. The preceding sentence applies only if the defined benefit plans
individually and in the aggregate satisfied the requirements of Section 415 for
all Limitation Years beginning before January 1, 1987. The "defined
contribution fraction" for any year is a fraction (i) the numerator of which is
the sum of the annual additions to the Participant's accounts under all defined
contribution plans (whether or not terminated) maintained by the Employer for
the current and all prior Limitation Years, including the annual additions
attributable to the Participant's nondeductible employee contributions to all
defined benefit plans, whether or not terminated, maintained by the Employer,
and the annual additions attributable to all welfare benefit funds and
individual medical accounts (as defined in Sections 419 (e) and 415 (1) (2) of
the Code) maintained by the Employer, and (ii) the denominator of which is the
sum of the lesser of the following amounts determined for the current year and
for all prior limitation years of service with the Employer, regardless of
whether a defined contribution plan was maintained by the Employer: (A) the
product 1.25 multiplied by the dollar limitation determined under Sections
415(b) and (d) of the
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Code in effect under Section 415(c)(1)(A) of the Code, or (B) thirty-five (35%)
percent of the Participant's compensation from the Employer for such plan
year. If the Employee was a Participant as of the end of the first day of
the first Limitation Year beginning after December 31, 1986, in one or more
defined contribution plans maintained by the Employer which were in existence
on May 6, 1986, the numerator of this fraction will be adjusted if the sum of
this fraction and the defined benefit fraction would otherwise exceed 1.0
under the terms of this Plan. Under the adjustment, an amount equal to the
product of (1) the excess of the sum of the fractions over 1.0 times (2) the
denominator of this fraction, shall be permanently subtracted from the
numerator of this fraction. The adjustment is calculated using the fractions
as they would be computed as of the end of the last Limitation year beginning
before January 1, 1987, and disregarding any changes in the terms and
conditions of the Plan made after May 5, 1986, but using the Section 415
limitation applicable to the first Limitation year beginning on or after
January 1, 1987.
The annual addition for any Limitation Year beginning before January 1, 1987,
shall not be recomputed to treat all employee contributions as annual additions.
The projected annual benefits under a defined benefit plan is the annual
retirement benefit (adjusted to an actuarially equivalent straight life
annuity if such benefit is expressed in a form other than a straight life
annuity or qualified joint and survivor annuity) to which the
Participant would be entitled under the terms of the Plan assuming the
Participant continues employment until normal retirement age under the plan (or
current age, if later), and the Participant's compensation for the current
Limitation Year and all other relevant factors used to determine benefits under
the Plan remain constant for all future Limitation Years.
(e) Special Transition Rule for Defined Contribution Fraction. At the
election of the Plan Administrator, in applying the provisions of subsection
(d) above with respect to the defined contribution plan fraction for any year
ending after December 31, 1982, the amount taken into account for the
denominator for each Participant for all years ending before January 1, 1983
shall be an amount equal to the product of the amount of the denominator
determined under subsection (d) above for the year ending in 1982, multiplied
by the "transition fraction".
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The "transition fraction" is a fraction (i) the numerator of which is the
lesser of (A) $51,875 or (B) 1.4 multiplied by twenty-five (25%) percent of the
Participant's compensation for the year ending in 1981, and (ii) the
denominator of which is the lesser of (A) $41,500 or (B) twenty-five (25%)
percent of the Participant's compensation for the year ending in 1981.
(f) Special Transition Rule for Excess Benefits. Provided that the Plan
satisfied the requirements of Section 415 of the Code for the last Plan Year
beginning before January 1, 1983, an amount shall be subtracted from the
numerator of the defined contribution plan fraction (not exceeding such
numerator) so that the sum of the defined benefit plan fraction and the defined
contribution fraction computed in accordance with Section 415(e)(1) of the Code
(as amended by the Tax Equity and Fiscal Responsibility Act of 1982) does not
exceed 1.0 for such year, in accordance with regulations issued by the Secretary
of the Treasury pursuant to the applicable provisions of the Code.
(g) Employer. For purposes of this Section, employer shall mean the
Employer that adopts this Plan and all members of a group of employers which
constitutes a controlled group of corporations or trades or businesses under
common control (as defined in Sections 414(b) and (c) of the Code, as modified
by Section 415(h) of the Code) or an affiliated service group (as defined in
Section 414(m) of the Code) of which the adopting employer is part and any
other entity required to be aggregated with the Employer under Section 414(o) of
the Code and the regulations issued thereunder.
(h) Compensation. For purposes of this Section as elected in the Adoption
Agreement by the Employer, Compensation shall mean all of a Participant's:
(i) Wages, Tips and Other Compensation Box on Form W-2. Wages as
defined in Section 3401(a) and all other payments of compensation to an
employee by the employer (in the course of the employer's trade or
business) for which the employer is required to furnish the employee a
written statement under Sections 6041(d) and 6051(a)(3) of the Code.
Compensation must be determined without regard to any rules under Section
3401(a) that limit the remuneration included in wages based on the nature
or location of the employment or the services rendered (such as the
exception for agricultural labor in Section 3401(a)(2) of the Code).
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(ii) Section 3401(a) Wages. Wages as defined in section 3401(a) of the Code
for the purposes of income tax withholding at the source but determined without
regard to any rules that limit the remuneration included in wages based on the
nature or location of the employment or the services performed (such as the
exception for agricultural labor in section 3401(a)(2) of the Code).
(iii) Section 415 Safe-Harbor Compensation. Wages, salaries and fees for
professional services and other amounts received without regard to whether or
not an amount is paid in cash for personal services actually rendered in the
course of employment for the employer maintaining the Plan to the extent that
the amounts are includible in gross income (including but not limited to
commissions paid salesmen, compensation for services on the basis of a
percentage of profits, commissions on insurance premiums, tips, bonuses, fringe
benefits, and reimbursements or other expense allowances under a nonaccountable
plan (as described in section 1.62-2(c) of the Regulations), but excluding:
(I) Employer contributions to a plan of deferred compensation which
are not includible in the Employee's gross income for the taxable year in
which contributed, or employer contributions under a simplified employee
pension plan to the extent such contributions are deductible by the
Employee or any distributions from a plan of deferred compensation;
(II) Amounts realized from the exercise of a non-qualified stock
option or when restricted stock or property held by the Employee is no
longer subject to a substantial risk of forfeiture or becomes freely
transferable.
(III) Amounts realized from the sale, exchange or other disposition of
stock acquired under an incentive stock option; and
(IV) Other amounts which received special tax benefits or
contributions made by the Employer (whether or not under a salary reduction
agreement) towards the purchase of an annuity contract described in Section
403(b) of the Code (whether or not the contributions are actually
excludable from the gross income of the Employee).
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For any self-employed individual, Compensation shall mean earned
income. For limitation years beginning after December 31, 1991,
for purposes of applying the limitations of this Article,
Compensation for a Limitation Year is the Compensation actually
paid or made available during such Limitation Year.
Notwithstanding the preceding sentence, Compensation for a
Participant who is permanently and totally disabled (as defined
in section 22 (e) (3) of the Code) is the compensation such
Participant would have received for the Limitation Year if the
Participant had been paid at the rate of compensation paid
immediately before becoming permanently and totally disabled;
such imputed compensation for the disabled Participant may be
taken into account only if the Participant is not a Highly
Compensated Employee and contributions made on behalf of such
Participant are nonforfeitable when made.
(i) Short Limitation Year. If the Limitation Year is amended to a
different twelve (12) consecutive month period, the new Limitation Year
must begin within the Limitation Year in which the amendment is made. If a
short Limitation Year is created because of an amendment changing the
Limitation Year to a different twelve (12) consecutive month period, the
maximum annual addition shall not exceed the defined contribution dollar
limitation determined in accordance with Section 415 (c) (1) (A) of the
Code then in effect multiplied by a fraction, the numerator of which is the
number of months in the short Limitation Year and the denominator of which
is twelve (12).
3.2.2 Controlled Businesses. If this plan provides contributions or
benefits for one or more owner-employees who control both the business for
which this plan is established and one or more other trades or businesses, this
plan and the plan established for other trades or businesses must, when looked
at as a single plan, satisfy sections 401 (a) and (d) for the employees of this
and all other trades or businesses.
If the plan provides contributions or benefits for one or more owner-employees
who control one or more other trades or businesses, the employees of the other
trades or businesses must be included in a plan which satisfies sections 401(a)
and (d) and which provides contributions and benefits not less favorable than
provided for owner-employees under this plan.
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If an individual is covered as an owner-employee under the plans of two or more
trades or businesses which are not controlled and the individual controls a
trade or business, then the contributions or benefits of the employees under
the plan of the trades or businesses which are controlled must be as favorable
as those provided for him under the most favorable plan of the trade or
business which is not controlled.
For purposes of the preceding paragraphs, an owner-employee, or two or more
owner-employees, will be considered to control a trade or business if the
owner-employee, or two or more owner-employees together:
(a) own the entire interest in an unincorporated trade or business, or
(b) in the case of a partnership, own more than 50 percent of either
the capital interest or the profits interest in the partnership.
For purposes of the preceding sentence, an owner-employee, or two or more
owner-employees shall be treated as owning any interest in a partnership
which is owned, directly or indirectly, by a partnership which such
owner-employee, or such two or more owner-employees, are considered to
control within the meaning of the preceding sentence.
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ARTICLE III
FIDUCIARIES
3.3.1 Standard of Conduct. The duties and responsibilities of the Plan
Administrator and the Trustee with respect to the Plan shall be discharged (a)
in a non-discriminatory manner; (b) for the exclusive benefit of Participants
and their Beneficiaries; (c) by defraying the reasonable expenses of
administering the Plan; (d) with the care, skill, prudence, and diligence under
the circumstances then prevailing that a prudent man acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims; (e) by diversifying the investments of the
Plan so as to minimize the risk of large losses, unless under the circumstances
it is clearly prudent not to do so; and (f) in accordance with the documents and
instruments governing the Plan insofar as such documents and instruments are
consistent with the provisions of the Act.
3.3.2 Individual Fiduciaries. At any time that a group of individuals
is acting as Plan Administrator or Trustee, the number of such persons who
shall act in such capacity from time to time shall be determined by the
Employer. Such persons shall be appointed by the Employer and may or may not
be Participants or Employees of the Employer. Any action taken by a group of
individuals acting as either Plan Administrator or Trustee shall be taken at
the direction of a majority of such persons, or, if the number of such persons
is two (2), by unanimous consent.
3.3.3 Disqualification from Service. No person shall be permitted to
serve as a Fiduciary, custodian, counsel, agent or employee of the Plan or as a
consultant to the Plan who has been convicted of any of the criminal offenses
specified in the Act.
3.3.4 Bonding. Except as otherwise permitted by law, each Fiduciary or
person who handles funds or other property or assets of the Plan shall be bonded
in accordance with the requirements of the Act.
3.3.5 Prior Acts. No Fiduciary shall be liable for any acts occurring
prior to the period of time during which the Fiduciary was actually serving in
such capacity with respect to the Plan.
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3.3.6 Insurance and Indemnity. The Employer may purchase or cause the
Trustee to purchase and keep current as an authorized expense liability
insurance for the Plan, its Fiduciaries, and any other person to whom any
financial responsibility with respect to the Plan and Trust is allocated or
delegated, from and against any and all liabilities, costs and expenses incurred
by such persons as a result of any act or omission to act in connection with
the performance of the duties, responsibilities and obligations under the Plan
and under the Act; provided that any such insurance policy purchased with Plan
assets permits subrogation by the Insurer against the Fiduciary in the case of
breach by such Fiduciary. Unless otherwise determined and communicated to
affected parties by the Employer, shall indemnify and hold harmless each such
person, other than a corporate trustee, for and from any such liabilities,
costs and expenses which are not covered by any such insurance, except to the
extent that any such liabilities, costs or expenses are judicially determined to
be due to the gross negligence or willful misconduct of such person. No Plan
assets may be used for any such indemnification.
3.3.7 Expenses. Expenses incurred by the Plan Administrator or the
Trustee in the administration of the Plan and the Trust, including fees for
legal services rendered, such compensation to the Trustee as may be agreed upon
in writing from time to time between the Employer and the Trustee, and all
other proper charges and expenses of the Plan Administrator or the Trustee and
of their agents and counsel shall be paid by the Employer, or at its election
at any time or from time to time, may be charged against the assets of the
Trust, but until so paid shall constitute a charge upon the assets of the
Trust. The Trustee shall have the authority to charge the Trust Fund for its
compensation and reasonable expenses unless paid or contested by written notice
by the Employer within sixty (60) days after mailing of the written billing by
the Trustee. All taxes of any and all kinds whatsoever which may be levied or
assessed under existing or future laws upon the assets of the Trust or the
income thereof shall be paid from such assets. Notwithstanding the foregoing,
no compensation shall be paid to any Employee for services rendered under the
Plan and Trust as a Trustee.
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3.3.8 Agents, Accountants and Legal Counsel. The Plan Administrator
shall have authority to employ suitable agents, custodians, investment counsel,
accountants and legal counsel who may, but need not be, legal counsel for the
Employer. The Plan Administrator and the Trustee shall be fully protected in
acting upon the advice of such persons. The Trustee shall at no time be
obliged to institute any legal action or to become a party to any legal
action unless the Trustee has been indemnified to the Trustee's satisfaction for
any fees, costs and expenses to be incurred in connection therewith.
3.3.9 Investment Manager. The Employer may employ as an investment
manager or managers to manage all or any part of the Trust Fund any (i)
investment advisor registered under the Investment Advisors Act of 1940; (ii)
bank as defined in said Act; or (iii) insurance company qualified to perform
investment management services in more than one state. Any investment manager
shall have all powers of the Trustee in the management of such part of the Trust
Fund, including the power to acquire or dispose of assets. In the event the an
investment manager is so appointed, the Trustee shall not be liable for the acts
or omissions of such investment manager or be under any obligation to invest or
otherwise manage that part of the Trust Fund which is subject to the management
of the investment manager. The Employer shall notify the Trustee in writing of
any appointment of an investment manager, and shall provide the Trustee with the
investment manager's written acknowledgment that it is a fiduciary with respect
to the Plan.
3.3.10 Finality of Decisions or Acts. Except for the right of a
Participant or Beneficiary to appeal the denial of a claim, and decision or
action of the Plan Administrator or the Trustee made or done in good faith upon
any matter within the scope of authority and discretion of the Plan
Administrator or the Trustee shall be final and binding upon all persons. In
the event of judicial review of actions taken by any Fiduciary within the scope
of his duties in accordance with the terms of the Plan and Trust, such actions
shall be upheld unless determined to have been arbitrary and capricious.
3.3.11 Certain Custodial Accounts and Contracts. The term "Trustee"
as used herein will also include a person holding the assets of a custodial
account, an annuity contract or other contract which is treated as a qualified
trust pursuant to Section 401(f) of the Code and references to the Trust Fund
shall be construed to apply to such custodial account, annuity contract or
other contract.
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ARTICLE IV
PLAN ADMINISTRATOR
3.4.1 Administration of Plan. The Plan Administrator shall be designated
be the Employer from time to time. The primary responsibility of the Plan
Administrator is to administer the Plan for the exclusive benefit of the
Participants and their Beneficiaries, subject to the specific terms of the Plan.
The Plan Administrator shall administer the Plan and shall construe and
determine all questions of interpretation or policy in a manner consistent with
the Plan and the Adoption Agreement. The Plan Administrator may correct any
defect, supply any omission, or reconcile any inconsistency in such manner and
to such extent as he shall deem necessary or advisable to carry out the purpose
of the Plan; provided, however, that any interpretation or construction shall be
done in a nondiscriminatory manner and shall be consistent with the intent that
the Plan shall continue to be a qualified Plan pursuant to the Code, and shall
comply with the terms of the Act. The Plan Administrator shall have all powers
necessary or appropriate to accomplish his duties under the Plan.
(a) The Plan Administrator shall be charged with the duties of the general
administration of the Plan, including but not limited to the following:
(1) To determine all questions relating to the eligibility of an
Employee to participate in the Plan or to remain a Participant hereunder.
(2) To compute, certify and direct the Trustee with respect to the
amount and kind of benefits to which any Participant shall be entitled
hereunder.
(3) To authorize and direct the Trustee with respect to all
disbursements from the Trust Fund.
(4) To maintain all necessary records for the administration of the
Plan.
(5) To interpret the provisions of the Plan and to make and publish
rules and regulations for the Plan as the Plan Administrator may deem
reasonably necessary for the proper and efficient administration of the
Plan and consistent with its terms.
(6) To select the Insurer to provide any Life Insurance Policy to be
purchased for any Participant hereunder.
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(7) To advise the Fiduciary with investment authority regarding
the short and long-term liquidity needs of the Plan in order that the
Fiduciary might direct its investment accordingly.
(8) To advise, counsel and assist any Participant regarding any
rights, benefits or elections available under the Plan.
(9) To instruct the Trustee as to the management, investment and
reinvestment of the Trust Fund unless the investment authority has
been delegated to the Trustee or an Investment Manager.
(b) The Plan Administrator shall also be responsible for preparing and
filing such annual disclosure reports and tax forms as may be required from
time to time by the Secretary of Labor, the Secretary of the Treasury or
other governmental authorities.
(c) Whenever it is determined by the Plan Administrator to be in the
best interest of the Plan and its Participants or Beneficiaries, the Plan
Administrator may request such variances, deferrals, extensions, or
exemptions or make such elections for the Plan as may be available under
the law.
(d) The Plan Administrator shall be responsible for procuring bonding
for all persons dealing with the Plan or its assets as may be required by
law.
(e) In the event this Plan is required to file reports or pay premiums
to the Pension Benefit Guaranty Corporation, the Plan Administrator shall
have the duty to prepare and make such filings, to pay any premiums
required, whether for basic or contingent liability coverage, and shall be
charged with the responsibility of notifying all necessary parties of such
events and under such circumstances as may be required by law.
3.4.2 Disclosure Requirements. Every Participant covered under the
Plan and every Beneficiary receiving benefits under the Plan shall receive from
the Plan Administrator a summary plan description, and such other information as
may be required by law or by the terms of the Plan.
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3.4.3 Information Generally Available. The Plan Administrator shall
make copies of this Plan and Trust, the Adoption Agreement, the summary plan
description, latest annual report, Life Insurance Policies, or other
instruments under which the Plan was established or is operated available for
examination by any Participant or Beneficiary in the principal office of the
Plan Administrator and such other locations as may be necessary to make such
information reasonably accessible to all interested parties. Subject to a
reasonable charge to defray the cost of furnishing such copies, the Plan
Administrator shall, upon written request of any Participant or Beneficiary,
furnish a copy of any of the above documents to the respective party.
3.4.4 Statement of Accrued Benefit. Upon written request to the Plan
Administrator once during any twelve (12) month period, a Participant or
Beneficiary shall be furnished with a written statement, based on the latest
available information, of his then vested accrued benefit and the earliest
date upon which the same will become fully vested and nonforfeitable. The
statement shall also include a notice to the Participant of any benefits which
are forfeitable if the Participant dies before a certain date.
3.4.5 Explanation of Rollover Treatment. The Plan Administrator
shall, when making a distribution eligible for rollover treatment, provide a
written explanation to the recipient of the provisions under which such
distribution will not be subject to tax if transferred to an eligible retirement
plan within sixty (60) days after the date on which the recipient received the
distribution and, if applicable, the provisions of law pertaining to the tax
treatment of lump sum distributions.
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ARTICLE V
TRUSTEE
3.5.1 Acceptance of Trust. The Trustee, by joining in the execution
of the Adoption Agreement to the Plan, agrees to act in accordance with the
express terms and conditions hereof.
3.5.2 Trustee Capacity - Co-Trustees. The Trustee may be a bank,
trust company or other corporation possessing trust powers under applicable
state or federal law or one or more individuals or any combination thereof.
When their are two or more Trustees, they may allocate specific
responsibilities, obligations or duties among themselves by their written
agreement. An executed copy of such written agreement shall be delivered to
and retained by the Plan Administrator.
3.5.3 Resignation, Removal, and Successors. Any Trustee may resign
at any time by delivering to the Employer a written notice of resignation to
take effect at a date specified therein, which shall not be less than thirty
(30) days after the delivery thereof; the Employer may waive such notice. The
Trustee may be removed by the Employer with or without cause, by tendering to
the Trustee a written notice of removal to take effect at a date specified
therein. Upon such removal or resignation of a Trustee, the Employer shall
either appoint a successor Trustee who shall have the same powers and duties as
those conferred upon the resigning or discharged Trustee, or, if a group of
individuals is acting as Trustee, determine that a successor shall not be
appointed and the number of Trustees shall be reduced by one (1).
3.5.4 Consultations. The Trustee shall be entitled to advice of
counsel, which may be counsel for the Plan or the Employer, in any case in which
the Trustee shall deem such advice necessary. The Trustee shall not be liable
for any action taken or omitted in good faith reliance upon the advice of such
counsel. With the exception of those powers and duties specifically allocated
to the Trustee by the express terms of the Plan, it shall not be the
responsibility of the Trustee to interpret the terms of the Plan and the Trustee
may request, and is entitled to receive, guidance and written direction from the
Plan Administrator on any point requiring construction or interpretation of the
Plan documents.
3.5.5 Rights, Powers and Duties. The rights, powers and duties of
the Trustee shall be as follows:
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(a) The Trustee shall be responsible for the safekeeping of the assets of
the Trust Fund in accordance with the provisions of the Plan and any amendments
hereto. The duties of the Trustee under the Plan shall be determined solely by
the express provisions hereof and no other further duties or responsibilities
shall be implied. Subject to the terms of this Plan, the Trustee shall be fully
protected and shall incur no liability in acting in reliance upon the written
instructions or directions of the Employer, the Plan Administrator, a duly
designated investment manager, or any other named Fiduciary.
(b) The Trustee shall have all powers necessary or convenient for the
orderly and efficient performance of its duties hereunder, including but not
limited to those specified in this Section. The Trustee shall have the power
generally to do all acts, whether or not expressly authorized, which the Trustee
in the exercise of its fiduciary responsibility may deem necessary or desirable
for the protection of the Trust Fund and the assets thereof.
(c) The Trustee shall have power to collect and receive any and all
monies and other property due hereunder and to give full discharge and release
therefore; to settle, compromise or submit to arbitration any claims, debts or
Fund; to commence or defend suits or legal proceedings wherever, in the
Trustee's judgment, any interest of the Trust Fund requires it; and to represent
the Trust Fund in all suits or legal proceedings in any court of law or equity
or before any other body or tribunal.
(d) The Trustee shall cause any Life Insurance Policies or assets of the
Trust Fund to be registered in its name as Trustee and shall be authorized to
exercise any and all ownership rights regarding these assets, subject to the
terms of the Plan.
(e) The Trustee may temporarily hold cash balances and shall be entitled
to deposit any funds received in a bank account in the name of the Trust Fund in
any bank selected by the Trustee, including the banking department of a
corporate Trustee, if any, pending disposition of such funds in accordance with
the Plan. Any such deposit may be made with or without interest.
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(f) The Trustee shall pay the premiums and other charges due and payable at
any time on any Life Insurance Policies as it may be directed by the Plan
Administrator, provided funds for such payments are then available in the Trust.
The Trustee shall be responsible only for such funds and Life Insurance Policies
as shall actually be received by it as Trustee hereunder, and shall have no
obligation to make payments other than from such funds and cash values of Life
Insurance Policies.
(g) If the whole or any part of the Trust Fund shall become liable for the
payment of any estate, inheritance, income or other tax which the Trustee shall
be required to pay, the Trustee shall have full power and authority to pay such
tax out of any monies or other property in its hands for the account of the
person whose interest hereunder is so liable. Prior to making any payment, the
Trustee may require such releases or other documents from any lawful taxing
authority as it shall deem necessary. The Trustee shall not be liable for any
nonpayment of tax when it distributes an interest hereunder on instructions from
the Plan Administrator.
(h) The Trustee shall keep a full, accurate and detailed record of all
transactions of the Trust which the Employer and the Plan Administrator shall
have the right to examine at any time during the Trustee's regular business
hours. As of the close of each Plan Year, the Trustee shall furnish the Plan
Administrator with a statement of account setting forth all receipts,
disbursements and other transactions effected by the Trustee during the year.
The Plan Administrator shall promptly notify the Trustee in writing of his
approval or disapproval of the account. The Plan Administrator's failure to
disapprove the account within sixty (60) days after receipt shall be considered
an approval. Except as otherwise required by law, the approval by the Plan
Administrator shall be binding as to all matters embraced in any statement to
the same extent as if the account of the Trustee had been settled by judgment or
decree of a court of competent jurisdiction under which the Trustee, Employer
and all persons having or claiming any interest in the Trust Fund were parties;
provided, however, that the Trustee may have its account judicially settled if
it so desires.
(i) The Trustee is hereby authorized to execute all necessary receipts and
releases to any parties concerned.
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(j) If, at any time, as the result of the death of the Participant
there shall be a dispute as to the person to whom payment or delivery of
monies or property should be made by the Trustee, or regarding any action
to be taken by the Trustee, the Trustee may postpone such payment, delivery
or action, retaining the funds or property involved, until such dispute
shall have been resolved in a court of competent jurisdiction or the
Trustee shall have been indemnified to its satisfaction or until it has
received written direction from the Plan Administrator.
(k) Anything in this instrument to the contrary notwithstanding, the
Trustee shall have no duty or responsibility with respect to the
determination of matters pertaining to the eligibility of any Employee to
become or remain a Participant hereunder, the amount of benefit to which
any Participant or Beneficiary shall be entitled hereunder, or the size and
type of any Life Insurance Policy to be purchased from any Insurer for any
Participant hereunder; all such responsibilities being vested in the Plan
Administrator.
3.5.6 Trustee Indemnification. The Employer shall indemnify and hold
harmless the Trustee for and from the assertion or occurrence of any liability
to a Participant or Beneficiary for any action taken or omitted by the Trustee
pursuant to any written direction to the Trustee from the Employer or the Plan
Administrator. Such indemnification obligation of the Employer shall not be
applicable to the extent that any such liability is covered by insurance.
3.5.7 Changes in Trustee Authority. If a successor Trustee is
appointed, neither an Insurer nor any other person who has previously had
dealings with the Trustee shall be chargeable with knowledge of such appointment
or such change until furnished with notice thereof. Until such notice, the
Insurer and any other such party shall be fully protected in relaying on any
action taken or signature presented which would have been proper in accordance
with that information previously received.
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ARTICLE VI
TRUST ASSETS
3.6.1 Trustee Exclusive Owner. All assets held by the Trustee, whether in
the Trust Fund or Segregated Funds, shall be owned exclusively by the Trustee
and no Participant or Beneficiary shall have any individual ownership thereof.
Participants and their Beneficiaries shall share in the assets of the Trust, its
net earnings, profits and losses, only as provided in this Plan.
3.6.2 Investments. The Trustee shall invest and reinvest the Trust Fund
without distinction between income or principal in one or more of the following
ways as the Trustee shall from time to time determine:
(a) The Trustee may invest the Trust Fund or any portion thereof in
obligations issued or guaranteed by the United States of America or of any
instrumentalities thereof, or in other bonds, notes, debentures, mortgages,
preferred or common stocks, options to buy or sell stocks or other
securities, mutual fund shares, limited partnership interests, commodities,
real estate or any interest therein, or in such other property, real or
personal, as the Trustee shall determine.
(b) The Trustee may cause the Trust Fund or any portion thereof to be
invested in a common trust fund established and maintained by a national or
other bank for the collective investment of fiduciary funds even though the
bank is acting as the Trustee or Investment Manager, providing such common
trust fund is a qualified trust under the applicable section of the Code,
or corresponding provisions of future federal internal revenue laws and is
exempt from income tax under the applicable section of the Code. In the
event any assets of the Trust Fund are invested in such a common trust
fund, the Declaration of Trust creating such common trust fund, as it may
be amended from time to time, shall be incorporated into this Plan by
reference and made a part hereof.
(c) The Trustee may deposit any portion of the Trust Fund in savings
accounts in federally insured banks or savings and loan associations or
invest in certificates of deposit issued by any such bank or savings and
loan association. The Trustee may, without liability for interest, retain
any portion of the Trust Fund in cash balances pending investment thereof
or payment of expenses.
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(d) The Trustee may buy and sell put and call options, covered or
uncovered, engage in spreads, straddles, ratio writing and other forms of
options trading, including sales of options against convertible bonds, and sales
of Standard & Poor futures contracts, and trade in and maintain a brokerage
account on a cash or margin basis.
(e) The Trustee may invest any portion or all of the assets of the Trust
Fund which are attributable to the vested and nonforfeitable interest in the
Accounts of a Participant in the purchase of group or individual Life Insurance
Policies issued on the life of and for the benefit of the Participant with the
consent of the Participant, subject to the following conditions:
(i) The aggregate premiums paid for ordinary whole Life Insurance
Policies with both nondecreasing death benefits and nonincreasing premiums
on the life of any Participant shall not at any time exceed forty-nine
percent (49%) of the aggregate amount of Employer contributions which have
been allocated to the Accounts of such Participant.
(ii) The aggregate Premiums paid for Life Insurance Policies on the
life of any Participant which are either term, universal or any other
contracts which are not ordinary whole life Policies shall not at any time
exceed twenty-five percent (25%) of the aggregate amount of Employer
contributions which have been allocated to the Accounts of such
Participant.
(iii) The sum of one-half of the aggregate premiums for ordinary whole
Life Insurance Policies and all premiums for other Life Insurance Policies
shall not at any time exceed twenty-five percent (25%) of the aggregate
amount of Employer contributions which have been allocated to the Accounts
of such Participant.
(iv) If the Plan permits in-service distributions to a Participant
prior to his Normal Retirement Date in accordance with Section 2.5.6(a) or
(b) and the Plan does not take into account contributions to provide
benefits under Social Security in the allocation of contributions by the
Employer, the amount which may be distributed to the Participant may be
applied to the purchase of Life Insurance Policies.
(f) The Trustee may invest the Trust Fund or any portion thereof to acquire
or hold Qualifying Employer Securities or Real Property, provided that the
portion so invested shall not exceed the amount allowed as an investment under
the Act.
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3.6.3 Administration of Trust Assets. Subject to the limitations
herein expressly set forth, the Trustee shall have the following powers and
authority in connection with the administration of the assets of the Trust:
(a) To hold and administer all contributions made by the Employer to the
Trust Fund and all income or other property derived therefrom as a single
Trust Fund, except as otherwise provided in the Plan.
(b) To manage, control, sell, convey, exchange, petition, divide,
subdivide, improve, repair, grant options, sell upon deferred payments,
lease without limit as determined for any purpose, compromise, arbitrate or
otherwise settle claims in favor of or against the Trust Fund, institute,
compromise and defend actions and proceedings, and to take any other action
necessary or desirable in connection with the administration of the Trust
Fund.
(c) To vote any stock, bonds, or other securities of any corporation or
other issuer; otherwise consent to or request any action on the part of any
such corporation or other issuer; to give general or special proxies or
powers of attorney, with or without power of substitution; to participate
in any reorganization, recapitalization, consolidation, merger or similar
transaction with respect to such securities; to deposit such stocks or
other securities in any voting trusts, or with any protective or like
committee, or with the trustee, or with the depositories designated
thereby; to exercise any subscription rights and conversion privileges or
other options and to make any payments incidental thereto; and generally to
do all such acts, execute all such instruments, take all such proceedings
and exercise all such rights, powers and privileges with respect to the
stock or other securities or property constituting the Trust Fund as if
the Trustee were the absolute owner thereof.
(d) To apply for and procure, at the election of any Participant, Life
Insurance Policies on the life of the Participant; to exercise whatever
rights and privileges may be granted to the Trustee under such Policies,
and to cash in, receive and collect such Policies or the proceeds therefrom
as and when entitled to do so under the provisions thereof;
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(e) To make, execute, acknowledge and deliver any and all
documents of transfer and conveyance and any and all other instruments
that may be necessary or appropriate to carry out the powers herein
granted;
(f) To register any investment held in the Trust in the
Trustee's own name or in the name of a nominee and to hold any
investment in bearer form, but the books and records of the Trustee
shall at all times show that all such investments are part of the
Trust;
(g) To borrow money for the purposes of the Plan in such amounts
and upon such term and conditions as the Trustee deems
appropriate; the assets of the Trust Fund with the assets of other
similar trusts which are exempt from income tax, whether sponsored by
the Employer, an affiliate of the Employer or an unrelated employer,
provided that the books and records of the Trustee shall at all times
show the portion of the commingled assets which are part of the Trust;
and
(h) To commingle
(i) To do all acts whether or not expressly authorized which
the Trustee may deem necessary or proper for the protection of the
property held hereunder.
3.6.4 Segregated Funds. Unless otherwise determined by the
Trustee to be prudent, the Trustee shall invest and reinvest each Segregated
Fund without distinction between income or principal in one or more
appropriately identified interest-bearing accounts or certificates of deposit
in the name of the Trustee and subject solely to the dominion of the Trustee in
a banking institution (which may or may not be the Trustee, if the Trustee is a
banking institution) or savings and loan association.
Any such account or certificate shall bear interest at a rate not less than the
rate of interest currently being paid upon regular savings accounts by that
banking corporation principally situated in the community in which the
Employer has its principal business location, which has capital, surplus and
undivided profits exceeding those of any other bank so situated. Such accounts
shall be held for the benefit of the Participant for whom such Segregated Fund
is established in accordance with the terms of the Plan and the Segregated
Account of the Participant shall be credited with any interest earned in
connection with such accounts.
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If the Trustee determines that an alternative investment is appropriate, the
Trustee may invest the Segregated Fund in any manner permitted with respect to
the Trust Fund and such Segregated Fund shall be credited with the net income
or loss or net appreciation or depreciation in value of such investments. No
Segregated Fund shall share in any Employer contributions or forfeitures, any
net income or loss from, or net appreciation or depreciation in value of, any
investments of the Trust Fund, or any allocation for which provisions is made
in this Plan which is not specifically attributable to the Segregated Fund.
3.6.5 Investment Control Option. If the Employer elects in the
Adoption Agreement to permit Participants to direct the investment of their
Accounts, each Participant may elect to have transferred to a Segregated Fund
and exercise investment control by appropriate direction to the Trustee with
respect to funds in the Trust Fund which do not exceed the balances in his
Accounts. To the extent that the balance in the Participant's Account with
respect to which a transfer is to be made includes his share of an Employer
contribution which has not been received by the Trustee, such transfer shall
not be made until such contribution is received by the Trustee. Funds so
transferred to a Segregated Fund on behalf of the Participant shall be
thereafter invested by the Trustee in such bonds, notes, debentures,
commodities, mortgages, equipment trust certificates, investment trust
certificates, preferred or common stocks, partnership interests, life insurance
policies, including universal life insurance policies, or in such other
property, real or personal (other than collectibles), wherever situated, as the
Participant shall direct from time to time in writing; provided, however, that
the Participant may not direct the Trustee to make loans to himself, nor to
make loans to the Employer; and provided further that the Trustee may limit the
investment alternatives available to the Participant in a uniform and
nondiscriminatory manner but taking into account whether the interest of the
Participant is fully vested and nonforfeitable. Any such election shall be
made by the Participant giving notice thereof to the Trustee as the Trustee
deems necessary and such notice shall specify the amount of such funds to be
transferred and the Account from which the transfer is to be made. Any such
election shall be at the absolute discretion of the individual Participant and
shall be binding upon the Trustee. Upon any such election being made, the
amount of such funds to be transferred shall be deducted from his Account as
appropriate and added to a Controlled Account of the Participant. All
dividends and interest thereafter received with respect to such transferred
funds, as well as any appreciation or depreciation in his investments, shall be
added to or deducted from his Controlled Account.
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If a Participant wishes to make such an election to transfer funds from the
Trust Fund to a Segregated Fund as of a date other than a Valuation Date, the
Trustee may defer such transfer until the next succeeding Valuation Date or, in
the Trustee's discretion, make such transfer, provided that the Trustee
determines that the nature of the assets in the Trust Fund is such that it is
feasible and practical to make, as of the date of such transfer, the
adjustments to Participants' Accounts for which provision is made in the Plan,
as if such date is a Valuation Date.
The Trustee shall not have any investment responsibility with respect to a
Participant's Segregated Fund. In the event that a Participant elects to have
any such funds transferred to a Segregated Fund and invested in particular
securities or assets pursuant to this Section, the Trustee shall not be liable
for any loss or damage resulting from the investment decision of the
Participant. As of any Valuation Date, the Participant may elect to have all or
any portion of any cash contained in his Segregated Fund transferred back to
the Trust Fund, in which case such cash shall be invested by the Trustee
together with other assets held in the Trust Fund. Any such election shall be
made by giving notice thereof to the Trustee as the Trustee deems necessary,
and the notice shall specify the amount of cash to be transferred.
As of the said Valuation Date, the amount of such funds to be so transferred
which is attributable to the balance in the Participant's Controlled Account
shall be deducted from such Account and added to the appropriate Account of the
Participant.
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ARTICLE VII
LOANS
3.7.1 Authorization. If the Employer elects in the Adoption Agreement
to permit loans to Participants or Beneficiaries, the Trustee shall establish a
participant loan program in compliance with Labor Regulation section 2550.408b.
The terms of such participant loan program shall be in writing and shall
constitute part of the Plan. Such terms shall include:
(a) The identity of the person or positions authorized to administer
the participant loan program;
(b) A procedure for applying for loans;
(c) The basis on which loans will be approved or denied;
(d) Limitations (if any) on the types and amount of loans offered;
(e) The procedure under the program for determining a reasonable rate
of interest;
(f) The types of collateral which may secure a participant loan; and
(g) The events constituting default and the steps that will be taken
to preserve plan assets in the event of default.
3.7.2 Spousal Consent. A Participant must obtain the written consent
of his spouse, if any, to the use of the Participant's interest in the Plan as
security for the loan within ninety (90) days before the date on which the loan
is to be so secured. A new consent must be obtained whenever the amount of the
loan is increased or if the loan is renegotiated, extended, renewed or
otherwise revised. The form of the consent must acknowledge the effect of such
consent and be witnessed by a Plan representative or a notary public but shall
be deemed to meet any such requirements relating to the consent of any
subsequent spouse. Such consent shall thereafter be binding with respect to the
consenting spouse or any subsequent with respect to that loan.
If a valid spousal consent has been obtained, then notwithstanding any other
provision of the Plan, the portion of the Participant's vested Account balance
used as a security interest held by the Plan by reason of a loan outstanding to
the Participant shall be taken into account for purposes of determining the
amount of the Account balance payable at the time of death or distribution but
only if the reduction is used as repayment of the loan.
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If less than the entire amount of the Participant's vested Account balance
(determined without regard to the preceding sentence) is payable to the
surviving spouse, the Account balance shall be adjusted by first reducing the
vested Account balance by the amount of the security used as repayment of the
loan and then determining the benefit payable to the surviving spouse.
3.7.3 Limitations. Except to the extent provided in the participant
loan program, in no event shall the amount loaned to any Participant or
Beneficiary exceed the lesser of (a) fifty thousand dollars ($50,000.00)
(reduced by the excess, if any, of the highest outstanding balance of loans
from the Plan) during the one year period ending on the day before the date on
which the loan was made over the outstanding balance of loans from the Plan on
the date on which such loan was made) or (b) one-half of the sum of the vested
and nonforfeitable interest in his Accounts, determined as of the Valuation
Date coinciding with or immediately preceding such loan. For the purposes
hereof, all loans from all plans of the Employer and other members of a group
of employers described in Sections 414(b), (c), (m) and (o) of the Code shall
be aggregated. All loans must be adequately secured and bear a reasonable
interest rate. No Participant loan shall exceed the present value of the
Participant's vested Account balance. In the event of a default, foreclosure on
the note evidencing the loan and attachment of the security shall not occur
until a distributable event occurs.
3.7.4 Availability. Loans, if any, must be available to all
Participants and Beneficiaries without regard to any individual's race, color,
religion, sex, age or national origin. Loans shall be made available to all
Participants and Beneficiaries and loans shall not be made available to Highly
Compensated Employees in an amount greater than the amount made available to
other employees.
3.7.5 Prohibitions. A loan shall not be made to a five (5%) percent
or greater shareholder-employee of an S corporation, an owner of more than ten
(10%) percent of either the capital interest or the profits interest of an
unincorporated Employer, a family member (as defined in section 267(c)(4) of
the Code) of such persons, or a corporation controlled by such persons through
the ownership, directly or indirectly, of fifty (50%) percent or more of the
total voting power or value of all shares of all classes of stock of the
corporation, unless an exemption for the loan is obtained pursuant to section
408 of the Act.
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ARTICLE VIII
BENEFICIARIES
3.8.1 Designation of Beneficiaries. Each Participant shall have the
right to designate a Beneficiary or Beneficiaries and contingent or successive
Beneficiaries to receive any benefits provided by this Plan which become
payable upon the Participant's death. The Beneficiaries may be changed at any
time or times by the filing of a new designation with the Plan Administrator,
and the most recent designation shall govern. Notwithstanding the foregoing and
subject to the provisions of Section 2.5.2(a)(3), the designated Beneficiary
shall be the surviving spouse of the Participant, unless such surviving spouse
consents in writing to an alternate designation and the terms of such consent
acknowledge the effect of such alternate designation and the consent is
witnessed by a representative of the Plan or by a notary public. A spouse may
not revoke the consent without the approval of the Participant. The designation
of a Beneficiary other than the spouse of the Participant or a form of benefits
with the consent of such spouse may not be changed without the consent of such
spouse and any consent must acknowledge the specific non-spouse Beneficiary,
including any class of Beneficiaries or any contingent Beneficiaries.
3.8.2 Absence or Death of Beneficiaries. If a Participant dies
without having a beneficiary designation then in force, or if all of the
Beneficiaries designated by a Participant predecease him, his Beneficiary shall
be his surviving spouse, or if none, his surviving children, equally, or if
none, such other heirs or the executor or administrator of his estate as the
Plan Administrator shall select.
If a Participant dies survived by Beneficiaries designated by him and if all
such surviving Beneficiaries thereafter die before complete distribution of
such deceased Participant's interest, the estate of the last of such designated
Beneficiaries to survive shall be deemed to be the Beneficiary of the
undistributed portion of such interest.
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3.8.3 Surviving Spouse Election. If the Plan is designated in the
Adoption Agreement as a Cash or Deferred Profit Sharing Plan or a Profit
Sharing Plan and the Employer does not elect a life annuity form of
distribution in the Adoption Agreement, a surviving spouse, who has not
consented to an alternate designation under Section 3.8.1, above, may elect to
have distribution of the Participant's vested Account balance commence within
the 90-day period following the date of the Participant's death. The Account
balance shall be adjusted for gains or losses occurring after the Participant's
death in accordance with the provisions of the Plan governing the adjustment of
account balances for other types of distributions.
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ARTICLE IX
CLAIMS
3.9.1 Claim Procedure. Any Participant or Beneficiary who is entitled
to a payment of a benefit for which provision is made in this Plan shall file a
written claim with the Plan Administrator on such forms as shall be furnished
to him by the Plan Administrator and shall furnish such evidence of entitlement
to benefits as the Plan Administrator may reasonably require. The Plan
Administrator shall notify the Participant or Beneficiary in writing as to the
amount of benefit to which he is entitled, the duration of such benefit, the
time the benefit is to commence and other pertinent information concerning his
benefit. If a claim for benefit is denied by the Plan Administrator, in whole
or in part, the Plan Administrator shall provide adequate notice in writing to
the Participant or Beneficiary whose claim for benefit has been denied within
ninety (90) days after receipt of the claim unless special circumstances
require an extension of time for processing the claim. If such an extension of
time for processing is required, written notice indicating the special
circumstances and the date by which a final decision is expected to be rendered
shall be furnished to the Participant or Beneficiary. In no event shall the
period of extension exceed one hundred eighty (180) days after receipt of the
claim. The notice of denial of the claim shall set forth (a) the specific
reason or reasons for the denial; (b) specific reference to pertinent Plan
provisions on which the denial is based; (c) a description of any additional
material or information necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary; and (d) a
statement that any appeal of the denial must be made by giving to the Plan
Administrator, within sixty (60) days after receipt of the notice of the
denial, written notice of such appeal, such notice to include a full
description of the pertinent issues and basis of the claim. The Participant or
Beneficiary (or his duly authorized representative) may review pertinent
documents and submit issues and comment in writing to the Plan Administrator.
If the Participant or Beneficiary fails to appeal such action to the Plan
Administrator in writing within the prescribed period of time, the Plan
Administrator's adverse determination shall be final, binding and conclusive.
3.9.2 Appeal. If the Plan Administrator receives from a Participant
or a Beneficiary, within the prescribed period of time, a notice of an appeal
of the denial of a claim for benefit, such notice and all relevant materials
shall immediately be submitted to the Employer. The Employer may hold a hearing
or otherwise ascertain such facts as it deems necessary and shall render a
decision which shall be binding upon both parties.
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The decision of the Employer shall be made within sixty (60) days after the
receipt by the Plan Administrator of the notice of appeal, unless special
circumstances require an extension of time for processing, in which case a
decision of the Employer shall be rendered as soon as possible but not later
than one hundred twenty (120) days after receipt of the request for review. If
such an extension of time is required, written notice of the extension shall be
furnished to the claimant prior to the commencement of the extension. The
decision of the Employer shall be in writing, shall include specific reasons
for the decision, written in a manner calculated to be understood by the
claimant, as well as specific references to the pertinent Plan provisions on
which the decision is based and shall be promptly furnished to the claimant.
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ARTICLE X
AMENDMENT AND TERMINATION
3.10.1 Right to Amend.
(a) The Employer may at any time or times amend the Plan and the
provisions of the Adoption Agreement, in whole or in part. Subject to
subsection (b), an Employer that amends the Plan shall no longer participate
in this prototype plan and shall be considered to have an individually
designed plan.
(b) The Employer may change the choice of options in the Adoption
Agreement, add overriding language in the Adoption Agreement when such
language is necessary to satisfy Section 415 or 416 of the Code because of
the required aggregation of multiple plans and add certain model amendments
published by the Internal Revenue Service which specifically provide that
their adoption shall not cause the Plan to be treated as individually
designed. An Employer that amends the Plan for any other reason, including a
waiver of the minimum funding requirements under Section 412(d) of the Code,
shall no longer participate in this prototype plan and shall be considered to
have an individually designed plan.
An Employer that had adopted a standardized regional prototype plan may
amend the trust or custodial account document provided such amendment merely
involves the specifications of the names of the Plan, Employer, trustee or
custodian, Plan Administrator or other fiduciaries, the trust year, or the
name of any pooled trust in which the Plan's trust will participate.
An Employer that has adopted a non-standardized regional prototype plan will
not be considered to have an individually designed plan merely because the
Employer amends administrative provisions of the trust or custodial account
document (such as provisions relating to investments and duties of trustees)
so long as the amended provisions are not in conflict with any other
provision of the Plan and do not cause the Plan to fail to qualify under
Section 401(a) of the Code.
3.10.2 Manner of Amending. Each amendment of this Plan shall be made
by delivery to the Trustee of a copy of the resolution of the Employee which
sets forth such amendment.
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3.10.3 Limitations On Amendments. No amendment shall be made
to this Plan which shall:
(a) Directly or indirectly operate to give the Employer any
interest whatsoever in the assets of the Trust or to deprive any
Participant or Beneficiary of his vested and nonforfeitable interest in
the assets of the Trust as then constituted, or cause any part of the
income or corpus of the Trust to be used for, or diverted to purposes
other than the exclusive benefit of Employees or their Beneficiaries;
(b) Increase the duties or liabilities of the Trustee without
the Trustee's prior written consent;
(c) Change the vesting schedule under the Plan if the
nonforfeitable percentage of the accrued benefit derived from Employer
contributions (determined as of the later of the date such amendment is
adopted or the date such amendment becomes effective) of any Participant
is less than such nonforfeitable percentage computed without regard to
such amendment; or
(d) Reduce the accrued benefit of a Participant within the
meaning of Section 411(d)(6) of the Code, except to the extent permitted
under Section 412(c)(8) of the Code. An amendment which has the effect
of decreasing a Participant's account balance or eliminating an optional
form of benefit with respect to benefits attributable to service before
the amendment shall be treated as reducing an accrued benefit.
If a Plan amendment changes the vesting schedule or the Plan is amended
in any way that directly or indirectly affects the computation of the
Participant's nonforfeitable percentage or if the Plan is deemed amended
by an automatic change to or from a top-heavy vesting schedule, each
Participant who has completed three (3) or, in the case of Participants
who do not have at least one (1) Hour of Service in any Plan Year
beginning after 1988, five (5) or more Years of Service may elect within
a reasonable period after the adoption of such amendment to have his
nonforfeitable percentage computed without regard to such amendment or
change. The period during which the election may be made shall commence
with the date the amendment is adopted or deemed to be made and shall
end on the latest of sixty (60) days after:
(i) the amendment is adopted;
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(ii) the amendment becomes effective; or
(iii) the Participant is issued written notice of the
amendment by the Employer or Plan Administrator.
3.10.4 Voluntary Termination. The Employer may terminate the Plan at
any time by delivering to the Trustee an instrument in writing which designates
such termination. Following termination of the Plan, the Trust will continue
until the Distributable Benefit of each Participant has been distributed.
3.10.5 Involuntary Termination. The Plan shall terminate if (a) the
Employer is dissolved or adjudicated bankrupt or insolvent in appropriate
proceedings, or if a general assignment is made by the Employer for the benefit
of creditors, or (b) the Employer loses its identity by consolidation or merger
into one or more corporations or organizations, unless within ninety (90) days
after such consolidation or merger, such corporations or organizations elect to
continue the Plan.
3.10.6 Withdrawal By Employer. The Employer may withdraw from
participation under the Plan without terminating the Trust upon making a
transfer of the Trust assets to another Plan which shall be deemed to
constitute an amendment in its entirety of the Trust.
3.10.7 Powers Pending Final Distribution. Until final distribution of
the assets of the Trust, the Plan Administrator and Trustee shall continue to
have all the powers provided under this Plan as are necessary for the orderly
administration, liquidation and distribution of the assets of the Trust.
3.10.8 Delegation to Sponsor. The Employer expressly delegates
authority to the Plan Sponsor the right to amend any part of the Plan on its
behalf to the extent necessary to preserve the qualified status of the Plan.
For purposes of amendments by the Plan Sponsor, the Mass Submitter shall be
recognized as the agent of the Plan Sponsor. If the Plan Sponsor does not adopt
the amendments made by the Mass Submitter, the Plan shall no longer be
identical to or a minor modifier of the mass submitter plan. The Plan Sponsor
shall submit a copy of the amendment to each Employer who has adopted the Plan
after first having received a ruling or favorable determination from the
Internal Revenue Service that the Plan as amended satisfies the applicable
requirements of the Code. The Employer may revoke the authority of the Plan
Sponsor to amend the Plan on its behalf by written notice to the Plan Sponsor
of such revocation.
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ARTICLE XI
PORTABILITY
3.11.1 Continuance by Successor. In the event of the dissolution,
consolidation or merger of the Employer, or the sale by the Employer of its
assets, the resulting successor person or persons, firm or corporations may
continue this Plan by (a) adopting the Plan by appropriate resolution;
(b) appointing a new Trustee as though the Trustee (including all members of a
group of individuals acting as Trustee) had resigned; and (c) executing a
proper agreement with the new Trustee. In such event, each Participant in this
Plan shall have an interest in the Plan after the dissolution, consolidation,
merger, or sale of assets, at least equal to the interest which he had in the
Plan immediately before the dissolution, consolidation, merger or sale of
assets. Any Participants who do not accept a position with such successor
within a reasonable time shall be deemed to be terminated. If, within ninety
(90) days from the effective date of such dissolution, consolidation, merger,
or sale of assets, such successor does not adopt this Plan, as provided herein,
the Plan shall automatically be terminated and deemed to be an involuntary
termination.
3.11.2 Merger With Other Plan. In the event of the merger or
consolidation with, or transfer of assets or liabilities to, any other deferred
compensation plan and trust, each Participant shall have an interest in such
other plan which is equal to or greater than the interest which he had in this
Plan immediately before such merger, consolidation or transfer, and if such
other plan thereafter terminates, each Participant shall be entitled to a
Distributable Benefit which is equal to or greater than the Distributable
Benefit to which he would have been entitled immediately before such merger,
consolidation or transfer if this Plan had then been terminated.
3.11.3 Transfer From Other Plans. The Employer may cause all or any
of the assets held in connection with any other plan or trust which is
maintained by the Employer for the benefit of its employees and satisfies the
applicable requirements of the Code relating to qualified plans and trusts to
be transferred to the Trustee, whether such transfer is made pursuant to a
merger or consolidation of this Plan with such other plan or trust or for any
other allowable purpose.
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In addition, the Employer, by appropriate election in the Adoption Agreement,
may permit rollover to the Trustee of assets held for the benefit of an
Employee in a conduit Individual Retirement Account, a terminated plan of the
Employer, or any other plan or trust which is maintained by some other employer
for the benefit of its employees and satisfies the applicable requirements of
the Code relating to qualified plans and trusts. Any such assets so
transferred to the Trustee shall be accompanied by written instructions from
the employer, or the trustee, custodian or individual holding such assets,
setting forth the name of each Employee for whose benefit such assets have been
transferred and showing separately the respective contributions by the employer
and by the Employee and the current value of the assets attributable thereto.
Upon receipt by the Trustee of such assets, the Trustee shall place such assets
in a Segregated Fund for the Participant and the Employee shall be deemed to be
one hundred percent (100%) vested and have a nonforfeitable interest in any
such assets. Notwithstanding any provisions herein to the contrary, unless the
Plan provides a life annuity distribution option, the Plan shall not be a
direct or indirect transferee of a defined benefit pension plan, money purchase
pension plan, target benefit pension plan, stock bonus or profit sharing plan
which is subject to the survivor annuity requirements of Section 401(a)(11) and
Section 417 of the Code.
3.11.4 Transfer to Other Plans. The Trustee, upon written direction
by the Employer, shall transfer some or all of the assets held under the Trust
to another plan or trust of the Employer meeting the requirements of the Code
relating to qualified plans and trusts, whether such transfer is made pursuant
to a merger or consolidation of this Plan with such other plan or trust or for
any other allowable purpose. In addition, upon the termination of employment of
any participant and receipt by the Plan Administrator of a request in writing,
the Participant may request that any distribution from the Trust to which he is
entitled shall be transferred to an Individual Retirement Account, an Individual
Retirement Annuity, or any other plan or trust which is maintained by some other
employer for the benefit of its employees and satisfies the applicable
requirements of the Code relating to qualified plans and trusts. Upon receipt
of any such written request, the Plan Administrator shall cause the Trustee to
transfer the assets so directed and, as appropriate, shall direct the Insurer to
transfer to the new trustee any applicable insurance policies issued by it.
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ARTICLE XII
MISCELLANEOUS
3.12.1 No Reversion to Employer. Except as specifically provided in
the Plan, no part of the corpus or income of the Trust shall revert to the
Employer or be used for, or diverted to purposes other than for the exclusive
benefit of Participants and their Beneficiaries.
3.12.2 Employer Actions. Any action by the Employer pursuant to the
provisions of the Plan shall be evidenced by appropriate resolution or by
written instrument executed by any person authorized by the Employer to take
such action.
3.12.3 Execution of Receipts and Releases. Any payment to any person
eligible to receive benefits under this Plan, in accordance with the provisions
of the Plan, shall, to the extent thereof, be in full satisfaction of all claims
hereunder. The Plan Administrator may require such person, as a condition
precedent to such payment, to execute a receipt and release therefore in such
form as he shall determine.
3.12.4 Rights of Participants Limited. Neither the creation of this
Plan and Trust nor anything contained in this Plan or the Adoption Agreement
shall be construed as giving any Participant, Beneficiary or Employee any equity
or other interest in the assets, business or affairs of the Employer, or the
right to complain by , the Employer, or as giving any Employee the right to be
retained in the service of the Employer; and all Employees shall remain subject
to discharge to the same extent as if the Plan had never been executed. Prior
to the time that distributions are made in conformity with the provisions of the
Plan, neither the Participants, nor their spouses, Beneficiaries, heirs-at-law,
or legal representatives shall receive or be entitled to receive cash or any
other thing of current exchangeable value, from either the Employer or the
Trustee as a result of the Plan or the Trust.
3.12.5 Persons Dealing With Trustee Protected. No person dealing
with the Trustee shall be required or entitled to see to the application of any
money paid or property delivered to the Trustee, or determine whether or not the
Trustee is acting pursuant to the authorities granted to the Trustee hereunder
or to authorizations or directions herein required. The certificate of the
Trustee that the Trustee is acting in accordance with the Plan shall protect any
person relying thereon.
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3.12.6 Protection of the Insurer. An Insurer shall not be
responsible for the validity of the Plan or Trust and shall have no
responsibility for action taken or not taken by the Trustee, for determining
the propriety of accepting premium payments or other contributions, for making
payments in accordance with the direction of the Trustee, or for the
application of such payments. The Insurer shall be fully protected in dealing
with any representative of the Employer or any one of a group of individuals
acting as Trustee. Until written notice of a change of Trustee has been
received by an Insurer at its home office, the Insurer shall be fully protected
in dealing with any party acting as Trustee according to the latest information
received by the Insurer at its home office.
3.12.7 No Responsibility for Act of Insurer. Neither the
Employer, the Plan Administrator nor the Trustee shall be responsible for any
of the following, nor shall they be liable for instituting action in connection
with:
(a) The validity of policies or policy provisions;
(b) Failure or refusal by the Insurer to provide benefits
under a policy;
(c) An act by a person which may render a policy invalid or
unenforceable; or
(d) Inability to perform or delay in performing an act, which
inability or delay is occasioned by a provision of a policy or a
restriction imposed by the Insurer.
3.12.8 Inalienability. The right of any Participant or his
Beneficiary in any distribution hereunder or to any separate Account shall not
be subject to alienation, assignment or transfer, voluntarily or involuntarily,
by operation of law or otherwise, except as may be expressly permitted herein.
No Participant shall assign, transfer, or dispose of such right nor shall any
such right be subjected to attachment, execution, garnishment, sequestration,
or other legal, equitable, or other process. The preceding shall also apply to
the creation, assignment, or recognition of a right to any benefit payable with
respect to a Participant pursuant to a domestic relations order, unless such
order is determined to be a qualified domestic relations order, as defined in
Section 414(p) of the Code, or any domestic relations order entered before
January 1, 1985.
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In the event a Participant's benefits are attached by order of any court, the
Plan Administrator may bring an action for a declaratory judgment in a court of
competent jurisdiction to determine the proper recipient of the benefits to be
paid by the Plan. During the pendency of the action, the Plan Administrator
shall cause any benefits payable to be paid to the court for distribution by
the court as it considers appropriate.
3.12.9 Domestic Relations Orders. The Plan Administrator shall adhere
to the terms of any judgment, decree or order (including approval of a property
settlement agreement) which relates to the provision of child support, alimony
payments, or marital property rights to a spouse, former spouse, child or other
dependent of a Participant and is made pursuant to a state domestic relations
law (including a community property law) and which creates or recognizes the
existence of an alternate payee's right to, or assigns to an alternate payee
the right to, receive all or a portion of the benefits payable with respect to
a Participant.
Any such domestic relations order must clearly specify the name and last known
mailing address of the Participant and the name and mailing address of each
alternate payee covered by the order, the amount or percentage of the
Participant's benefit to be paid by the Plan to each such alternate payee, or
the manner in which such amount or percentage is to be determined, the number
of payments or period to which such order applies, and each plan to which such
order applies.
Any such domestic relations order shall not require the Plan to provide any
type or form of benefit, or any option not otherwise provided under the Plan,
to provide increased benefits (determined on the basis of actuarial value) or
the payment of benefits to an alternate payee which are required to be paid to
another alternate payee under another order previously determined to be a
qualified domestic relations order. Notwithstanding the foregoing sentence, a
domestic relations order may require the payment of benefits to an alternate
payee before the Participant has separated from service on or after the date on
which the Participant attains or would have attained the earliest retirement
age under the Plan as if the Participant had retired on the date on which such
payment is to begin under such order (but taking into account only the present
value of the benefits actually accrued and not taking into account the present
value of any Employer subsidy for early retirement) and in any form in which
such benefits may be paid under the Plan to the Participant (other than the
form of a joint and survivor annuity with respect to the alternate payee and his
or her subsequent spouse).
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The interest rate assumption used in determining the present value shall be
five (5%) percent. For these purposes, the earliest retirement age under the
Plan means the earlier of: (a) the date on which the Participant is entitled
to a distribution under the Plan, or (b) the later of the date the Participant
attains age 50, or the earliest date on which the Participant could begin
receiving benefits under the Plan if the Participant separated from service.
If the Employer so elects in the Adoption Agreement, distributions may be made
to an alternate payee even though the Participant may not receive a
distribution because he continues to be employed by the Employer.
To the extent provided in the qualified domestic relations order, the former
spouse of a Participant shall be treated as a surviving spouse of such
Participant for purposes of Sections 401(a)(11) and 417 of the Code (and any
spouse of the Participant shall not be treated as a spouse of the Participant
for such purposes) and if married for at least one (1) year, the surviving
former spouse shall be treated as meeting the requirements of Section 417(d) of
the Code.
The Plan Administrator shall promptly notify the Participant and each alternate
payee of the receipt of a domestic relations order by the Plan and the Plan's
procedures for determining the qualified status of domestic relations orders.
Within a reasonable period after receipt of a domestic relations order, the
Plan Administrator shall determine whether such order is a qualified domestic
relations order and shall notify the Participant and each alternate payee of
such determination. If the Participant or any affected alternate payee
disagrees with the determinations of the Plan Administrator, the disagreeing
party shall be treated as a claimant and the claims procedure of the Plan shall
be followed. The Plan Administrator may bring an action for a declaratory
judgment in a court of competent jurisdiction to determine the proper recipient
of the benefits to be paid by the Plan.
During any period in which the issue of whether a domestic relations order is a
qualified domestic relations order is being determined (by the Plan
Administrator, by a court of competent jurisdiction or otherwise), the Plan
Administrator shall separately account for the amounts which would have been
payable to the alternate payee during such period if the order had been
determined to be a qualified domestic relations order. If, within the eighteen
(18) month period beginning on the date on which the first payment would be
required to be made under the domestic relations order, the order (or
modification thereof) is determined to be a qualified domestic relations order,
the Plan Administrator shall pay the segregated amounts, including any interest
thereon, to the person or persons entitled thereto.
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<PAGE> 143
If within such eighteen (18) month period it is determined that the order is
not a qualified domestic relations order or the issue as to whether such order
is a qualified domestic relations order is not resolved, then the Plan
Administrator shall pay the segregated amounts, including any interest thereon,
to the person or persons who would have been entitled to such amounts if there
had been no order. Any determination that an order is a qualified domestic
relations order which is made after the close of the eighteen (18) month period
shall be applied prospectively only.
3.12.10 Authorization to Withhold Taxes. The Trustee is authorized in
accordance with applicable law to withhold from distribution to any payee such
sums as may be necessary to cover federal and state taxes which may be due with
respect to such distributions.
3.12.11 Missing Persons. If the Trustee mails by registered or
certified mail, postage prepaid, to the last known address of a Participant or
Beneficiary, a notification that the Participant or Beneficiary is entitled to
a distribution and if (a) the notification is returned by the post office
because the addressee cannot be located at such address and if neither the
Employer, the Plan Administrator nor the Trustee shall have any knowledge of
the whereabouts of such Participant or Beneficiary within three (3) years from
the date such notification was mailed, or (b) within three years after such
notification was mailed to such Participant or Beneficiary, he does not respond
thereto by informing the Trustee of his whereabouts, the ultimate disposition
of the then undistributed balance of the Distributable Benefit of such
Participant or Beneficiary shall be determined in accordance with the then
applicable Federal laws, rules and regulations. If any portion of the
Distributable Benefit is forfeited because the Participant or Beneficiary
cannot be found, such portion shall be reinstated if a claim is made by the
Participant or Beneficiary.
3.12.12 Notices. Any notice or direction to be given in accordance
with the Plan shall be deemed to have been effectively given if hand delivered
to the recipient or sent by certified mail, return receipt requested, to the
recipient at the recipient's last known address. At any time that a group of
individuals is acting as Trustee, notice to the Trustee may be given by giving
notice to any one or more of such individuals.
3.12.13 Governing Law. The provisions of this Plan shall be construed,
administered and enforced in accordance with the provisions of the Act and, to
the extent applicable, the laws of the state in which the Employer has its
principal place of business. All contributions to the Trust shall be deemed to
take place in such state.
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3.12.14 Severability of Provisions. In the event that any provision
of this Plan shall be held to be illegal, invalid or unenforceable for any
reason, said illegality, invalidity or unenforceability shall not affect the
remaining provisions, but shall be fully severable and the Plan shall be
construed and enforced as if said illegal, invalid or unenforceable provisions
had never been inserted herein.
3.12.15 Gender and Number. Whenever appropriate, words used in the
singular shall include the plural, and the masculine gender shall include the
feminine gender.
3.12.16 Binding Effect. The Plan and the Adoption Agreement, and all
actions and decisions hereunder, shall be binding upon the heirs, executors,
administrators, successors and assigns of any and all parties hereto and
Participants, present and future.
3.12.17 Qualification Under Internal Revenue Laws. The Employer
intends that the Trust qualify under the applicable provisions of the Code.
Until advised to the contrary, the Trustee may assume that the Trust is so
qualified and is entitled to tax exemption under the Code. If the Plan of the
Employer fails to attain or retain qualification, the Plan of the Employer
shall no longer participate in this prototype and shall be considered an
individually designed plan.
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MODEL SECTION 401(a)(31) AMENDMENT TO
Section 1. This Article applies to distributions made on or after
January 1, 1993. Notwithstanding any provision of the plan to the contrary that
would otherwise limit a distributee's election under this Article, a
distributee may elect, at the time and in the manner prescribed by the plan
administrator, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a
direct rollover.
Section 2. Definitions.
Section 2.1. Eligible rollover distribution: An eligible rollover
distribution is any distribution of all or any portion of the balance to the
credit of the distributee, except that an eligible rollover distribution does
not include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated beneficiary,
or for a specified period of ten years or more; any distribution to the extent
such distribution is required under section 401(a)(9) of the Code; and the
portion of any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
Section 2.2. Eligible retirement plan: An eligible retirement plan is
an individual retirement account described in section 408(a) of the Code, an
individual retirement annuity described in section 408(b) of the Code, an
annuity plan described in section 403(a) of the Code, or a qualified trust
described in section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible rollover
distribution to the surviving spouse, an eligible retirement plan is an
individual retirement account or individual retirement annuity.
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Section 2.3. Distributee: A distributee includes an employee or
former employee. In addition, the employee's or former employee's surviving
spouse and the employee's or the former employee's spouse or former spouse who
is the alternate payee under a qualified domestic relations order, as defined
in section 414(p) of the Code, are distributees with regard to the interest of
the spouse or former spouse.
Section 2.4. Direct rollover: A direct rollover is a payment by the
plan to the eligible retirement plan specified by the distributee.
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MODEL SECTION 401(a)(17) AMENDMENT TO
SECTION 401(a)(17) LIMITATION
In addition to other applicable limitations set forth in the plan, and
notwithstanding any other provision of the plan to contrary, for plan years
beginning on or after January 1, 1994, the annual compensation of each employee
taken into account under the plan shall not exceed the OBRA '93 annual
compensation limit. the OBRA '93 annual compensation limit is $150,000, as
adjusted by the Commissioner for increases in the cost of living in accordance
with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living
adjustment in effect for a calendar year applies to any period, not exceeding
12 months, over which compensation is determined (determination period)
beginning in such calendar year. If a determination period consist of fewer
than 12 months, the OBRA '93 annual compensation limit will be multiplied by a
fraction, the numerator of which is the number of months in the determination
period, and the denominator of which is 12.
For plan years beginning on or after January 1, 1994, any reference in
this plan to the limitation under section 401(a)(17) of the Code shall mean the
OBRA '93 annual compensation limit set forth in the provision.
If compensation for any prior determination period is taken into
account in determining an employee's benefits accruing in the current plan
year, the compensation for that prior determination period is subject to the
OBRA '93 annual compensation limit in effect for that prior determination
period. For this purpose, for determination periods beginning before the first
day of the first plan year beginning on or after January 1, 1994, the OBRA '93
annual compensation limit is $150,000.
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REVENUE PROCEDURE 93-47 AMENDMENT TO
The following language, applicable to distributions made on or after January 1,
1993, is hereby inserted following the final sentence of section 2.5.2(e)
of __________________________________, Plan and Trust.
"If a distribution is one to which sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less
than 30 days after the notice required under section 1.411(a)-11(c) of the
Income Tax Regulations is given, provided that:
(1) the plan administrator clearly informs the participant that the
participant has a right to a period of at least 30 days after receiving the
notice to consider the decision of whether or not to elect a distribution
(and if applicable, a particular distribution option), and
(2) the participant, after receiving the notice, affirmatively elects a
distribution."
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<PAGE> 1
EXHIBIT 10.25
INSURANCE SERVICE AGREEMENT
This Agreement is between Mutual Service Casualty Insurance Company, a
Minnesota corporation (hereinafter called "MSI", and IGF Insurance Company, an
Indiana corporation (hereinafter called "IGF").
WHEREAS, IGF insures growing crops; and
WHEREAS, IGF is not licensed to do an insurance business in all states; and
WHEREAS, IGF has requested that MSI front for it in several states in which IGF
is not licensed to do an insurance business; and
WHEREAS, MSI is willing to provide its facilities to IGF, subject to the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the Reinsurance Agreement identified in
paragraph 3, and for other good and valuable consideration, MSI and IGF agree
as follows:
1. Authority of IGF.
A. MSI authorizes IGF:
(1) to procure Crop Hail, Multi-Peril, Named Peril (Agricultural)
and Flood Insurance business (herein called "Insurance")
through properly licensed producers ("Agents") for MSI's
account in the states of California, Florida, Georgia, Idaho,
Kentucky, Michigan, New Mexico, North Carolina, Ohio,
Oklahoma, South Carolina, Tennessee, Texas, Virginia,
Washington and such other states as the parties may mutually
agree to in a writing referencing this Agreement; and
(2) to manage such Insurance on behalf of MSI as set forth in this
Agreement.
B. Subject to the restrictions contained in this Agreement, MSI
grants IGF the authority to perform the following activities on MSI's
behalf:
(1) to file rules, rates and forms applicable to the Insurance
with appropriate regulatory authorities;
(2) to appoint and remove Agents, and to pay commissions on
Insurance produced by Agents;
(3) to accept and decline Insurance risks;
(4) to bind, issue and cancel Insurance policies ("Policies");
(5) to bill, collect and refund Insurance premiums;
(6) to make customary endorsements, changes, assignments,
transfers and modifications of existing Policies; and
(7) to adjust, compromise and process Insurance claims, including
the right to litigate claims in MSI's name.
2. Effective Date. IGF can Issue Policies providing Multi-Peril Crop
Insurance Coverage reinsured by the Federal Crop Insurance Corporation for
the policy period July 1, 1995 - June 30, 1996 upon execution of this
Agreement. IGF can issue Policies for the other lines of insurance
beginning January 1, 1996.
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<PAGE> 2
3. Reinsurance.
A. All Insurance business coming within the scope of this Agreement
shall be the joint and several liability of IGF and PAFCO General
Insurance Company, an Indiana corporation, under a 100% Quota Share
Reinsurance Agreement approved by MSI (the "Reinsurance Agreement").
B. IGF agrees to maintain reinsurance on Insurance underwritten and
assumed by it from time to time as may be required by MSI. IGF shall
not change its reinsurance cover without MSI's written consent.
4. Issuing Fee and Expense.
A. MSI shall be entitled to an annual fee for its participation hereunder
equal to the greater of the sum of the percentages shown below of the
net premium written on Insurance, by line, during the calendar year
and $350,000 (the "Issuing Fee").
(1) Crop Hail
2.50% of the net premium written on the Insurance during the
calendar year for all Crop Hail business.
(2) Multi-Peril Crop Insurance
(a) Non Catastrophe Policies
A minimum rate of 2.00% shall apply to 100% of farmers
paid and subsidy premium and shall slide to maximum of
3.00% if the Grow Loss Ratio (before application of the
Standard Reinsurance Agreement (SRA)) is less than or
equal to 90%, for the applicable crop year in question.
(b) Catastrophe Policies
A minimum rate of .6% of "imputed premium", as defined in
the SRA, and shall slide to a maximum of 1.10% if the
Gross Loss Ratio is less than or equal to 90%, for the
applicable Crop year in question.
B. IGF agrees to pay and/or reimburse MSI for all expenses related to
insurance produced pursuant to this Agreement. Such expenses shall
include, but shall not be limited to Agent licenses, Agent
Commissions, agency supplies (such as application forms, policy
blanks, daily reports, adjuster supplies and loss drafts),
advertising, premium taxes, local board and association fees, state
policy filing fees, and other fees pursuant to those laws and
regulations creating obligatory funds, pools, joint underwriting
associations, FAIR plans and similar plans, and reinsurance facilities
designed to provide insurance on risks upon which coverage cannot be
obtained through the normal insurance market.
C. IGF agrees to hold MSI harmless and reimburse it for all other
amounts, including claims and adjustment fees and judgments, to pay as
a result of insurance produced pursuant to this Agreement and not
covered by the Reinsurance Agreement, it being the intent of the
parties that MSI shall be entitled to earn a profit in each year that
this Agreement is in effect equal to the Issuing Fee.
D. As used in this Agreement "net premium written" means gross premium
written less returns and cancellations.
Page 2
<PAGE> 3
5. Reports and Remittances.
A. IGF shall prepare and submit to MSI within forty-five (45)
days after the end of each month a bordereau report showing
for that month gross premiums written less returns and
cancellations; Agent's commissions; paid losses and loss
adjustment expenses; and reserves for outstanding losses. IGF
shall also provide MSI with such other information as MS[ may
require to complete its Annual Statement and satisfy internal
and external reporting requirements.
B. IGF shall remit to MSI within forty-five (45) days after the
end of each month an amount equal to MSI's liability for
premium taxes on the net premium written on insurance during
such month.
C. Each year, by December 1, IGF shall remit to MSI an amount
equal to the greater of the percentage fees noted in 4.A.
1.-2. of the net premium on Insurance written through October
of that year and $350,000.
D. Beginning in 1996 and each year thereafter, on or before April
15, IGF shall remit to MSI the amount, if any, by which the
percentage fees noted In 4.A. 1.-2. of the net premium on
Insurance written during the preceding calendar year exceeds
the amount paid to MSI under paragraph 5.C. In the event the
amount previously paid by IGF under paragraph 5.C. for the
year exceeds the difference to IGF following receipt of notice
form IGF on the amount due.
E. IGF shall be liable to MSI for all premiums on Insurance
produced under this Agreement, regardless of whether such
premiums are collected by IGF.
F. IGF shall have its financial affairs audited annually by an
Independent auditor acceptable to MSI, and shall provide MSI
with a copy of such audit promptly upon its completion.
6. Restrictions.
A. IGF shall underwrite, issue and non-renew Policies in accordance with
the following underwriting guidelines:
(1) Maximum annual net written premium: $21 million (inclusive of
direct subsidies).
(2) Maximum limits of liability: For Crop Hail or Named Peril
(Agricultural) - $1,600,000 in any one township; for
Multi-Peril - $10,000,000 in any township; for Flood - $1,000,000
per risk.
(3) Maximum policy period: For Crop Hail, Multi-Peril and Named
Peril (Agricultural) - 12 months; for Flood - 36 months.
(4) Lines and classes of business to be written: Crop Hail,
Multi-Peril, Named Peril (Agricultural) and Flood - 36 months.
(5) Policy rates and rating basis: For Crop Hail, Multi-Peril and
Named Peril (Agricultural) - the rules and rates approved by MSI
and, where required, applicable regulatory authorities, and in
effect in the various territories in which Insurance is being
marketed; for Flood - in accordance with the rules and rates
promulgated under the National Flood Insurance Program.
(6) Required policy wording and exclusions: For Crop Hail,
Multi-Peril and Named Peril (Agricultural) - as set forth in the
various policy forms developed by IGF, and approved by MSI and,
where required, applicable regulatory authorities; for Flood -
as set forth in forms promulgated under the National Flood
Insurance Program.
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<PAGE> 4
(7) Territorial limitations: Risks resident in the states identified
in paragraph 2.A.
Subject to applicable laws, regulations and policy terms, IGF
shall have the right to cancel or non-renew any Policy at its
discretion.
B. IGF shall process and adjust all claims incurred under binders,
endorsements or Policies issued by IGF under this Agreement at its own
expense. Settlement of any individual claim exceeding the sum of
$70,000 shall be subject to the approval of MSI. In connection with
lawsuits seeking the recovery of damages in excess of $100,000, IGF
shall furnish MSI with copies of all pleadings, and related file
material, pertaining thereto in a prompt and timely fashion. IGF
shall consult with MSI in the handling of all such litigation.
C. MSI reserves the right to inspect and audit IGF's claim files
pertaining to insurance business written pursuant to this Agreement
and to evaluate and establish claim reserves on such Agreement and to
evaluate and establish claim reserves on such business at it sole
discretion. Furthermore, MSI reserves the right to determine that any
Insurance claim denied by IGF is payable and, upon such determination,
IGF shall promptly pay such claim.
D. All files and records pertaining to claims arising out of business
subject to this Agreement shall be the property of both parties hereto
and, upon request, MSI shall have unrestricted access to such files
and records during IGF's business hours. IGF shall not delete or
destroy such files and records without MSI's prior consent.
E. In the event of any disagreement or dispute regarding the performance
of any delegated underwriting or claim settlement function, or upon
discovery of any failure on the part of IGF to comply with all
established underwriting or claim settlement provisions, guidelines or
instructions, MSI shall have the right to immediately suspend IGFs
authority to perform such function pending satisfactory resolution of
the disagreement, dispute or instance of non-compliance and perform
such function itself. IGF shall provide MSI, at IGF's expense, with a
copy of the requisite files and shall reimburse MSI for the expenses
MSI shall incur in performing any suspended function.
7. Records.
A. IGF shall maintain separate records on the Insurance produced
under this Agreement. MSI and the State Insurance Commissioners
shall each have access to, and the right to copy, all accounts
and records related to such insurance at any time during IGFs
business hours. Such records shall be retained for at least
three (3) years after the termination of the Reinsurance
Agreement, or until the completion of MSI's statutory
examination by the Minnesota Department of Commerce covering the
period during which the Reinsurance Agreement was in effect,
whichever is later.
B. MSI shall have the right at any time to inspect and audit the
books and records of IGF on business produced under this
Agreement, which shall be made available by IGF at its normal
place of business.
B. Arbitration.
A. As a condition precedent to any right of action hereunder, in
the event of any dispute or difference of opinion hereafter
arising with respect to this Agreement, it is hereby mutually
agreed that such dispute or difference of opinion shall be
submitted to arbitration. One Arbiter shall be chosen by MSI,
the other by IGF, and an Umpire shall be chosen by the two
Arbiters before they enter arbitration, all of which shall be
active or retired disinterested executive officers of insurance
and reinsurance companies or Lloyd's of London Underwriters. In
the event that either party should fail to choose an Arbiter
within thirty (30) days following a written request by
Page 4
<PAGE> 5
the other party to do so, the requesting party may choose two
Arbiters who shall in turn choose an Umpire before entering upon
arbitration. If the two Arbiters fail to agree upon the
selection of an Umpire within thirty (30) days following their
appointment, each Arbiter shall nominate three (3) Candidates
within ten (10) days thereafter, two (2) of whom the other shall
decline, and the decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within thirty
(30) days following the date of appointment of the Umpire. The
Arbiters shall consider this Agreement as an honorable
engagement rather than merely as a legal obligation, and they
are relieved of all judicial formalities and may abstain from
following the strict rules of the law. The decision of the
Arbiters shall be final and binding on both parties; but failing
to agree, they shall call in the Umpire and the decision or the
majority shall be final and binding upon both parties. Judgment
upon the final decision of the Arbiters may be entered in any
court of competent jurisdiction.
C. Each party shall bear the expense of its own Arbiter, and shall
jointly and equally bear with the other expense of the Umpire
and of the arbitration. In the event that the two Arbiters are
chosen by one party, as above provided, the expense of the
Arbiters, the Umpire and the arbitration shall be equally
divided between the two parties.
D. Any arbitration proceedings shall take place at a location
mutually agreed upon by both parties to this Agreement, but
notwithstanding the location of the arbitration, all proceedings
pursuant hereto shall be governed by the law of the state of
Minnesota.
9. Termination. This Agreement shall terminate:
A. Automatically, upon the termination of the Reinsurance
Agreement. It is of the essence of this Agreement that the
Reinsurance Agreement, as approved by MSI, shall be in place at
all time.
B. Immediately, following written notice from the other party, upon
the placement of a party to this Agreement under supervision by
a State Insurance Commissioner.
C. Immediately, following receipt of written notice from MSI, on
account of IGF's failure to comply with a condition or provision
of this Agreement within thirty (30) days after such failure is
brought to IGF's attention in writing.
D. On December 31 of any year, by either party. The party desiring
to terminate this Agreement shall give the other at least ninety
(90) days advance written notice of its intention to terminate
this Agreement.
E. Unless otherwise directed by MSI in writing. In the event this
Agreement is terminated, IGF shall continue to perform the
duties necessary to service all Policies, at its own expense,
until all liability underlying the Policies shall have been
terminated. Such services shall consist of, but shall not
necessarily be limited to, cancellations, return premiums,
endorsements, account current reporting and claim settlements.
IGF shall also Issue, for and on behalf of MSI, an effective
notice of non-renewal to all policyholders terminating their
coverage upon the expiration of their Policy term next following
the termination of this Agreement. Should good cause exist for
MSI shall incur in performing such duties. IGF shall also
provide MSI, at IGF's expense, with a copy of all Insurance
records on unexpired Policies, and all Insurance claim files.
F. Should this Agreement terminate on a date other than December
31, IGF shall remit to MSI within forty-five (45) days following
the date of termination an amount equal to the sum of the
percentages show in 4.A. 1.-2. of the net premium written on
Insurance in that year to the date of termination. If the date
of termination shall be on or after July 1, IGF shall remit to
MSI the greater of the amount described in the preceding
sentence and $350,000.
10. General Provisions.
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<PAGE> 6
A. Payment of all commissions due on Policies secured by Agents
shall be made directly by IGF to the Agents. IGF shall
indemnify and hold MSI harmless from all expenses, costs, causes
of action, and damages resulting from or growing out of claims
made by Agents against MSI for commissions or other payments
allegedly due them on Insurance produced under this Agreement.
B. IGF warrants that it will abide by all statues, rules and
regulations of the various territories in which Insurance is
being marketed. Furthermore, IGF shall indemnify and hold MSI
harmless from any and all wrongful acts or conduct by its
representatives, employees and/or the Agents on account of
failure to properly license Agents with MSI, failure to provide
Insurance to applicants, failure to handle claims properly, and
any other act that creates a financial obligation for MSI as a
result of acts or omissions by said representatives, employees
and/or the Agents, including but not limited to all costs,
expenses and attorney fees incurred by MSI as a result thereof.
C. IGF shall reimburse MSI for any out-of-pocket expenses MSI may
incur in connection with any audit of IGF's underwriting and
claims processing operations, including testing for reserve
adequacy on Insurance claims. IGF's maximum obligation under
this paragraph is limited to $5,000 per calendar year.
D. IGF's obligations hereunder to reimburse MSI for all expenses
related to business produced under this Agreement, and to
indemnify and hold MSI harmless, shall survive the termination
of the Agreement.
E. This Agreement shall not be assigned by IGF without the written
consent of MSI.
IN WITNESS THEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the date shown.
Arden Hills, Minnesota, this 15th day of May ,1996
----------- ------------ --
By: /s/ Lloyd A. Keller
----------------------------
Lloyd A. Keller, Director of
Reinsurance
Mutual Service
Casualty Insurance company
Des Moines, Iowa, this 20th day of May ,1996
--------------- ---------------- --
BY: /s/ Dennis G. Daggett
-----------------------------
IGF Insurance Company
Page 6
<PAGE> 1
EXHIBIT 10.26
GORAN CAPITAL INC.
- and -
MONTREAL TRUST COMPANY OF CANADA
AMENDED AND RESTATED TRUST INDENTURE
December 29, 1992
SMITH, LYONS, TORRANCE, STEVENSON & MAYER
GOODMAN & GOODMAN
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I N D E X
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PARTIES 1
RECITALS 1
ARTICLE ONE - GENERAL
Section 1.01 Interpretation 2
Section 1.02 Meaning of "Outstanding" 14
Section 1.03 References to Dollars 15
Section 1.04 Calculation of Interest 15
Section 1.05 Prescription 16
Section 1.06 Headings, etc. 16
Section 1.07 Applicable Law 16
Section 1.08 Entire Agreement 16
Section 1.09 Severability 16
Section 1.10 Time 16
ARTICLE TWO - THE NOTES
Section 2.01 Limitation of Issue 17
Section 2.02 Amendments to Notes 17
Section 2.03 Terms of Series A Notes 18
Section 2.04 Terms of Series B Notes 20
Section 2.05 Forms of Notes 21
Section 2.06 Signature of Notes 22
Section 2.07 Certification and Commencement
of Interest 22
Section 2.08 Registers of Notes 23
Section 2.09 Payments and Paying Agents 25
Section 2.10 Mutilation, Loss, Theft or
Destruction of Notes 27
Section 2.11 Transfer and Exchange of Notes 28
Section 2.12 Payment of Additional Amounts 29
ARTICLE THREE - REPLACEMENT OF NOTES
Section 3.01 Replacement of Registered
Original Notes for Registered
Amended Notes 31
Section 3.02 Procedures for Replacement of Bearer
Original Notes and Coupons for Bearer
Amended Notes and Coupons 32
Section 3.03 Effect of Effective Date 32
Section 3.04 Certification of Notes 33
ARTICLE FOUR - SUBORDINATION OF NOTES
Section 4.01 Subordination of Series B Notes
to Unsubordinated Indebtedness 33
Section 4.02 Subordination of Series A Notes 33
Section 4.03 Payment on Dissolution or Winding-up 35
Section 4.04 Senior Indebtedness Default 36
Section 4.05 Subrogation of Series A Notes 36
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Section 4.06 Subrogation of Series B Notes 37
Section 4.07 Rights of Noteholders Reserved 38
Section 4.08 Exceptions to Subordination 38
Section 4.09 Renewal or Extension of Senior Indebtedness 39
Section 4.10 Renewal or Extension by Holders of
Series A Notes and of Other Indebtedness 39
ARTICLE FIVE - RANKING OF SERIES A NOTES AND SERIES B NOTES
Section 5.01 Postponement of Series B Notes to Prior
Indebtedness 39
Section 5.02 Payment on Series A Notes and Series B
Notes on Dissolution or Winding Up 39
Section 5.03 Subrogation of Series B Notes 42
Section 5.04 Renewal or Extension by Holders of Series A
Notes and of Other Indebtedness 42
Section 5.05 Ranking of Notes 42
Section 5.06 Trustee Not Charged with Knowledge 43
ARTICLE SIX - COVENANTS OF THE COMPANY
Section 6.01 General Covenants 43
Section 6.02 Covenants Solely for Benefit of
Holders of Series A Notes 49
Section 6.03 Registrations and Deliveries 56
Section 6.04 After-Acquired Property and Further
Assurances 57
Section 6.05 Special Covenant 59
Section 6.06 Trustee's Remuneration and Expenses 59
Section 6.07 Not to Extend Time for Payment
of Principal or Interest 59
Section 6.08 Good Standing Certificate 59
Section 6.09 Warrant Indenture 60
Section 6.10 Performance of Covenants by Trustee 60
Section 6.11 Negative Pledge 60
Section 6.12 Discretion of Trustee as to Dealing with
Charged Property 61
Section 6.13 Effective Date of Security Documents 62
ARTICLE SEVEN - REDEMPTION OF NOTES
Section 7.01 Redemption 62
Section 7.02 Places of Payment 62
Section 7.03 Partial Redemption 62
Section 7.04 Selection for Redemption 63
Section 7.05 Notice of Redemption 63
Section 7.06 Payment of Redemption Price 63
Section 7.07 Deposit of Redemption Moneys 64
Section 7.08 Home Office Payment 64
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2.
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ARTICLE EIGHT - DEFAULT AND ENFORCEMENT
Section 8.01 Events of Default 65
Section 8.02 Acceleration on Default 67
Section 8.03 Waiver of Default 68
Section 8.04 Proceedings by the Trustee 68
Section 8.05 Suits by Noteholders 69
Section 8.06 Application of Moneys Received by the Trustee 70
Section 8.07 Distribution of Proceeds 71
Section 8.08 Remedies Cumulative 72
Section 8.09 Judgment Against the Company 72
Section 8.10 Trustee Appointed Attorney 72
ARTICLE NINE - SUCCESSOR COMPANIES
Section 9.01 Certain Requirements in Respect of
Merger, etc. 72
Section 9.02 Vesting of Powers in Successor 73
ARTICLE TEN - INVESTMENT OF TRUST FUNDS
Section 10.01 73
ARTICLE ELEVEN - MEETINGS OF NOTEHOLDERS
Section 11.01 Right to Convene Meetings 74
Section 11.02 Notice 74
Section 11.03 Chairman 74
Section 11.04 Quorum 74
Section 11.05 Power to Adjourn 75
Section 11.06 Show of Hands 75
Section 11.07 Poll 75
Section 11.08 Voting 75
Section 11.09 Regulations 75
Section 11.10 Company and Trustee May be Represented 76
Section 11.11 Powers Exercisable by Extraordinary
Resolution 76
Section 11.12 Meaning of "Extraordinary Resolution" 78
Section 11.13 Powers Cumulative 79
Section 11.14 Minutes 79
Section 11.15 Instruments in Writing 79
Section 11.16 Binding Effect of Resolutions 79
Section 11.17 Serial Meetings 80
ARTICLE TWELVE - SUPPLEMENTAL INDENTURES
Section 12.01 81
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3.
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ARTICLE THIRTEEN - SATISFACTION AND DISCHARGE
Section 13.01 Cancellation and Destruction 82
Section 13.02 Non-Presentation of Notes 83
Section 13.03 Discharge of Security 83
Section 13.04 Release from Covenants 83
ARTICLE FOURTEEN - NOTICES
Section 14.01 Notice to Noteholders 84
Section 14.02 Notice to the Trustee or the Committee 85
Section 14.03 Notice to the Company 85
ARTICLE FIFTEEN - CONCERNING THE TRUSTEE
Section 15.01 Trust Indenture Legislation 85
Section 15.02 Rights and Duties of Trustee 86
Section 15.03 Evidence, Experts and Advisors 87
Section 15.04 Documents, Moneys, etc. Held by Trustee 88
Section 15.05 Action by Trustee to Protect Interests 88
Section 15.06 Trustee Not Required to Give Security 88
Section 15.07 Protection of Trustee 88
Section 15.08 Replacement of Trustee 89
Section 15.09 Conflict of Interest 90
Section 15.10 Acceptance of Trust 90
Section 15.11 Future Conflict of Interest 90
ARTICLE SIXTEEN - COMMITTEE OF SERIES A NOTEHOLDERS
Section 16.01 Establishment of Committee 91
Section 16.02 Indemnity of Committee Members 92
ARTICLE SEVENTEEN - EXECUTION
Section 17.01 Counterparts and Formal Date 93
EXHIBITS
Exhibit A - Form of Series Al Note (Registered) A-1
Exhibit B - Form of Series A2 Note (Registered) B-1
Exhibit C - Form of Series B Note (Registered) C-1
Exhibit D - Form of Series A2 Note (Bearer) D-1
Exhibit D.l - Interest Coupon (Series A2 Note) D-1
Exhibit E - Form of Series B Note (Bearer) E-l
Exhibit E.l - Interest Coupon (Series B Notes) E-1
Exhibit F - Form of Letter of Transmittal G-1
Exhibit G - Form of Warrant Indenture I-1
Exhibit H - Form of Agency Agreement J-1
Exhibit I - Form of General Security Agreement I-1
Exhibit J - Form of Share Pledge Agreement J-1
Exhibit K - Form of Guarantee K-1
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4.
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Exhibit L - Form of Guarantee Pledge Agreement L-1
Exhibit M - Form of Guarantee Security Agreement M-1
Exhibit N - Power of Attorney (Goran) N-1
Exhibit O - Power of Attorney (Guarantor) O-1
SCHEDULE
Schedule 1 - List of 1992 Related Party Compensation (s.6.02)
Schedule 2 - List of Existing Transactions within Goran Group (s.6.02)
</TABLE>
5.
<PAGE> 7
THIS AMENDED AND RESTATED TRUST INDENTURE made as of the 29th day of
December, 1992.
B E T W E E N:
GORAN CAPITAL INC., a corporation incorporated under
the laws of Canada
(hereinafter called the "Company")
OF THE FIRST PART
- and -
MONTREAL TRUST COMPANY OF CANADA, a trust company
incorporated under the laws of Canada
(hereinafter called the "Trustee")
OF THE SECOND PART
WHEREAS the Company (formerly called Pafco Financial Holdings Ltd.)
entered into a trust indenture dated as of December 30, 1986 (such trust
indenture as supplemented and amended prior to the date of this Trust Indenture
is referred to herein as the "Original Indenture") with Guaranty Trust Company
of Canada;
AND WHEREAS pursuant to a supplemental trust indenture dated as of
March 9, 1992, the Trustee replaced Guaranty Trust Company of Canada as the
trustee under the Original Indenture;
AND WHEREAS the Company now wishes to, and has been authorized
pursuant to an extraordinary resolution of the Original Noteholders passed at a
meeting held on December 8, 1992, amend and restate the Original Indenture;
AND WHEREAS all necessary resolutions of the directors of the Company
have been passed and other proceedings have been taken and complied with to
make this Trust Indenture and the execution thereof by the Company legal and
valid;
AND WHEREAS the foregoing recitals are made as representations and
statements of fact by the Company and not by the Trustee;
NOW THEREFORE THIS INDENTURE WITNESSES THAT AND IT IS HEREBY
COVENANTED, AGREED AND DECLARED as follows:
<PAGE> 8
2.
ARTICLE ONE
GENERAL
Section 1.01 Interpretation: In this Trust Indenture, in addition to the terms
defined elsewhere herein:
(a) "affiliate" means any person who or which, directly or
indirectly, controls or is controlled by or is under common
control with the Company, and, for the purposes of this
definition, "control" (including with correlative meanings,
the terms "controlled by" and "under common control with")
means the power to direct or cause the direction of the
management and policies of any person, whether through the
ownership of voting shares or by contract or otherwise;
(b) "After-Acquired Property" has the meaning attributed to it in
Section 6.04;
(c) "Agency Agreement" means an amended and restated paying agency
agreement made as of the Effective Date among the Company, the
Principal Paying Agent, the Paying Agents, the Transfer
Agents, the Registrar and the Trustee substantially in the
form of the amended and restated paying agency agreement
attached hereto as Exhibit H;
(d) "Amended Notes" means, collectively, the Series Al Notes, the
Series A2 Notes and the Series B Notes;
(e) "Applicable Legislation" has the meaning attributed to it in
Section 15.01;
(f) "auditors of the Company" means an independent public
accountant or independent firm of public accountants appointed
as auditor or auditors of the Company and approved by the
Trustee;
(g) "Bearer Amended Notes" means Amended Notes in bearer form;
(h) "Bearer Notes" has the meaning attributed to it in Subsection
2.05(c);
(i) "Bearer Original Notes" means Original Notes in bearer form;
(j) "Borrowed Money" means money borrowed, premium, if any, and
interest in respect thereof and all other liabilities under
any note, bond, debenture or other evidence of indebtedness
whether or not issued as consideration for assets or services
but excluding all such indebtedness and liabilities incurred
solely in relation to the
<PAGE> 9
3.
ordinary course of business of any Subsidiary as an insurance
company;
(k) "business day" means any day other than a Saturday or Sunday
on which banks are open for business in the relevant place of
payment and, in the case of payment by transfer to a Canadian
dollar account, on which dealings in foreign currencies may be
carried on both in Toronto and in such place of payment;
(l) "certificate of the Company", "order of the Company" and
"request of the Company" mean respectively a written
certificate, a written order and a written request, in each
case signed in the name of the Company by its chairman of the
board or president or executive vice-president or a
vice-president or a director and, in addition, by its
secretary or treasurer, or secretary treasurer if the offices
of secretary and treasurer shall be combined, or
assistant-secretary or assistant-treasurer or a director, and
may consist of one or more instruments so executed;
(m) "certified resolution" means a copy of a resolution certified
by the secretary or an assistant-secretary of the Company
under its corporate seal to have been passed by the directors
and to be in full force and effect on the date of such
certification, without modification or amendment;
(n) "Charged Property" means all property and assets, present and
future, of the Company or any Subsidiary which at the
particular time are subject to (or required by this Indenture
to be subject to) the Series A Lien;
(o) "Collateral" means cash, a bank draft or letter of credit of a
Canadian chartered bank acceptable to the Trustee, a surety
bond of an insurer carrying on business in Canada acceptable
to the Trustee or other security satisfactory to the Trustee;
(p) "Committee" means the committee of holders of Series A Notes
established pursuant to Article Sixteen;
(q) "Common Shares" means the common shares which the Company is
authorized to issue from time to time;
(r) "Company" means the Party of the First Part and also every
successor company which shall have complied with the
provisions of Article Nine;
(s) "Compensation Limit" means:
(i) in respect of the Company's fiscal year ending
December 31, 1992, U.S. $1,050,000 ; and
<PAGE> 10
4.
(ii) in respect of each fiscal year of the Company ending
after December 31, 1992, the amount equal to the
aggregate of:
(A) the Compensation Limit established for the
immediately preceding fiscal year (the "Base
Amount"), plus
(B) the amount determined by multiplying the Base
Amount by the lesser of
(I) 5%, and
(II) expressed as a percentage, the U.S.
consumer price index for the 12
month period ended on September 30
of the preceding year;
and for purposes of this definition of "Compensation Limit" the
term "U.S. consumer price index" means the measure of change in
consumer prices as determined by a monthly survey conducted by
the U.S. Bureau of Labour Statistics;
(t) "Consolidated" means the consolidation of the accounts of each
Subsidiary with those of the Company, if and to the extent the
accounts of each such Subsidiary would normally be
consolidated with those of the Company, all in accordance with
Generally Accepted Accounting Principles;
(u) "counsel" means a barrister and solicitor or firm of
barristers and solicitors (who may be counsel for the Company)
acceptable to the Trustee;
(v) "Coupons" means, as and when applicable, the interest coupons
originally attached to the Bearer Original Notes or the
interest coupons attached to the Bearer Amended Notes being in
the form or substantially in the form attached hereto as
Exhibit D.1 (in the case of Series A2 Notes) and Exhibit E.1
(in the case of Series B Notes);
(w) "Debt" means, at any time, all amounts that, in conformity
with Generally Accepted Accounting Principles, would be
classified as debt on a Consolidated balance sheet of the
Company including, without limitation, all bank and other
operating and term debt, all Prior Indebtedness, all
indebtedness evidenced by the Series B Notes and all debt
subordinated to the Series A Notes, but excluding trade
accounts payable in the ordinary course of business;
(x) "deemed" means deemed conclusively;
<PAGE> 11
5.
(y) "Delivery Event" has the meaning attributed to it in Subsection
6.02(a);
(z) "director" means a director of the Company for the time being,
and reference without more to action by the directors means
action by the directors of the Company as a board or, whenever
empowered, action by an executive committee of the board;
(aa) "Effective Date" means the date of this Trust Indenture, being
December 29, 1992;
(bb) "Election" means the election made by or on behalf of an
Original Noteholder on a proxy submitted for use at the
meeting of the Original Noteholders at which this Trust
Indenture was authorized, sanctioned, and approved to amend
the attributes of his Original Notes to the attributes of one
or more of the Amended Notes;
(cc) "Equity" means, at any particular time, the outstanding share
capital of the Company and other amounts, including retained
earnings and minus any deficit, that, in conformity with
Generally Accepted Accounting Principles, would be classified
as shareholders' equity on a Consolidated balance sheet of the
Company;
(dd) "Euro-clear" means The Euro-clear System;
(ee) "Event of Default" has the meaning attributed to it in Section
8.01;
(ff) "Extraordinary Resolution" has the meaning attributed to it in
Article Eleven and "Series A Extraordinary Resolution" means
an Extraordinary Resolution passed solely and exclusively by
the holders of Series A Notes at a meeting of the holders of
Series A Notes called for such purpose and "Series B
Extraordinary Resolution" means an Extraordinary Resolution
passed solely and exclusively by the holders of Series B Notes
at a meeting of holders of Series B Notes called for such
purpose;
(gg) "Financing Leases" means (i) any lease of property, real or
personal, the then present value of the minimum rental
commitment thereunder of which should (in accordance with
generally accepted accounting principles of the jurisdiction
in which the lessee is located) be capitalized on a balance
sheet of the lessee, and (ii) any other lease of property,
real or personal, the obligations under which are capitalized
on a Consolidated balance sheet of the Company;
(hh) "General Security Agreement" means a general security
agreement in substantially the form of the general security
agreement attached hereto as Exhibit I and includes any
instrument supplemental or ancillary thereto or in
implementation thereof;
<PAGE> 12
6.
(ii) "Generally Accepted Accounting Principles" means generally
accepted accounting principles, consistently applied, that are
in effect from time to time in Canada or, in the case of any
Subsidiary, in the jurisdiction of its incorporation;
(jj) "Goran Group" means, collectively, the Company and each
corporation that is, at the relevant time, a Subsidiary of the
Company;
(kk) "Guarantee Agreement" means a guarantee agreement
substantially in the form of the guarantee agreement attached
hereto as Exhibit K and includes any instrument supplemental
or ancillary thereto or in implementation thereof;
(ll) "Guarantee Pledge Agreement" means a share pledge agreement
substantially in the form of the pledge agreement attached
hereto as Exhibit L and includes any instrument supplemental
or ancillary thereto or in implementation thereof;
(mm) "Guarantee Security Agreement" means a general security
agreement substantially in the form of the guarantee security
agreement attached hereto as Exhibit M and includes any
instrument supplemental or ancillary thereto or in
implementation thereof;
(nn) "Indebtedness" means the aggregate of (i) all indebtedness for
Borrowed Money or for the deferred purchase price of property
or services, (ii) all monetary or other financial obligations
under Financing Leases and (iii) all monetary or other
financial obligations in respect of letters of credit (except
letters of credit issued by any Subsidiary that is principally
engaged in the insurance business to provide credit support
for insurance obligations undertaken in the ordinary course of
such business), acceptances or similar obligations;
(oo) "Initial Principal Amount" means, in respect of Series Al
Notes, Series A2 Notes or Series B Notes, as applicable, the
principal amount thereof outstanding at 12:02 a.m. on the
Effective Date;
(pp) "Interest Payment Date" means each date on which interest on
the Notes, or any of them, is payable pursuant to this
Indenture;
(qq) "Letter of Transmittal" means a letter of transmittal
substantially in the form of the letter of transmittal
attached hereto as Exhibit F;
(rr) "Lien" means any mortgage, charge, pledge, lien, privilege,
security intrest, hypothec, cessation and
<PAGE> 13
7.
transfer, lease of real property or other encumbrance, whether
fixed or floating, upon or with respect to any property of any
kind of the Company whether real, personal or mixed, tangible
or intangible, moveable or immoveable, now owned or hereafter
acquired;
(ss) "Noteholders" or "holders" means,, in respect of the Bearer
Notes, the bearers from time to time of such Notes and, in
respect of the Registered Notes, the registered owners from
time to time of such Notes;
(tt) "Noteholders" Request" means an instrument signed in one or
more counterparts by the holder or holders of not less than
25% in principal amount of the Notes outstanding for the time
being, requesting the Trustee to take some action or
proceeding specified therein and "Series A Noteholders'
Request" means an instrument making such a request so signed
by the holder or holders of not less than 25% in principal
amount of the Series A Notes outstanding for the time being
and "Series B Noteholders' Request" means an instrument making
such a request so signed by the holder or holders of not less
than 25% in principal amount of the Series B Notes outstanding
for the time being;
(uu) "Notes" means the notes of the Company issued and certified
hereunder and for the time being outstanding including, as and
when applicable, the original Notes and the Amended Notes and,
for purposes of Article Four, the term "Notes" shall include
the Coupons relating to the Bearer Amended Notes;
(VV) "Original Indenture" has the meaning attributed to it in the
first recital hereof;
(ww) "Original Notes" means the Notes,, whether in bearer form or
registered form, having the attributes prescribed in the
Original Indenture and "Original Noteholders" means, in
respect of Bearer Original Notes, the bearers of the Bearer
Original Notes and, in respect of Registered Original Notes,
the registered owners of the Registered Original Notes;
(xx) "Paying Agents" means the paying agents appointed from time to
time pursuant to the Agency Agreement;
(yy) "Periodic Payments" has the meaning attributed to it in
Subsection 2.09(a);
(zz) "Permitted Indebtedness" means, at any particular time, with
respect to the company and its Subsidiaries, any Indebtedness
that is:
<PAGE> 14
8.
(i) owed by one member of the Goran Group to another member of the
Goran Group provided and to the extent that the incurring or
creation of such Indebtedness does not directly or indirectly
result in or cause any default under the Senior Indebtedness;
(ii) an amount not exceeding U.S. $468,408 in respect of a mortgage
bond registered against the head office premises (the "IGF
Premises") of IGF Insurance Corporation (the "IGF Bond");
(iii) Indebtedness outstanding on the Effective Date under
Financing Leases in an aggregate principal amount not
exceeding U.S. $850,000 in respect of the Goran Group as a
whole;
(iv) unsecured Indebtedness in an amount not exceeding U.S.
$1,500,000 payable by the Company to Pembridge Capital Inc. in
respect of unallocated loss adjustment expenses;
(v) unsecured Indebtedness incurred in the ordinary course of
business of the Goran Group for (A) trade accounts payable or
(B) operating leases for premises and equipment used by the
Goran Group for the purpose of carrying on its insurance
business;
(vi) Prior Indebtedness;
(vii) Indebtedness owing under a line of credit in favor of IGF
Insurance Corporation relating to crop insurance written by
such Subsidiary in the United States not exceeding in the
aggregate U.S. $2,000,000;
(viii) fully subordinated and postponed to the indebtedness evidenced
by the Series A Notes in a manner satisfactory to the
Committee such that no principal, interest or other payments,
except as permitted by the Committee, may be made in respect
of such Indebtedness so long as any Series A Notes are
outstanding;
(ix) Indebtedness evidenced by the Series B Notes; and
(x) any other Indebtedness that has been disclosed in writing by
the Company or any Subsidiary to, and which has been accepted
by, the holders of Series A Notes by way of Series A
Extraordinary Resolution or in writing by the Committee;
<PAGE> 15
9.
(aaa) "Permitted Liens" means, at any particular time, with respect to the
Company and its Subsidiaries, any one or more of the following:
(i) any Lien for taxes, rates and assessments not yet due or, if
due, the validity of which is being contested diligently and
in good faith by appropriate proceedings by the Company or any
Subsidiary, as the case may be, and liens for the excess of
the amount of any past due taxes for which a final assessment
has not been received over the amount of such taxes as
estimated and paid;
(ii) any Lien in respect of any judgment rendered, which is being
contested diligently and in good faith by appropriate
proceedings by the Company or any Subsidiary, as the case may
be, and which does not have a material adverse effect on the
ability of the Company or any of the Subsidiaries to conduct
their respective businesses;
(iii) any Lien howsoever ranking for which provision has been made
by the deposit with the Trustee of Collateral in an amount
sufficient to pay the same and all interest and costs in
connection therewith at maturity;
(iv) any Liens against the IGF Premises securing the IGF Bond;
(v) the Series A Lien;
(vi) Liens securing Purchase Money Obligations, limited in each
case to the property acquired in the transaction in which such
Purchase Money Obligation was incurred;
(vii) any Liens securing the Senior Indebtedness;
(viii) Liens representing Financing Leases;
(ix) any Liens against the property on which the Highlander Inn is
located securing the U.S. $2,000,000 and U.S. $650,000
mortgages registered against the property on which the
Highlander Inn is located; and
(x) any other Lien that has been disclosed in writing by the
Company or any Subsidiary to, and which has been accepted by
the holders of Series A Notes by way of Series A Extraordinary
Resolution or in writing by the Committee;
<PAGE> 16
10.
(bbb) "person" means an individual, a corporation, an unincorporated
association, a partnership, a trust or trustee, an
unincorporated organization or a government or political
subdivision thereof; and pronouns have a similar extended
meaning;
(ccc) "Principal Paying Agent" means the principal paying agent
appointed from time to time pursuant to the Agency Agreement;
(ddd) "Principal Repayment Date" means each date on which a
principal payment on the Series A Notes, or any of them, is
payable pursuant to this Indenture;
(eee) "Prior Indebtedness" means the Senior Indebtedness and the
principal of, accrued and unpaid interest on and all other
liabilities and obligations (including, without limitation,
fees, costs and expenses) in respect of the Indebtedness
evidenced by the Series A Notes;
(fff) "Purchase Money Obligations" means obligations of the company
or any Subsidiary incurred or assumed in the ordinary course
of business in connection with the purchase of property to be
used in its business;
(ggg) "Record Date" means the fifteenth day prior to the applicable
Interest Payment Date as set out in Subsection 2.03(a) or
Subsection 2.04(a) or applicable Principal Repayment Date as
set out in Subsections 2.03(b) or (c), as the case may be;
(hhh) "redemption date" means, in respect of the redemption of any
Note, the date specified in the notice of such redemption as
the date on which such Note shall be redeemed;
(iii) "Registered Amended Notes" means Amended Notes in registered
form;
(jjj) "Registered Notes" has the meaning attributed to it in
Subsection 2.05(b);
(kkk) "Registered Original Notes" means Original Notes in registered
form;
(lll) "Registrar" means the registrar appointed from time to time
pursuant to the Agency Agreement;
(mmm) "Related Party" at any particular time means any person who is
at any time related or not at arm's length (within the meaning
of the Income Tax Act (Canada)) to, or is an associate (within
the meaning of the Securities Act (Ontario)) of (i) G. Gordon
Symons or any member of his immediate family at such time,
(ii) the controlling
<PAGE> 17
11.
shareholders of the Company at such time or (iii) any member
of the Goran Group at such time;
(nnn) "Relevant Date" means the later of (i) the date on which
payment in respect of a Note or Coupon becomes due and payable
and (ii) if the full amount of the moneys payable on such due
date has not been received in Toronto by the Principal Paying
Agent or the Trustee on or prior to such due date, the date on
which the full amount of such moneys having been received,
notice that such moneys have been so received is published in
accordance with the notice provisions set out in Section
14.01;
(ooo) "Replacement Notice" has the meaning attributed to it in
Subsection 3.02(a);
(ppp) "Replacement Shares" has the meaning attributed to it in
Subsection 2.02(c);
(qqq) "Security Documents" means, collectively, the General Security
Agreement, the Share Pledge Agreement, each Guarantee
Agreement, each Guarantee Security Agreement and each
Guarantee Pledge Agreement and each other document deemed to
be a Security Document pursuant to this Indenture including,
without limitation, Subsection 6.02(m) and Subsection 6.03(a);
(rrr) "Senior Indebtedness" means the Indebtedness outstanding on
December 8, 1992 and as reduced from time to time pursuant to
the amended and restated credit agreement dated as of June 3,
1992 between SIG Indiana and the Senior Lender as the same may
be amended, supplemented or otherwise modified from time to
time and, subject to the approval of the Committee, any
Indebtedness in replacement of, or substitution for, such
Indebtedness; provided that, notwithstanding any other
provision of this Indenture or any other document, at no time
shall the principal amount of the Senior Indebtedness be
greater than the amount (the "Maximum Senior Indebtedness")
equal to the lesser of (i) U.S. $5,500,000, and (ii) the
minimum principal amount to which such Indebtedness has been
reduced and provided further that any such Indebtedness in
excess of the Maximum Senior Indebtedness shall not be Senior
Indebtedness for the purposes of this Trust Indenture;
(sss) "Senior Indebtedness Default" means:
(i) the declaration of the Senior Indebtedness to be due
and payable prior to the stated maturity thereof
following the occurrence of an event which permits
the Senior Lender to make such declaration; or
<PAGE> 18
12.
(ii) the non-payment in full of any principal amount of
the Senior Indebtedness upon its stated maturity
(other than maturity pursuant to any instalment
payment obligation);
(ttt) "Senior Lender" and "holder(s) of Senior Indebtedness" means
Chemical Bank, as successor by merger to Manufacturers Hanover
Trust Company, and its successors and assigns and any other
holder(s) of Senior Indebtedness approved by the Committee
from time to time, in each case in its capacity, or their
capacities, as lender or lenders of the Senior Indebtedness;
(uuu) "Series A Default" has the meaning attributed to it in
Subsection 8.01(b);
(vvv) "Series A Lien" means each and every Lien held by the Trustee
for the benefit of the holders of Series A Notes including,
without limitation, pursuant to the Security Documents;
(www) "Series A Noteholders' Resolution" means a resolution, other
than a Series A Extraordinary Resolution, of the holders of
Series A Notes passed in the manner prescribed in Article
Eleven;
(xxx) "Series A Notes" means Notes having the attributes prescribed
in Section 2.03 and, for purposes of Article Four, the term
"Series A Notes" shall include the Coupons relating to Series
A Notes in bearer form;
(yyy) "Series A1 Notes" means Series A Notes having the attributes
as to repayment of principal prescribed in Subsection 2.03(b);
(zzz) "Series A2 Notes" means Series A Notes having the attributes
as to repayment of principal prescribed in Subsection 2.03(c);
(aaaa) "Series B Notes" means Notes having the attributes prescribed
in Section 2.04 and, for the purposes of Article Four, the
term "Series B Notes" shall include the Coupons relating to
Series B Notes in bearer form;
(bbbb) "Share Pledge Agreement" means a share pledge agreement in
substantially the form of the share pledge agreement attached
hereto as Exhibit J;
(cccc) "Specific Series A Lien" means the Series A Lien on the
Specifically Charged Property;
(dddd) "Specifically Charged Property" means the property and assets
of the Company now or hereafter secured, granted, transferred,
assigned, mortgaged, pledged and/or charged
<PAGE> 19
13.
hereunder, or required by any Security Documents to be, as and
by way of a fixed and specific mortgage, pledge, assignment
and charge to and in favour of the Trustee;
(eeee) "Subsidiary" means any corporation of which more than 50% of
the voting shares (provided that the ownership of such shares
confers the right at all times to elect at least a majority of
the board of directors of such corporation) are now or
hereafter owned, directly or indirectly, by or for the Company
and/or by or for any corporation in like relation to the
Company and includes any corporation in like relation to a
Subsidiary;
(ffff) "successor company" has the meaning attributed to it in
Article Nine;
(gggg) "SIG Indiana" means Symons International Group, Inc., an
Indiana corporation and a Wholly-Owned Subsidiary of the
Company;
(hhhh) "Transfer Agents" has the meaning attributed to it in Section
2.08;
(iiii) "Trust Indenture", "Indenture", "herein", "hereby" and similar
expressions mean or refer to this amended and restated trust
indenture and any indenture, deed or instrument supplemental
or ancillary hereto; and the expressions "Article",
"Section", "Subsection", "paragraph", "subparagraph" and
"clause" followed by a number and/or letter mean and refer to
the specified Article, Section, Subsection, paragraph,
subparagraph or clause of this Trust Indenture;
(jjjj) "Trustee" means the Party of the Second Part and its successor
for the time being in the trusts hereby created;
(kkkk) "U.S. person" means any natural person resident in the United
States, a corporation, partnership or other entity organized
under the laws of the United States or, any estate of which
any executor or administrator is a U.S. Person, any trust of
which any trustee is a U.S. Person, any agency or branch of a
foreign entity located in the United States, any
non-discretionary custodial account or similar account held by
a dealer or other fiduciary for the benefit or the account of
a U.S. person and any discretionary custodial account or
similar account held by a dealer or other professional
fiduciary organized or incorporated, or, if an individual,
resident, in the United States or any corporation, partnership
or other entity organized or incorporated under the laws of a
jurisdiction other than the United States if formed by a U.S.
person principally for the purpose of investing in
<PAGE> 20
14.
securities not registered under the Securities Act of 1933
(United States);
(llll) "Underlying Shares" means the Common Shares or other
securities issuable on exercise of the Warrants;
(mmmm) "United States" means the United States of America, its
territories and possessions, any state thereof and the
District of Columbia;
(nnnn) "voting shares" means shares of any class of any corporation
having under all circumstances the right to elect at least a
majority of the board of directors of such corporation,
provided that, for the purposes of this definition, shares
which only carry the right to vote conditionally on the
happening of an event shall not be considered voting shares
nor shall any shares be deemed to cease to be voting shares
solely by reason of a right to vote accruing to shares of
another class or classes by reason of the happening of such
event;
(oooo) "Warrant Indenture" means a warrant indenture substantially in
the form of the warrant indenture attached hereto as Exhibit G;
(pppp) "Warrants" means the common share purchase warrants of the
Company to be issued under the Warrant Indenture, each one of
which will initially entitle the holder thereof to purchase
one Common Share at a price per share equal to the greater of
(i) $3.00 and (ii) 110% of the average closing price of the
Common Shares on The Toronto Stock Exchange for the 15 trading
days immediately following December 8, 1992; and
(qqqq) "Wholly-Owned Subsidiary" means a Subsidiary all of the shares
of every class of which are owned, directly or indirectly, by
the Company.
Words importing the singular number shall include the plural
and vice versa and words importing the masculine gender shall include the
feminine and neuter genders.
Any reference in this Indenture to any Act or section thereof
shall be deemed to be a reference to such Act or section as amended or
re-enacted from time to time.
Section 1.02 Meaning of "Outstanding": Every Note certified or authenticated
and delivered by or on behalf of the Trustee hereunder shall be deemed to be
outstanding until it shall be cancelled or delivered to the Registrar or the
Principal Paying Agent for cancellation or moneys for the payment thereof shall
be set aside under Section 13.04, provided that:
<PAGE> 21
15.
(a) Notes which have been partially redeemed shall be deemed to be
outstanding only to the extent of the unredeemed part of the
principal amount thereof;
(b) where a new Note has been issued in substitution for a Note
which has been lost, stolen or destroyed, only one of them
shall be counted for the purpose of determining the aggregate
principal amount of Notes outstanding;
(c) Notes which have become void pursuant to Section 1.05 shall
be deemed not to be outstanding; and
(d) for the purpose of any provision of this Indenture entitling
holders of outstanding Notes to vote, sign consents, requests
or other instruments or take any other action under this
Indenture, Notes owned, directly or indirectly, legally or
equitably, by the Company or any affiliate thereof shall be
disregarded except that:
(i) for the purpose of determining whether the Trustee
shall be protected in relying on any such vote,
consent, request or other instrument or other action
only the Notes which the Trustee knows are so owned
shall be so disregarded; and
(ii) Notes so owned which have been pledged in good faith
other than to the Company or any affiliate thereof
shall not be so disregarded if the pledgee shall
establish to the satisfaction of the Trustee the
pledgee's right to vote such Notes in his discretion
free from the control of the Company or such
affiliate.
Section 1.03 References to Dollars: As used herein and unless
otherwise provided, the dollar sign ($) and the expressions "dollars" and
"Canadian dollars" shall be deemed to refer to currency of Canada.
Section 1.04 Calculation of Interest: In the event that interest
payable hereunder on any Notes is required to be calculated for a period of
less than one year, it will be calculated on the basis of a 360 day year
consisting of 12 months of 30 days each and in the case of an incomplete month
the actual number of days elapsed. For the purposes of the Interest Act
(Canada) the yearly rate of interest for that portion of any period of less
than one year falling within a particular year is the interest rate set forth
herein for such interest period multiplied by a fraction of which:
(a) the numerator is the product of (i) the actual number of days
in the year commencing on the first day of such period,
multiplied by (ii) the sum of (y) the product of 30 multiplied
by the number of complete months elapsed in such period and
(z) the actual number of days elapsed in any incomplete month
in such period; and
<PAGE> 22
16.
(b) the denominator is the product of (i) 360 multiplied by (ii)
the actual number of days in such period.
For the purposes of clause (a) of this Section, each month
shall be deemed to commence on the same day as the day of the month from which
interest is calculated.
Section 1.05 Prescription: Each Note and Coupon shall become void
unless presented for payment within a period of 10 years and five years,
respectively, from the Relevant Date in respect thereof.
Section 1.06 Headings, etc.: The division of this Indenture
into Articles, Sections and Subsections, the provision of a table of contents
and the insertion of headings are for convenience of reference only and shall
not affect the construction or interpretation hereof.
Section 1.07 Applicable Law: This Indenture, the Notes and the
Coupons shall be construed in accordance with the laws of the Province of
Ontario and the laws of Canada applicable therein and shall be treated in all
respects as Ontario contracts. The Company and the Trustee hereby attorn to the
non-exclusive jurisdiction of the courts of Ontario.
Section 1.08 Entire Agreement: This Indenture constitutes the
entire agreement between the Company, the Trustee and the Noteholders and
supersedes all prior and contemporaneous agreements, understandings,
negotiations and discussions, whether oral or written between the Company, the
Trustee and the Noteholders, including but not limited to any correspondence
exchanged between the Company and any Noteholder in connection with the subject
matter hereof and any information set forth in the management information
circular and proxy statement dated November 4, 1992 of the Company mailed and
distributed in connection with the meeting of Original Noteholders held on
December 8, 1992 and there are no warranties, representations or other
agreements between the Company, the Trustee and the Noteholders in connection
with the subject matter hereof except as specifically set forth herein.
Section 1.09 Severability: Any provision of this Indenture which
is prohibited or unenforceable in any applicable jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 1.10 Time: Time shall be of the essence of this Indenture.
<PAGE> 23
17.
ARTICLE TWO
THE NOTES
Section 2.01 Limitation of Issue: The aggregate principal amount
of Notes that may be issued and outstanding hereunder is limited to $20,000,000
in principal amount and the aggregate principal amount of Series B Notes that
may be issued and outstanding hereunder is limited to $2,400,000 in principal
amount and it is hereby acknowledged that Notes aggregating $20,000,000 in
principal amount were created and issued pursuant to the Original Indenture.
Section 2.02 Amendments to Notes:
(a) The attributes of the Original Notes are hereby amended
effective at 12:01 a.m. on the Effective Date in the following
manner:
(i) in the case of Original Noteholders who made an
Election, in accordance with the Elections of the
Original Noteholders so that the attributes of the
Original Notes of such Original Noteholders become
the attributes of one or more of the following:
(A) Series A1 Notes, with $1.00 principal amount
of Series Al Notes replacing $1.00 principal
amount of Original Notes held at 12:01 a.m.
on the Effective Date;
(B) Series A2 Notes, with $1.00 principal amount
of Series A2 Notes replacing $1.00 principal
amount of Original Notes held at 12:01 a.m.
on the Effective Date; or
(C) subject to Subsections 2.02(d) and (e),
Series B Notes, with $0.60 principal amount
of Series B Notes and 0.1 of a Common Share
replacing $1.00 principal amount of Original
Notes held at 12:01 a.m. on the Effective
Date; and
(ii) in the case of Original Noteholders who did not make
an Election, so that the attributes of the Original
Notes of such Noteholders become the attributes of
the Series A2 Notes, with $1.00 principal amount of
Series A2 Notes replacing $1.00 principal amount of
Original Notes held at 12:01 a.m. on the Effective
Date.
(b) Effective as of the Effective Date, the Company shall issue
to each Original Noteholder on the Effective Date 25 Warrants
for each $1,000 principal amount of Amended Notes which each
such original Noteholder is entitled to receive pursuant to
Subsection 2.02(a). The Warrants
<PAGE> 24
18.
shall be issued pursuant to the Warrant Indenture and
certificates representing such Warrants shall be delivered to
the original Noteholders in accordance with the provisions of
Section 3.01 or 3.02, as the case may be.
(c) Effective as of the Effective Date, the Company shall issue to
each Original Noteholder who has made an Election, and is
entitled, to receive Series B Notes, in replacement of 40% of
the aggregate principal amount of the Original Notes held by
such Original Noteholder (as contemplated by subparagraph 2.02
(a)(i)(C)), 100 Common Shares (the "Replacement Shares") for
each $1,000 principal amount of Original Notes in respect of
which such Election was made by such Original Noteholder.
(d) If Elections are made requesting the amendment of the
attributes of the Original Notes to the attributes of the
Series B Notes such that the Initial Principal Amount of the
Series B Notes would exceed $2,400,000, then each original
Noteholder making such an Election shall be deemed:
(i) to have made such Election only in respect of
Original Notes having an aggregate principal amount
equal to the amount obtained by multiplying the
aggregate principal amount of the Original Notes in
respect of which such Original Noteholder actually
made such Election by a fraction of which
(A) the numerator is $2,400,000, and
(B) the denominator is the aggregate principal
amount of the Original Notes in respect of
which such Elections were actually made; and
(ii) with respect to the balance of the aggregate
principal amount of the Original Notes in respect of
which such Original Noteholder actually made such
Election, to have elected to have the attributes of
such Original Notes become the attributes of Series
A2 Notes on the terms set out in subparagraph 2.02(a)
(i)(B).
(e) No certificates evidencing Notes other than in the
denominations set out in Section 2.05 will be issued. Each
holder of an Original Note who would otherwise be entitled to
an Amended Note in a denomination other than a denomination
set out in Section 2.05 will receive, in lieu of any such
certificate, a cash payment equal to the principal amount of
the Original Note for which such holder is not entitled by
virtue of this Subsection to receive a certificate evidencing
an Amended Note.
<PAGE> 25
19.
Section 2.03 Terms of Series A Notes:
(a) The Series A Notes shall be dated as of the Effective Date,
shall mature on December 30, 1998, and shall bear interest
from and including December 31, 1992 at the rate of 8% per
annum, with interest on overdue interest at the same rate,
calculated and payable semi-annually in arrears on June 30 and
December 30 in each year, the first such payment to be made on
June 30, 1993, but, in the case of Bearer Series A2 Notes,
only upon presentation and surrender of the Coupons relating
thereto as they shall severally mature.
(b) Beginning December 30, 1993 the Company shall repay to the
holders of Series Al Notes the principal amount of the Series
Al Notes outstanding in proportion to the principal amount of
Series Al Notes held by each such Noteholder at the applicable
Record Date in accordance with the following schedule:
Principal Aggregate Principal Amount of
Repayment Date Series Al Notes to be Repaid
----------------------- ---------------------------------
December 30, 1993 5% of Initial Principal Amount
December 30, 1994 10% of Initial Principal Amount
December 30, 1995 15% of Initial Principal Amount
December 30, 1996 20% of Initial Principal Amount
December 30, 1997 25% of Initial Principal Amount
December 30, 1998 25% of Initial Principal Amount
(c) Beginning December 30, 1993 the Company shall repay to the
holders of Series A2 Notes the principal amount of the Series
A2 Notes outstanding in proportion to the principal amount of
the Series A2 Notes held by each such Noteholder at the
applicable Record Date in accordance with the following
schedule:
Principal Aggregate Principal Amount of
Repayment Date Series A2 Notes to be Repaid
------------------ --------------------------------
December 30, 1993 5% of Initial Principal Amount
December 30, 1994 5% of Initial Principal Amount
December 30, 1995 5% of Initial Principal Amount
December 30, 1996 5% of Initial Principal Amount
<PAGE> 26
20.
December 30, 1997 5% of Initial Principal Amount
December 30, 1998 75% of Initial Principal Amount
For purposes of determining the entitlement of holders of a
Bearer Series A2 Note to receive a principal repayment constituting a Periodic
Payment, as provided for in this Subsection, the holder of such Note who
presents it for payment as provided for in Subsection 2.09(b) shall be
irrevocably deemed to have been the holder thereof on the applicable Record
Date.
Section 2.04 Terms of Series B Notes:
(a) The Series B Notes shall be dated as of the Effective Date,
shall mature on December 30, 1998, and shall bear interest
from and including December 31, 1992 at the rate of 8% per
annum, with interest on overdue interest at the same rate,
calculated and, subject to Subsection 2.04(d), payable
semi-annually in arrears on June 30 and December 30 in each
year, the first such payment to be made on June 30, 1993, but,
in the case of Bearer Series B Notes, only upon presentation
and surrender of the Coupons as they shall severally mature.
(b) Subject to Subsection 2.04(c), the Series B Notes shall be
repaid in full at maturity on December 30, 1998.
(c) Notwithstanding Subsections 2.04(a) and (b), no principal,
interest, or other obligations or any other amounts shall be
paid, redeemed or repaid on or in respect of the Series B
Notes until:
(i) the Prior Indebtedness and all principal, interest
and other obligations on or in respect thereof have
been paid, redeemed or repaid in full; and
(ii) all other Indebtedness ranking prior to the Series B
Notes and permitted pursuant to the terms of this
Indenture which is due and payable on or before
December 30, 1998 and all principal, interest and
other obligations on or in respect thereof have been
paid, redeemed or repaid in full;
provided that interest may be paid on the Series B Notes in
accordance with Subsection 2.04(a) unless and until an
Event of Default has occurred or an event of default under the
Senior Indebtedness has occurred, in which event no interest
shall be paid on the Series B Notes until such Event of
Default, or event of default, has been waived in accordance
with the provisions of this Trust Indenture or the instruments
or instruments evidencing the Senior Indebtedness, as the case
may be and, in the latter case, the Trustee or the Registrar
has received actual notice thereof. If an Event of Default
<PAGE> 27
21.
or an event of default under the Senior Indebtedness has
occurred which has not been waived in accordance with the
provisions of this Trust Indenture or the instrument or
instruments evidencing the Senior Indebtedness, as the case
may be, and the Trustee or the Registrar has actual notice of
such Event of Default or the Trustee or the Registrar has
received actual notice of an event of default under the Senior
Indebtedness from the Company or the Senior Lender, if the
Trustee or the Registrar or any other registrar or Transfer
Agent or the Principal Paying Agent or any other Paying Agent
shall receive from the Company or shall hold any amount for
payment in respect of the Series B Notes, such amount shall be
received and held in trust for the benefit of the Senior
Lender, the holders of the Series A Notes or the holders of
other Indebtedness ranking prior to the Series B Notes and
permitted pursuant to the terms of this Indenture, as the case
may be, and shall be paid over to the Senior Lender, the
holders of the Series A Notes, or the holders of other
Indebtedness ranking prior to the Series B Notes and permitted
pursuant to the terms of this Indenture, as the case may be,
for application to the payment of all liabilities and
obligations in respect of the Senior Indebtedness, the Series
A Notes or other Indebtedness ranking prior to the Series B
Notes and permitted pursuant to the provisions of this
Indenture remaining unpaid after giving effect to any payment
or distribution, or provision therefor, to the Senior Lender,
the holders of the Series A Notes or other Indebtedness
ranking prior to the Series B Notes and permitted pursuant to
the provisions of this Indenture. If the Trustee or the
Registrar or any other registrar or Transfer Agent or the
Principal Paying Agent or any other Paying Agent shall make
any payment to any holder of Series B Notes contrary to the
provisions of the preceding sentence, then such holder of
Series B Notes shall repay any amount so received to the
Trustee, to be held and applied by the Trustee in accordance
herewith.
Section 2.05 Forms of Notes:
(a) Notwithstanding any other provision of this Indenture:
(i) all Series Al Notes shall be issued as fully registered
Notes,
(ii) all Series A2 Notes and Series B Notes may be issued
either as fully registered Notes or in bearer form, and
(iii) Notes issued in Canada or to residents of Canada shall
be issued as fully registered Notes.
<PAGE> 28
22.
(b) All Notes issued as fully registered Notes shall be in
denominations of $5,000 and integral multiples thereof, shall
be substantially in the form of Exhibit A (for Series Al
Notes), Exhibit B (for Series A2 Notes) or Exhibit C (for
Series B Notes) attached hereto (the "Registered Notes")
without interest coupons attached and with such appropriate
insertions, omissions, substitutions and variations as are
required or permitted by this Indenture and shall bear such
distinguishing letters and/or numbers as the Trustee may
approve.
(c) The Notes in bearer form shall be issued in denominations of
$5,000, $50,000 and $500,000, substantially in the form of
Exhibit D (for Series A2 Notes) or Exhibit E (for Series B
Notes) (the "Bearer Notes") with Interest Coupons attached
representing the semi-annual interest payable thereon. The
Bearer Notes shall contain such appropriate insertions,
omissions, substitutions and other variations as are required
or permitted by this Indenture and may have such letters,
numbers or other marks or identifications and such legends or
endorsements placed thereon as may, consistent herewith, be
determined by the officers of the Company executing such Notes,
as evidenced by their execution of such Notes.
Section 2.06 Signature of Notes: All Notes shall be under the corporate seal
of the Company and shall be signed (either manually or by facsimile signature)
by the chairman of the board or the president or the executive vice-president or
a vice-president and by the secretary or an assistant-secretary or the treasurer
or a vice-president of the Company. A facsimile signature upon any of the Notes
shall for all purposes of this Indenture be deemed to be the signature of the
person whose signature it purports to be and to have been signed at the time
such facsimile signature is reproduced and notwithstanding that any person whose
signature, either manual or in facsimile, may appear on the Notes is not at the
date of this Indenture or at the date of the Notes or at the date of the
certifying and delivery thereof the chairman of the board, the president, the
executive vice-president, a vice-president, the secretary, an
assistant-secretary or the treasurer, as the case may be, of the Company, such
Notes shall, subject to authentication as provided below, be valid and binding
upon the Company and entitled to the benefits of this Indenture.
Section 2.07 Certification and Commencement of Interest:
(a) Except for Original Notes, no Note shall be issued or, if
issued, shall be obligatory, or shall entitle the holder to
the benefits of this Indenture,until it has been certified by
or on behalf of the Trustee substantially in the applicable
form set out in Exhibit A, Exhibit B, Exhibit C, Exhibit D, or
Exhibit E attached hereto, as the case may be, or in some other
form approved by the Trustee. Such certification on any Note
shall be
<PAGE> 29
23.
conclusive evidence that such Note was duly issued, is a valid
and binding obligation of the Company and that the holder is
entitled to the benefits hereof.
(b) The certificate of the Trustee signed on Notes shall not be
construed as a representation or warranty by the Trustee as to
the validity of this Indenture or of the Notes or their
issuance.
(c) The certificate of the Trustee signed on the said Notes shall,
however, be a representation or warranty by the Trustee that
the said Notes have been duly certified by or on behalf of
the Trustee pursuant to the provisions of this Indenture.
Section 2.08 Registers of Notes:
(a) The Company shall cause to be kept by and at the principal
office of the Registrar in the City of Toronto, and at such
other place or places, if any, and by the Registrar or by
such other registrar or registrars or transfer agent or
transfer agents appointed pursuant to the Agency Agreement (the
"Transfer Agents"), if any, as the Company with the approval of
the Trustee may designate, registers in which shall be entered
the names and addresses of the holders of the Registered Notes
of each series and particulars of the Registered Notes held by
such holders respectively. Such registration shall be noted on
the Registered Notes by the Registrar or other registrar or
Transfer Agents. No transfer of a Registered Note shall be
valid unless made on one of such registers by the registered
holder or his executors or administrators or other legal
representatives or his or their attorney duly appointed by an
instrument in writing in form and execution satisfactory to the
Registrar, upon compliance with such reasonable requirements
as the Company may from time to time agree upon with the
Registrar, the Trustee, the Transfer Agents and/or other
registrar and unless such transfer shall have been duly noted
on such Registered Note by the Registrar or other registrar or
Transfer Agents.
(b) The registers referred to in this Section shall at all
reasonable times be open for inspection by the Company,
by the Trustee and by any holder of Notes.
(c) The holder of a Registered Note may at any time and from time
to time have such Registered Note transferred at any of the
places at which a register is kept for the Registered Notes
pursuant to the provisions of this Section, in accordance with
such reasonable regulations as the Registrar may prescribe.
<PAGE> 30
24.
(d) The holder of a Registered Note may at any time and from time
to time have the registration of such Registered Note
transferred from the register in which the registration thereof
appears to another register kept pursuant to the provisions of
this Section, in accordance with such reasonable regulations as
the Registrar may prescribe.
(e) Neither the Company nor the Registrar nor any other registrar or
Transfer Agent shall be required (i) to make transfers or
exchanges of any Registered Notes on the day of or during the
10 business days next preceding any selection by the Trustee of
Registered Notes to be redeemed; or (ii) to make transfers or
exchanges of any Registered Note which has been selected or
called for redemption in whole or in part unless upon due
presentation of such Registered Note for redemption such
Registered Note or part shall not be redeemed.
(f) The Registrar and/or any registrar or Transfer Agent for any of
the Registered Notes and/or the Company shall not be charged
with notice of or be bound to see to the execution of any
trust, whether express, implied or constructive, in respect
of any Registered Note and may transfer the same on the
direction of the holder thereof, whether named as trustee or
otherwise, as though that person were the beneficial owner
thereof.
(g) Except in the case of the register required to be kept at the
City of Toronto, the Company, with the approval of the
Registrar, may at any time close any register for Registered
Notes and in that event shall transfer the records thereof to
another existing register or to a new register and thereafter
Registered Notes which were registered on such closed register
at the time of its closing shall be deemed to be registered on
such existing or new register as the case may be. In the event
that the register in any place is closed and the records
transferred to a register kept in another place, notice of such
change shall be given, in the manner provided in Section 14.01,
to the holders of the Registered Notes registered in the
register so closed.
(h) Every registrar and Transfer Agent shall, whenever requested so
to do by the Company or by the Registrar, furnish the Company
or the Registrar, as the case may be, with a list of the names
and addresses of holders of the Registered Notes registered on
the register or registers maintained by such registrar showing
the principal amount and serial numbers of such Registered
Notes held by each holder.
<PAGE> 31
25.
Section 2.09 Payments and Paying Agents:
(a) The person in whose name any Registered Note is registered
shall be deemed to be and regarded as the owner thereof for all
purposes of this Indenture. Payment of the principal due on
maturity on December 30, 1998 of any Registered Note shall be
made in lawful money of Canada, at the holder's option, subject
to any applicable laws or regulations, against presentation
and surrender of such Registered Note, at the specified
office of the Registrar or any of the Paying Agents. Subject to
Section 7.08, payments of interest and principal repayments,
other than those due on maturity on December 30, 1998
(collectively "Periodic Payments"), on any Registered Note
shall be made to any such registered holder whose name is shown
on the register at the close of business on the applicable
Record Date. Subject to Section 7.08, Periodic Payments on such
Registered Note shall be made in lawful money of Canada and
mailed to the registered holder thereof (or to the first-named
of joint holders) at his address appearing in the register
maintained by the Registrar or other registrar or Transfer
Agent. Upon application by such registered holder to the
specified office of the Registrar or any Paying Agent not less
than 15 business days prior to the due date for any Periodic
Payment in respect of a Registered Note, such payment may be
made by transfer to a Canadian dollar account maintained by the
payee with a bank in Toronto. Any payment made in accordance
with the foregoing provisions shall be a good and sufficient
discharge to the Company and to the Trustee and the Registrar
and to any other registrar and to any Paying Agent for the
amounts so paid.
The holder for the time being of any Registered Note shall be
entitled to the principal moneys and interest evidenced by
such Registered Note, free from all equities or rights of
set-off or counterclaim between the Company and the original
or any intermediate holder thereof, and all persons may act
accordingly and a transferee of a Registered Note shall,
after the appropriate form of transfer is lodged with the
Registrar or other registrar or Transfer Agent and upon
compliance with all other conditions in that behalf required
by this Indenture or by any conditions contained in or
endorsed on such Registered Note or by law, be entitled to be
entered on any one of the said registers as the owner of such
Registered Note free from all equities or rights of set-off or
counterclaim between the Company and his transferor or any
previous holder thereof, save in respect of equities of which
the Company is required to take notice by statute or by order
of a court of competent Jurisdiction.
<PAGE> 32
26.
(b) The Company, the Trustee, the Principal Paying Agent and the
Paying Agents may deem and treat the bearer of any Bearer Note
or Coupon appertaining thereto as the absolute owner of such
Note or Coupon, as the case may be, for the purpose of
receiving any payment due hereunder and for all other purposes
of this Indenture and the Agency Agreement whether or not any
such Note or Coupon shall be overdue and notwithstanding any
notation of ownership or other writing on such Note or Coupon.
Any payment in accordance with the foregoing provisions shall
be a good and sufficient discharge to the Company and to the
Trustee and to the Registrar and to any Paying Agent for the
amounts so paid. Payment of interest on the Bearer Notes shall
be made in lawful money of Canada, at the holder's option,
subject to any applicable laws or regulations, against
surrender of the Coupons at any specified office of any Paying
Agent. Payment of principal on the Bearer Notes payable at
maturity shall be made in lawful money of Canada, at the
holder's option, subject to any applicable laws or regulations,
against surrender of the Bearer Note at any specified office
of any Paying Agent. Payment of principal constituting a
Periodic Payment on the Bearer Notes shall be made in lawful
money of Canada, at the holder's option, subject to any
applicable laws or regulations against delivery of the Bearer
Note at any specified office of any Paying Agent and such
Paying Agent shall, in accordance with the Agency Agreement,
be authorized to make a notation of such payment on such Bearer
Note. Payments at the offices referred to above shall be made
by a cheque drawn on a Canadian dollar account or, at the
option of the holder, by wire transfer to a Canadian dollar
account maintained by the payee with a bank in Toronto.
Each Bearer Note should be presented for redemption
together with all unmatured Coupons appertaining thereto,
failing which the amount of any such missing unmatured Coupon
(or, in the case of payment not being made in full, that
proportion of the amount of such missing unmatured Coupon which
the sum of principal so paid bears to the total amount due on
redemption) will be deducted from the sum due for payment.
Each amount so deducted will be paid in the manner mentioned
above against surrender of the relevant missing Coupon not
later than five years from the Relevant Date. If the redemption
date is not an Interest Payment Date the interest accrued from
the preceding Interest Payment Date or the issue date, as the
case may be, shall be payable only against presentation of the
relevant Coupon.
If the due date for payment of any amount of principal or
interest in respect of any Bearer Note is not at any place of
payment a business day, then the holder thereof
<PAGE> 33
27.
will not be entitled to payment at the relevant place of
payment of the amount due until the next following business
day at the relevant place of payment and will not be entitled
to any further interest or other payment in respect of any such
delay.
(c) The Company shall pursuant to the Agency Agreement initially
appoint the Principal Paying Agent and the Paying Agents at
their specified offices as set out in the Agency Agreement.
The Company reserves the right at any time, with the prior
written approval of the Trustee, to vary or terminate the
appointment of any Paying Agent and appoint additional or other
Paying Agents or approve any change in the office through
which any Paying Agent acts, provided that it shall at all
times maintain a Paying Agent in Toronto and in a European city
which, so long as the Notes are listed on the Luxembourg Stock
Exchange, will be Luxembourg. Any removal or appointment of a
Paying Agent or any change in the specified office of a Paying
Agent shall only take effect (other than in the case of the
insolvency of the Paying Agent being removed when it shall be
of immediate effect) after not more than 60 nor less than 45
days' notice thereof shall have been given to Noteholders in
accordance with Section 14.01 hereof.
Section 2.10 Mutilation, Loss, Theft or Destruction of Notes: In case any Note
or Coupon shall at any time become mutilated, defaced, destroyed, stolen or
lost and such Note or Coupon (with the Note to which such Coupon appertains) or
evidence of the loss, theft or destruction thereof (together with the indemnity
hereinafter referred to and such other documents or proof as may be required)
shall be delivered to the specified office of the Registrar or to the specified
office of the Paying Agent in London, England, a new Note of like tenor and
date with appropriate Coupons, if any, shall be certified and delivered by the
Trustee at the office of the Registrar or at the office of the Paying Agent
in London, England in exchange for the Note so mutilated, or the Note to which
such mutilated Coupon appertains, or in lieu of the Note so destroyed, stolen
or lost, or in exchange for the Note to which such destroyed, stolen or lost
Coupon appertains (upon surrender of such Note with all appurtenant Coupons not
destroyed, stolen or lost), but, in the case of a defaced, destroyed,
stolen or lost Note or Coupon, only upon receipt by the Registrar or the said
Paying Agent of evidence satisfactory to the Trustee and the Company that such
Note or Coupon was defaced, destroyed, stolen or lost, and, if required by the
Trustee or the Company, upon receipt by the Registrar or the said Paying Agent
also of indemnity satisfactory to the Trustee and the Company. All expenses and
reasonable charges associated with procuring such indemnity and with the
preparation, authentication and delivery of a new Note or Coupon shall be borne
by the applicant for a new Note or Coupon. Any new or substituted Note
certified and delivered by the Trustee pursuant to the provisions of this
Section shall be in a form
<PAGE> 34
28.
approved by the Trustee and shall be entitled to the benefits of this Indenture
and rank equally in accordance with its terms with all other Notes of the same
series issued or to be issued hereunder.
Section 2.11 Transfer and Exchange of Notes:
(a) At the option of any Noteholder upon request confirmed in
writing Registered Notes may be exchanged for an equal
aggregate principal amount of Bearer Notes of the same series
upon certification that the beneficial owner thereof is not a
U.S. person. Bearer Notes issued upon exchange of a Registered
Note between a Record Date and the relevant Interest Payment
Date will be issued without the Coupon relating to such
Interest Payment Date and any Periodic Payment due on such
Interest Payment Date shall be made to the registered holder of
the Note on the Record Date.
(b) At the option of any Noteholder upon request confirmed in
writing Bearer Notes (with all unmatured Coupons
attached, except as provided below) may be exchanged for an
equal aggregate principal amount of Registered Notes of the
same series. Bearer Notes surrendered in exchange for
Registered Notes between a Record Date and the relevant
Interest Payment Date should be surrendered without the Coupon
relating to such Interest Payment Date.
(c) A Noteholder may exchange one $500,000 Bearer Note for 10
$50,000 Bearer Notes or 100 $5,000 Bearer Notes, and
vice versa, one $50,000 Bearer Note for 10 $5,000 Bearer
Notes, or 10 $5,000 Bearer Notes for one $50,000 Bearer Note at
any time prior to the date of final redemption of the Notes on
presentation of such Bearer Notes at the specified office of
the Principal Paying Agent or the Registrar or any other
registrar. Registered Notes of any denomination or series may
be exchanged for Registered Notes of any other authorized
denomination or denominations of the same series, any such
exchange to be for an equal principal amount of Registered
Notes.
(d) Bearer Notes may be presented for exchange, and Registered
Notes may be presented for exchange or transfer, at the
specified office of any Transfer Agent or, in the case of
Registered Notes at the specified office of the Registrar or
any other registrar, without service charge (other than the
cost of delivery) but upon payment of any taxes and other
governmental charges required to be paid. Any exchange or
transfer will be effected by the Transfer Agents or the
Registrar or any other registrar, as the case may be, being
satisfied with the documents of title and identity of the
person making the request, and subject to such requirements as
the
<PAGE> 35
29.
Company may from time to time agree upon with the Transfer
Agents, the Registrar and any other registrar and the Trustee.
Registered Notes may be exchanged or transferred (in whole or
in part) in the amount of $5,000 or integral multiples
thereof.
(e) Any Notes tendered for exchange shall be cancelled in
accordance with the provisions of Section 13.01 hereof.
Notes issued in exchange for Notes which at the time of
such issue have been selected or called for redemption at a
later date shall be deemed to have been selected or called for
redemption in the same manner and shall have noted thereon a
statement to that effect.
(f) The Company has, pursuant to the Agency Agreement, appointed the
Transfer Agents and Registrar at their specified offices as
set out therein. The Company reserves the right at any time,
with the prior approval of the Trustee, to vary or terminate
the appointment of any Transfer Agent or Registrar and appoint
additional or other Transfer Agents or Registrars or approve
any change in the office through which such Transfer Agent or
Registrar acts, but it will at all times maintain a Registrar
in Toronto and a Transfer Agent in a European city which, so
long as the Notes are listed on the Luxembourg Stock Exchange,
shall be Luxembourg. Any removal or appointment of a Transfer
Agent or Registrar or any change in the specified office of a
Transfer Agent or Registrar shall only take effect (other than
in the case of the insolvency of a Transfer Agent or Registrar
being removed when it shall be of immediate effect) after not
more than 60 nor less than 45 days' notice thereof shall have
been given to the Noteholders in accordance with Section 14.01
hereof.
Section 2.12 Payment of Additional Amounts:
(a) The Company covenants and agrees with the Trustee for the
benefit of the Trustee and the holders of Series A2
Notes, holders of Series B Notes and holders of Coupons
relating thereto (and for greater certainty not for the benefit
of holders of Series A1 Notes or holders of Coupons relating
thereto) that, so long as any Series A2 Notes or Series B Notes
remain outstanding, it will pay as additional interest on the
Series A2 Notes and Series B Notes such additional amounts as
are necessary in order that the net payment by the Company of
the principal of and interest payable on the Series A2 Notes,
Series B Notes or the Coupons relating thereto to any holder
thereof, after deduction or withholding of any present or
future taxes or duties of whatever nature imposed, levied,
collected, withheld or assessed in respect of any payments
hereunder, including additional amounts, by or within Canada or
any authority therein or thereof having
<PAGE> 36
30.
power to tax, will not be less than the amount provided in the
Series A2 Notes, Series B Notes or Coupons relating thereto to
be then due and payable had no such taxes or duties been
required to be withheld or deducted; provided, however, that
the foregoing obligation to pay additional amounts shall not
apply:
(i) to a person with whom the Company is not dealing at arm's
length within the meaning of the Income Tax Act (Canada);
(ii) to a holder who is subject to such taxes or duties (except
for any taxes exigible pursuant to Part XIII of the Income
Tax Act (Canada) or any replacement thereof) solely by
reason of his having some connection with Canada other
than the mere holding of such Series A2 Note, Series B
Note or Coupon relating thereto; or
(iii) to any Series A2 Note or Series B Note in respect of which
a holder thereof has delivered a certificate as to
Canadian residence upon a redemption of Series A2 Notes
or Series B Notes in accordance with Section 7.01,
following the time of delivery of such certificate.
Any reference in this Indenture to the payment of the principal of and
interest payable on the Series A2 Notes, Series B Notes or Coupons
relating thereto shall be deemed to refer also to any additional
amounts which may be payable under this Section.
(b) If at any time the Company or the Principal Paying Agent is
required by law to make any deduction or withholding
from any amount payable by it hereunder or under the Agency
Agreement (or if there is any change in the rates at which or
the manner in which such deductions or withholdings are
calculated), the Company shall promptly notify the Trustee.
(c) If the Company makes any payment hereunder in respect of which
it is required by law to make any deductions or withholdings,
in addition to the additional amounts required to be paid to
the holders of the Series A2 Notes, Series B Notes and Coupons
under Subsection 2.12(a), it shall pay the full amount
required to be deducted or withheld to the relevant taxation
or other authority within the time allowed for such payment
under applicable law and shall deliver to the Trustee within 30
days after it has made such payment to the applicable
authority, an original receipt (or a certified copy thereof)
issued by such authority evidencing the deduction or
withholding of all amounts so required to be deducted or
withheld.
<PAGE> 37
31.
ARTICLE THREE
REPLACEMENT OF NOTES
Section 3.01 Replacement of Registered Original Notes for Registered Amended
Notes:
(a) As soon as practicable after the Effective Date, the Company
shall send to all holders of Registered Original Notes
as of the close of business on the Effective Date a Letter of
Transmittal with respect to the replacement of Registered
Original Notes with Registered Amended Notes, Warrants and, in
the case of those Original Noteholders who made an Election.
and are entitled to receive Series B Notes, Replacement Shares.
Within 10 days following receipt of the Letter of Transmittal,
each holder of Registered Original Notes shall complete the
Letter of Transmittal and deliver the same, together with the
certificate or certificates representing the Registered
Original Notes of such holder, to the address set out in the
Letter of Transmittal. Within 10 days following receipt from a
holder of Registered Original Notes of the Letter of
Transmittal and the certificate or certificates representing
the Registered Original Notes of such holder, the Company shall
forward or cause the Trustee to forward to such holder
certificates representing the appropriate number and type of
Registered Amended Notes registered in the name of such holder,
a bearer certificate representing the appropriate number of
Warrants and, in the case of those holders who made an Election
and are entitled to receive Series B Notes, a certificate
representing the appropriate number of Replacement Shares
registered in the name of such holder. Certificates
representing Registered Amended Notes, Warrants and Replacement
Shares, if any, held by the Trustee that are not so replaced on
or before December 30, 1998 shall be redelivered by the Trustee
to the Company on demand and thereupon the Trustee shall be
released from all further liability with respect to the
issuance or replacement of certificates representing any such
Registered Amended Notes, Warrants and Replacement Shares.
Subject to Section 1.05, after such Registered Amended Notes,
Warrants and Replacement Shares are so redelivered to the
Company, holders of Registered Original Notes shall be entitled
to obtain the Registered Amended Notes, Warrants and
Replacement Shares from the Company.
(b) Despite Subsection 3.01(a), neither the Company nor the Trustee
shall be required to distribute Registered Amended Notes,
Warrants, Replacement Shares or Underlying Shares to any holder
of Registered Original Notes if such distribution would be
contrary to Applicable Legislation
<PAGE> 38
32.
or to the securities or other laws of Canada or any other
jurisdiction.
Section 3.02 Procedures for Replacement of Bearer Original Notes and Coupons
for Bearer Amended Notes and Coupons:
(a) As soon as practicable after the Effective Date, the Company
shall publish a notice in the Financial Times and through
Euro-clear (the "Replacement Notice") advising all holders of
Bearer Original Notes of the exercise price of the Warrants.
The Replacement Notice shall also instruct (i) the Bearer
Original Noteholders how the certificates representing Bearer
Original Notes may be replaced with certificates representing
Bearer Amended Notes and Warrants and, in the case of those
holders who made an Election, and are entitled to receive
Series B Notes, Replacement Shares and (ii) the holders of
Coupons relating to the Bearer Original Notes how such
Coupons may be replaced with Coupons relating to the Bearer
Amended Notes. Certificates representing Bearer Amended Notes,
the Coupons relating to Bearer Notes, Warrants and Replacement
Shares, if any, held by the Trustee that are not so replaced on
or before December 30, 1998 shall be redelivered by the Trustee
to the Company on demand and thereupon the Trustee shall be
released from all further liability with respect to the
issuance or replacement of certificates representing any such
Bearer Amended Notes, Coupons related to Bearer Amended Notes,
Warrants and Replacement Shares. Subject to Section 1.05, after
such Bearer Amended Notes, Coupons relating to Bearer Amended
Notes, Warrants and Replacement Shares are so redelivered to
the Company holders of Bearer Original Notes or Coupons
relating to Bearer Original Notes shall be able to obtain the
certificates representing such Bearer Amended Notes, Coupons
related to Bearer Amended Notes, Warrants and Replacement
Shares from the Company.
(b) Despite Subsection 3.02(a), neither the Company nor the Trustee
shall be required to distribute Bearer Amended Notes, Coupons
related to Bearer Amended Notes, Warrants, Replacement Shares
or Underlying Shares to any holder of Bearer original Notes if
such distribution would be contrary to Applicable Legislation
or to the securities or other laws of Canada or any other
jurisdiction.
Section 3.03 Effect of Effective Date: Notwithstanding any other provision of
this Trust Indenture, after the Effective Date, holders of Original Notes shall
have no rights under the Original Notes (except that each Coupon pursuant to
which interest was payable on or prior to December 31, 1992 shall be honoured
by and shall remain an obligation of the company as if such Coupon were issued
pursuant to this Trust Indenture) but holders of Original Notes shall have all
the rights and remedies under this Trust Indenture as if they had replaced the
certificates representing
<PAGE> 39
33.
their original Notes and, if applicable, Coupons with certificates representing
Amended Notes, Warrants and, if entitled thereto, Coupons or Replacement
Shares, in accordance with Section 3.01 or 3,02.
Section 3.04 Certification of Notes: Upon receipt of a written direction from
the Company, Amended Notes shall be certified by or on behalf of the Trustee
and delivered in accordance with the provisions hereof without any further act
or formality on the part of the Company and without the Trustee receiving any
consideration therefor. The Trustee shall have no duty or responsibility with
respect to the use or application of any of the Amended Notes so certified and
delivered.
ARTICLE FOUR
SUBORDINATION OF NOTES TO SENIOR INDEBTEDNESS
Section 4.01 Subordination: The payment of the principal of, and interest
payable on the Notes shall be subordinate and rank junior, to the extent and in
the manner set out in this Article Four, to the prior payment in full of all
present or future Senior Indebtedness, Upon the maturity of any Senior
Indebtedness by lapse of time, acceleration or otherwise, then, except as
hereinafter in Section 4.06 otherwise provided, the principal of, and premium,
if any, and interest on such matured Senior Indebtedness shall first be paid in
full or payment duly provided for before any payment on account of the
principal of and interest on the Notes is made.
Section 4.02 Payment on Dissolution or Winding-UP:
(a) in the event of any payment or distribution of assets of the
Company upon any liquidation, dissolution or winding-up (or
arrangement or other reorganization that is similar thereto) of
the Company, whether or not pursuant to any bankruptcy,
insolvency or analogous law of Canada or of any province
thereof, subject to Section 4.06:
(i) the holders of all Senior Indebtedness shall first be
entitled to receive payment in full thereof, or such
payment shall be duly provided for, before the holders of
the Notes shall be entitled to receive any payment upon
the principal of, or interest on, the Notes;
(ii) the holders of Notes by their acceptance thereof assign to
the holders of the Senior Indebtedness or the designated
representatives thereof, for the purposes and to the
extent set forth in this paragraph 4.02 (a) (ii) all their
right and title and
<PAGE> 40
34.
interest to and in any payment or distribution of assets of
the Company of any kind or character, whether in cash, property
or securities, to which the Noteholders or the Trustee (for
their benefit) would be entitled but for the provisions of this
Section 4.02, and the Trustee shall take such steps as may be
necessary or appropriate to entitle the holders of Senior
Indebtedness or the designated representatives thereof to
receive such payment or distribution directly from the
liquidating trustee or agent or other person making such
payment or distribution, whether a trustee in bankruptcy, a
receiver or other liquidating agent, rateably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness
held or represented by each, all to the extent necessary to
provide for payment of the Senior Indebtedness in full (after
giving effect to any concurrent payment or distribution to the
holders of such Senior Indebtedness or provision therefor),
prior to any payment upon the principal of or interest on the
Notes;
(iii) in the event, notwithstanding the provisions of paragraphs 4.02
(a) (i) and (ii), any payment or distribution of the assets of
the Company of any kind or character in respect of the
principal of or interest on, the Notes, whether in cash,
property or securities, shall be received by the Trustee or any
other registrar, by the Principal Paying Agent, by any other
Paying Agent or by any Noteholder before all Senior
Indebtedness shall have been paid in full or duly provided for,
such payment or distribution shall be held by the recipient in
trust (which trust is hereby declared) for the benefit of, and
shall be paid over to, the holders of senior Indebtedness or
the designated representatives thereof, rateably according to
the aggregate amount remaining on such Senior Indebtedness
represented by each, to the extent necessary to pay all Senior
Indebtedness in full (after giving effect to any concurrent
payment or distribution to the holders of such Senior
Indebtedness or provision therefor); and
(iv) when all Senior Indebtedness shall have been paid in full the
holders of the Notes shall be entitled to receive payment from
any assets of the Company then available for such payment.
The reconstruction or reorganization of the Company, the consolidation,
amalgamation or merger of the Company with another corporation or the
transfer, lease or sale of its undertaking and assets as an entirety,
or substantially
<PAGE> 41
35.
as an entirety, to another corporation, in each case upon the terms
and conditions provided in Article Nine, shall be deemed not to be a
liquidation, dissolution or winding-up of the Company for the purposes
of this Section if such reconstruction, reorganization, consolidation,
arrangement, amalgamation, merger, transfer, lease or sale may be and
is carried out in compliance with the terms and conditions set out in
Article Nine.
(b) For the purposes of ascertaining the persons entitled to
participate in any payment or distribution, the holders of Senior
Indebtedness and other Indebtedness, the amount thereof or payable
thereon, the amount or amounts distributed thereon and all other facts
pertinent thereto, the Trustee and the Noteholders shall be entitled
to rely upon a certificate of the Company or a certificate, in similar
form, of a trustee in bankruptcy or other liquidating trustee or agent
or an order or decree of a court of competent jurisdiction and, upon
the request of the Trustee, the Company will use its best efforts to
provide to or obtain for the Trustee such a certificate, order or
decree.
Section 4.03 Senior Indebtedness Default: In the event that a Senior
Indebtedness Default shall have occurred and be continuing and written notice
of such Senior Indebtedness Default, containing reasonable particulars thereof,
shall have been received by the Trustee and the Company from the holder of the
affected Senior Indebtedness or the designated representative thereof, subject
to Section 4.06, unless and so long as the Company shall in good faith dispute
the existence of such Senior Indebtedness Default:
(a) the Company shall not purchase or redeem any Notes or make any payment
of the principal of, or interest on, the Notes; and
(b) if the Trustee or the Registrar or any other registrar or Transfer
Agent or the Principal Paying Agent or any other Paying Agent shall
receive from the Company or shall hold any amount for payment of the
principal of, or interest on, the Notes, such amount shall be received
and held in trust for the benefit of the holders of such senior
Indebtedness and shall be paid over to the holders of such Senior
Indebtedness or to the representatives thereof for application to the
payment of all Senior Indebtedness remaining unpaid to the extent
necessary to pay all such Senior Indebtedness after giving effect to
any concurrent payment or distribution, or provision therefor, to the
holders of such Senior Indebtedness;
provided, however, that if such Senior Indebtedness Default shall be cured or
waived, or all amounts that shall have become due for principal of, and
interest on, all Senior Indebtedness shall have
<PAGE> 42
36.
been paid or duly provided for (whether by the Company or by application as
aforesaid), and the Trustee shall have received a certificate of the Company to
that effect and either (i) shall have received a similar certificate from the
holders of each class of Senior Indebtedness or the designated representative
thereof as to the payment in full or due provision for the payment of all
amounts due in respect of such class, or (ii) shall not, within 10 days after
written request by the Trustee to each such holder or the designated
representative thereof, have received a statement to the contrary from any
such holder or designated representative, such trusts for the benefit of the
holders of Senior Indebtedness and the designated representatives thereof shall
terminate and any amount still held by the Trustee or the Registrar or any
other registrar or Transfer Agent or the Principal Paying Agent or any other
Paying Agent shall be applied by them for the purposes for which such amount
shall have been received from the Company as aforesaid. In the event that the
Trustee or the Registrar or any other registrar or Transfer Agent or the
Principal Paying Agent or any other Paying Agent shall make any payment to any
Noteholder contrary to the provisions of clause (b) above, then such Noteholder
shall repay any amount so received to the Trustee, to be held and applied by
the Trustee in accordance with the provisions of clause (b) above. The Trustee
shall not have any obligation to institute a suit, action or proceeding to
recover such amount unless the holders of any class of Senior Indebtedness or
the designated representative thereof shall have made written request upon the
Trustee to institute such suit, action, or proceeding and shall have provided
to the Trustee reasonable indemnity and security against the costs, expenses
and liabilities to be incurred therein or thereby.
Section 4.04 Subrogation to Senior Indebtedness: Subject to the payment in full
of all Senior Indebtedness or the making of due provision for such payment, the
holders of the Notes and/or Coupons shall be subrogated to the rights of the
holders of the Senior Indebtedness to receive payments or distributions of the
assets of the Company applicable to such Senior Indebtedness, to the extent of
the application thereto of moneys or other assets which would have been
received by the holders of Notes and/or Coupons but for the provisions of this
Article Four, until the principal of and interest on the Notes shall be paid in
full or duly provided for.
Section 4.05 Rights of Noteholders Reserved: The provisions of this Article
Four are and are intended solely for the purpose of defining the relative
rights of the holders of the Notes and/or Coupons on the one hand, and the
holders of the Senior Indebtedness, on the other hand. Nothing in this Article
Four or elsewhere in this Indenture or in the Notes is intended to or shall
impair the obligation of the Company, subject to the rights of the holders of
the Senior Indebtedness, to pay to the holders of the Notes the principal of,
and interest on, the Notes as and when the same shall become due and payable in
accordance herewith, or affect the relative rights of the holders of the Notes
and/or the Coupons, and creditors of the Company other than the holders of the
<PAGE> 43
37.
Senior Indebtedness, nor shall anything herein or in the Notes prevent the
Trustee or the holder of any Note and/or Coupon from exercising all remedies
otherwise permitted by this Indenture upon default under the Note or this
Indenture, subject to the rights (if any) under this Article Four of the
holders of Senior Indebtedness in respect of any payment or distribution of
cash, property or securities of the Company received upon the exercise of any
such remedy.
Section 4.06 Exceptions to Subordination: Notwithstanding any other provision
of this Article Four or any provision of the Notes relating to subordination:
(a) if notice of redemption of any Notes has been given in accordance
with Section 7.05, the amount necessary to provide for the redemption
of such Notes may be paid to the Trustee or the Principal Paying Agent
by the Company;
(b) any amounts (other than the amounts referred to in Subsection (c) of
this Section 4.06) received by the Trustee or the Registrar or any
other registrar or Transfer Agent or the Principal Paying Agent or any
other Paying Agent from the Company in compliance with the provisions
of this Indenture or the Agency Agreement for the purpose of making
any payments to holders of the Notes shall be held in trust solely for
the purpose of making such payments and the Trustee or the Registrar
or any other registrar or Transfer Agent or the Principal Paying Agent
or any other Paying Agent may pay or make, and any such holder may
receive, any payment or distribution from any such amounts and the
holders of the Senior Indebtedness shall have no right to, or claim in
respect of, such amounts, payments or distributions, either against
the Trustee or such holders, if,
(i) in case of a redemption or principal repayment of the
Notes, the Trustee shall not have received, on or before the 40th
day prior to the redemption date or the applicable Principal
Repayment Date from the Company or from the holders of any class
of Senior Indebtedness or the designated representative thereof,
written notice that a Senior Indebtedness Default has occurred
and is continuing, or
(ii) in case of a deposit for the purposes of any other payment to
holders of Notes, the Trustee shall not have received, on or
before the tenth day prior to the date on which such payment to
such holders is to be made, from the Company or from the holders
of any class of Senior Indebtedness or the designated
representative thereof, written notice that a Senior Indebtedness
Default has occurred and is continuing;
<PAGE> 44
38.
(c) this Article Four shall not be applicable to any funds which are
deposited with the Trustee or the Principal Paying Agent for the
purposes of the redemption of Notes and which constitute the proceeds
of the substantially concurrent issue of other debentures or notes
maturing not earlier than the Notes which have subordination
provisions (if any) not less favourable to the holders of Senior
Indebtedness than those contained herein or the substantially
concurrent sale by the Company of shares of its capital or both;
(d) this Article Four shall not be applicable to any cash received by the
Trustee pursuant to Section 4.04 or by the Trustee or the holder of
any Note as a holder of Senior Indebtedness.
Notwithstanding this Article Four or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts which
would prohibit the making of any payment of moneys to the Trustee or any other
registrar or the Principal Paying Agent or any other Paying Agent, or the
application of such moneys by the Trustee or any other registrar or the
Principal Paying Agent or any other Paying Agent in accordance with the terms
hereof, unless and until such person shall have received written notice
thereof as provided in Section 4.03.
Section 4.07 Renewal or Extension of Senior Indebtedness:
(a) The holders of any Senior Indebtedness may at any time in their
discretion renew or extend the time of payment of the Senior
Indebtedness so held or exercise any other of its rights under the
Senior Indebtedness, including, without limitation, the waiver of
default thereunder, all without notice to or assent from the holders
of the Notes or the Trustee,
(b) No compromise, alteration, amendment, modification, extension, renewal
or other change of, or waiver, consent or other action in respect of,
any liability or obligation under or in respect of any Senior
Indebtedness, or of any of the terms, covenants or conditions of any
indenture or other document under which the Senior Indebtedness shall
have been advanced, shall in any way alter or affect any of the
provisions of this Article Four or of the Notes relating to the
subordination thereof.
Section 4.08 Authorization to Trustee: Each holder of Notes by his acceptance
thereof irrevocably authorizes and directs the Trustee on his behalf to take
such action as may be necessary or appropriate to further assure the
subordination provided for in this Article Four, and appoints the Trustee his
agent for any and all such purposes. Without limitation of the foregoing, the
Trustee, for and on behalf of the holders from time to time of all
<PAGE> 45
39.
of the Notes, is authorized and directed to execute deeds of subordination
from time to time upon receipt of a written request of the Company to that
effect specifying the amount and nature thereof. Any deed of subordination
executed pursuant to this Section 4.08 shall be conclusive evidence that the
Indebtedness therein specified is Senior Indebtedness. The Trustee shall keep
on file at its principal office in Toronto, and shall deliver to the Company, a
copy of each deed of subordination executed and delivered by it pursuant to
this Section 4.08. Nothing contained in this Section 4.08 shall impair the
rights of any holders of Senior Indebtedness in whose favour a deed of
subordination has not been so executed and delivered.
Section 4.09 Relationship of Trustee: The Trustee shall not have any duty or
obligation to the holders of Senior Indebtedness other than to perform such
duties and obligations, and only such duties and obligations, as are
specifically set out in this Article Four for the benefit of the holders of the
Senior Indebtedness,
Section 4.10 Restriction on Purchase of Notes: Subject to Section 4.06, the
Company shall not purchase any Notes or make any payment of the principal of or
interest on the Notes or make any other payments or distributions to any
persons with respect thereto if, at the time of such action or after giving
effect to such action, there would exist any Senior Indebtedness Default.
ARTICLE FIVE
RANKING OF SERIES A NOTES AND SERIES B NOTES
Section 5.01 Postponement of Series B Notes to Prior Indebtedness: Except as
provided in Subsection 2.04(c), the payment of the principal of and interest
payable on the Series B Notes shall be fully postponed, subordinate and rank
junior to the extent and in the manner set out in this Article Five, to the
prior payment in full of all present and future Prior Indebtedness and all
other Indebtedness ranking prior to the Series B Notes and permitted pursuant
to the terms of this Indenture. All Prior Indebtedness and all other
Indebtedness ranking prior to the Series B Notes and permitted pursuant to the
provisions of this Indenture which is due and payable on or before December 30,
1998 shall first be paid in full before any payment is made on account of the
principal of the Series B Notes, or except as provided in Subsection 2.04(c),
on account of interest on the Series B Notes,
Section 5.02 Payment on Series A Notes and Series B Notes on Dissolution or
Winding Up:
(a) In the event of any payment or distribution of assets of the
Company upon any liquidation, dissolution or winding up or arrangement
or other reorganization that is similar thereto of the Company,
whether or not pursuant to any bankruptcy, insolvency or analogous law
of Canada or of
<PAGE> 46
40.
any province thereof, and subject to Sections 4.02 and 4.06:
(i) after payment in full of the Senior Indebtedness, the
holders of Series A Notes shall be entitled to receive
payment in full of all liabilities in respect thereof, or
such payment shall be duly provided for, before the holders
of Series B Notes or the holders of any other Indebtedness
or other liabilities of the Company (other than Series A
Notes) shall be entitled to receive any payment in respect
thereof;
(ii) after payment in full of the Prior Indebtedness, the holders
of all other Indebtedness ranking prior to the Series B
Notes and permitted pursuant to the terms of this Indenture
shall be entitled to receive payment in full of liabilities
in respect thereof, or such payment shall be duly provided
for, before the holders of Series B Notes or the holders of
any other Indebtedness or other liabilities of the Company
shall be entitled to receive any payment in respect
thereof;
(iii) subject to paragraph 5.02(a)(ii), the holders of Series B
Notes by their acceptance thereof assign to the Trustee for
the benefit of holders of Series A Notes and the holders of
all other Indebtedness ranking prior to the Series B Notes
and permitted pursuant to the provisions of this Indenture,
for the purposes and to the extent set out in this
paragraph (iii), all of their right, title and interest in
and to any payment or distribution of the assets of the
Company of any kind or character, whether in cash, property
or securities, to which the holders of Series B Notes or
the Trustee (for the benefit of the holders of Series B
Notes) would be entitled but for the provisions of this
Section, and the Trustee shall take such steps as may be
necessary or appropriate to entitle the holders of Series A
Notes and the holders of all other Indebtedness ranking
prior to the Series B Notes and permitted pursuant to the
provisions of this Indenture or the Trustee (for the
benefit of the holders of Series A Notes) to receive such
payment or distribution directly from the liquidating
trustee or agent or other person making such payment or
distribution, whether a trustee in bankruptcy, a receiver
or other liquidating agent, all to the extent necessary to
provide for the payment of all principal of and interest
payable on and all other amounts in respect of the Series A
Notes and all other Indebtedness ranking prior to the
Series B Notes and permitted pursuant to the
<PAGE> 47
41.
provisions of this Indenture in full (after giving effect
to any payment or distribution to the holders of Series A
Notes and to holders of all other Indebtedness ranking
prior to the Series B Notes and permitted pursuant to the
provisions of this Indenture or provision therefor), prior
to any payment on the principal of or interest on or any
other amount in respect of the Series B Notes;
(iv) after all Senior Indebtedness has been paid in full, if,
despite the provisions of paragraphs 5.02 (a)(i) to
(iii) inclusive, any payment or distribution of the
assets of the Company of any kind or character in respect
of the principal of or interest payable on or any other
amount in respect of the Series B Notes, whether in cash,
property or securities, shall be received by the Trustee or
any other Registrar, by the Principal Paying Agent, by any
other Payment Agent or by any holder of Series B Notes
before all principal of and interest payable on and all
other amounts in respect of the Series A Notes and all
other Indebtedness ranking prior to the Series B Notes and
permitted pursuant to the provisions of this Indenture
shall have been paid in full or duly provided for, such
payment or distribution shall be held by the recipient in
trust (which trust is hereby declared) for the benefit of,
and shall be paid over to, the holders of Series A Notes
and the holders of all other Indebtedness ranking prior to
the Series B Notes and permitted pursuant to the provisions
of this Indenture or the Trustee (for the benefit of the
holders of the Series A Notes) to the extent necessary to
pay all principal of and interest payable on and all other
amounts in respect of the Series A Notes and all other
Indebtedness ranking prior to the Series B Notes and
permitted pursuant to the provisions of this Indenture
(after giving effect to any payment or distribution to the
holders of the Series A Notes or the holders of other
Indebtedness ranking prior to the Series B Notes and
permitted pursuant to the provisions of this Indenture or
provision therefor); and
(v) when the Series A Notes and all amounts in respect thereof
and all other Indebtedness ranking prior to the Series B
Notes and permitted pursuant to the provisions of this
Indenture shall have been paid in full, the holders of the
Series B Notes shall be entitled to receive payment from
any assets of the Company then available for such payment.
<PAGE> 48
42.
Section 5.03 Subrogation of Series B Notes: Subject to the payment in full of
all Prior Indebtedness and of all other Indebtedness ranking prior to the
Series B Notes and permitted pursuant to the provisions of this Indenture or
the making of due provision for such payment, the holders of the Series B Notes
shall be subrogated to the rights of the holders of the Prior Indebtedness and
of all other Indebtedness ranking prior to the Series B Notes and permitted
pursuant to the provisions of this Indenture to receive payments or
distributions of the assets of the Company, to the extent of the application
thereto of moneys or other assets which would have been received by the holders
of Series B Notes but for the provisions of this Article Five, until all
principal and interest on the Series B Notes shall be paid in full or duly
provided for.
Section 5.04 Renewal or Extension by Holders of Series A Notes and of Other
Indebtedness: The holders of Series A Notes may at any time in their discretion
renew or extend the time for payment of the Series A Notes or exercise any
other of their rights under this Indenture, including, without limitation, the
waiver of default thereunder, all without notice to or assent from the holders
of the Series B Notes or the Trustee (on behalf of the holders of Series B
Notes). The holder of any Indebtedness ranking prior to the Series B Notes and
permitted pursuant to the provisions of this Indenture may at any time in its
discretion renew or extend the time for payment of such Indebtedness or
exercise any other of its rights including, without limitation, the waiver of
default thereunder, all without notice to or assent from the holders of such
Indebtedness or the Trustee (on behalf of the holders of Series B Notes). For
greater certainty, any renewed or extended Series A Notes or Indebtedness
ranking prior to the Series B Notes shall be and remain subject to the
provisions of this Article Five.
Section 5.05 Ranking of Notes:
(a) Notwithstanding any other provision hereof, except as contained in
Article Seven, the holders of all Series A Notes and all their
rights hereunder and under any documentation delivered pursuant
hereto (except the rights to principal repayments set out in
Subsection 2.03(b) and (c)) shall rank pari passu and the Company
shall not make or permit to be made any purchase of Notes or any
payment or grant or permit to be granted any preference to any
such holder that is not made or granted to any other such holder,
pro rata in each case in accordance with the respective aggregate
principal amount of each holder's Series A Notes.
(b) Notwithstanding any other provision hereof, except as contained in
Article Seven, the holders of all Series B Notes and all their
rights hereunder and under any documentation delivered pursuant
hereto shall rank pari passu and the Company shall not make or
permit to be made
<PAGE> 49
43.
any purchase of Notes or any payment or grant or permit to be
granted any preference to any such holder that is not made or
granted to any other such holder, pro rata in each case in
accordance with the respective aggregate principal amount of each
holder's Series B Notes.
(c) Notwithstanding any other provision of the Indenture or any other
document, the relative rights of the holders of the Series A Notes
and the Series B Notes shall be governed by this Article Five.
Section 5.06 Trustee Not Charged with Knowledge: Notwithstanding this Article
Five or any other provision of this Indenture, the Trustee shall not be charged
with knowledge of the existence of any facts which would prohibit the making of
any payment of moneys to the Trustee or any other registrar or the Principal
Paying Agent or any other Paying Agent, or the application of such moneys by
the Trustee or any other registrar or the Principal Paying Agent or any other
Paying Agent in accordance with the terms hereof, unless and until such person
shall have received written notice thereof, The Trustee shall not be charged
with knowledge of the existence of any Indebtedness ranking prior to the Series
B Notes other than the Prior Indebtedness unless it has received written notice
of the existence thereof.
ARTICLE SIX
COVENANTS OF THE COMPANY
Section 6.01 General Covenants: The Company covenants and agrees with the
Trustee for the benefit of the Trustee and the Noteholders that, so long as any
Notes remain outstanding:
(a) It will well, duly and punctually pay or cause to be paid the
principal thereof and all interest and interest on overdue
interest, if any, and all other liabilities and obligations
(including, without limitation, for fees, costs and expenses) in
respect thereof to the persons, at the dates and places, in the
currencies and in the manner mentioned herein, in the Agency
Agreement and in the Notes. For the purposes of this Indenture,
the Trustee shall not be required to take notice of any
non-payment of any liabilities or obligations (except the
non-payment of principal of or interest on the Notes) unless and
until it has received a certificate to that effect from the person
or persons alleging such non-payment.
(b) Subject to the express provisions hereof, it will at all times
maintain its corporate existence and diligently maintain, use and
operate, or cause to be maintained, used and operated, its
property and that of its Subsidiaries and carry on and conduct, or
cause to be carried on and conducted, its business and the
businesses
<PAGE> 50
44.
of its Subsidiaries in a proper, business-like and efficient
manner and in accordance with good business practice, so as to
preserve and protect its properties and those of its Subsidiaries
and the earnings, incomes, rents, issues and profits thereof;
provided that nothing herein contained shall prevent the Company
from ceasing to maintain, use or operate or to cause to be
maintained, used or operated any property of the Company or of any
Subsidiary that is not (alone or aggregated with any other such
property ceased or having ceased to be maintained, used or
operated), a material asset of such corporation.
(c) It will pay or cause to be paid all taxes, rates, levies,
assessments, ordinary or extraordinary, government fees or dues
levied, assessed or imposed upon or in respect of the property or
any part thereof or upon the income or profits of the Company or
of the Subsidiaries as and when the same become due and payable,
and it will exhibit or cause to be exhibited to the Trustee, when
required, the receipts and vouchers establishing such payment and
will duly observe and conform to all valid requirements of any
governmental authority relative to any of the property or rights
of the Company or the Subsidiaries and all covenants, terms and
conditions upon or under which any such property or rights are
held; but the Company and the Subsidiaries shall have the right to
contest by legal proceedings any such taxes, rates, levies,
assessments, government fees or dues, and, upon such contest, may
delay or defer payment or discharge thereof, if it shall satisfy
the Trustee and, if required, furnish Collateral satisfactory to
the Trustee, that such contestation will involve no forfeiture of
any property of the Company or the Subsidiaries,
(d) If and whenever from time to time the Company or any Subsidiary
shall be entitled to obtain a renewal or renewals of any leases,
licences, concessions, franchises or agreements or to obtain any
new lease of any premises or other property leased to the Company
or to any Subsidiary or to obtain any new licences, concessions,
franchises or agreements, it will from time to time duly exercise
or cause to be exercised every such right, if the same shall be of
value to its operations, and will obtain or cause to be obtained
such new leases, licences, concessions, franchises or agreements
for the longest time or times, if advantageous, and upon the most
favourable terms obtainable, including all rights of further
renewal.
(e) It will cause all property of the Company and the Subsidiaries
which is of a character usually insured by prudent persons
operating properties of a similar nature in the same or
similar localities to be properly insured
<PAGE> 51
45.
and kept insured with reputable insurers (which may include
associations or other organizations for mutual or reciprocal
insurance) against loss or damage by fire or other hazards of
the nature and to the extent that such properties are usually
insured by prudent persons operating properties of a similar
nature in the same or similar localities.
(f) It will at any and all times upon written request of the
Trustee permit the Trustee, by its agents and attorneys, to
examine all the books of account, records, reports and other
papers of the Company and the Subsidiaries and to make copies
thereof and take extracts therefrom. The Trustee, however,
shall be under no obligation to make such examination.
(g) It will deliver to the Trustee:
(i) as soon as available, but in any event within 120 days
after the end of each fiscal year of the Company
(A) a copy of the audited Consolidated financial
statements for the Company, including,
without limitation, its balance sheet,
statement of operations and retained earnings
and statement of changes in cash resources
with respect to such fiscal year setting out
in comparative form the figures for the
previous fiscal year of the Company together
with notes thereto, all in reasonable detail
and accompanied by an unqualified opinion of
the auditors of the Company, and
(B) a copy of the unaudited, unconsolidated
financial statements of the Company and each
other member of the Goran Group with respect
to such fiscal year; and
(ii) as soon as available, but in any event within 60 days
after the end of each fiscal quarter in each fiscal
year of the Company, (A) a copy of the unaudited,
Consolidated financial statements for the Company,
including, without limitation, its balance sheet,
statement of operations and retained earnings and
statement of changes in cash resources to the end of
such fiscal period, certified by a senior officer of
the Company, setting out, in each case in comparative
form, the figures for the same fiscal period in the
previous fiscal year of the Company, all in reasonable
detail, and (B) a copy of the unaudited, unconsolidated
financial statements of the Company and each other
member of the Goran Group for the same fiscal period;
<PAGE> 52
46.
(iii) as soon as possible, but in any event within 75 days
after the end of each fiscal year of the Company, a
copy of all statutory financial statements for each
Subsidiary which is principally engaged in the
insurance business in Canada filed as at the end of
such fiscal year, including in detail the calculations
in support of the requirements of Section 516 of the
Insurance Companies Act (Canada) and the regulations
made thereunder;
(iv) as soon as possible, but in any event within 75 days
after the end of each of the first three fiscal
quarters of each fiscal year of the Company, a copy of
the financial statements (prepared in a manner
consistent with paragraph 6.01(g)(iii), of each
Subsidiary which is principally engaged in the
insurance business in Canada for such fiscal period,
including in detail the calculations in support of the
requirements of Section 516 of the Insurance Companies
Act (Canada) and the regulations made thereunder;
(v) concurrently with the delivery of the financial
statements referred to in subparagraph 6.01(g)(i)(A),
a certificate of the auditors of the Company
reporting on such financial statements certifying
(A) solely and exclusively for the benefit of the
holders of Series A Notes that Subsections
6.02(d) and (e) have been complied with in
respect of such fiscal year and that they
have conducted such investigations as they
considered reasonably necessary in order to
provide such certification, and
(B) in making the examinations necessary to
render their audit opinion (but without
having made any special review for the
purposes of rendering such certificate other
than the investigations contemplated by
subparagraph 6.01 (g)(v)(A)) no knowledge
was obtained by them of any Event of Default,
except as specified in such certificate;
(vi) concurrently with the delivery of the financial
statements referred to in subparagraph 6.01(g)(i)(A),
a certificate of the Company stating that, to the
best of the knowledge, information and belief of the
officer executing such certificate, the Company
during such period has observed or performed all of
its covenants and other agreements, and satisfied
every condition
<PAGE> 53
47.
contained in this Indenture to be observed, performed
or satisfied by it, and that such officer has
obtained no knowledge of any Event of Default, except
as specified in such certificate;
(vii) concurrently with the delivery of the financial
statements referred to in subparagraph 6.01 (g)(ii),
a certificate of the Company describing in
reasonable detail all transactions and agreements
other than those transactions described in Schedule 2
hereto, that occurred during the immediately
preceding fiscal quarter of the Company between one
member of the Goran Group and one or more other
members of the Goran Group involving the transfer,
disposition, loan, advance or lease of assets
(including cash) having, in each transaction or
agreement, an aggregate value exceeding $50,000 on an
annualized basis, as well as any change in the
corporate structure of the Goran Group (including,
without limitation, any transaction referred to in
paragraph 6.02(k)(iv);
(viii) not later than the end of each fiscal year of the
Company, a copy of the projections by the Company of
the operating budget and cash flow of the Company and
the Subsidiaries on a Consolidated basis for the next
succeeding fiscal year, such projections to be
accompanied by a certificate of the Company to the
effect that such projections have been prepared on
the basis of sound financial planning practice and
that the officer executing the certificate has no
reason to believe that they are incorrect or
misleading in any material respect;
(ix) within five days after the same are sent, a copy of
all financial statements and reports which the
Company sends to its shareholders, and within five
days after the same are filed, a copy of all
financial statements and reports which the Company
may make to, or file with, The Toronto Stock
Exchange;
(x) within 10 days of receipt thereof by the Company, a
copy of any management letter prepared by the
auditors of the Company; and
(xi) promptly, such additional financial and other
information as the Trustee may from time to time
reasonably request.
All financial statements delivered pursuant to this Subsection
6.01(g) shall be prepared in accordance with Generally
Accepted Accounting Principles except that (i)
<PAGE> 54
48.
any unconsolidated statements that must be prepared in
accordance with applicable statutory or regulatory
requirements may be prepared solely in accordance with such
requirements and (ii) any unconsolidated statements for any
Subsidiary incorporated in the United States shall be prepared
in accordance with generally accepted accounting principles,
consistently applied, that are in effect from time to time in
the United States.
(h) Subject to the express provisions hereof, it will do, observe
and perform or cause to be done, observed and performed and it
will cause its Subsidiaries to do, observe or perform, all
matters and things necessary or expedient to be done, observed
or performed by virtue of any law of Canada or any province or
municipality thereof or any other jurisdiction, including,
without limitation, the Applicable Legislation, for the
purpose of creating, performing or maintaining the trust
herein referred to for the benefit of the Trustee and the
Noteholders and will do, observe and perform all the
obligations hereby imposed upon it.
(i) It will at all times repair and keep in repair and good order
and condition, or cause to be so repaired and kept in repair
and good order and condition, all buildings and erections used
in or in connection with its business and which are necessary
in connection with the efficient operation of such business up
to a modern standard of usage, and renew and replace or cause
to be renewed and replaced all and any of the same which may
become worn, dilapidated, unserviceable, inconvenient or
destroyed even by a fortuitous event, fire or other cause and
which are necessary for efficient operation.
(j) It will well and truly perform and carry out all of the acts
or things to be done by it as provided in this Indenture, the
Warrant Indenture and all instruments and other documents
contemplated hereby and thereby.
(k) It will give notice in writing to the Trustee of the
occurrence of any Event of Default (or any condition, event or
act which with the lapse of time and/or upon the giving of
notice and/or the giving of a certificate would constitute an
Event of Default) promptly upon becoming aware thereof and
without waiting for the Trustee to take any action.
(l) It will at all times execute all such further documents and do
all such further acts and things as may be necessary at any
time in the reasonable opinion of the Trustee to give effect
to the terms and conditions of this Indenture, the Warrant
Indenture and all instruments and other documents contemplated
hereby and thereby.
<PAGE> 55
49.
(m) It will at all times use its best efforts to obtain and
maintain the listing of the Notes on the Luxembourg Stock
Exchange or, if it is unable to do so having used such best
efforts or if the maintenance of such listing is agreed by the
Trustee to be unduly onerous, use its best efforts to obtain
and maintain the quotation of or listing of the Notes on such
other stock exchange or exchanges as it may (with the prior
written approval of the Trustee) decide upon and give notice
of the identity of such stock exchange or exchanges to the
Noteholders in accordance with Section 14.01 and also use its
best efforts to procure that there will at all times be
furnished to any stock exchange on which the Notes are for the
time being quoted or listed such information and undertakings
as such stock exchange may require to be furnished in
accordance with its normal requirements or in accordance with
any arrangements for the time being made with any such stock
exchange.
(n) (i) It will obtain the prior approval of the Trustee to
the form of all notices to be given to Noteholders
pursuant to Section 14.01 unless the Trustee shall,
in its discretion, dispense with the requirement to
obtain such approval.
(ii) It will send to the Trustee, not later than the date
of publication, four copies of each notice regarding
the Notes published in accordance with Section 14.01
and if publication in the manner provided in Section
14.01 is not practicable, consult with, or if not
practicable notify, the Trustee, as soon as
practicable after publication has been made.
(o) It will not, without the prior written approval of the
Trustee, such approval not to be unreasonably withheld,
appoint additional or other Paying Agents or Transfer Agents
or Registrar or registrars or vary or terminate the
appointment of any Paying Agent, Transfer Agent or the
Registrar or any other registrar or registrars.
Section 6.02 Covenants Solely for Benefit of Holders of Series A Notes: The
Company covenants and agrees with the Trustee for the benefit of the Trustee
and the holders of Series A Notes (and for greater certainty not for the
benefit of the holders of Series B Notes) from and after December 8, 1992
(except as set out in Subsections 6.02(a) and (b)) that so long as any Series A
Notes remain outstanding:
(a) Upon the earliest of (i) the date on which all amounts owing
to the Senior Lender under the instrument or instruments
evidencing the Senior Indebtedness are repaid in full, (ii)
the date on which the Senior Lender consents to the execution
and delivery of the Security
<PAGE> 56
50.
Documents referred to in this Subsection and (iii) the
occurrence of any Event of Default (each of (i), (ii) and (iii)
being herein called a "Delivery Event") it will:
(i) execute and deliver to the Trustee (on its own behalf and
on behalf of the holders of Series A Notes)
(A) a share pledge agreement containing a pledge in favour
of the Trustee of 1,000 common shares of SIG Indiana,
125,000 common shares of Granite Reinsurance Company
Ltd, 155,295 common shares of Granite Insurance
Company and of all other shares of any member of the
Goran Group beneficially owned by the Company from time
to time (except as otherwise approved by the
Committee) in the form of the Share Pledge Agreement,
and
(B) a general security agreement granting a first fixed
and floating charge and security interest in all of
the property, assets and undertaking of the Company in
favour of the Trustee in the form of the General
Security Agreement; and
(ii) cause each Subsidiary (including, without limitation, any
Subsidiary hereafter created or acquired) from time to
time to execute and deliver to the Trustee (on its own
behalf and on behalf of the holders of Series A Notes) a
Guarantee Agreement, a Guarantee Pledge Agreement and a
Guarantee Security Agreement, as applicable, if and to the
extent that the execution and delivery thereof is (A)
permitted by applicable law and (B) not prohibited by any
regulatory security restrictions on the ability of an
insurance company to grant security on its assets.
(b) For purposes of giving effect to Subsection 6.02(a), it
will:
(i) concurrently with the execution and delivery of this
Indenture
(A) execute and deliver to the Trustee (on behalf of the
attorneys referred to therein) a power of attorney in
the form annexed hereto as Exhibit N, and
(B) cause SIG Indiana to execute and deliver to the Trustee
(on behalf of the attorneys referred to therein) a
power of attorney in the form annexed hereto as Exhibit
0; and
<PAGE> 57
51.
(ii) thereafter from time to time in order to give full effect
to paragraph 6.02(a)(ii), cause each Subsidiary that is
required to execute and deliver the Security Documents
referred to therein to execute and deliver a power of
attorney in the form annexed hereto as Exhibit N or Exhibit
O, as applicable, with such amendments or modifications as
may be required to give effect thereto.
The execution and delivery of powers of attorney pursuant to this
Subsection shall not derogate from the primary obligation (the
"Primary Obligation") of the Company to execute and deliver, or
cause to be executed and delivered, Security Documents pursuant to
Subsection 6.02(a) but the execution and delivery of any such
Security Document by any attorney so appointed shall be deemed to
fulfill the Primary Obligation of the Company with respect to such
Security Document. The attorney so appointed shall not be required
to await any default of the Company in fulfilling its Primary
Obligation and may carry out the authority conferred by the
applicable power of attorney immediately upon the occurrence of a
Delivery Event. For purposes of determining whether a Delivery
Event has occurred, such attorney may, in the absence of actual
knowledge to the contrary, rely upon a certificate to that effect
from the Trustee or any member of the Committee.
(c) It will cause SIG Indiana to take all steps necessary or desirable
to ensure that $50,000 of the loan in the principal amount of
$100,000 made by it to a Related Party in calendar 1992 is
repaid no later than December 31, 1993 and the balance of such
loan is repaid no later than December 31, 1994.
(d) It will not, and will ensure that each other member of the Goran
Group does not, pay, directly or indirectly, any compensation,
benefits or other amounts in any fiscal year of the Company
commencing after December 31, 1992, to the five highest paid
employees (the "Five Employees"), not more than three of whom
shall be Related Parties of the Goran Group (including for this
purpose officers, directors and consultants), whether by way of
salary, bonus, dividend (other than dividends paid by the Company
itself in accordance with Subsection 6.02 (h)), fees or otherwise,
in an aggregate amount for the Goran Group exceeding the
Compensation Limit for the applicable fiscal year. For greater
certainty, any amount received or receivable by or on behalf of
Highlander Inn Inc. or by any other Related Party in respect of the
management of the Highlander Inn, Las Vegas, shall be included (net
of cash expenses) within the Compensation Limit, unless at the
applicable time Highlander Inn Inc. is a Subsidiary.
<PAGE> 58
52.
(e) Except as specifically permitted under Subsection 6.02 (d) or
paragraphs 6.02 (h)(vi) and (vii), it will not, and will ensure
that each member of the Goran Group does not, pay, directly or
indirectly, any compensation, benefits or other amounts in any
fiscal year of the Company commencing after December 31, 1992
whether by way of salary, bonus, dividend, fees or otherwise to any
Related Party of the Goran Group in an aggregate amount for the
Goran Group exceeding U.S. $50,000 and for greater certainty, any
amount paid to Symtech Micro Computer Services Inc. or Tritech
Financial Systems Inc. in respect of computer services, supplies or
software provided to any member of the Goran Group shall be
included within this U.S. $50,000 limit, but payment at
commercially competitive rates for hardware and included operating
system software purchased by the Goran Group in the ordinary course
of business shall not be included in such amount.
(f) It will not create or assume or permit to be outstanding, and will
ensure that each Subsidiary does not create or assume or permit to
be outstanding, any Indebtedness except Permitted Indebtedness.
(g) Notwithstanding the provisions of Article Nine, it will not enter
into, and will ensure that each Subsidiary does not enter into,
any transaction involving the transfer of all or substantially all
of its property or assets to another person or to another entity
with which it amalgamates other than, in either case, any one or
more Wholly-Owned Subsidiaries.
(h) It will not enter into or permit to continue, and will ensure that
each Subsidiary does not enter into or permit to continue, any
transaction with any Related Party except for:
(i) transactions specifically permitted under Subsections
6.02(d), (e) or (g),
(ii) subject to Subsection 6.02(d), transactions required by a
hotel management agreement between Pafco General Insurance
Company and Highlander Inn Inc.,
(iii) subject to Subsections 6.02(d) and (e), the payment of
amounts due to the Goran Group as described in Notes 14(a),
(d) and (e) to the audited Consolidated financial
statements of the Company for the fiscal year ended
December 31, 1991,
(iv) computer services provided by a corporation in which Robert
Symons has an interest, provided that such transactions
comply with Subsection 6.02(e),
<PAGE> 59
53.
(v) transactions relating to the loans by SIG Indiana or the
Company to Related Parties, as disclosed and described under
"Indebtedness of Officers and Directors to the Corporation"
on page 5 of the management information circular and proxy
statement of the Company prepared for the annual meeting of
shareholders held in connection with the fiscal year of the
Company ended December 31, 1991, which disclosure is full,
true and not misleading as at the date of such disclosure,
(vi) transactions relating to the acquisition of the Waste
Purification System Division from Symons International
Group Ltd. for a purchase price not exceeding $100,000,
which price shall include all liabilities (whether absolute
or contingent), directly or indirectly, assumed or arising
in connection with such transaction, and
(vii) any other transaction authorized by the Committee.
(i) It will not, and will ensure that each Subsidiary does not, declare
or pay any dividend or make any other distribution to its
shareholders (other than to another member of the Goran Group)
unless and until:
(i) at least 50% of the Initial Principal Amount of the Series
A Notes has been repaid or been redeemed pursuant hereto,
and
(ii) the Equity to Debt ratio exceeds 2.5:1.0,
whereupon, so long as, after the payment of any dividend or
other distribution, the Equity to Debt ratio will continue
to exceed 2.5:1.0, the Company may establish a dividend
policy at the discretion of its directors, which policy
shall not permit more than one-third of the Consolidated
after-tax earnings of the Company in any fiscal year to be
distributed to its shareholders.
(j) It will not, and will ensure that each Subsidiary does
not:
(i) redeem or purchase any of its outstanding shares (including,
without limitation, any preference shares of the Company)
from any person other than a member of the Goran Group
unless the proceeds therefrom are used exclusively to repay
the Senior Indebtedness or Permitted Indebtedness, or
(ii) issue any shares to any person other than a member of the
Goran Group without the prior consent of the Committee;
<PAGE> 60
54.
but IGF Insurance Company shall be entitled to purchase for
cancellation any currently outstanding shares held by
persons other than members of the Goran Group for aggregate
consideration not exceeding U.S. $115,000.
(k) It will pay all reasonable legal and other professional fees and
disbursements incurred by or on behalf of the Trustee or the
holders of Series A Notes in connection with the negotiation,
preparation, settlement, approval, execution, delivery,
registration, monitoring, enforcement and realization of or under
this Indenture, the Warrant Indenture and all instruments and other
documents contemplated herein and therein, and all provisions of
and transactions relating to any of the foregoing documents.
(l) It will not, and will ensure that each Subsidiary does not, make
or enter into any investment, acquisition or other transaction out
of the ordinary course of business, directly or indirectly, using
any cash or other property (including, without limitation, the
direct or indirect proceeds of any primary or secondary offering or
distribution of shares) unless and until:
(i) at least 50% of the Initial Principal Amount of the Series
A Notes has been repaid or redeemed, and
(ii) the Equity to Debt ratio exceeds 2.5:1.O, whereupon, so
long as, after such investment, acquisition or transaction,
the Equity to Debt ratio will continue to exceed 2.5:1.0,
the Company may make or enter into such an investment,
acquisition or other transaction;
provided, however, that this Subsection shall not prevent:
(iii) any member of the Goran Group from making prudent
investments in deposits and securities that would, in
conformity with Generally Accepted Accounting Principles,
be classified as current assets on a balance sheet of
such member;
(iv) the incorporation and operation of any new Wholly-Owned
Subsidiary in the insurance business if such Subsidiary is
regulated by insurance regulatory authorities in the United
States of America or Canada;
(v) any Wholly-Owned Subsidiary entering into any investment,
acquisition or other transaction with any other
Wholly-Owned Subsidiary; or
<PAGE> 61
55.
(vi) any member of the Goran Group entering into an agreement with another
member of the Goran Group to
(A) make loans or advances used exclusively to reduce the Senior
Indebtedness, or
(B) enter into reinsurance arrangements in the ordinary course of
business.
(m) It shall ensure, no later than March 31, 1993, that all of the amounts
or loans (the "Related Party Loans") referred to in paragraphs
6.02(g)(iii) and (v) are properly documented in accordance with the
practices of a prudent lender or creditor, and that all Related Party
Loans which were incurred or made in respect of any purchase(s) of
shares of any member of the Goran Group are properly secured by a fully
perfected pledge of all such shares purchased and that the amount
described in Note 14(a) to the audited Consolidated financial statements
of the Company for the fiscal year of the Company ended December 31,
1991 (the "SUM Loan") is secured by a guarantee of Symons International
Group Ltd. and that such guarantee is properly secured by a fully
perfected pledge of 1,200,000 common shares of the Company. The Company
agrees to, and to cause each Subsidiary to, maintain all security
referred to in this Subsection once it has been entered into. The
Company further agrees to specifically assign to the Trustee, at the
request of the Trustee or the Committee after any Delivery Event, all
Related Party Loans and all security referred to in this subsection as
collateral security for the obligations of the Company hereunder all
subject to the provisions of Subsection 6.02(b) and Section 6.13. The
Company shall take all available action to ensure the collection of all
Related Party Loans and realization of all security referred to in this
subsection in the event that any Related Party receives any proceeds of
any sale or other disposition of any shares of any member of the Goran
Group or any shareholder thereof.
(n) It shall not sell, transfer, assign or otherwise deal with the SUM
Loan without the prior written consent of the Committee.
(o) If all or substantially all of the assets of the Company or of any
Subsidiary are seized, compulsorily purchased or expropriated by any
governmental authority or agency, it shall replace, or cause to be
replaced, such assets.
(p) It shall ensure that the Senior Indebtedness and all guarantees and
other security in connection therewith is fully paid, released and
discharged by no later than December 31, 1994.
<PAGE> 62
56.
(q) It shall not change its name or amalgamate with another corporation
under a different name without giving at least ten business days prior
written notice to the Trustee of the new name and the date upon which
such change of name or amalgamation is to take effect, and within five
business days of the change of name or amalgamation, the company shall
provide the Trustee with:
(i) a notarial or certified copy of the articles of amendment or
articles of amalgamation effecting the change of name; and
(ii) an opinion from legal counsel satisfactory to the Trustee as to
the correct name of the Company and confirming that all
appropriate registrations, filings or recordings have been made
on behalf of the Trustee to fully and effectively maintain the
perfection and priority of the security interests created
hereby.
(r) It shall, within three business days of receipt of a written request
from the Trustee, furnish to the Trustee, or such other person as the
Trustee may direct, a true copy of this Trust Indenture, any security
delivered in connection herewith and any instrument supplemental or
ancillary hereto or thereto.
The Company hereby represents and warrants to the Trustee for the benefit of
the Trustee and the holders of Series A Notes (and for greater certainty not
for the benefit for the holders of Series B Notes) that (i) all of the
covenants and agreements contained in Section 6.02 (other than Subsections
6.02(a) and (b)) have been fully complied with as and from December 8, 1992 as
if this Indenture had been dated, and the Effective Date had occurred on,
December 8, 1992, and (ii) the Goran Group did not pay, directly or indirectly,
any compensation, benefits on other amounts in the fiscal year of the Company
ending December 31, 1992 to any Related Party, whether by pay of salary,
bonus, dividend (other than dividends paid by the Company itself in accordance
with Subsection 6.02(i)), fees or otherwise, in an aggregate amount for the
Goran Group except as set out in Schedule 1 hereto.
Section 6.03 Registrations and Deliveries: The Company agrees that:
(a) promptly after any Delivery Event or the execution of any document
relating to the Series A Lien and after the execution of each
instrument supplemental or ancillary hereto or thereto, as the case
may be, it shall, and shall cause each Subsidiary to, register, file
or record a financing statement or other prescribed statement in
respect thereof at all offices where, the opinion of counsel, such
registration, filing or recording may be necessary or of advantage in
preserving or protection the
<PAGE> 63
57.
Series A Lien provided that the Trustee or any agent of the Committee
shall be entitled to register, file or record same at any time after the
occurrence of any Delivery Event;
(b) from time to time after the occurrence of any Delivery Event, it shall,
and shall cause each of the Subsidiaries to, renew such registrations,
filings or recordings as required to maintain the Series A Lien as valid
and effective security;
(c) promptly after any such registrations, filings, recordings or renewals,
it shall cause to be delivered to the Trustee certificates establishing
such registrations, filings, recordings or renewals evidencing that the
provisions of this Section have been complied with;
(d) promptly after execution of this Indenture and of any Security
Document from time to time executed and after the execution of each
instrument supplemental or ancillary hereto or thereto, as the case may
be, it shall, and shall cause each of the Subsidiaries to, deliver to
the Trustee such documents of title, opinions of counsel, security
certificates and other documents as, in the opinion of counsel, are
necessary or of advantage to be delivered to preserve or protect the
Series A Lien in the property represented by such documents of title,
security certificates and other documents; and
(e) if the Series A Lien shall have become enforceable and the Trustee
shall have determined or become bound to enforce the same, it shall
and shall cause each Subsidiary to from time to time execute and do
all such assurances and things as the Trustee may reasonably require
for facilitating the realization of the Charged Property and for
exercising all the powers, authorities and discretions hereby
conferred upon the Trustee and for confirming to any purchaser of the
Charged Property or any part thereof, whether sold by the Trustee
hereunder or by judicial proceedings, the title to the property so
sold, and that it shall give and shall cause each Subsidiary to give
all notices and directions which the Trustee may consider expedient.
Section 6.04 After-Acquired Property and Further Assurances: The Company agrees
that after any Delivery Event:
(a) all property acquired by the Company after any of the Security
Documents become effective including, without limitation, any property
acquired by the Company to replace any property released from the
Specific Series A Lien and all improvements, extensions or additions
to the property owned by the Company which by this Indenture is, or is
intended to become, part of the Specifically
<PAGE> 64
58.
Charged Property (all such property, improvements, extensions and
additions being hereinafter referred to as "After-Acquired Property")
shall, upon the acquisition thereof, without any further conveyance,
mortgage, pledge, charge, assignment or act on the part of the Company
or the Trustee, become and be subject to the Specific Series A Lien as
fully and completely as though now owned by the Company and specifically
described or referred to herein;
(b) notwithstanding Subsection 6.04(a), the Company shall from time to time
execute and deliver all such further deeds or other instruments of
conveyance, assignment, transfer, mortgage, pledge or charge of the
After-Acquired Property or of any property intended to be subject to the
Specific Series A Lien, as are required by the provisions hereof or as,
in the opinion of counsel, are requisite or desirable for the purpose of
effectively mortgaging, assigning, pledging or charging such
After-Acquired Property or other property to and in favour of the Trustee
as and by way of a fixed and specific mortgage, pledge and charge for
the purpose and upon the conditions specified herein or for the purpose
of registering, filing, recording, re-registering, re-filing or
re-recording any such mortgage, pledge or charge, including without
limitation, any notice to an account debtor of any assignment hereunder;
provided that the foregoing obligation of the Company to execute and
deliver deeds and other instruments shall apply:
(i) whenever the Trustee may (and shall, pursuant to a
Series A Noteholders' Request authorizing the Trustee to do
so) request that the Company execute and deliver such deeds
and other instruments; or
(ii) whenever the Company has been required to specifically
mortgage its property pursuant to this Indenture;
(c) the Company shall from time to time execute and deliver all such
further deeds or instruments of conveyance, assignment, transfer or
charge of any property intended to be subject to the floating charge
created by a Security Document to which it is a party as are required by
the provisions of this Indenture or as, in the opinion of counsel, are
requisite or desirable for the purpose of effectively charging such
property in favour of the Trustee as and by way of a floating charge for
the purpose of and upon the conditions specified herein; and
(d) it will cause each Subsidiary from time to time to execute and
deliver all such further deeds or other instruments of conveyance,
assignment, transfer, mortgage, pledge or charge of any property of such
<PAGE> 65
59.
Subsidiary required to be subject to a Lien in favour of the
Trustee pursuant to the provisions of this Indenture.
Section 6.05 Special Covenant: The Company covenants and agrees with the
Trustee for the benefit of the Trustee and the Noteholders that, so long as any
Notes remain outstanding but subject to Subsection 6.02(h) it will, to the
fullest extent permitted by applicable laws, cause its Subsidiaries to pay to
it, by way of dividend or otherwise, all such sums as it shall require in order
to enable it to duly and punctually perform its covenants and obligations
hereunder.
Section 6.06 Trustee's Remuneration and Expenses: The Company covenants
that it will pay to the Trustee from time to time reasonable remuneration for
its services hereunder and will pay or reimburse the Trustee on demand for all
reasonable expenses, disbursements and advances incurred or made by the Trustee
in the administration or execution of the trusts hereby created (including the
reasonable compensation and the disbursements of its counsel and all other
advisers and assistants not regularly in its employ) both before any default
hereunder and thereafter until all duties of the Trustee under the trusts
hereof shall be finally and fully performed, except any such expense,
disbursement or advance as may arise from the Trustee's negligence or bad
faith. Any amount due under this Section and unpaid 30 days after request for
such payment shall bear interest at the rate of 8% per annum from the
expiration of such 30 days. After default all amounts so payable and the
interest thereon shall be payable out of any funds coming into the possession
of the Trustee or its successors in the trusts hereunder in priority to the
repayment of principal of and interest payable on the Notes.
Section 6.07 Not to Extend Time for Payment of Principal or Interest:
In order to prevent any accumulation after the maturity of any unpaid interest
or unpaid Notes, the Company covenants with the Trustee that it will not,
except with the approval of the Noteholders expressed by an Extraordinary
Resolution, directly or indirectly extend or assent to the extension of time
for the payment of any interest or principal payable hereunder or under the
Notes or directly or indirectly be a party to or approve any such arrangement
by purchasing or funding any of said interest or principal or in any other
manner. In case the time for payment of any such interest or principal shall
be so extended, whether for a definite period or otherwise, such interest or
principal shall not be entitled in case of default hereunder to the benefit of
this Indenture except subject to the prior payment in full of the principal of
all Notes issued hereunder then outstanding and of all interest payable on such
Notes, the payment of which has not been so extended, and of all other moneys
payable hereunder.
Section 6.08 Good Standing Certificate: The Company covenants with the
Trustee that, so long as any of the Notes remain outstanding, it will deliver
to the Trustee upon the execution and delivery hereof and concurrently with the
delivery of the financial
<PAGE> 66
60.
statements referenced in subparagraph 6.01(g)(i)(A) , and at any other time
if so requested by the Trustee:
(a) a certificate of the Company that the Company has complied
with all covenants, conditions or other requirements contained
in this Indenture, that each Subsidiary that carries on an
insurance business is in full compliance with all laws,
regulations, orders and directives pertaining thereto, or, if
such is not the case, specifying the laws, regulations, orders
or directives which are not being complied with and giving
particulars of such non-compliance, and that no Event of
Default has occurred which has not been waived or, if such is
not the case, specifying the covenant, condition or other
requirement which has not been complied with and giving
particulars of such non-compliance and setting out the Equity
to Debt ratio as of the date of the financial statements
delivered; and
(b) a certificate of the Company that none of the Company or any
of the Subsidiaries except 137171 Canada Inc. is an "insolvent
person" within the meaning of the Bankruptcy and Insolvency
Act (Canada).
Section 6.09 Warrant Indenture: Concurrently with the execution and delivery of
this Indenture the Company and the Trustee shall enter into the Warrant
Indenture and shall execute and deliver all documentation required to be
executed and delivered thereunder.
Section 6.10 Performance of Covenants by Trustee: If the Company shall fail to
perform any covenant on its part herein contained, the Trustee may in its
discretion, but (subject to Applicable Legislation and to the provisions of
Section 8.01) need not, notify the Noteholders of such failure or itself may
perform any of the said covenants capable of being performed by it and, if any
such covenant requires the payment or expenditure of money, may make such
payment or expenditure with its own funds, or with money borrowed by or
advanced to it for such purpose, but shall be under no obligation so to do; and
all sums so expended or advanced shall be repayable by the Company in the
manner provided in Section 6.06, but no such performance or payment shall be
deemed to relieve the Company from any default hereunder.
Section 6.11 Negative Pledge:
(a) Except for Permitted Liens and subject to Subsection 6.11
(b) , the Company shall not, and will ensure that each
Subsidiary does not, sell, assign, transfer, grant a Lien on
or dispose of, or permit to be sold, assigned, transferred,
subjected to a Lien or disposed of, or permit any Lien to
continue on or in respect of, any asset or property, now owned
or hereafter acquired by the Company or any Subsidiary
including, without limitation, any Charged Property or any
property or asset subject to
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a Lien under any Security Document without the Trustee's prior
written consent, such consent not to be unreasonably withheld.
The proceeds of any Permitted Lien, if any, shall be received
by the Company and used by the Company in the normal course of
its business provided that such uses are on commercially
reasonable terms and conditions and are not in breach of this
Indenture.
(b) Nothing in Subsection 6.11(a) shall prevent the Company or any
Subsidiary from selling or transferring for valuable
consideration (but not as security) any asset or property, now
or hereafter acquired by the Company or any Subsidiary:
(i) to any other member of the Goran Group, or
(ii) in the normal course of its own insurance business
and on commercially reasonable terms and conditions.
Section 6.12 Discretion of Trustee as to Dealing with Charged Property:
Whether or not the Series A Lien shall have become enforceable and the Trustee
shall have determined or become bound to enforce the same, the Trustee may at
any time and from time to time upon the written request of the Company and at
the expense of the Company but without any consent of the holders of Series A
Notes, but only if and so far as in the opinion of the Trustee the interests of
the holders of Series A Notes will not be prejudiced thereby, do or concur in
doing all or any of the following things:
(a) consent to any modification of or change in any agreements,
leases, licences, privileges, franchises, concessions and
contracts forming or which may be subsisting in respect of any
part of the Charged Property, provided the Trustee shall not
consent to any such modification or change unless the other
party to any such agreement, lease, licence, privilege,
franchise, concession or contract is not a Related Party and
the Company has delivered a certificate to the Trustee to that
effect;
(b) settle, adjust, refer to arbitration, compromise or arrange
all accounts, reckonings, controversies, questions, claims and
demands whatsoever in relation to any of the Charged Property;
(c) execute and do all such contracts, deeds, documents and things
and bring, defend and abandon all such actions, suits and
proceedings in relation to any of the Charged Property for
purposes not inconsistent with the provisions of this
Indenture as may seem expedient; and
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(d) generally act in relation to the Charged Property in such
manner and on such terms as to the Trustee may seem in the
interests of the holders of Series A Notes.
Section 6.13 Effective Date of Security Documents: Upon delivery of any
Security Document pursuant to Subsection 6.02 (a) or by an attorney pursuant to
Subsection 6.02 (b), such Security Document and all security, rights and
remedies in respect thereof (including, without limitation, the Series A Lien
constituted thereby) so delivered shall be automatically deemed to be effective
as of the Effective Date or, to the extent that any Security Document or any
provision thereof may not, in accordance with applicable law, be able to become
effective on the Effective Date, the earliest such date thereafter as such
Security Document or such provision may, in accordance with applicable law,
become effective without, in each case, any declaration or action on the part
of the Trustee or any other person.
ARTICLE SEVEN
REDEMPTION OF NOTES
Section 7.01 Redemption: Subject to Subsection 2.04(c) and Article Five, the
Company shall have the right, at its option and in the manner hereinafter in
this Article provided, to redeem the whole or from time to time any part of the
principal amount of the Notes outstanding upon payment of 100% of the principal
amount thereof plus accrued and unpaid interest to the date specified for
redemption, the whole constituting the redemption price.
Section 7.02 Places of Payment: The redemption price of Notes called for
redemption under the provisions of this Article shall be payable upon
presentation and surrender thereof, together, in the case of Bearer Notes, with
all appurtenant Coupons, if any, maturing subsequent to the redemption date, at
any of the places where the principal and interest payable in respect of the
Notes is expressed to be payable and at such other places (if any) as may be
specified in the notice of redemption.
Section 7.03 Partial Redemption:
(a) Subject to Article Four, any part, being $5,000 or an integral
multiple thereof, of a Note of a denomination in excess of
$5,000 may be selected and called for redemption as
hereinafter provided and all references in this Indenture to
redemption of Notes shall be deemed to include redemption of
such parts; but any partial redemption of Notes must be of
Notes having an aggregate principal amount of $1,000,000 or a
higher integral multiple of $500,000 thereof.
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(b) The holder of any Note of which part only is redeemed shall,
upon presentation of his said Note and upon receiving the
moneys payable to him by reason of such redemption, surrender
the said Note, together, in the case of Bearer Notes, with all
appurtenant Coupons, if any, maturing subsequent to the
redemption date, to the Trustee or, alternatively, pursuant to
the Agency Agreement, to any Paying Agent, and the Trustee or
such Paying Agent shall either make the appropriate notation
of such partial redemption on the Note and return the same to
the holder or cancel the same and without charge forthwith
certify and deliver to the said holder a new Note or Notes of
an aggregate principal amount equal to the unredeemed part of
the principal amount of the said Note so surrendered.
Section 7.04 Selection for Redemption: In case less than all of the Notes are
to be redeemed, the Company shall in each such case, at least twenty-one days
before the date upon which the notice of redemption is to be given, notify the
Trustee and the Principal Paying Agent in writing of its intention to redeem
Notes and of the aggregate principal amount of Notes so to be redeemed. Subject
to Section 4.13, the Notes so to be redeemed shall be selected by the Trustee,
or, if so requested by the Company and approved by the Trustee, by the
Principal Paying Agent, by lot in such manner as the Trustee shall deem
equitable. For this purpose, the Trustee may make regulations with regard to
the manner in which such Notes may be so selected, and regulations so made
shall be valid and binding upon all holders of Notes.
Section 7.05 Notice of Redemption: Notice of redemption of any Notes shall be
given by or on behalf of the Company to the holders of the Notes which are to
be redeemed, not more than 60 days nor less than 30 days prior to the
redemption date, in the manner provided in Section 14.01. Every such notice
shall specify the aggregate principal amount of Notes called for redemption,
the date on which such Notes are to be redeemed, the redemption price and the
places of payment, shall state that interest upon the principal amount of Notes
called for redemption shall cease to be payable from and after the redemption
date. In addition, unless all the Notes are being redeemed, the notice of
redemption shall specify the distinguishing letters and/or numbers of the Notes
which are to be redeemed and of the Notes previously called for redemption and
not presented for payment and, if any such Note is to be redeemed in part only,
the principal amount of such part.
Section 7.06 Payment of Redemption Price: Upon notice being given in
accordance with the provisions of Section 7.05 and upon presentation and
surrender of the Notes, and in the case of Bearer Notes the Coupons appurtenant
thereto, in accordance with Section 7.02 , the principal amount of each Note so
called for redemption and the principal amount to be redeemed of each Note so
called for redemption in part shall be paid and redeemed at the places and in
the manner and currency specified herein and in the
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Agency Agreement and at the redemption price, together with interest accrued to
the redemption date, on the redemption date and with the same effect as if it
were the date of maturity specified in such Note; but all unpaid interest
instalments represented by Coupons appertaining to such Notes which shall have
matured on or prior to the redemption date shall continue to be payable to the
bearers of such Coupons severally and respectively, and the holders of such
Notes shall receive such unpaid instalments of interest only upon their
presentation and surrender of the Coupons representing such instalments. From
and after the redemption date, unless moneys for the redemption of the Notes
called for redemption shall not have been made available at any of the places
specified pursuant to Section 7.02 for redemption of the Notes upon surrender
and presentation thereof at any of such places on the redemption date, the
Notes shall cease to bear interest, the Coupons appertaining thereto (whether
or not attached) maturing subsequent to the redemption date, if any, shall be
void and no payment shall be made in respect thereof, and the only right of the
holders of such Notes shall be to receive payment of the redemption price
together with interest accrued to the redemption date as aforesaid. If moneys
for the redemption of the Notes called for redemption are not made available at
any of the places specified pursuant to Section 7.02 for redemption of the
Notes until after the redemption date, the Notes shall continue to bear
interest until such moneys have been so made available.
Section 7.07 Deposit of Redemption Moneys: The Company shall provide for
every such redemption by paying to or to the order of the Trustee or, in
accordance with the Agency Agreement, the Principal Paying Agent, not later
than the last business day preceding the redemption date, such sums as may be
sufficient to pay the redemption price of such Notes, From the sums so
deposited the Trustee or the Paying Agents, as the case may be, shall, in
accordance with the provisions of the Agency Agreement, pay or cause to be paid
to the holders of such Notes so called for redemption, upon surrender of such
Notes, the principal and interest to which they are respectively entitled on
redemption.
Section 7.08 Home Office Payment: Notwithstanding any of the other provisions
of this Article or of Section 2.09, payment of the redemption price or
principal repayment of a portion of any Registered Note may be made to the
holder thereof without presentation or surrender thereof if there shall have
been filed with the Trustee a certificate of the Company stating that the
Company has entered into an agreement with such holder or the person for whom
such holder is acting as nominee to the effect that (i) payments will be so
made, (ii) such holder or other person shall make a notation on such Note or a
paper attached thereto of the portions thereof so redeemed, and (iii) such
holder or other person will not dispose of such Note or permit its nominee to
dispose of such Note without prior to the delivery thereof presenting such Note
to the Trustee for appropriate notation or confirmation of the notation thereon
of the portion of the principal amount thereof which has been redeemed or
surrendering
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the same to the Trustee in exchange for a Note or Notes in authorized
denominations aggregating the same principal amount as the principal amount of
such Note so surrendered which shall remain unpaid. A copy of such agreement
or of the appropriate portion of such agreement shall be filed with the Trustee
along with said certificate of the Company, The Trustee shall not be under any
duty to determine that such notations shall have been made.
ARTICLE EIGHT
DEFAULT AND ENFORCEMENT
Section 8.01 Events of Default:
(a) Each of the following events is herein sometimes called an
"Event of Default":
(i) the Company fails to pay any principal of the Series A
Notes within five days of the due date or fails to pay any
interest due thereon or other amount relating thereto
within 10 days of the due date; or
(ii) the Company fails to pay any principal of the Series B
Notes within five days of the due date or fails to pay
any interest due thereon or other amount relating thereto
within 10 days of the due date; or
(iii) the Company or any Subsidiary defaults in the performance
or observance of or compliance with any of the covenants
contained or referred to in Subsection 6.02(a), (c), (d),
(e), (g), (h), (i), (j), (1) or (n); or
(iv) the Company or any Subsidiary defaults in performance or
observance of or compliance with any of the covenants
contained or ref erred to in this Indenture (other than
the covenants referred to in paragraph 8.01(a) (iii)) or
any document executed pursuant hereto which default is
incapable of remedy or which, if capable of remedy, is not
in the opinion of the Trustee remedied within 30 days
after notice of such default shall have been given to the
Company by the Trustee; or
(v) any obligation to repay any indebtedness for Borrowed Money
of the Company or any Subsidiary, having an aggregate
outstanding principal amount of at least $500,000 (or its
equivalent in any other currency or currencies), becomes
due and payable before its stated maturity by reason of
default in respect of the terms thereof or any
indebtedness
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for Borrowed Money having an aggregate outstanding
principal amount of at least $500,000 (or its equivalent
in any other currency or currencies) is not paid at its
stated maturity (or by the expiry of any applicable grace
period) or if due on demand is not paid on demand (or by
the expiry of any applicable grace period); or
(vi) a distress or execution or other legal process is levied
or enforced upon or against any part of the assets or
revenues of the Company or any Subsidiary and is not
satisfied or the Company has not taken bona fide action to
dispute the same within 30 days of the Company having
become aware of same; or
(vii) an encumbrancer takes possession or a Receiver or person
with similar powers is appointed of the whole or any
part of the assets or revenues of the Company or any
Subsidiary; or
(viii) the Company or any Subsidiary shall make a general
assignment for the benefit of its creditors or a
proposal under bankruptcy or similar laws, or shall be
declared bankrupt, or shall become insolvent or if a
custodian or a sequestrator or a receiver and manager or
any other officer with similar power shall be appointed of
the Company or any Subsidiary or the whole or any part of
the undertaking, property, assets or revenues of the
Company or any Subsidiary or ceases or threatens to cease
to carry on its business or any substantial part of its
business; or
(ix) a judgment or decree shall be made or an effective
resolution be passed for the winding up, liquidation or
dissolution of the Company or a Subsidiary except for the
purpose of giving effect to a merger, consolidation,
reconstruction, amalgamation or arrangement permitted
under this Indenture;
provided that in, the case of paragraphs 8.01(a), (vi) and
(vii), the Trustee shall have certified that, in its opinion,
such event is materially prejudicial to the interests of the
holders of Series A Notes or the holders of Series B Notes or
both.
(b) For purposes of this Indenture, each Event of Default except that
specified in paragraph 8.01 (a)(ii) is called a "Series A
Default".
(c) The Trustee shall give to the Noteholders, in the manner
provided in Section 14.01 and within 30 days after the Trustee
becomes aware of the occurrence of an Event of
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Default, notice of every Event of Default so occurring and
continuing at the time the notice is given, unless the Trustee
in good faith determines that the withholding of such notice
is in the best interests of the Noteholders and gives written
notice of such determination to the Company.
Section 8.02 Acceleration on Default:
(a) Subject to Subsection 8.02(b) and Section 8.03, in case any
Event of Default hereunder has occurred which has not been
waived, the Trustee may in its discretion, and shall upon
receipt of a Noteholders' Request or if so directed by the
provisions of any Extraordinary Resolution that may be passed by
the Noteholders, by notice in writing to the Company declare the
principal of and interest payable on one or more series of Notes
then outstanding and other moneys payable hereunder to be due
and payable and, subject to Article Four, the same shall
forthwith become immediately due and payable to the Trustee,
anything therein or herein to the contrary notwithstanding, and
the Company shall forthwith pay to the Trustee for the benefit
of the Noteholders the full principal amount of all Notes
outstanding applicable to the date of repayment together with
all accrued and unpaid interest to such date and all other
liabilities in respect thereof. Such payment when made shall be
deemed to have been made in discharge of the Company's
obligations hereunder and any moneys so received by the Trustee
shall be applied as provided in Section 8.06.
(b) Notwithstanding Subsection 8.02(a):
(i) the Trustee shall not accelerate the payment of principal
and interest payable on the Series B Notes if the Event
of Default that would be relied upon for such purpose is
one specified in paragraphs 8.01(a)(i) or (iii) unless
it has received a Series A Noteholders' Request to do so
or is so permitted by a Series A Extraordinary Resolution;
(ii) if the Event of Default to be relied upon for purposes of
an acceleration hereunder is a Series A Default, the
Trustee shall be required to accelerate the payment of
principal and interest payable on the Series A Notes upon
receipt of a Series A Noteholders' Request to do so or if
so required by a Series A Extraordinary Resolution; and
(iii) if the Event of Default to be relied upon for purposes of
an acceleration hereunder is one specified in paragraph
8.01(a)(ii), the Trustee shall not be required to
accelerate the payment of principal and interest payable
on the Notes unless it has received a Series B
Noteholders' Request to
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do so or is so required by a Series B Extraordinary
Resolution and may not accelerate the payment of principal
and interest payable on the Notes unless it has given not
less than 7 days notice to the holders of Series A Notes,
such notice to be given in accordance with Subsection
14.01.
Section 8.03 Waiver of Default: In case any Event of Default hereunder has
occurred otherwise than by default in payment of any principal moneys due on
December 30, 1998:
(a) subject to Subsection 8.03(b), the holders of not less than 75%
of the principal amount of the Notes then outstanding shall
have the power (in addition to and subject to the powers
exercisable by Extraordinary Resolution as hereinafter provided)
by requisition in writing to instruct the Trustee to waive the
default and/or cancel any declaration made by the Trustee
pursuant to Section 8.02 and the Trustee shall thereupon waive
the default and/or cancel such declaration upon such terms and
conditions as shall be prescribed in such requisition;
(b) despite Subsection 8.03(a) , no waiver of a Series A Default
given pursuant to Subsection 8.03(a) shall be effective unless
such requisition is signed by the holders of not less than 75%
of the principal amount of the Series A Notes then outstanding
and no waiver of an Event of Default specified in paragraph
8.01(a)(ii) shall be effective unless such requisition is signed
by the holders of not less than 75% of the principal amount of
the Series B Notes then outstanding; and
(c) the Trustee, so long as it has not become bound to institute any
proceedings hereunder, shall have power to waive the default if,
in the Trustee's opinion, the same shall have been cured or
adequate satisfaction made therefor, and in such event to cancel
any such declaration theretofore made by the Trustee in the
exercise of its discretion, upon such terms and conditions as
to the Trustee may seem advisable;
but no act or omission either of the Trustee or of the Noteholders in the
premises shall extend to or be taken in any manner whatsoever to affect any
subsequent default hereunder or the rights resulting therefrom.
Section 8.04 Proceedings by the Trustee:
(a) Whenever any Event of Default hereunder has occurred and the
Trustee has given notice to the Company in accordance with
Section 8.02, but subject to the provisions of Article Four,
Subsection 8.02(b) and Section 8.03 and to the provisions of any
Extraordinary Resolution that may
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be passed by the Noteholders or the holders of Notes of either
series as a series:
(i) the Trustee, in the exercise of its discretion, may
proceed to enforce the rights of the Trustee and the
Noteholders by any action, suit, remedy or proceeding
authorized or permitted by law or by equity and may file
such proofs of claim and other papers or documents as may
be necessary or advisable in order to have the claims of
the Trustee and of the noteholders lodged in any
bankruptcy, winding-up or other judicial proceedings
relative to the Company; and
(ii) upon receipt of a Noteholders' Request, or upon being so
directed by the provisions of an Extraordinary
Resolution and upon being indemnified to its satisfaction
as provided in Section 15.02, the Trustee shall exercise
or take such one or more of the said remedies as the
Noteholders' Request or Extraordinary Resolution may
direct or, if such Noteholders' Request or Extraordinary
Resolution contains no direction, as the Trustee may deem
expedient.
(b) No such remedy for the enforcement of the rights of the Trustee
or of the Noteholders shall be exclusive of or dependent on any
other such remedy but any one or more of such remedies may from
time to time be exercised independently or in combination.
(c) Subject to Subsection 8.02(b), upon the exercising or taking by
the Trustee of any of such remedies whether or not a declaration
and demand have been made pursuant to Section 8.02, the
principal of and interest payable on all Notes then outstanding
and the other moneys payable under Section 8.02 shall forthwith
become due and payable to the Trustee as though such a
declaration and a demand therefor had actually been made.
(d) All rights of action hereunder may be enforced by the Trustee
without the possession of any of the Notes or the production
thereof on the trial or other proceedings relative thereto.
Section 8.05 Suits by Noteholders:
(a) No holder of any Note or Coupon shall have any right to
institute any action, suit or proceeding at law or in equity
for the purpose of enforcing payment of the principal of or
interest payable on the Notes or for the execution of any trust
or power hereunder or for the appointment of a liquidator or
receiver or for a receiving order under applicable bankruptcy
law or to
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have the Company wound up or to file or prove a claim in any
liquidation or bankruptcy proceeding or for any other remedy
hereunder, unless (i) such holder shall previously have given
to the Trustee written notice of the happening of an Event of
Default hereunder; and (ii) subject to Subsection 8.02(b), the
Noteholders by Extraordinary Resolution or by Noteholders'
Request shall have made a request to the Trustee and the
Trustee shall have been afforded reasonable opportunity either
itself to proceed to exercise the powers hereinbefore granted
or to institute an action, suit or proceeding in its name for
such purpose; and (iii) the Noteholders or any of them shall
have furnished to the Trustee, if so required by the Trustee,
the funds and indemnity required to be furnished to the
Trustee pursuant to Subsection 15.02 (b) ; and (iv) the
Trustee shall have failed to act within a reasonable time
after such notification and request and an offer of such funds
and indemnity.
(b) All conditions, constraints and limitations pursuant to this
Indenture of or on the Trustee's rights and remedies
hereunder, including, without limitation, upon, after or in
respect of any Event of Default are for the sole and exclusive
benefit of the Noteholders and not the Company or any other
person. Neither the Company nor any other person shall be
entitled to inquire into whether any such condition,
constraint or limitation has been breached or complied with,
nor to rely upon or assert any such breach or non-compliance
as a defence or otherwise.
Section 8.06 Application of Moneys Received by the Trustee: Except as
otherwise herein provided, all moneys received by the Trustee and arising from
any enforcement hereof shall be held by the Trustee and applied by it, together
with any other moneys then or thereafter in the hands of the Trustee available
for the purpose, as follows:
(a) firstly, in payment or reimbursement to the Trustee of the
remuneration, expenses, disbursements and advances of the
Trustee earned, incurred or made in the administration or
execution of the trusts hereunder or otherwise in relation to
this Indenture with interest thereon as herein provided;
(b) secondly, but subject to the provisions of Section 6.04, in
payment of the principal amount outstanding on the Series A
Notes together with all accrued and unpaid interest to such
date on and all other liabilities relating to the Series A
Notes which shall then be outstanding and which are known to
the Trustee ratably and proportionately and without preference
or priority or discrimination as between principal and
interest unless otherwise directed by a Series A Extraordinary
Resolution and in that case in such order of priority as
between
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principal and interest as may be directed by such Series A
Extraordinary Resolution;
(c) thirdly, but subject to the provisions of Section 6.04, in
payment of the principal amount outstanding on the Series B
Notes together with all accrued and unpaid interest to such
date on and all other liabilities relating to the Series B
Notes which shall then be outstanding ratably and
proportionately and without preference or priority or
discrimination as between principal and interest unless
otherwise directed by a Series B Extraordinary Resolution and
in that case in such other order of priority as between
principal and interest as may be directed by such Series B
Extraordinary Resolution; and
(d) the surplus, if any, of such moneys shall be paid to the
Company or its assigns;
but no payment shall be made pursuant to Subsection (b) or (c) above in respect
of the principal of or interest payable on any Note held, directly or
indirectly, by or for the benefit of the Company or any affiliate (other than
any Note pledged for value and in good faith to a person other than the Company
or any affiliate but only to the extent of such person's interest therein)
except subject to the prior payment in full of the principal and interest of
all Notes which are not so held, provided that the Trustee shall not be liable
in respect of any such payment unless it had actual knowledge that the Note in
respect of which payment was made was held, directly or indirectly, by or for
the benefit of the Company or any affiliate thereof.
Section 8.07 Distribution of Proceeds: Payments to Noteholders pursuant to
Subsection 8.06(b) and (c) shall be made as follows:
(a) At least 15 days' notice of every such payment shall be given
in the manner provided in Section 14.01 specifying the time
when and the place or places where the Notes are to be
presented and the amount of the payment and the application
thereof as between principal and interest.
(b) Payment of any Note shall be made upon presentation thereof at
any one of the places specified in such notice and any such
Note thereby paid in full shall be surrendered, otherwise a
memorandum of such payment shall be endorsed thereon; but the
Trustee may in its discretion dispense with presentation and
surrender or endorsement in any special case upon such
indemnity being given as it shall deem sufficient.
(c) From and after the date of payment specified in the notice,
interest shall accrue only on the amount owing on each Note
after giving credit for the amount of the payment specified in
such notice unless such Note is duly
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presented on or after the date so specified and payment of
such amount is not made.
(d) The Trustee shall not be required to make any interim payment
to Noteholders unless the moneys in its hands, after reserving
thereout such amount as the Trustee may think necessary to
provide for the payments mentioned in Subsection 8.06 (a),
exceed two per cent of the principal amount of the then
outstanding Notes.
Section 8.08 Remedies Cumulative: No remedy herein conferred upon or
reserved to the Trustee, or upon or to the holders of Notes or any of them, is
intended to be exclusive of any other remedy, but each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now existing or hereafter to exist by law or in equity or by
statute.
Section 8.09 Judgment Against the Company: The Company covenants and agrees
with the Trustee that, in case of any judicial or other proceedings to enforce
the rights of the Noteholders, judgment may be rendered against it in favour of
the Noteholders or in favour of the Trustee, as trustee for the Noteholders,
for any amount which may remain due in respect of the Notes and the interest
payable thereon and all other liabilities in respect thereof.
Section 8.10 Trustee Appointed Attorney: The Company hereby irrevocably
appoints the Trustee to be the attorney of the Company for and in the name and
on behalf of the Company to execute any instruments and do any things which the
Company ought to execute and do hereunder or under any document executed
pursuant hereto and which the Company has not executed or done and generally to
use the name of the Company in the exercise of all or any of the powers hereby
conferred on the Trustee, with full powers of substitution and revocation.
ARTICLE NINE
SUCCESSOR COMPANIES
Section 9.01 Certain Requirements in Respect of Merger etc.: In addition
to the covenants contained in Section 6.02, so long as any of the Notes remain
outstanding, the Company shall not enter into any transaction (whether by way
of reconstruction, reorganization, consolidation, arrangement, amalgamation,
merger, transfer, lease, sale or otherwise) whereby all or substantially all of
its undertaking or assets would become the property of another person or, in
the case of any such amalgamation, of the continuing company resulting
therefrom unless, but may do so if:
(a) such other person or continuing company is a corporation
(herein called the "successor company") incorporated under the
laws of Canada or one of its provinces;
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(b) the successor company shall execute, prior to,
contemporaneously with or forthwith after the consummation of
such transaction, such instruments as are satisfactory to the
Trustee and in the opinion of counsel are necessary or
advisable either to evidence the assumption by the successor
company of liability for the due and punctual payment of the
principal of and interest payable on all the Notes and all
other moneys payable hereunder and the covenant of the
successor company to pay the same and its agreement to observe
and perform all the covenants and obligations of the Company
under this Indenture; or evidence the agreement by the
successor company to unconditionally guarantee the due and
punctual payment of all amounts payable under this Indenture;
(c) such transaction shall to the satisfaction of the Trustee and
in the opinion of counsel be upon such terms as to
substantially preserve and not to materially impair the Series
A Lien or not to materially prejudice any of the rights and
powers of the Trustee or of the Noteholders hereunder; and
(d) no condition or event shall exist in respect of the Company or
the successor company either at the time of or immediately
after the consummation of such transaction and after giving
full effect thereto or immediately after the successor company
complying with the provisions of Subsection (b) above which
constitutes or would constitute an Event of Default hereunder.
Section 9.02 Vesting of Powers in Successor: Whenever the conditions of
Section 9.01 have been duly observed and performed the successor company shall
possess and from time to time may exercise each and every right and power of
the Company under this Indenture in the name of the Company or otherwise and
any act or proceeding by any provision of this Indenture required to be done or
performed by any directors or officers of the Company may be done and performed
with like force and effect by the like directors or officers of such successor
company.
ARTICLE TEN
INVESTMENT OF TRUST FUNDS
Section 10.01 Unless otherwise provided in this Indenture, any moneys held
by the Trustee, which under the trusts of this Indenture may or ought to be
invested, shall be invested and reinvested by the Trustee in its name or under
its control in any securities in which trustees are, by the laws of the
Province of Ontario, authorized to invest trust moneys, provided that such
securities are expressed to mature within two years after their purchase by the
Trustee, and unless and until the Trustee shall have declared the principal of
and interest payable on the Notes to
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be due and payable, the Trustee shall so invest such moneys at the request of
the Company. Unless an Event of Default shall have occurred and be continuing,
all interest or other income received by the Trustee in respect of such
investments shall belong to the Company.
ARTICLE ELEVEN
MEETINGS OF NOTEHOLDERS
Section 11.01 Right to Convene Meetings: The Trustee may at any time and
from time to time and shall, on receipt of a request of the Company or a
Noteholders' Request and upon being indemnified to its reasonable satisfaction
by the Company or by the Noteholders signing such Noteholders' Request against
the costs which may be incurred in connection with the calling and holding of
such meeting, convene a meeting of the Noteholders. In the event of the
Trustee failing within 30 days after receipt of such request and indemnity to
give notice convening such meeting, the Company or such Noteholders, as the
case may be, may convene such meeting. Every such meeting shall be held in the
Cities of Toronto or London, England or at such other place as may be approved
or determined by the Trustee.
Section 11.02 Notice: At least 30 days notice of any meeting shall be given
to the Noteholders in the manner provided in Section 14.01 and a copy thereof
shall be sent by post to the Trustee unless the meeting has been called by it
and to the Company unless the meeting has been called by it. Such notice shall
state the time when and the place where the meeting is to be held and shall
state briefly the general nature of the business to be transacted thereat and
it shall not be necessary for any such notice to set out the terms of any
resolution to be proposed or any of the provisions of this Article Eleven.
Section 11.03 Chairman: Some person, who need not be a Noteholder, nominated
in writing by the Trustee shall be chairman of the meeting and if no person is
so nominated, or if the person so nominated is not present within 15 minutes
from the time fixed for the holding of the meeting, the Noteholders present in
person or by proxy shall choose some person present to be chairman.
Section 11.04 Quorum: Subject to the provisions of Section 11.12, at any
meeting of the Noteholders a quorum shall consist of Noteholders present in
person or by proxy and holding at least 25% in principal amount of the then
outstanding Notes. If a quorum of the Noteholders shall not be present within
half-an-hour from the time fixed for holding any meeting, the meeting, if
convened by the Noteholders or on a Noteholders' Request, shall be dissolved;
but if otherwise convened the meeting shall stand adjourned to the same day in
the next week (unless such day is not a business day in which case it shall
stand adjourned to the next following business day thereafter) at the same time
and place, and no notice shall be
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required to be given in respect of such adjourned meeting. At the adjourned
meeting the Noteholders present in person or by proxy shall form a quorum and
may transact the business for which the meeting was originally convened
notwithstanding that they may not hold 25% in principal amount of the then
outstanding Notes.
Section 11.05 Power to Adjourn: The chairman of any meeting at which a quorum
of the Noteholders is present may with the consent of the holders of a majority
in principal amount of the Notes represented thereat adjourn any such meeting
and no notice of such adjournment need be given except such notice, if any, as
the meeting may prescribe.
Section 11.06 Show of Hands: Every question submitted to a meeting shall be
decided in the first place by a majority of the votes given on a show of hands
except that votes on Extraordinary Resolutions shall be given in the manner
hereinafter provided. At any such meeting, unless a poll is duly demanded as
herein provided, a declaration by the chairman that a resolution has been
carried or carried unanimously or by a particular majority or lost or not
carried by a particular majority shall be conclusive evidence of the fact.
Section 11.07 Poll: On every Extraordinary Resolution, and on any other
question submitted to a meeting when demanded after a vote by show of hands by
the chairman or by any Noteholder or proxy for a Noteholder, a poll shall be
taken in such manner and either at once or after an adjournment as the chairman
shall direct. Questions other than Extraordinary Resolutions shall, if a poll
be taken, be decided by the votes of the holders of a majority in principal
amount of the Notes represented at the meeting and voted on the poll.
Section 11.08 Voting: On a show of hands every person who is present and
entitled to vote, whether as a Noteholder or as proxy for one or more absent
Noteholders or both, shall have one vote. On a poll each Noteholder present in
person or represented by a proxy duly appointed by instrument in writing shall
be entitled to one vote in respect of each $5,000 principal amount of Notes of
which he shall then be a holder. A proxy need not be a Noteholder.
Section 11.09 Regulations: The Trustee or the Company with the approval of the
Trustee may from time to time make and from time to time vary such regulations
as it shall from time to time think fit:
(a) for the deposit of instruments appointing proxies at such
place as the Trustee, the Company or the Noteholders
convening the meeting, as the case may be, may in the notice
convening the meeting direct; and
(b) for the deposit of instruments appointing proxies at some
approved place or places other than the place at which the
meeting is to be held and enabling particulars of such
instruments appointing proxies to be mailed, cabled
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or telegraphed before the meeting to the Company or to the
Trustee at the place where the same is to be held and for the
voting of proxies so deposited as though the instruments
themselves were produced at the meeting.
Any regulations so made shall be binding and effective and the votes given in
accordance therewith shall be valid and shall be counted. Save as such
regulations may provide, the only persons who shall be recognized at any
meeting as the holders of any Notes, or as entitled to vote or be present at
the meeting in respect thereof, shall be the holders of Notes and persons whom
holders of Notes have by instrument in writing duly appointed as their proxies.
Section 11.10 Company and Trustee May be Represented: The Company and the
Trustee, by their respective officers and directors, and the legal advisers of
the Company and the Trustee, may attend any meeting of the Noteholders but
shall have no vote as such.
Section 11.11 Powers Exercisable by Extraordinary Resolution: In addition to
all other powers stated in this Indenture to be exercisable by Extraordinary
Resolution or conferred upon them by any other provisions of this Indenture or
by law, a meeting of the Noteholders shall have the following powers
exercisable from time to time by Extraordinary Resolution:
(a) power to agree to any modification, abrogation, alteration,
compromise or arrangement of the rights of Noteholders and/or
the Trustee against the Company or against its undertaking,
property and assets or any part thereof whether such rights
arise under this Indenture or the Notes or otherwise;
(b) powers to direct or authorize the Trustee to exercise any
power, right, remedy or authority given to it by this
indenture or the Notes in any manner specified in such
Extraordinary Resolution or to refrain from exercising any
such power, right, remedy or authority;
(c) power to waive and direct the Trustee to waive any default on
the part of the Company in complying with any provision of
this Indenture or the Notes and/or to cancel and to direct the
Trustee to cancel any declaration in respect of such default
made by the Trustee pursuant to Section 8.02, either
unconditionally or upon any conditions specified in such
Extraordinary Resolution;
(d) power to restrain any Noteholder from taking, instituting or
maintaining any suit, action or proceeding for the payment of
principal or interest or for the execution of any trust or
power hereunder or for the appointment of a trustee in
bankruptcy or to have the Company wound up or for any other
remedy hereunder;
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(e) power to sanction the exchange of Notes for or the conversion
of Notes into shares, bonds, debentures, notes or any other
securities or obligations of the Company or any other
corporation which shall be agreed to by the Company and, if
applicable, such other corporation;
(f) power to assent to any modification of or change in or
omission from the provisions contained herein or any deed or
instrument supplemental hereto which shall be agreed to by the
Company and to authorize the Trustee to concur in and execute
any deed or instrument supplemental hereto embodying such
modification, change or omission;
(g) power to repeal, modify or amend any Extraordinary Resolution
previously passed by the Noteholders; and
(h) power to appoint and remove a committee to consult with the
Trustee and to delegate to such committee (subject to such
limitations, if any, as may be prescribed in such
Extraordinary Resolution) all or any of the powers which the
Noteholders could exercise by Extraordinary Resolution under
the foregoing Subsections (b), (c) and (d). The Extraordinary
Resolution making such appointment may provide for payment of
the expenses and disbursements of and compensation to such
committee. Such committee shall consist of such number of
persons as shall be prescribed in the Extraordinary Resolution
appointing it, and the members need not be themselves
Noteholders. Subject to the Extraordinary Resolution
appointing it, every such committee may elect its chairman and
may make regulations respecting its quorum, the calling of its
meetings, the filling of vacancies occurring in its number,
the manner in which it may act and its procedure generally and
such regulations may provide that the committee may act at a
meeting at which a quorum is present or may act by minutes
signed by a majority of the members thereof or the number of
members thereof necessary to constitute a quorum, whichever is
the greater. All acts of any such committee within the
authority delegated to it shall be binding upon all
Noteholders. Neither the committee nor any member thereof shall
be liable for any loss arising from or in connection with any
action taken or omitted to be taken by them in good faith.
Notwithstanding the foregoing, no committee appointed pursuant
to this Subsection 11.11(h) by Extraordinary Resolution shall
have the power to:
(i) change the maturity of any Note or the dates on which
principal or interest is payable in respect thereof
or reduce the principal amount or interest on the
Notes, without the consent of the holders of each
Note so affected; or
(ii) change the currency of payment of the Notes; or
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(iii) affect or impair any of the rights of the Trustee
hereunder, without the approval of the Trustee.
Section 11.12 Meaning of "Extraordinary Resolution":
(a) The expression "Extraordinary Resolution" when used in this
Indenture means, subject as hereinafter in this Section and in
Section 11.15 provided, a resolution proposed to be passed as
an Extraordinary Resolution at a meeting of Noteholders duly
convened for the purpose and held in accordance with the
provisions of this Article at which the holders of more than
50% (unless such business involves consideration of a proposal
to: (i) change the maturity of the Notes or the dates on
which interest is payable in respect of the Notes; or (ii)
reduce the principal amount of or interest owing under the
Notes; or (iii) change the currency of payment of the Notes,
in which case the necessary quorum shall consist of persons
present in person or by proxy and holding at least 75%), in
principal amount of the Notes then outstanding are present in
person or by proxy and passed by the favourable votes of the
holders of not less than 75% of the principal amount of Notes
represented at the meeting and voted on a poll upon such
resolution.
(b) If at any such meeting the holders of more than 50% in
principal amount of the Notes then outstanding are not present
in person or by proxy within half-an-hour after the time
appointed for the meeting, then the meeting, if convened by
Noteholders or on a Noteholders' Request, shall be dissolved;
but if otherwise convened the meeting shall stand adjourned to
such date, being not less than 21 nor more than 60 days later,
and to such place and time as may be appointed by the
chairman. Not less than 10 days notice shall be given of the
time and place of such adjourned meeting in the manner
provided in Section 14.01. Such notice shall state that at
the adjourned meeting at least two Noteholders present in
person or by proxy shall form a quorum but it shall not be
necessary to set forth the purposes for which the meeting was
originally called or any other particulars. At the adjourned
meeting at least two Noteholders present in person or by proxy
shall form a quorum, whatever the principal amount of the
Notes held or represented, and may transact the business for
which the meeting was originally convened (unless such
business involves consideration of a proposal to: (i) change
the maturity of the Notes or the dates on which interest is
payable in respect of the Notes; or (ii) reduce the principal
amount of or interest owing under the Notes; or (iii) change
the currency of payment of the Notes, in which case the
necessary quorum for an adjourned meeting shall consist of
persons present in person or by proxy and holding at least 50%
in principal amount of the then outstanding
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Notes); and a resolution proposed at such adjourned meeting
and passed by the requisite vote as provided in Subsection (a)
of this Section shall be an Extraordinary Resolution within
the meaning of this Indenture, notwithstanding that the
holders of more than 50% in principal amount of the Notes then
outstanding are not present in person or by proxy at such
adjourned meeting.
(c) Votes on an Extraordinary Resolution shall always be given on
a poll and no demand for a poll on an extraordinary resolution
shall be necessary.
Section 11.13 Powers Cumulative: It is hereby declared and agreed that any
one or more of the powers and/or combination of the powers in this Indenture
stated to be exercisable by the Noteholders by Extraordinary Resolution or
otherwise may be exercised from time to time and the exercise of any one or
more of such powers or any combination of powers from time to time shall not be
deemed to exhaust the right of the Noteholders to exercise such power or powers
or combination of powers then or any power or powers or combination of powers
thereafter from time to time.
Section 11.14 Minutes: Minutes of all resolutions and proceedings at every
such meeting as aforesaid shall be made and duly entered in books to be from
time to time provided for that purpose by the Trustee at the expense of the
Company, and any such minutes as aforesaid, if signed by the chairman of the
meeting at which such resolutions were passed or proceedings had, or by the
chairman of the next succeeding meeting of the Noteholders, shall be prima
facie evidence of the matters therein stated and, until the contrary is proved,
every such meeting, in respect of the proceedings of which minutes shall have
been made, shall be deemed to have been duly held and convened, and all
resolutions passed thereat or proceedings had, to have been duly passed and
had.
Section 11.15 Instruments in Writing: All actions which may be taken and
all powers which may be exercised by the noteholders at a meeting held as
hereinbefore in this Article provided may also be taken and exercised by the
holders of 66-2/3% of the principal amount of all the then outstanding Notes by
an instrument in writing signed in one or more counterparts and the expression
"Extraordinary Resolution" when used in this Indenture shall include an
instrument so signed.
Section 11.16 Binding-Effect of Resolutions: Subject to Section 11.17, every
resolution and every Extraordinary Resolution passed in accordance with the
provisions of this Article at a meeting of Noteholders shall be binding upon
all the Noteholders, whether present at or absent from such meeting, and every
instrument in writing signed by Noteholders in accordance with Section 11.15
shall be binding upon all the Noteholders, whether signatories thereto or not,
and each and every Noteholder and the Trustee (subject to the provisions for
its indemnity herein contained)
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shall be bound to give effect accordingly to every such resolution,
Extraordinary Resolution and instrument in writing.
Section 11.17 Serial Meetings:
(a) If any business to be transacted at a meeting of Noteholders, or
any action to be taken or power to be exercised by instrument in
writing under Section 11.15, affects the rights of the holders
of Notes of one or more series (for which purpose, series Al Notes
and Series A2 Notes shall be deemed to be separate series to the
extent that any such business affects the principal repayment
obligations of the Company in respect thereof) in a manner or to
an extent substantially different from that in or to which it
affects the rights of the holders of Notes of any other series (as
to which an opinion of counsel shall be binding on all
Noteholders, the Trustee and the Company for all purposes hereof)
then:
(i) reference to such fact, indicating each series so affected,
shall be made in the notice of such meeting and the meeting
shall be and is herein called a "serial meeting"; and
(ii) the holders of Notes of a series so affected shall not be
bound by any action taken at a serial meeting or by
instrument in writing under Section 11.15 unless in
addition to compliance with the other provisions of this
Article:
(A) at such serial meeting:
(I) there are present in person or by proxy holders
of at least 25% (or for the purpose of passing an
Extraordinary Resolution more than 50%) in
principal amount of the then outstanding Notes of
such series, subject to the provisions of this
Article as to adjourned meetings; and
(II) the resolution is passed by the favourable votes
of the holders of more than 50% (or in the case
of an Extraordinary Resolution not less than 75%)
in principal amount of the Notes of such series
voted on the resolution or Extraordinary
Resolution as, the case may be; or
(B) in the case of action taken or power exercised by
instrument in writing under Section 11.15, such
instrument is signed in one or more counterparts by
the holders of not less than
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66 2/3% in principal amount of the then outstanding
Notes of such series.
(b) If in the opinion of counsel any business to be transacted at any
meeting, or any action to be taken or power to be exercised by
instrument in writing under Section 11.15, does not materially
adversely affect the rights of the holders of Notes of one or more
particular series, the provisions of this Article Eleven shall
apply as if the Notes of such series were not outstanding and
no notice of any such meeting need be given to the holders of Notes
of such series. Without limiting the generality of the foregoing,
a proposal to modify or terminate any covenant or agreement which
by its terms is effective only so long as Notes of a particular
series are outstanding shall be deemed not to adversely affect the
rights of the holders of Notes of any other series.
(c) A proposal (i) to extend the maturity of Notes of any particular
series or reduce the principal amount thereof or the rate of
interest payable thereon or (ii) to modify or terminate any
covenant or agreement which by its terms is effective only so long
as Notes of a particular series are outstanding, shall be deemed to
especially affect the rights of the holders of such series in a
manner substantially different from that in which it affects
the rights of holders of Notes of any other series, whether or not
a similar extension, reduction, modification or termination is
proposed with respect to Notes of any or all other series.
ARTICLE TWELVE
SUPPLEMENTAL INDENTURES
Section 12.01 From time to time the Company (when authorized by a resolution of
its directors) and the Trustee may, subject to the provisions of this
Indenture, and they shall, when so required by this Indenture, execute and
deliver by their proper officers, indentures or other instruments supplemental
hereto, which thereafter shall form part hereof, for any one or more or all of
the following purposes:
(a) evidencing the succession of successor companies in accordance
with the provisions of Article Nine;
(b) giving effect to any Extraordinary Resolution passed as provided in
Article Eleven;
(c) adding to or altering the provisions hereof in respect of the
registration and transfer of Notes, making provision for the issue
of Notes in forms or denominations other than those herein provided
for and for the exchange of
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Notes of different forms and denominations; and making any
modification in the forms of the Notes which does not affect the
substance thereof;
(d) making any additions to, deletions from or alterations of the
provisions of this Indenture which, in the opinion of the Trustee,
do not materially and adversely affect the interests of the
Noteholders;
(e) any other purpose not inconsistent with the terms of this
Indenture, provided that in the opinion of the Trustee the rights
of the Trustee and of the Noteholders are in no way prejudiced
thereby.
The Trustee may also, without the consent or concurrence of the Noteholders, by
supplemental indenture or otherwise, concur with the Company in making any
changes or corrections in this Indenture which it shall have been advised by
counsel are required for the purpose of curing or correcting any ambiguity or
defective or inconsistent provision or clerical omission or mistake or manifest
error contained herein or in any deed or indenture supplemental or ancillary
hereto, provided that in the opinion of the Trustee the rights of the Trustee
and of the Noteholders are in no way prejudiced thereby.
ARTICLE THIRTEEN
SATISFACTION AND DISCHARGE
Section 13.01 Cancellation and Destruction:
(a) Subject to the provisions of Section 7.03 as to Notes redeemed in
part, all Notes which are redeemed and surrendered for cancellation
together, in the case of Bearer Notes, with such unmatured Coupons
as are attached thereto or are surrendered therewith at the time of
redemption or surrender and all Coupons which are paid, shall be
forthwith delivered to and cancelled by the Trustee or,
alternatively, pursuant to the provisions of the Agency Agreement,
delivered to and cancelled by the Paying Agent, the Transfer
Agent or the Registrar by or through which they are redeemed,
exchanged, surrendered or paid.
(b) All matured Notes and Coupons shall be forthwith cancelled by the
Registrar or, alternatively, pursuant to the Agency Agreement, be
delivered to and cancelled by any Paying Agent.
(c) All Notes or Coupons cancelled or required to be cancelled under
this or any provision of this Indenture shall be destroyed by or
under the direction of the Trustee by cremation or otherwise (in
the presence of
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a representative of the Company if the Company shall so require)
and the Trustee shall prepare and retain a certificate of such
destruction and deliver a duplicate thereof to the Company,
Section 13.02 Non-Presentation of Notes: Any moneys paid by the Company to the
Trustee or the Principal Paying Agent or any other Paying Agent for the payment
of the principal of or interest payable on any Notes, and remaining unclaimed
at the end of 10 years, in the case of moneys relating to the payment of
principal on the Notes, and five years, in the case of moneys relating to the
payment of interest payable on the Notes, after such principal or interest
shall have become due and payable (whether at maturity or upon call for
redemption, purchase or otherwise), shall then be repaid to the Company, upon
its written request, and upon such repayment all liability of the Trustee or
the Principal Paying Agent or any other Paying Agent, as the case may be, with
respect thereto shall thereupon cease, without, however, limiting in any way
any obligation the Company may have to pay the principal of or interest payable
on such Notes as the same shall become due. Payment at any agency will be made
by a cheque drawn on a Canadian dollar account at a bank in Toronto or, at the
option of the holder, by wire transfer to a Canadian dollar account at a bank
in London.
Section 13.03 Discharge of Security: Upon proof being given to the reasonable
satisfaction of the Trustee that the principal amount of all Series A Notes and
all interest (including interest on overdue interest, if any) payable thereon
and other moneys thereby secured have been paid or upon provision satisfactory
to the Trustee being made therefor, the Trustee shall, at the request and at
the expense of the Company, execute and deliver to the Company such deeds or
other instruments as shall be requisite to evidence the satisfaction and
discharge of the Series A Lien and to release or reconvey the Charged Property
to the Company freed and discharged from the trusts and provisions contained in
the applicable Security Documents.
Section 13.04 Release from Covenants: Upon proof being given to the reasonable
satisfaction of the Trustee that all the Notes and interest (including interest
on amounts in default) payable thereon and other moneys payable hereunder have
been paid or satisfied or that, all the outstanding Notes having matured or
having been duly called for redemption, or the Trustee having been given
irrevocable instructions by the Company to publish within 90 days notice of
redemption of all the outstanding Notes, such payment and/or redemption has
been duly and effectually provided for by payment to the Trustee or otherwise;
and upon payment of all costs, charges and expenses properly incurred by the
Trustee in relation to this Indenture and all interest payable thereon and the
remuneration of the Trustee, or upon provision satisfactory to the Trustee
being made therefor, the Trustee shall, at the request and at the expense of
the Company, execute and deliver to the Company such deeds or other instruments
as shall be requisite to release the Company from
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its covenants herein contained except those relating to the indemnification of
the Trustee.
ARTICLE FOURTEEN
NOTICES
Section 14.01 Notice to Noteholders: Unless herein otherwise expressly
provided, any notice to be given hereunder to Noteholders shall be deemed to be
validly given:
(a) to holders of Registered Notes, if such notice is sent by surface
or air mail, postage prepaid, addressed to such holders at their
respective addresses appearing on any of the registers above
mentioned; but if in the case of joint holders of any Registered
Note more than one address appears in the register in respect of
such joint holding, such notice shall be addressed only to the
first address so appearing. Any notice so given shall be deemed to
have been given on the fifth day after the day of mailing.
Notwithstanding the foregoing, in the event that the Company is
prevented by circumstances beyond its control, including but not
limited to a work stoppage, threatened or actual, by postal
employees, from giving notice by mail to holders of Registered
Notes in the manner provided herein, the Company may, with the
consent of the Trustee, give notice to holders of Registered Notes
by publishing a notice once in each of the Cities of Toronto,
Montreal, Winnipeg and Calgary, each such publication to be made in
an English language daily newspaper of general circulation in the
designated city and approved by the Trustee and the giving of such
notice by publication shall have the same effect as if it had been
given by mail in the manner provided herein. In determining under
any provision hereof the date when notice of any meeting,
redemption or other event must be given, the date of giving the
notice shall be included and the date of the meeting, redemption or
other event shall be excluded; and
(b) to holders of Bearer Notes, if such notice is published once in the
Financial Times of London, England, and once through Euro-clear.
If, because of temporary suspension of publication or general
circulation of either of such services or for any other reason, it
is impossible or impracticable, in the opinion of the Trustee, to
make any publication of any notice required by this indenture in
the manner herein provided, such notice may be published, in
lieu of publication in either of such services, in an English
language newspaper having general circulation in Western Europe.
If either of such services shall cease to be published, any notice
to be given hereunder to Noteholders shall be deemed to be validly
given if such
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notice is published in another leading newspaper of general
circulation in London.
Couponholders will be deemed for all purposes to have notice of the contents of
any notice given to holders of Bearer Notes in accordance with this Section.
Accidental error or omission in giving notice or accidental failure to mail
notice to any one or more noteholders shall not invalidate any action or
proceeding founded thereon.
Section 14.02 Notice to the Trustee or the Committee: Any notice, request or
direction to the Trustee or the Committee under the provisions of this
Indenture shall be valid and effective if delivered to an officer of the
Trustee or if sent by registered mail, postage prepaid, addressed to the
Trustee (or, in the case of a notice, request or direction to the Committee,
addressed to the Committee, c/o The Trustee) at the Trustee's principal office
in Toronto, 15 King Street West, 9th Floor, Toronto, Ontario, Canada, M5H 1B4,
Attention: Corporate Trust Department. Notice by mail shall be deemed to have
been effectively given at the time when in the ordinary course of post the same
should have reached its destination.
Section 14.03 Notice to the Company: Any notice to the Company under any
provision of this Indenture shall be valid and effective if delivered to an
officer of the Company or if sent by registered mail, postage prepaid,
addressed to the Company at Suite 1101, 181 University Avenue, Toronto,
Ontario, M5H 3M7, Attention: Vice-President. Notice by mail shall be deemed to
have been effectively given at the time when in the ordinary course of post the
same should have reached its destination. The Company may from time to time
notify the Trustee of a change in address which thereafter, until changed by
like notice, shall be the address of the Company for all purposes of this
Indenture.
ARTICLE FIFTEEN
CONCERNING THE TRUSTEE
Section 15.01 Trust Indenture Legislation:
(a) In this Indenture, the term "Applicable Legislation" means the
provisions, if any, of the Canada Business Corporations Act and
any other statute of Canada or a province thereof, and of any
regulations under any such named or other statute, relating to
trust indentures and/or to the rights, duties and obligations of
trustees under trust indentures and of corporations issuing debt
obligations under trust indentures, to the extent that such
provisions are at the time in force and applicable to this
Indenture or the Company.
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86.
(b) If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with a mandatory requirement of Applicable
Legislation, such mandatory requirement shall prevail.
(c) The Company and the Trustee agree that each will, at all times in
relation to this Indenture and any action to be taken hereunder,
observe and comply with and be entitled to the benefits of
Applicable Legislation.
Section 15.02 Rights and Duties of Trustee:
(a) In the exercise of the rights and duties prescribed or conferred
by the terms of this Indenture, the Trustee shall exercise that
degree of care, diligence and skill that a reasonably prudent
trustee would exercise in comparable circumstances.
(b) Subject only to Subsection (a) of this Section, the Trustee shall
not be bound to do, observe or perform or see to the observance
or performance by the Company of any of the obligations herein
imposed upon the Company or of the covenants on the part of the
Company herein contained, nor to taken any steps to enforce the
Series A Lien, nor in any way to supervise or interfere with the
conduct of the Company's business, unless and until the Series A
Lien shall have become enforceable and the Trustee shall have
determined or become bound to enforce the same and unless the
Trustee shall have been directed to do so by a Noteholders'
Request or by an Extraordinary Resolution; and then the obligation
of the Trustee to take any action or to commence or continue any
act, action or proceeding for the purpose of enforcing any rights
of the Trustee or the Noteholders hereunder shall be conditional
upon the Noteholders furnishing, when required by notice by the
Trustee given in accordance with Section 14.01 hereof, sufficient
funds to commence or continue such act, action or proceeding and
indemnity reasonably satisfactory to the Trustee to protect and
hold harmless the Trustee against the costs, charges, expenses and
liabilities to be incurred thereby and any loss and damage it may
suffer by reason thereof. None of the provisions contained in
this Indenture shall require the Trustee to expend or risk its own
funds or otherwise incur financial liability in the performance of
any of its duties or in the exercise of any of its rights or
powers unless indemnified as aforesaid.
(c) The Trustee may, before commencing or at any time during the
continuation of any such act, action or proceeding, require the
Noteholders at whose instance it is acting to deposit with the
Trustee the Notes held by them, for which Notes the Trustee
shall issue receipts.
<PAGE> 93
87.
(d) Every provision of this Indenture that by its terms relieves the
Trustee of liability or entitles it to rely upon any evidence
submitted to it, is subject to the provisions of Applicable
Legislation and of this Section and of Section 15.03.
Section 15.03 Evidence, Experts and Advisors:
(a) In addition to the reports, certificates, opinions and other
evidence required by this Indenture, the Company shall furnish
to the Trustee such additional evidence of compliance with any
provision hereof, and in such form, as may be prescribed by
Applicable Legislation or as the Trustee may reasonably require by
written notice to the Company.
(b) In the exercise of its rights and duties, the Trustee may, if it is
acting in good faith, rely as to the truth of the statements and
the accuracy of the opinions expressed therein, upon statutory or
other declarations, opinions, reports, certificates or other
evidence, including evidence furnished by means of cable, telex or
other electronic means of communication, furnished to the Trustee
pursuant to any provision hereof or of Applicable Legislation or
pursuant to a request of the Trustee provided that such evidence
complies with Applicable Legislation and that the Trustee examines
the same and determines that such evidence complies with the
applicable requirements of this Indenture.
(c) Whenever Applicable Legislation requires that evidence referred to
in Subsection (a) of this Section be in the form of a statutory or
other declaration, the Trustee may accept such statutory or
other declaration in lieu of a certificate of the Company required
by any provision hereof. Any such statutory or other declaration
may be made by one or more of the chairman of the board,
president, executive vice-president, vice-presidents, secretary,
treasurer, or secretary-treasurer, if the offices of secretary
and treasurer be combined, assistant secretaries or assistant
treasurers of the Company.
(d) Proof of the execution of an instrument in writing, including a
Noteholders' Request, by any Noteholder may be made by the
certificate of a notary public, or other officer with similar
powers, that the person signing such instrument acknowledged to
him the execution thereof, or by an affidavit of a witness to
such execution or in any other manner which the Trustee may
consider adequate.
(e) The Trustee may employ or retain, and may rely upon any opinion
furnished by, such solicitors, accountants engineers appraisers or
other experts or advisers as it may reasonably require for the
proper discharge of its
<PAGE> 94
88.
duties hereunder, and may pay reasonable remuneration for all
services so performed by any of them, without taxation of
costs of any solicitor, and shall not be responsible for any
misconduct or negligence on the part of any of them if retained in
good faith by the Trustee. Any solicitors employed or consulted
by the Trustee may, but need not, be solicitors for the Company.
Section 15.04 Documents, Moneys, etc. Held by Trustee: Any securities,
documents of title or other instruments that may at any time be held by the
Trustee subject to the trusts hereof may be placed in the deposit vaults of the
Trustee or of any Canadian chartered bank or deposited for safekeeping with any
such bank. Unless herein otherwise expressly provided, any moneys held by the
Trustee pending the application or withdrawal thereof under any provisions of
this Indenture, may be deposited in the name of the Trustee in any Canadian
chartered bank at the rate of interest (if any) then current on similar
deposits or, with the consent of the Company, may be deposited in the deposit
department of the Trustee or any other loan or trust company authorized to
accept deposits under the laws of Canada or a province thereof. Unless an
event of default shall have occurred and be continuing, all interest or other
income received by the Trustee in respect of such deposits shall belong to the
Company.
Section 15.05 Action by Trustee to Protect Interests: The Trustee shall have
power to institute and to maintain such actions and proceedings as it may
consider necessary or expedient to preserve, protect or enforce its interests
and the interests of the holders of Notes.
Section 15.06 Trustee Not Required to Give Security: The Trustee shall not be
required to give any bond or security in respect of the execution of the trusts
and powers of this Indenture or otherwise in respect of the premises.
Section 15.07 Protection of Trustee: By way of supplement to the provisions of
any law for the time being relating to trustees, it is expressly declared and
agreed as follows:
(a) The Trustee shall not be liable for or by reason of any statements
of fact or recitals in this Indenture or in the Notes (except the
representation contained in Section 15.09 or in the certificate of
the Trustee on the Notes) or required to verify the same, but all
such statements or recitals are and shall be deemed to be made by
the Company.
(b) Nothing herein contained shall impose any obligation on the
Trustee to see to or to require evidence of the registration or
filing (or renewal thereof) of this Indenture or any instrument
ancillary or supplemental hereto.
<PAGE> 95
89.
(c) The Trustee shall not be bound to give notice to any person or
persons of the execution hereof.
(d) The Trustee shall not incur any liability or responsibility
whatever or be in any way responsible for the consequence of any
breach on the part of the Company of any of the covenants
herein contained or of any acts of the agents or servants of the
Company or of any acts or omissions of any Paying Agent or other
agent appointed hereunder or under the Agency Agreement or as a
result of a conflict of interest arising in its role as a
fiduciary hereunder.
(e) The Company hereby agrees to indemnify the Trustee against any
losses, liabilities, costs, claims, actions and demands which it
may incur or which may be made against it, including those
attributable to the arising or elimination of a conflict of
interest relating to the Trustee's role as a fiduciary hereunder
or as a result of or in connection with its appointment or the
exercise of its powers and duties hereunder, except such as may
result from its own willful misconduct, negligence or bad faith or
that of its directors, officers, employees or agents. This
indemnity shall survive the termination and discharge of this
Indenture.
Section 15.08 Replacement of Trustee: The Trustee may resign its trust and be
discharged from all further duties and liabilities hereunder by giving to the
Company not less than 90 days notice in writing or such shorter notice as the
Company may accept as sufficient. The Noteholders by Extraordinary Resolution
shall have power at any time to remove the Trustee and to appoint a new
Trustee. In the event of the Trustee resigning or being removed or being
dissolved, becoming bankrupt, going into liquidation or otherwise becoming
incapable of acting hereunder, the Company shall forthwith appoint a new
Trustee unless a new Trustee has already been appointed by the Noteholders;
failing such appointment by the Company the retiring Trustee or any noteholder
may apply to a Justice of the Ontario Court (General Division) (or of any
successor of such Court), on such notice as such Justice may direct, for the
appointment of a new Trustee; but any new Trustee so appointed by the Company
or by the Court shall be subject to removal as aforesaid by the Noteholders.
Any new Trustee appointed under any provision of this section shall be a
corporation authorized to carry on the business of a trust company in the
Province of Ontario and, if required by Applicable Legislation of any other
province, in such other provinces as may be required. On any such appointment
the new Trustee shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as Trustee without
any further assurance, conveyance, act or deed; but there shall be immediately
executed, at the expense of the Company, all such conveyances or other
instruments as may, in the opinion of counsel, be necessary or advisable for
the purpose of assuring the same to the new Trustee.
<PAGE> 96
90.
Any company into which the Trustee may be merged or with which it may be
consolidated or amalgamated, or any company resulting from any merger,
consolidation or amalgamation to which the Trustee shall be a party, shall be
the successor Trustee under this Indenture without the execution of any
instrument or any further act.
Section 15.09 Conflict of Interest:
(a) The Trustee represents to the Company that at the time of the
execution and delivery hereof no material conflict of interest
exists in the Trustee's role as a fiduciary hereunder and agrees
that in the event of a material conflict of interest arising
hereafter it will, within 90 days after ascertaining that it has
such material conflict of interest, either eliminate the same or
resign its trust hereunder.
(b) Subject to Subsection (a) of this Section, the Trustee, in its
personal or any other capacity, may buy, sell, lend upon and deal
in Notes and other securities of the Company and generally may
contract and enter into financial and other business transactions
with the Company or any affiliate of the Company without being
liable to account for any profit made thereby.
Section 15.10 Acceptance of Trust: The Party of the Second Part hereby accepts
the trusts in this indenture declared and provided for, agrees to perform
the same upon the terms and conditions herein set forth and has required this
Indenture to be in the English language.
Section 15.11 Future Conflict of Interest: In the event that the Trustee
determines that in discharging its role as a fiduciary hereunder and as trustee
for both the holders of Series A Notes and holders of Series B Notes a material
conflict of interest exists, then the Trustee may (notwithstanding and in
addition to its general right to resign provided for in Section 15.08 ) resign
as the Trustee of one of the series of Notes (for which purpose the Series Al
Notes and the Series A2 Notes shall be deemed to be one series and the Series B
Notes shall be deemed to be another series) in order to eliminate the conflict
of interest by giving the Company not less than 90 days notice in writing or
such shorter notice as the Company may accept as being sufficient. In the event
of the Trustee so resigning, the Company shall forthwith appoint a new Trustee
unless a new Trustee has already been appointed by the Noteholders for whom
the retiring Trustee is no longer acting as Trustee; failing such appointment
by the Company the retiring Trustee or any Noteholder may apply to a Justice of
the Ontario Court (General Division) (or of any successor of such Court), on
such notice as such Justice may direct, for the appointment of a new Trustee;
but any new Trustee so appointed by the Company or by the Court shall be
subject to removal by the Noteholders in accordance with Section 15.08. Any new
Trustee appointed pursuant
<PAGE> 97
91.
to this Section shall enter into a new Indenture which shall be identical to
the form hereof, subject to the deletion of the provisions governing those
series of Notes for whom the new Trustee is not acting as Trustee. Any new
Trustee appointed under this Section shall be a corporation authorized to carry
on the business of a trust company in the Province of Ontario and, if required
by Applicable Legislation of any other province, in such other provinces as may
be required. On any such appointment the new Trustee shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named herein as Trustee without any further assurance, conveyance, act or deed;
but there shall be immediately executed, at the expense of the Company, all
such conveyances or other instruments as may, in the opinion of counsel, be
necessary or advisable for the purpose of assuring the same to the new Trustee.
The Company agrees to do, file, record, make, execute and deliver all such
acts, deeds, things, notices and instruments as may be necessary or desirable
in the opinion of the Trustee in order to effectively carry out the intent and
purpose of this Section 15.11. In the event that the Company fails to execute
and deliver such documents as are necessary to carry out the intent and purpose
of this Section 15.11 then the Trustee, after giving the Company notice of its
intention to do so, shall be empowered to execute such documents and the
Company hereby appoints two authorized signatories of the Trustee, acting
jointly, as its attorneys in fact to execute and deliver such documents.
ARTICLE SIXTEEN
COMMITTEE OF SERIES A NOTEHOLDERS
Section 16.01 Establishment of Committee: In addition to the powers conferred
on the Noteholders pursuant to Subsection 11.11(h), a committee of the holders
of Series A Notes is hereby constituted from among their members consisting of
one representative of the holder of the largest principal amount of Series Al
Notes and one representative of the holder of the largest principal amount of
Series A2 Notes as at the Effective Date, to the extent ascertainable by the
Trustee, each such holder to nominate its representative in writing in form
reasonably satisfactory to the Company and the Trustee, and provided that each
such representative has consented in writing so to act. Either such
representative may resign from the Committee at any time, and shall resign
forthwith after any transfer of Series A Notes such that the holder of Series A
Notes whom he is representing is not, directly or indirectly, the holder of the
largest principal amount of the applicable series of Series A Notes by written
notice to the Trustee and the Company and by notice given to the Noteholders in
accordance with Section 14.01, in which event the holder of Series A Notes
entitled to appoint such representative shall promptly appoint a
representative. A quorum for the transaction of any business of the Committee
shall consist of the two individuals so appointed. To be effective, all
decisions of the Committee must be the unanimous decision of the two
representatives.
<PAGE> 98
92.
Notwithstanding any other provision of this Indenture, the Committee shall have
the following powers:
(a) power to authorize any transaction provided for in Paragraph
6.02(h)(vii); and
(b) power to waive and direct the Trustee to waive any Series A
Default, to direct the Trustee to cancel any declaration in
respect of such default made by the Trustee pursuant to Section
8.02 and to direct the Trustee not to exercise any remedy
hereunder or in respect hereof, either unconditionally or upon any
conditions specified by the Committee provided that the Committee
shall, acting in good faith, be satisfied that such action is not
materially prejudicial to the interest of the holders of Series A
Notes when the Goran Group is taken as a whole.
All acts of the Committee within the authority delegated to it in this Section
shall be binding upon all holders of Series A Notes. For greater certainty, the
Committee shall not have the power to amend or modify any term or condition of
this Indenture or to deal with any proposal to: (i) change the maturity of the
Notes or the dates on which interest is payable in respect of the Notes; or
(ii) reduce the principal amount of or interest owing under the Notes; or (iii)
change the currency of payment of the Notes.
Section 16.02 Indemnity of Committee Members: The members of the Committee
shall not be liable for any loss arising from or in connection with any action
taken or omitted to be taken by them in good faith and the Company and, by
acceptance of any Notes, each Noteholder hereby releases, indemnifies and saves
harmless each such member from and against any losses, liabilities, costs,
claims, actions and demands that they may incur or that may be made against
them as a result of or in connection with any such action or omission. This
indemnity shall survive the termination and discharge of this Indenture.
<PAGE> 99
93.
ARTICLE SEVENTEEN
EXECUTION
Section 17.01 Counterparts and Formal Date: This Indenture may be
simultaneously executed in several counterparts, each of which so executed
shall be deemed to be an original, and such counterparts together shall
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed these presents under
their respective corporate seals and the hands of their proper officers in that
behalf.
GORAN CAPITAL INC.
Per: /s/ Alan G. Symons
------------------------------
Authorized Signature
Per: /s/ Cannot read signature c/s
------------------------------
Authorized Signature
MONTREAL TRUST COMPANY OF CANADA
Per: /s/ Cannot read signature c/s
APPROVED ------------------------------
FOR EXECUTION Authorized Signature
BY M.T.C. of C.
............... Per: /s/ Cannot read signature c/s
------------------------------
Authorized Signature
<PAGE> 100
THE FIRST SUPPLEMENTAL INDENTURE is made as of the 30th day of April, 1996.
BETWEEN:
GORAN CAPITAL INC.
- and -
MONTREAL TRUST COMPANY OF CANADA
WHEREAS the Company and the Trustee are parties to an Amended and
Restated Trust Indenture made as of the 29th day of December, 1992
(the "Indenture");
WHEREAS pursuant to Section 11.15 of the Indenture, Noteholders holding
in excess of 66 2/3% of the aggregate outstanding principal amount of the Series
A Notes and 100% of the aggregate principal amount of the Series B Notes have
consented to the passage of a resolution in writing (the "Resolution") which,
among other things, authorizes the amendment of certain provisions of the
Indenture and waives compliance by the Company with certain provisions thereof;
WHEREAS the Resolution provides that the Indenture is to be amended by
one or more Supplemental Indentures;
NOW THEREFORE, in consideration of the mutual premises and covenants
set forth herein, the parties hereto agree as follows:
Section 1 - Definitions
Capitalized terms used herein shall, unless otherwise defined herein,
have the meanings ascribed to such terms in the Indenture.
Section 3 - Amendments to Indenture
The Indenture is hereby amended as follows:
(a) the definition of "Compensation Limit" set forth in Section 1.01
of the Indenture is amended, for greater certainty with respect to
fiscal years following December 31, 1995, by inserting the
following phrase at the beginning of Paragraph (ii)(A) thereof:
"the greater of U.S. $2,000,000 or"
<PAGE> 101
2
(b) by the addition of the following definition immediately following the
definition of "Prior Indebtedness" in Section 1.01 and by renumbering the
following definitions accordingly:
"Public Offering" means the sale to the public in the United
States of America and elsewhere of 50% of the shares of common
stock of IGF Holdings, Inc.;"
(c) the definition of "Subsidiary" set forth in Section 1.01 of the
Indenture is amended by inserting the following immediately before the
semi-colon at the end thereof:
"for greater certainty, none of the following corporations or
their respective Subsidiaries shall be deemed to be Subsidiaries
for the purpose of this Indenture: GGS Management Holdings Inc.,
GGS Management Inc., Pafco General Insurance Company or Superior
Insurance Company."
(d) Subsection 2.03(a) of the Indenture is amended by inserting the following
proviso immediately before the period at the end thereof:
"provided, however, that if the Public Offering is not completed
on or before December 31, 1996, the Series A Notes shall bear
interest from and including January 1, 1997 at the rate of 10%
per annum with interest on overdue interest at the same rate,
calculated and payable in the manner hereinbefore provided";
(e) Subsection 2.04(a) of the Indenture is amended by inserting the following
proviso immediately before the period at the end thereof:
"provided, however, that if the Public Offering is not completed
on or before December 31, 1996, the Series B Notes shall bear
interest from and including January 1, 1997 at the rate of 10%
per annum with interest on overdue interest at the same rate,
calculated and payable in the manner hereinbefore provided";
(f) Section 2.05 of the Indenture is amended by inserting the following as
Subsection (d) thereof:
"(d) If the interest rate payable pursuant to the Notes
increases from 8% per annum to 10% per annum as at January 1,
1997 pursuant to the provisions of Sections 2.03(a) and 2.04(a)
hereof, the outstanding forms of Notes shall be deemed to
represent an obligation of the Company to pay interest at the
rate of 10% per annum in accordance with the provisions of
Sections 2.03 (a) and 2.03 (b) hereof notwithstanding the lack
<PAGE> 102
3
of, and without the necessity for, any amendment to the
provisions thereof provided, however, that if, in the
opinion of counsel, the issue of coupons evidencing the
obligation to pay such increased interest is necessary,
the Company covenants that it will cause such additional
coupons to be issued.";
(g) Subsection 6.02(a) is amended by deleting the word "and" at
the end of paragraph (ii)(B) thereof and the period at the end of paragraph
(ii) thereof and inserting a semi-colon and by inserting the following
paragraphs:
"(iii) notwithstanding the provisions of paragraph
(ii), the Company shall not be required to cause
any of the following corporations to execute,
and such corporations shall not required to
execute a Guarantee Agreement, a Guarantee
Pledge Agreement or a Guarantee Security
Agreement: GGS Management Holdings Inc., GGS
Management Inc., Pafco General Insurance Company
or any other present or future Subsidiary of GGS
Management Holdings Inc.;
(iv) the Company shall be entitled to request that
the Trustee release, and the Trustee shall
release, from the Lien created in favour of the
Trustee for the benefit of the Noteholders, up
to 50% of the issued and outstanding common
shares of IGF Holdings Inc. upon receipt by the
Trustee of a certificate of the Company stating
that such shares are to be sold to the public
pursuant to the Public Offering.".
Section 3 - Release
The Trustee hereby releases: (a) the 10,000 shares of common stock of
Pafco General Insurance Company; and (b) the assets to be contributed by SIG
Indiana to GGS Management Holdings Inc. held by the Trustee from the Liens
created in its favour on behalf of the Series A Noteholders and acknowledges
and agrees that neither the Company nor any of its Subsidiaries is obligated to
charge such shares or assets in favour of the Trustee or the Series A
Noteholders pursuant to Section 6.02 of the Indenture or otherwise.
Section 4 - Consent
The entry by the Company and certain of its Subsidiaries into the transactions
described below (the "Transactions") is hereby consented to for and on behalf
of the Noteholders:
<PAGE> 103
4
(a) Pafco General Insurance Company ("PGIC") will incorporate a new
subsidiary, IGF Holdings, Inc. ("IGF Holdings").
(b) PGIC will transfer the issued and outstanding shares of IGF
Insurance Company ("IGF Insurance") to IGF Holdings in exchange
for 100% of the shares of IGF Holdings, U.S. $7,500,000 in cash
(to be obtained by way of loan from Union Federal Bank) and a
subordinated promissory note of IGF Holdings in the principal
amount of $3,475,269 payable to PGIC both of which will be
secured by a pledge of 966,666 shares of the Company by Symons
International Group Limited and a pledge of the issued and
outstanding shares of IGF Insurance by IGF Holdings;
(c) PGIC will distribute its shares of IGF Holdings to SIG Indiana
and SIG Indiana will pledge all such shares to the Trustee
pursuant to a Guarantee Pledge Agreement free and clear of all
Liens except Permitted Liens;
(d) SIG Indiana will contribute all of the shares of PGIC and
certain other assets consisting of furniture and other personal
property having an aggregate value of approximately U.S.
$250,000 to GGS Management Holdings, Inc. ("GGS Holdings") in
exchange for 52% of the shares of GGS Holdings and GS Capital
Partners II, L.P. will subscribe for the remaining 48% of the
shares in consideration of US $21,200,000 payable in cash. The
Company will pledge its shares of GGS Holdings to the Trustee
pursuant to a Guarantee Pledge Agreement free and clear of all
Liens except Permitted Liens;
(e) GGS Holdings will incorporate a wholly owned subsidiary, GGS
Management Holdings Inc. ("GGS Management") and all of the
issued and outstanding shares of PGIC will be contributed by GGS
Holdings to GGS Management in exchange for 100% of the GGS
Management shares;
(f) SIG Indiana and the Company will contribute their rights under
that certain Stock Purchase Agreement dated January 31, 1996
(the "Stock Purchase Agreement") and made among the Company,
SIG Indiana, Fortis, Inc. and Interfinancial Inc. to GGS
Holdings which will, in turn, contribute such right to GGS
Management;
(g) GGS Management will borrow US$48 million from a financial
institution, which loan will be non-recourse to the Company, SIG
Indiana or GGS Holdings;
(h) GGS Management will acquire all of the issued and outstanding
shares of Superior Insurance Company in accordance with the
terms of the Stock Purchase Agreement;
(i) the Public Offering may, but shall not be required to be,
completed; and
<PAGE> 104
5
(j) the Company and its Subsidiaries will take such further actions as may
be necessary to effect or facilitate the completion of the foregoing
transactions.
Section 5 - Representations and Warranties
(a) The Company hereby represents and warrants to the Trustee, on its own
behalf and on behalf of the members of the Committee and each of the
Noteholders, as follows, and acknowledges that the Trustee, in entering
into this First Supplemental Indenture (and the Committee and the
Noteholders in authorizing the Trustee to enter into this First
Supplemental Indenture) is relying on these representations and warranties:
(i) Except as expressly waived or modified pursuant to this First
Supplemental Indenture, all covenants and agreements of the
Company and each of its Subsidiaries contained in the Indenture
or any document delivered pursuant thereto or in connection
therewith have been fully performed, complied with and
satisfied;
(ii) No Event of Default or event, circumstance or condition which,
with the giving of notice or lapse of time or both, would
constitute an Event of Default, has occurred and is continuing to
the date hereof or would occur as a result of any of the
Transactions, subject to the waivers and amendments to the
Indenture provided for in this First Supplemental Indenture;
(iii) The Company and each of its Subsidiaries is not in default or
violation of any judgment, order, writ, injunction, decree,
award, notice, citation, directive, request, summons, claim or
other communication of any court, arbitrator, board or other
governmental or regulatory entity and is in compliance with and
will, after completion of the Transactions, remain in compliance
with, all applicable laws, statutes, codes, ordinances, rules,
regulations, by-laws and regulatory policies and guidelines of
any jurisdiction, whether federal, state, local or provincial.
(b) All waivers, modifications, amendments, releases and discharges in
favour of the Company or any of its Subsidiaries set out in this First
Supplemental Indenture or any document delivered pursuant hereto or in
connection herewith are expressly conditioned on each of the
representations and warranties of the Company set out in this First
Supplemental Indenture being true upon the date hereof and shall cease to
be of any force and effect if any such representation or warranty is not
true.
<PAGE> 105
6
Section 6 - Indemnity
The Company hereby indemnifies and saves harmless the Committee and
each of its members from and against all claims, liabilities, obligations,
suits, actions, proceedings, damages, costs and expenses arising out of or in
connection with the execution and delivery of this First Supplemental
Indenture, the Transactions described herein and all documentation executed or
delivered in connection herewith.
Section 7 - Continuing Obligations
The Company confirms that its obligations pursuant to Section 2.12 of
the Indenture shall continue to apply at all times from and after the date
hereof notwithstanding the amendment of the Indenture by this First
Supplemental Indenture. The Company hereby indemnifies and saves harmless each
holder of Series A Notes or Series B Notes from any taxes, interest and
penalties for which such Noteholder may become liable as a result of any
failure of the Company to pay any taxes when due to the appropriate taxing
authority.
Section 8 - Governing Law
This First Supplemental Indenture shall be governed by and construed in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein and shall be treated in all respects as Ontario contracts.
The Company and the Trustee hereby attorn to the non-exclusive jurisdiction of
the Courts of Ontario.
Section 9 - Counterpart Execution
This First Supplemental Indenture may be executed in separate
counterparts, each of which shall be deemed to be an original and all of
which, taken together, shall constitute one and the same instrument.
Section 10 - Confirmation
The Company hereby acknowledges and confirms that, except as
specifically amended by the provisions of this First Supplemental Indenture, all
of the terms and conditions contained in the Indenture and the Security
Documents are and shall remain in full force and effect, unamended, in
accordance with the provisions thereof.
Section 11 - Further Assurances
The parties hereto covenant and agree to execute and deliver such
further and other instruments and to take such further and other action as may
be necessary or advisable to give effect to this First Supplemental Agreement
and the provisions hereof.
<PAGE> 106
Section 12 - Effective Date
Notwithstanding the date of execution of this First Supplemental
Indenture, this First Supplemental Indenture shall be, and be deemed to be,
effective as of and from the date first above written.
IN WITNESS WHEREOF the parties hereto have executed these presents
under their respective corporate seals and the hands of their proper officers
in that behalf.
GORAN CAPITAL INC.
Per: /s/ David L. Bates
-----------------------------
MONTREAL TRUST COMPANY OF CANADA
APPROVED Per: /s/ M. Brady
FOR EXECUTION -----------------------------
BY M.T.C. of C.
MJB
--------------- Per: /s/
-----------------------------
<PAGE> 107
Extraordinary Resolution of the
Holders of 8% Notes
issued by Goran Capital Inc.
WHEREAS Goran Capital Inc. (the "Corporation") has created and issued
$18,855,000 aggregate principal amount of 8% Series A Notes and $685,000
aggregate principal amount of 8% Series B Notes pursuant to an Amended and
Restated Trust Indenture dated as of December 29, 1992 (the "Trust Deed") and
made between the Corporation and Montreal Trust Company of Canada, as Trustee
(the "Trustee") of which $14,447,250 aggregate principal amount of Series A
Notes are outstanding and $685,000 aggregate principal amount of Series B Notes
are outstanding;
WHEREAS capitalized terms defined in the Trust Deed and used herein
shall have the meanings ascribed to such terms in the Trust Deed;
WHEREAS the Corporation and certain of its subsidiaries propose to
enter into a series of transactions, some of which are prohibited or restricted
by the terms of the Trust Deed or otherwise require waivers or consents on the
part of the Noteholders;
WHEREAS the Corporation has also proposed that certain amendments be
made to the terms and conditions of the Notes and the provisions of the Trust
Deed;
WHEREAS Section 11.11 of the Trust Deed provides that the Noteholders
may, by Extraordinary Resolution, agree to any modification, abrogation,
alteration, compromise or arrangement of the rights of the Noteholders and/or
the Trustee against the Corporation or assent to any modification of or change
in or omission from the provisions of the Trust Deed which is agreed to by the
Corporation;
WHEREAS the Trust Deed also provides, in Section 11.15 thereof, that
all actions which may be taken by the Noteholders by Extraordinary Resolution at
a meeting may be taken and exercised by the holders of 66 2/3% of the principal
amount of the then outstanding Notes by an instrument in writing signed in one
or more counterparts;
NOW THEREFORE the undersigned, being the holders of in excess of
66 2/3% of the principal amount of all the Series A Notes now outstanding and
100% of the principal amount of the Series B Notes now outstanding DO HEREBY:
1. RESOLVE THAT, subject to the Corporation delivering to the Trustee, the
Committee and their counsel, such representations, warranties, indemnities
and other assurances and such opinions of counsel to the Corporation as are
required by the Committee and its counsel, the entry by the Corporation
into the transactions described below (the
1
<PAGE> 108
"Transactions") be and the same is hereby authorized and approved and the
application of any provision of the Trust Deed which would otherwise prohibit
or restrict the Corporation from completing the Transactions or require the
Corporation or any of its Subsidiaries to grant security or give a guarantee
upon completion of any Transaction (including, without limitation, Section 6.02
thereof) be and the same is hereby waived:
(a) Pafco General Insurance Company ("PGIC") will incorporate a new
subsidiary, IGF Holdings, Inc. ("IGF Holdings");
(b) PGIC will transfer the issued and outstanding shares of IGF Insurance
Company ("IGF Insurance") to IGF Holdings in exchange for 100% of the
shares of IGF Holdings and a promissory note in the principal amount of
approximately US$11.5 million payable to PGIC;
(c) PGIC will distribute, as a dividend, its shares of IGF Holdings to
Symons International Group, Inc. (SIG) and SIG will pledge all such
shares to the Trustee free and clear of encumbrances;
(d) SIG will contribute all of the shares of PGIC and certain other assets
to GGS Management Holdings, Inc. ("GGS Holdings") in exchange for 52%
of the shares of GGS Holdings and GS Capital Partners II, LP will
subscribe for the remaining 48% of the shares in consideration of
US$20,000,000 payable in cash;
(e) GGS Holdings will incorporate a wholly owned subsidiary, GGS Management
Inc. ("GGS Management") and all of the issued and outstanding shares of
PGIC will be contributed by GGS Holdings to GGS Management in exchange
for 100% of the GGS Management shares;
(f) SIG will contribute its rights under that certain Stock Purchase
Agreement dated January 31, 1996 (the "Stock Purchase Agreement") and
made among the Corporation, SIG, Fortis Inc. and International Inc.
to GGS Holdings which will, in turn, contribute such right to GGS
Management;
(g) GGS Management will borrow US$44 million from a financial institution,
which loan will be non-recourse to the Corporation, SIG or GGS
Holdings;
(h) GGS Management will acquire all of the issued and outstanding shares of
Superior Insurance Company in accordance with the terms of the Stock
Purchase Agreement; and
(i) SIG may cause an initial public offering of the shares of IGF Holdings
to be made to the public before December 31, 1996 (the "Public
Offering").
2
<PAGE> 109
2. RESOLVE THAT, subject to the Corporation delivering to the Trustee, the
Committee and their counsel, such representations, warranties,
indemnities and other assurances and such opinions of counsel to the
Corporation as are required by the Committee and its counsel, the Trust
Deed be amended:
(a) to provide that, in the event that the Public Offering has not
been completed on or before December 31, 1996, the interest rate
payable on the Notes shall be increased, effective January 1, 1997,
to 10% per annum;
(b) to provide for the release of the shares of IGF Insurance from the
security created or required to be created in favour of the Series A
Noteholders by PGIC;
(c) to provide for the release of the shares of PGIC from the security
created in favour of the Series A Noteholders by SIG;
(d) to amend the definition of "Compensation Limit" and the provisions
of Section 6.02(d) of the Trust Deed to increase the maximum amount
which may be paid as salary and bonus to the five highest paid
employees of the Goran Group to US$2.0 million;
(e) to provide that SIG shall charge, in favour of the Trustee, the IGF
Holdings shares as security for its obligations under its guarantee
of the Notes provided that up to 50% of such shares shall be
released from such charge by the Trustee, without the necessity of
any further authorization from or on behalf of the Noteholders, upon
receipt of a Certificate of the Company stating that such shares are
to be sold to the public; and
(f) to the extent and in the manner determined to be necessary or
desirable by the Committee and the Corporation in order to give
effect to the foregoing resolutions and the resolution set forth in
paragraph (1) hereof;
all such amendments to be made by one or more supplemental indentures
from time to time (the "Supplemental Indentures") in form and content
satisfactory to the Committee.
3. RESOLVE THAT the Trustee be and is hereby authorised and instructed to
execute and deliver the Supplemental Indentures and any other document or
instrument deemed necessary or desirable by the Committee in order to
carry the foregoing resolutions into effect.
4. RESOLVE THAT in addition to its powers pursuant to Section 16.01 of the
Trust Deed, the Committee is hereby authorized to act on behalf of the
Noteholders in respect of the matters set forth in the foregoing
resolutions and, without limitation, is hereby authorized to waive
compliance with any term, condition or provision of the Trust Deed,
consent to any Transaction which is a Related Party transaction, release
and take any action
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<PAGE> 110
required to facilitate the release of any security, accept substitute
security for any security required to be provided pursuant to the Trust
Deed and amend any term of the Trust Deed for and on behalf of the
Noteholders, in each case with respect to any Transaction.
5. RESOLVE THAT, without limiting Section 16.02 of the Trust Deed, each
member of the Committee be and is hereby released, indemnified and saved
harmless from and against any losses, liabilities, costs, claims,
actions, and demands that they may incur or which may be made against
them as a result of or in connection with any action taken or omitted to
be taken by them in good faith in furtherance of the foregoing
resolutions.
THE FOREGOING EXTRAORDINARY RESOLUTION is hereby consented to in
writing pursuant to Section 11.15 of the Trust Deed by the holders of in excess
of 66 2/3% of the aggregate principal amount of the Series A outstanding as of
the date hereof and 100% of the aggregate principal amount of the Series B Notes
outstanding as of the date hereof.
DATED this day of March, 1996.
Lombard Odier & Cie Royal Trust Corporation of Canada,
7 March 1996 Account: New York Life Insurance
Company of Canada
By: /s/ Paul Lombard By:
------------------------------------ -------------------------------
Paul Lombard (under power of attorney) representing $3,500,000 aggregate
representing $3,735,750 aggregate principal amount of Series A Notes
principal amount of Series A Notes
The Canada Trust Company, Account: Gee & Co., Account:
098-250354-1\5767553 Brewin Dolphin
By: By:
------------------------------------ --------------------------------
representing $700,000 aggregate representing $1,932,000 aggregate
principal amount of Series A Notes principal amount of Series A Notes
and $495,000 aggregate principal
amount of Series B Notes
4
<PAGE> 111
Brewin Nominees Limited C.E.P.A., S.A.
BREWIN NOMINEES LIMITED
By: /s/ cannot read signature DIRECTOR By:
----------------------- ------------------------
representing $190,000 aggregate representing $978,000 aggregate
principal amount of Series B Notes principal amount of Series A Notes
Alberto Scorza
By:
-----------------------
representing $250,000 aggregate
principal amount of Series A Notes
5
<PAGE> 1
EXHIBIT 10.27(1)
EXHIBIT A
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Between
PAFCO GENERAL INSURANCE COMPANY, Cedent
and
SUPERIOR INSURANCE COMPANY, Reinsurer
<PAGE> 2
CONTENTS
ARTICLE PAGE
I BUSINESS REINSURED 1
II COMMENCEMENT AND TERMINATION 1
III TERRITORY 2
IV EXCLUSIONS 3
V REINSURANCE LIMITS 3
VI OTHER REINSURANCE 4
VII DEFINITIONS 4
VIII REPORTS AND REMITTANCES 6
IX CASH LOSSES 6
X SALVAGE AND SUBROGATION 6
XI PREMIUM 6
XII CEDING COMMISSION 7
XIII LIABILITY OF THE REINSURER 7
XIV OFFSET 7
XV ACCESS TO RECORDS 8
XVI NET RETAINED LINES 8
XVII ERRORS AND OMISSIONS 8
XVIII CURRENCY 9
XIX TAXES 9
XX FEDERAL EXCISE TAX 9
XXI INSOLVENCY 9
XXII ARBITRATION 10
<PAGE> 3
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
ISSUED TO
PAFCO GENERAL INSURANCE COMPANY
INDIANAPOLIS, INDIANA
(HEREINAFTER REFERRED TO AS THE "COMPANY")
BY
SUPERIOR INSURANCE COMPANY
INDIANAPOLIS, INDIANA
(HEREINAFTER REFERRED TO AS THE "REINSURER")
ARTICLE I - BUSINESS REINSURED
By this Contract the Reinsurer agrees to reinsure the liability which may
accrue to the Company under its contracts, agreements and binders of insurance
(hereinafter called "policies") which are in-force, issued or renewed on or
after the effective date hereof for Private Passenger Automobile and Motorcycle
Third Party Bodily Injury and Property Damage Liability including medical
payments, uninsured and underinsured motorists, and loss arising from no-fault
coverage as mandated by law which are underwritten by Pafco General Insurance
Company and classified as Automobile Liability business and to include
Automobile Physical Damage business.
ARTICLE II - COMMENCEMENT AND TERMINATION
A. This Contract shall become effective on 12:01 A.M. May 1, 1996, with
respect to losses occurring on in-force, new and renewal policies and shall
continue in force thereafter until terminated.
B. Either party may terminate this Contract at any January 1 by giving the
other party not less than ninety (90) days prior notice in writing.
C. Upon termination, the Company may elect a cut-off or run-off basis.
1) "Run-off basis" - In the event of termination on a run-off basis, the
Reinsurer shall remain liable for occurrences arising out of covered
policies in force at the date of
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<PAGE> 4
cancellation until expiration, cancellation or next renewal of such
policies, but in no case shall this reinsurance be extended for a
period longer than twelve (12) months plus odd time after the date of
cancellation of this Contract.
2) "Cut-off basis" - In the event of termination on a cut-off basis the
Reinsurer shall have no liability with respect to loss occurrences
happening after the effective time and date of cancellation.
If the cut-off basis is elected, upon termination of this reinsurance,
the Reinsurers shall return the unearned premium, if any, calculated
on the monthly pro-rata basis, less the appropriate ceding commission
as provided for in Article XII.
D. Should at any time the Reinsurer or the Company:
1) Be 100% reinsured without the previous written consent of the other
party;
2) Default in payment due under the terms of this Contract if not
rendered within fifteen (15) days; this provision shall not apply to
any items that may be in dispute;
3) Have a reduction of 20% or more of the paid-in capital for any reason
whatsoever;
4) Have proceedings instituted or filed against them by any insurance
regulatory authority for bankruptcy, rehabilitation, conservation,
liquidation or dissolution;
5) Reach mutual agreement to do so;
This Contract may be terminated by either the Reinsurer or the Company
upon giving thirty (30) days notice of cancellation in writing by
certified mail to the other party. In the event of termination under
the provision of this paragraph the Reinsurer shall remain liable for
losses arising from business written prior to the effective time and
date of cancellation, but shall have no liability with respect to
business written after that time and date.
E. At the Company's request, this Contract may be commuted for any Accident
Year at terms to be agreed.
ARTICLE III - TERRITORY
The Coverage hereunder applies to policies written and providing coverage
within the United States of America except for such incidental foreign exposure
as may be covered under the territorial provisions of these policies.
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<PAGE> 5
ARTICLE IV - EXCLUSIONS
A. Excess Coverage, including coverage written over self insured retentions or
deductible amounts greater than $5,000.
B. Assumed reinsurance.
C. Nuclear Incident per the Nuclear Incident Exclusion Clauses attached hereto
and made a part of this Contract.
D. Pools, Associations or Syndicates, except losses from Assigned Risk Plans
or similar plans are not excluded.
E. Business classified by the Company as commercial, or normally classified
and rated as such by the applicable Insurance Services Office Manual.
However, this exclusion shall not apply to Artisans' vehicles as defined in
the underwriting guidelines.
ARTICLE V - REINSURANCE LIMITS
A. The Company shall cede and the Reinsurer shall accept as Quota Share
reinsurance 100% of all gross written premium and resultant liabilities as
a percent of the total business written that is in excess of 3 times
statutory capital and surplus at December 31 of any year.
B. Should any loss covered hereunder result in an Extra Contractual Obligation
or Excess of Policy Limit judgment, then the combination of policy loss and
Extra Contractual Obligation or Excess of Policy Limit judgment and Loss
Adjustment Expense shall not exceed $500,000.
An Extra Contractual Obligation or Excess of Policy Limit loss shall be
covered hereunder at the proportionate share of 100% of any such loss.
C. For the purpose of determining the liability of the Reinsurer the limits of
liability of the Company with respect to any one policy shall be deemed not
to exceed:
1) Third Party bodily injury not to exceed
or death as respects $100,000 each person
automobile and motorcycle $300,000 each occurrence
liability including first
aid medical expense payments
supplementary to bodily
injury liability, inclusive
of PIP
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<PAGE> 6
2) Third party property not to exceed
damage as respects $50,000 each occurrence
automobile and motorcycle
liability
3) Automobile Physical Damage not to exceed
50,000 per vehicle
ARTICLE VI-OTHER REINSURANCE
The Company maintains Contingency Excess of Loss Reinsurance of $850,000 excess
of $200,000 each and every occurrence which inures to the benefit of this
Contract whether collectible or not. The Reinsurer shall contribute their
proportionate share of the cost of such Contingency Excess of Loss Cover.
ARTICLE VII-DEFINITIONS
A. "Policies" shall mean all contracts, policies and binders of insurance.
B. "Occurrence" shall mean each accident or occurrence, or series of
accidents or occurrences, arising out of one event.
C. "Loss" shall mean the sum actually paid by the Company in settlement of
loss or liability after making deductions of all salvages,
recoveries and all amounts recoverable, whether collected or not, from
other reinsurances.
D. "Loss Adjustment Expenses" as used in this Contract will mean all
allocated expenses incurred by the Company in the investigation,
appraisal, adjustment, litigation and/or defense of claims under
policies reinsured hereunder, including court costs, interest accrued
after final verdicts, judgments or awards, first aid medical
expense payments supplementary to bodily injury liability, but
excluding internal office expenses, salaries, per diem, and other
remuneration of regular Company employees, and sums paid to attorneys
as retainers. Such expense, where incurred in connection with claims
involving this reinsurance and not defined as part of loss in the
reinsured policies, will be apportioned between the Company and the
Reinsurers in proportion to their respective interests as finally
determined. Loss Adjustment Expenses shall be in addition to the
limits hereunder in the same proportion as the loss paid hereunder,
except as stipulated in Article V, Paragraph B.
4
<PAGE> 7
E. "Gross Net Written Premium Income" (GNWPI) shall mean the gross premium
and additional premium written for the business reinsured
hereunder, less cancellation and return premiums, and less premiums
paid for other reinsurance which inures to the benefit of this
Contract, if any.
F. "Gross Net Earned Premium Income" (GNEPI) shall mean the gross premium
and additional premium earned for business reinsured hereunder,
less cancellation and return premiums, and less ceded earned premiums
paid for other reinsurance which inures to the benefit of this
Contract, if any. GNEPI subject hereunder shall be the unearned
premium at the beginning of the accident year, plus the written premium
during the accident year, less the unearned premium at the end of the
accident year.
G. "Loss in Excess of Policy Limits" as used herein shall mean any amount
paid or payable by the Company in excess of its policy limits,
but otherwise within the terms of its policy, as a result of an action
against it by its insured or its insured's assignee to recover damages
the insured is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in discharging its duty
to defend or prepare the defense in the trial of an action against its
insured, or in discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
H. "Extra Contractual Obligations" as used herein shall mean any punitive,
exemplary, compensatory or consequential damages paid or payable by the
Company as a result of an action against it by its insured or its
insured's assignee, which alleges negligence or bad faith on the part of
the Company in handling a claim under an original policy subject to this
Contract, it being understood that Extra Contractual Obligations and/or
Loss in Excess of Policy Limits payable by the Company under the terms
of its original policies shall be covered as contractual losses
hereunder. An Extra Contractual Obligation shall be deemed to have
occurred on the same date as the loss covered or alleged to be covered
under the original policy. Notwithstanding anything stated herein,
this Contract shall not apply to any Extra Contractual Obligation
incurred by the Company as a result of fraudulent and/or criminal act by
any officer or director of the Company acting individually or
collectively or in collusion with any individual or corporation or any
other organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
Coverage provided by the reinsurance afforded hereunder as
regards paragraphs (G) and (H) above shall be for the proportionate
share as provided by this Contract of 100% of any Excess of Policy
Limits or Extra Contractual Obligation award as defined in Article V,
paragraph B.
I. "Incurred Loss" shall mean the paid loss and loss adjustment expense
plus the outstanding loss and loss adjustment expense for each
accident year.
5
<PAGE> 8
ARTICLE VIII-REPORTS AND REMITTANCES
A. The ceding Company shall render a monthly report within forty-five (45)
days of the close of each month showing the:
1) Ceded Gross Net Written Premium; less
2) Provisional Ceding Commission; less
3) Ceded Loss and Loss Adjustment Expense paid; plus
4) Preliminary loss recoveries, if any.
B. Any amounts shown to be due either party, shall be remitted monthly
within sixty (60) days after the close of the month.
C. Each monthly report shall include a statement of the reserves for
Unearned Premium and Outstanding Losses and Loss Adjustment Expense.
ARTICLE IX-CASH LOSSES
It is understood that when the amount of loss paid by the Company under
policies subject to this Contract as a result of any one occurrence exceeds
$50,000, the Reinsurer's share will, at the option and demand of the Company,
be paid by special remittance immediately, but the Reinsurer shall have the
right to deduct from such special remittance any overdue balance due the
Reinsurer by the Company. Any special remittance made pursuant to this
provision is to be credited to the Reinsurer in the account in which the paid
loss appears.
ARTICLE X-SALVAGE AND SUBROGATION
The Reinsurer shall be credited with its proportionate share of salvage or
subrogation recoveries (i.e., reimbursement obtained or recovery made by the
Company, less the actual cost, excluding salaries of officials and employees of
the Company, of obtaining such reimbursement or making such recovery) on
account of claims and settlements involving reinsurance hereunder.
ARTICLE XI-PREMIUM
The Company shall cede to the Reinsurers 100% of all gross written premium and
resultant liabilities as a percent of the total business written that is in
excess of 3 times statutory capital and surplus at December 31 of any year of
the Gross Net Written Premium Income, plus 100% of all gross written
6
<PAGE> 9
premium and resultant liabilities as a percent of the total business written
that is in excess of 3 times statutory capital and surplus at December 31 of
any year of the Unearned Premium at the beginning of each accident year for the
business covered hereunder less a ceding commission.
ARTICLE XII-CEDING COMMISSION
The Reinsurer shall allow the Company a ceding commission equal to agents
commissions, including contingent profit commissions and management fees as paid
to GGS Management, Inc. plus premium taxes and other expenses based on the
Gross Net Written Premium ceded as set forth herein. The commission allowance
shall cover premium taxes of all kinds, local board assessments, and all other
expenses and charges whatsoever based upon premium (except losses and loss
adjustment expenses) ceded under this Contract.
The term "losses incurred" for the accident year shall be understood to mean
the loss and loss adjustment expense paid by the Reinsurer (less salvages,
subrogation and recoveries received) on losses ascribed to the accident year,
plus loss and loss adjustment expense reserves outstanding on the losses
ascribed to the accident year.
ARTICLE XIII-LIABILITY OF THE REINSURER
The liability of the Reinsurer shall coincide with that of the Company,
provided same is within the terms and conditions of the original policies of
insurance and within the terms of this Contract. The liability of the Reinsurer
under this Contract or any endorsements attached hereto shall in no event
exceed the limits specified herein as defined under Article V paragraph A and
modified by paragraph B, nor be extended to cover any risks, perils or classes
of insurance generally or specifically excluded herein.
Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third party or any persons not
parties to this Contract.
ARTICLE XIV-OFFSET
The Company or the Reinsurer shall have, and may exercise at any time and from
time to time, the right to offset any balance or balances, whether on account
of premiums or on account of losses or otherwise, due from one party to the
other under the terms of this Contract. However, in the event of the
insolvency of any party hereto, offset shall only be allowed in accordance with
the statutes and/or regulations of the state having jurisdiction over
insolvency.
7
<PAGE> 10
ARTICLE XV-ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have the right at
any reasonable time to examine all papers in the possession of the Company
referring to business effected hereunder.
As soon as possible after the end of the calendar year, the Company shall
furnish the Reinsurer all statistical information necessary for the completion
of the Annual Statement in a form and with sufficient detail as to be
acceptable to the Reinsurer.
ARTICLE XVI-NET RETAINED LINES
This Contract applies only to that portion of any insurances covered by this
Contract which the Company retains net for its own account. In calculating the
amount of any loss hereunder only loss or losses in respect of that portion of
any insurance which the Company retains net for its own account shall be
included. It being understood and agreed that the amount of the Reinsurer's
liability hereunder in respect of any loss or losses shall not be increased by
reason of the inability of the Company to collect from any other reinsurers,
whether specific or general, any amounts which may have become due from them,
whether such inability arises from the insolvency of such other reinsurers or
otherwise.
ARTICLE XVII-ERRORS AND OMISSIONS
A. Inadvertent delays, errors or omissions made in connection with this
Contract or any transaction hereunder shall not relieve either
party from any liability which would have attached had such delay, error
or omission not occurred, provided always that the error or omission is
rectified as soon as possible after discovery by management personnel
of the Company, but in no event shall either be bound by such delay,
error or omission for a period longer than thirty days after they
receive knowledge thereof.
B. The liability of the Reinsurer under this Contract or any exhibits or
endorsements attached thereto shall in no event exceed the
limits specified therein, nor be extended to cover any risks, perils,
or classes of insurance generally or specifically excluded therein.
C. Reinsurance which is reported but not covered by this Contract shall
obligate the Reinsurer only to return the premiums paid for such
reinsurance.
8
<PAGE> 11
ARTICLE XVIII-CURRENCY
All retention and limits hereunder are expressed in United States dollars and
all premium and loss payments shall be made in United States currency. For the
purposes of this Contract amounts paid or received by the Company in any other
currency shall be converted into United States dollars at the rates of exchange
at which such transactions are converted on the books of the Company.
ARTICLE XIX-TAXES
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE XX-FEDERAL EXCISE TAX
If the Reinsurer is subject to the Federal Excise Tax, the Reinsurer agrees to
allow, for the purposes of paying the Tax, up to 1% of the premium payable
hereon to the extent such premium is subject to the Tax. In the event of any
return premium becoming due hereunder, the Reinsurer will deduct from the
amount of the return premium the same percentage as it allowed, and the Company
or its agent should take steps to recover the Tax from the U.S. Government.
ARTICLE XXI-INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall
be payable directly on the basis of the liability of the
Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor of
the Company has failed to pay all or a portion of any claim. It is
agreed, however, that the liquidator, receiver, conservator or
statutory successor of the Company shall give written notice to the
Reinsurer of the pendency of a claim against the Company indicating the
original policy reinsured which claim would involve a possible
liability on the part of the Reinsurer within a reasonable time after
such claim is filed in the conservation or liquidation proceeding or in
the receivership, and that during the pendency of such claim, the
Reinsurer may investigate such claim and interpose, at its own expense,
in the proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator,
receiver, conservator or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to the approval
of the Court, against the Company as part of the expense of
conservation or liquidation to the extent of a pro-rata share of
benefit which may accrue to the Company solely as a result of the
defense undertaken by the Reinsurer.
9
<PAGE> 12
B. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim,
the expense shall be apportioned in accordance with the terms of this
Contract as though such expense had been incurred by the Company.
C. It is further understood and agreed that, in the event of the
insolvency of the Company, the reinsurance under this Contract
shall be payable directly by the Reinsurer to the Company or to its
liquidator, receiver or statutory successor, except as provided by
Section 4118(a) of the New York Insurance Law or except (a) where this
Contract specifically provides another payee of such reinsurance in the
event of the insolvency of the Company or (b) where the Reinsurer with
consent of the direct insured or insureds has assumed such original
contract obligation of the Company as direct obligations of the
Reinsurer to the payees under such contracts and in substitution for
the obligations of the Company to such payees.
ARTICLE XXII-ARBITRATION
A. As a condition precedent to any right of action hereunder, in the event
of any dispute or difference of opinion hereafter arising with respect
to this Contract, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration. One Arbiter
shall be chosen by the Company, the other by the Reinsurer, and an
Umpire shall be chosen by the two Arbiters before they enter upon
arbitration, all of whom shall be active or retired disinterested
executive officers of insurance or reinsurance companies. In the event
that either party should fail to choose an Arbiter within 30 days
following a written request by the other party to do so, the requesting
party may choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two parties fail to agree upon the
selection of an Umpire within 30 days following their appointment, each
Arbiter shall nominate three candidates within 10 days thereafter, two
of whom the other shall decline, and the decision shall be made drawing
lots.
B. Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters
shall consider this Contract as an honorable engagement rather than
merely as a legal obligation and they are relieved of all judicial
formalities and may abstain from following the strict rules of law.
The decision of the Arbiters shall be final and binding on both
parties; but failing to agree, they shall call in the Umpire and the
decision of the majority shall be final and binding upon both parties.
Judgement upon the final decision of the Arbiters may be entered in any
court of competent jurisdiction.
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes
of this Article and communications shall be made by the Company to each
of the reinsurers constituting one party, provided, however, that
nothing
10
<PAGE> 13
herein shall impair the rights of such reinsurers to assert several,
rather than joint, defenses or claims, nor be construed as changing
the liability of the reinsurers participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and
of the arbitration. In the event that the two Arbiters are chosen by
one party, as above provided, the expense of the Arbiters, the Umpire
and the arbitration shall be equally divided between the two parties.
E. Any arbitration proceedings shall take place either at the location of
the Company's principal office or at a location mutually agreed
upon by the parties to this Contract, but notwithstanding the location
of the arbitration, all proceedings pursuant hereto shall be governed
by the law of the state in which the Company has its principal office.
F. Cancellation of this Contract shall not invalidate this arbitration
provision in respect of disputes arising after cancellation but
resulting from actions taken or transactions made during any period
during which this Contract was in effect.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the dates undermentioned at:
At Indianapolis this 30th day of May, 1996.
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
--------------------------
Its: President
--------------------------
At Indianapolis this 30th day of May, 1996.
SUPERIOR INSURANCE COMPANY
By: /s/ cannot read signature
--------------------------
Its: Vice President, CFO
--------------------------
Treasurer
11
<PAGE> 14
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE
(Approved by Lloyd's Underwriters' Fire and Non-Marine Association)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of
insurers or reinsurers formed for the purpose of covering nuclear risks
or as a direct or indirect reinsurer of any such member, subscriber or
association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of
this reinsurance all the original policies of the Reassured (new,
renewal and replacement) of the classes specified in Clause II of this
paragraph (2) from the time specified in Clause III in this paragraph
(2) shall be deemed to include the following provision (specified as
the Limited Exclusion Provision):
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage, to
{injury, sickness, disease, death, or destruction,
{bodily injury or property damage with respect to which an
insured under the policy is also an insured under a nuclear
energy liability policy issued by Nuclear Energy Liability
Insurance Association, Mutual Atomic Energy Liability
Underwriters or Nuclear Insurance Association of Canada, or
would be an insured under any such policy but for its
termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobiles, liability
only), Comprehensive Personal Lability Policies (liability
only), or policies of a similar nature; and the liability
portion of combination forms related to the four classes of
policies stated above, such as the Comprehensive Dwelling
Policy and the applicable types of Homeowner Policies.
III. The inception dates and thereafter of all original policies as
described in II above.
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion Provision set out above:
Provided this paragraph (2) shall not be applicable to
Family Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured
on New York risks, until 90 days following approval of
the Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
<PAGE> 15
(3) Except for those classes of policies specified in Clause II of
paragraph (2) and without in any way restricting the operation
of paragraph (1) of this Clause, it is understood and agreed that for
all purposed of this reinsurance the original liability policies of
the Reassured (new, renewal and replacement) affording the following
coverages:
Owners, Landlords and Tenants Liability,
Contractual Liability, Elevator Liability, Owners or
Contractors (including railroad), Protective Liability,
Manufacturers and Contractors Liability, Product Liability,
Professional and Malpractice Liability, Storekeepers Liability,
Garage Liability, Automotive Liability (including Massachusetts
Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages,
from the time specified in Clause V of this paragraph (3), the
following provision (specified as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
1. Under any liability coverage, to
{injury, sickness, disease, death or destruction
{bodily injury or property damage
(a) with respect to which an insured under the policy is
also an insured under a nuclear energy liability policy
issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters
or Nuclear Insurance Association of Canada, or would be
an insured under any such policy but for its termination
upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear
material and with respect to which (1) any person or
organization is required to maintain financial
protection pursuant to the Atomic Energy Act of 1954,
or any law amendatory thereof, or (2) the insured is,
or had this policy not been issued would be, entitled
to indemnity from the United States of America, or any
agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with
any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to
{immediate medical or surgical relief,
{first aid,
to expenses incurred with respect to
{bodily injury, sickness, disease or death
{bodily injury
resulting from the hazardous properties of nuclear material and arising
out of the operation of a nuclear facility by any person or
organization.
<PAGE> 16
III. Under any Liability Coverage to
{injury, sickness, disease, death or destruction
{bodily injury or property damage
resulting from the hazardous properties of nuclear material if
(a) the nuclear material (1) is at any nuclear facility
owned by, or operated by or on behalf of, an insured
or (2) has been discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or
waste at any time possessed, handled, used, processed,
stored, transported or disposed of by or on behalf of
an insured; or
(c) {the injury, sickness, disease, death or destruction
{bodily injury or property damage
arises out of the furnishing by an insured of services,
materials, parts or equipment in connection with
planning, construction, maintenance, operation or use
of any nuclear facility, but if such facility is
located within the United States of America, its
territories, or possessions or Canada, this exclusion
(c) applies only to
{injury to or destruction of property at such nuclear
facility,
{property damage to such nuclear facility and any
property threat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or
explosive properties: "nuclear material" means source material,
special nuclear material or byproduct material: "source
material", "special nuclear material", and "byproduct material"
have the meanings given to them in the Atomic Energy Act of
1954 or in any law amendatory thereof: "spent fuel" means any
fuel element or fuel component, solid or liquid, which has been
used or exposed to radiation in a nuclear reactor: "waste"
means any waste material
(1) containing byproduct material and
(2) resulting from the operation by any person or organization
or any nuclear facility included within the definition of
nuclear facility under paragraph (a) or (b) thereof; "nuclear
facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for
(1) separating the isotopes of uranium or
plutonium, (2) processing or utilizing spent fuel,
or (3) handling processing or packaging waste,
(c) any equipment or device used for the
processing, fabricating or alloying of special nuclear
material if at any time the total amount of such
material in the custody of the insured at the premises
where such equipment or device is located consists of
or contains more than 25 grams of plutonium or uranium
233 or any combination thereof, or more than 250 grams
of uranium 235,
(d) any structure, basin, excavation, premises or place
prepared or used for the storage or disposal of waste,
<PAGE> 17
and includes the site on which any of the foregoing is located, all operations
conducted on such site and all premises used for such operations: "nuclear
reactor" means any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of fissionable
material;
{With respect to injury to or destruction of property, the word "injury" or
"destruction" "property damage" includes all forms of radioactive contamination
of property.
{includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all original policies affording
coverages specified in this paragraph (3), whether new, renewal or
replacement, being policies which become effective on or after 1st
May, 1960 provided this paragraph (3) shall not be applicable to
(I) Garage and Automobile Policies issued by the Reassured on New
York risks, or
(ii) statutory liability insurance required under Chapter 90,
General Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion Provision by
the Governmental Authority having jurisdiction thereof.
(4) Without in any way restricting the operation on paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3)
above are not applicable to original liability policies of the
Reassured in Canada and that with respect to such policies this Clause
shall be deemed to include the Nuclear Energy Liability Exclusion
Provisions adopted by the Canadian Underwriters' Association or the
Independent Insurance Conference of Canada.
*Note: The words printed in bold in the Limited Exclusion Provision and in the
Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a
Broad Exclusion Provision containing those words.
<PAGE> 18
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
CANADA
1. This reinsurance does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear energy risks
or as a direct or indirect reinsurer of any such member, subscriber, or
association.
2. Without in any way restricting the operation or paragraph 1 of this
clause it is agreed that for all purposes of this reinsurance all the
original liability contracts of the Company, whether new, renewal or
replacements, of the following classes, namely,
Personal Liability,
Farmer Liability,
Storekeepers Liability,
Which become effective on or after 31st December 1962, shall be deemed
to include, from their inception dates and thereafter, the following
provision:
LIMITED EXCLUSION PROVISION
This Agreement does not apply to injury, sickness, disease, death, damage or
destruction with respect to which an insured under this Agreement is also
insured under a contract or nuclear energy liability insurance (whether the
insured is named in such Agreement or not or whether or not it is legally
enforceable by the insured) issued by the Nuclear Insurance Association of
Canada or any other group or pool of insurers or would be an insured under any
such policy but for its termination upon exhaustion of its limits of liability.
With respect to property, loss of use of such property shall be deemed to be
damage to or destruction of property.
3. Without in any way restricting the operation of paragraph 1 of this
clause it is agreed that for all purposes of this reinsurance all the
original liability contracts of the Company, whether new, renewal or
replacement, of any class whatsoever (other than personal liability,
farmers liability, storekeepers liability or automobile liability
contracts), which become effective on or after 31st December 1962,
shall be deemed to include from their inception dates and thereafter,
the following provision:
BROAD EXCLUSION PROVISION
This agreement does not apply to injury, sickness, disease, death, damage or
destruction
(A) With respect to which an insured under this Agreement is also
insured under a contract of nuclear energy liability insurance
(whether the insured is named in such contract or not and
whether or not it is legally enforceable by the insured)
<PAGE> 19
issued by the Nuclear Insurance Association of Canada or any
other group or pool or insurers or would be an insured under
any such policy but for its termination upon exhaustion or its
limit of liability: or
(B) Resulting directly or indirectly from the nuclear energy
hazard arising from:
(1) The ownership, maintenance, operation or use of nuclear
facility by or on behalf of an insured:
(2) The furnishing by an Insured of services, materials,
parts or equipment in connection with the planning,
construction, maintenance, operation or use of any
nuclear facility; and
(3) The transportation, consumption, possession, handling,
disposal or use of radioactive material (other than
radioisotopes away from a nuclear facility) sold,
handled, used or distributed by an insured.
As used in this Endorsement:
(I) The term "Nuclear Energy Hazard" means the radioactive, toxic,
explosive or other hazardous properties of radioactive
material;
(II) The term "Radioactive Material" means uranium, thorium,
plutonium, neptunium, their respective derivatives and
compounds, radioactive isotopes of other elements and any other
substances that the Atomic Energy Control Board may, by
regulation, designate as being prescribed substances capable of
releasing atomic energy, or being requisite for the production,
use or application of atomic energy:
(III) The term "Nuclear Facility" means:
(A) Any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to
contain a critical mass of plutonium, thorium and
uranium or any one or more of them;
(B) Any equipment or device designed or used for (I)
separating and isotopes of plutonium, thorium and
uranium or any one or more of them, (II) processing or
utilizing spent fuel, or (III) handling, processing or
packaging waste;
(C) Any equipment or device used for the processing,
fabricating or alloying of plutonium, thorium and
uranium or any one or more of then if at any time the
total amount of such material in the custody of the
insured at the premises where such equipment or device
is located consists of or contains more than 25 grams
of plutonium or uranium 233 or any combination thereof,
or more than 250 grams or uranium 235;
<PAGE> 20
(D) Any structure, basin, excavation, premises or place prepared
or used for the storage or disposal of waste radioactive
material;
and includes the site on which any of the foregoing is located, together with
all operations conducted thereon and all premises used for such operations.
(IV) With respect to property, loss of use of such property shall be deemed
to be damage to or destruction of property.
<PAGE> 21
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE--PHYSICAL DAMAGE-
REINSURANCE
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer,
from any Pool of Insurers of Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (1) of this
Clause, this Reinsurance does not cover any loss or liability
accruing to the Reassured, directly or indirectly and whether as
Insurer or Reinsurer from any insurance against Physical Damage
(including business interpretation or consequential loss arising out of
such Physical Damage) to:
I. Nuclear reactor power plants including all auxiliary property
on the site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials, in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for
processing substantial quantities of "special nuclear
material", and for reprocessing, salvaging, chemically
separating, storing or disposing of "spent" nuclear fuel or
waste materials, or
IV. Installations other than those listed in paragraph (2) III
above using substantial quantities of radioactive isotopes or
other products of nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, from any nuclear
installation and which normally would be insured therewith except that
this paragraph (3) shall not operate
(a) where Reassured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where said insurance contains a provision excluding
coverage for damage to property caused by or resulting
from radioactive contamination,
however caused.
However on and after 1st January, 1960 this
subparagraph (b) shall only apply provided the said
radioactive contamination exclusion provision has
been approved by the Governmental Authority having
jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2)
and (3) hereof, this Reinsurance does not cover any loss or liability
by radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
<PAGE> 22
5. It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is
not considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in
the Atomic Energy act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: without in any way restricting the operation of paragraph (1) hereof,
it is understood and agreed that
(a) all policies issued by the Reassured on or before 31st
December 1957 shall be free from the application of the other
provisions of this Clause until expiry date or 31st December
1960 whichever first occurs whereupon all the provisions of
this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by
the Reassured on or before 31st December 1958 shall be free
from the application of the other provisions of this Clause
until expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
<PAGE> 23
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE--PHYSICAL DAMAGE--
REINSURANCE
1. This Agreement does not cover any loss or liability accruing to the
Reinsured directly or indirectly, and whether as Insurer or Reinsurer,
from any Pool of Insurers or Reinsurers formed for the purpose of
covering Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this
clause, this Agreement does not cover any loss or liability accruing to
the Reinsured, directly or indirectly and whether as Insurer or
Reinsurer, from any insurance against Physical Damage (including
business interruption or consequential loss arising out of such
Physical Damage) to:
(1) Nuclear reactor power plants including all auxiliary property
on the site, or
(2) Any other nuclear reactor installation, "Including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(3) Installations for fabricating complete fuel elements or for
processing substantial quantities of prescribed substances,
and for reprocessing, salvaging, chemically separating, storing
or disposing of spend nuclear fuel or waste materials, or
(4) Installations other than those listed in (3) above using
substantial quantities of radioactive isotopes or other
products of nuclear fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of
this clause, this Agreement does not cover any loss or liability by
radioactive contamination accruing to the Reinsured, directly or
indirectly, and whether as Insurer or Reinsurer, from any insurance on
property which is on the same site as a nuclear reactor power plant or
other nuclear installation and which normally would be insured
therewith, except that this paragraph 3 shall not operate.
(a) where the Reinsured does not have knowledge of such nuclear
reactor power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding a
coverage for damage to property caused by or resulting from
radioactive contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3
of this clause, the Agreement does not cover any loss or liability by
radioactive contamination accruing to the Reinsured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
<PAGE> 24
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reinsured to
be the primary hazard.
6. The term "prescribed substances" shall have the meaning given to it by
the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory
thereof.
7. Reinsured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and
4 of this clause, this Agreement does not cover any loss or liability
accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer caused by any nuclear incident as defined in The
Nuclear Liability Act, nuclear explosion or contamination by
radioactive material.
NOTE: Without in any way restricting the operation of paragraphs 1,
2, 3 and 4 of this clause, paragraph 8 or this clause shall
only apply to all original contracts of the Reinsured whether
new, renewal or replacement which become effective on or after
December 31, 1984.
<PAGE> 25
INTERESTS AND LIABILITIES AGREEMENT
entered into by and between
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
SUPERIOR INSURANCE COMPANY
Indianapolis, Indiana
IT IS HEREBY MUTUALLY AGREED that the SUBSCRIBING REINSURER shall have a 100%
share of all gross written premium and resultant liabilities as a percent of
the total business written that is in excess of 3 times statutory capital and
surplus at December 31 of any year in the interests and liabilities of the
"Reinsurer" as set forth in the attached Contract entitled:
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: MAY 1, 1996
IT IS FURTHER AGREED that this Agreement shall become effective on business
written from May 1, 1996, and shall continue in force until terminated, in
accordance with the provisions of the attached Contract.
IT IS FURTHER AGREED that the SUBSCRIBING REINSURER'S share in the attached
Contract shall be separate and apart from the shares of the other reinsurers,
it being understood that the SUBSCRIBING REINSURER shall in no event
participate in the interests and liabilities of the other reinsurers.
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the dates undermentioned at:
At Indianapolis this 30th day of May, 1996.
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
Its: President
-------------------------------
At Indianapolis this 30th day of May, 1996.
SUPERIOR INSURANCE COMPANY
By: /s/ cannot read signature
-------------------------------
Its: Vice President, CFO, & Treasurer
-------------------------------
<PAGE> 1
EXHIBIT 10.27(2)
CROP HAIL QUOTA SHARE
REINSURANCE CONTRACT
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
(hereinafter referred to as the "Company")
by
IGF INSURANCE COMPANY
Des Moines, Iowa
(hereinafter referred to as the "Reinsurer")
ARTICLE I - CLASSES OF BUSINESS REINSURED
A. By this Contract the Company obligates itself to cede to the Reinsurer
and the Reinsurer obligates itself to accept 100% quota share reinsurance
of the Company's gross liability under policies, contracts and binders of
insurance (hereinafter called "policies") issued or renewed on or after
the effective date hereof and classified by the Company as Crop Hail
(including additional coverages and perils written in conjunction
therewith) produced for the Company by the Reinsurer.
B. The liability of the Reinsurer with respect to each cession hereunder
shall commence obligatorily and simultaneously with that of the Company,
subject to the terms, conditions and limitations hereinafter set forth.
ARTICLE II - COMMENCEMENT AND TERMINATION
A. This Contract shall become effective on February 1, 1990 with respect to
losses occurring on or after that date, and shall continue in force
thereafter until terminated.
B. Either party may terminate this Contract at any December 31 by giving the
other party not less than 45 days prior notice by certified mail, it being
understood that if the General Agency Agreement, effective February 1,
1990, between the Company and the Reinsurer is terminated for any reason,
this Contract shall expire automatically on the same date.
C. Unless otherwise mutually agreed, reinsurance hereunder on business in
force on the effective date of termination or expiration shall remain in
full force and effect until expiration, or the next renewal or premium
anniversary date of such business, whichever first occurs.
- 1 -
<PAGE> 2
ARTICLE III - ASSIGNMENTS AND ASSESSMENTS
A. The provisions of this Contract shall apply to a proportion of any
assessments made against the Company pursuant to those laws and
regulations creating obligatory funds (including insurance guaranty and
insolvency funds), pools, joint underwriting associations, FAIR plans and
similar plans, said proportion to be the proportion of the Company's total
premiums causing the assessment which were or are subject to this
Contract.
B. In the event this Contract is terminated, the provisions of this Article
shall continue to apply for as long as the Company is required to accept
assignments and/or assessments because of the business reinsured
hereunder.
ARTICLE IV - ORIGINAL CONDITIONS
A. All reinsurance under this Contract shall be subject to the same rates,
terms, conditions and waivers, and to the same modifications and
alterations as the respective policies of the Company. The Reinsurer
shall be credited with its exact proportion of the original premiums
written by the Company, whether collectible or not, prior to disbursement
of any dividends, but after deduction of premiums, if any, ceded by the
Company for inuring reinsurance.
B. Nothing herein shall in any manner create any obligations or establish
any rights against the Reinsurer in favor of any third party or any
persons not parties to this Contract.
ARTICLE V - COMMISSION
The Reinsurer shall allow the Company a commission on gross premiums ceded
(i.e., original premiums written less only cancellations and return premiums)
equal to the ceding commission rate under retrocession agreements pertaining to
the business assumed by the Reinsurer hereunder.
ARTICLE VI - LOSSES, LOSS ADJUSTMENT EXPENSES AND SALVAGE
A. All loss settlements shall be made by the Reinsurer on behalf of the
Company, and the Reinsurer shall pay or allow, as the case may be, 100% of
such loss settlements.
B. The Reinsurer shall also bear 100% of all loss adjustment expenses
incurred on behalf of the Company in the investigation, adjustment,
appraisal or defense of claims under policies subject to this Contract,
and shall receive its proportionate share of any recoveries of such
expense.
C. The Reinsurer shall be credited with 100% of any salvage (i.e.,
reimbursement obtained or recovery made by or on
- 2 -
<PAGE> 3
behalf of the Company) on account of claims and settlements involving
reinsurance hereunder.
ARTICLE VII - REPORTS
A. Monthly during each crop season, the Reinsurer shall prepare and forward
a report to the Company setting forth gross premiums assumed, losses and
loss adjustment expenses paid, and the reserves for outstanding losses and
loss adjustment expenses as of the date of the report.
B. As soon as possible after December 15 of each year, the Reinsurer shall
prepare and forward a report to the Company setting forth:
1. Earned premiums assumed for the then current crop season;
2. Commission thereon;
3. Losses and loss adjustment expenses paid (net of inuring reinsurance
recoveries, if any) for the then current crop season; and
4. The reserves for outstanding losses and loss adjustment expenses for
the then current crop season as of the date of the report.
ARTICLE VIII - ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have
the right at any reasonable time to examine all papers in the
possession of the Company or the General Agent referring to business effected
hereunder.
ARTICLE IX - ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this Contract
or any transaction hereunder shall not relieve either party from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission will be rectified as soon as
possible after discovery.
ARTICLE X - INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator,
receiver, conservator or statutory successor on the basis of the liability
of the Company without diminution because of the insolvency of the Company
or because the liquidator, receiver, conservator or statutory successor of
the Company has failed to pay all or a portion of any claim. It is
agreed, however, that the liquidator, receiver,
- 3 -
<PAGE> 4
conservator or statutory successor of the Company shall give written
notice to the Reinsurer of the pendency of a claim against the Company
indicating the policy or bond reinsured which claim would involve a
possible liability on the part of the Reinsurer within a reasonable time
after such claim is filed in the conservation or liquidation proceeding
or in the receivership, and that during the pendency of such claim, the
Reinsurer may investigate such claim and interpose, at its own expense, in
the proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator,
receiver, conservator or statutory successor. The expense thus incurred by
the Reinsurer shall be chargeable, subject to the approval of the Court,
against the Company as part of the expense of conservation or liquidation
to the extent of a pro rata share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer.
B. It is further understood and agreed that, in the event of the insolvency
of the Company, the reinsurance under this Contract shall be payable
directly by the Reinsurer to the Company or to its liquidator, receiver,
conservator or statutory successor, except as provided by Section 4118(a)
of the New York Insurance Law or except (a) where this Contract
specifically provides another payee of such reinsurance in the event of
the insolvency of the Company or (b) where the Reinsurer with the consent
of the direct insured or insureds has assumed such policy obligations of
the company as direct obligations of the Reinsurer to the payees under
such policies and in substitution for the obligations of the Company to
such payees.
ARTICLE XI - ARBITRATION
A. As a condition precedent to any right of action hereunder, in the event
of any dispute or difference of opinion hereafter arising with respect to
this Contract, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration. One Arbiter
shall be chosen by the Company, the other by the Reinsurer, and an Umpire
shall be chosen by the two Arbiters before they enter upon arbitration,
all of whom shall be active or retired disinterested executive officers of
insurance or reinsurance companies or Lloyd's London Underwriters. In the
event that either party should fail to choose an Arbiter within 30 days
following a written request by the other party to do so, the requesting
party may choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two Arbiters fail to agree upon the
selection of an Umpire within 30 days following their appointment, each
Arbiter shall name three nominees, of whom the other shall decline two,
and the decision shall be made by drawing lots.
- 4 -
<PAGE> 5
B. Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters shall
consider this Contract as an honorable engagement rather than merely as a
legal obligation and they are relieved of all judicial formalities and may
abstain from following the strict rules of law. The decision of the,
Arbiters shall be final and binding on both parties; but failing to agree,
they shall call in the Umpire and the decision of the majority shall be
final and binding upon both parties. Judgment upon the final decision of
the Arbiters may be entered in any court of competent jurisdiction.
C. Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party,
as above provided, the expense of the Arbiters, the Umpire and the
arbitration shall be equally divided between the two parties.
D. Any arbitration proceedings shall take place at a location mutually
agreed upon by the parties to this Contract, but notwithstanding the
location of arbitration, all proceedings pursuant hereto shall be governed
by the law of the state in which the Company has its principal office.
IN WITNESS WHEREOF, the parties hereto have caused this Contract
to be executed by their duly authorized representatives at:
Indianapolis, Indiana, this 26th day of September, 1990.
/s/ Douglas Symons
------------------------------------
PAFCO GENERAL INSURANCE COMPANY
Des Moines, Iowa this 10th day of September, 1990.
/s/ William L. McDonald, Pres
------------------------------------
IGF INSURANCE COMPANY
- 5 -
<PAGE> 6
CROP INSURANCE SERVICE AGREEMENT
Entered into by and between
Pafco General Insurance Company
(hereinafter referred to as the "Company")
and
IGF Insurance Company
(hereinafter referred to as the "General Agent")
ARTICLE I - AUTHORITY OF GENERAL AGENT
A. The Company hereby appoints the General Agent to supervise and conduct the
writing of Crop Hail and/or Multi-Peril Crop Insurance and assumed reinsurance
(including additional coverages and perils written in conjunction therewith) in
the states listed in EXHIBIT "A" hereby attached and becoming part of this
Agreement.
B. The Company hereby grants to the General Agent any and all authority
as may be required for the General Agent to properly supervise and conduct the
writing of the aforesaid business, including (but not by way of limitation) the
authority to accept and decline risks, to appoint agents, to remove agents
appointed by him previously, to collect premiums, and to adjust, compromise and
pay losses.
C. The General Agent hereby accepts such appointment, power and authority, and
agrees to carry out his resulting duties to the best of his ability, knowledge,
skill and judgement.
- 1 -
<PAGE> 7
ARTICLE II - REINSURANCE
The Company requires the General Agent and the General Agent agrees to arrange,
on behalf of the Company, reinsurance for 100% of the Company's liability on
Insurance business produced by General Agent and assumed reinsurance business
produced by the General Agent pursuant to the authority granted herein. Such
reinsurance shall be arranged with a reinsurer or reinsurers approved by the
Company. The General Agent is authorized and agrees to provide, on behalf of
the Company, all reports required under such reinsurance, to remit on behalf of
the Company all premiums due reinsurers thereunder, to receive, on behalf of
the Company, all losses recoverable thereunder, and to issue or receive, on
behalf of the Company, notice of termination thereof.
ARTICLE III - EXPENSES
The General Agent agrees to pay and/or reimburse the Company for all expenses
related to supervising and conducting the writing of business pursuant to this
Agreement. Such expenses shall include, but shall not be limited to, agent
licenses, local agent commissions, agency supplies (such as applications forms,
policy blanks, daily reports, adjuster supplies and loss drafts), advertising,
premium taxes, local board and association fees, state policy filings fees,
and other fees pursuant to those laws and regulations creating obligatory
funds, pools, joint underwriting association, FAIR plans and similar plans, and
reinsurance facilities designed to provide insurance on risks upon which
coverage cannot be obtained through the normal insurance market.
- 2 -
<PAGE> 8
ARTICLE IV - COMMISSION
The Company agrees to allow the General Agent a commission on gross premiums
written hereunder (i.e., original premiums less only cancellations and
returns) equal to and in effect offset by the ceding commission allowed the
Company under the reinsurance arranged by the General Agent pursuant to Article
II hereof.
ARTICLE V - ISSUING FEE
As an annual issuing fee under this Agreement the General Agent shall pay to
the Company the greater of the following 1. amount equal to 2% of the gross
premiums written or 2. $30,000.00 which ever amount is greater.
ARTICLE VI - REPORTS AND REMITTANCES
A. Monthly, the General Agent shall prepare and submit to the Company a
bordereau report showing premiums written, cancellations and return premiums,
reinsurance premiums, losses and loss adjustment expenses paid, and an estimate
of outstanding losses and loss adjustment expenses.
B. The General Agent agrees to reimburse the Company for all premium taxes paid
on business written hereunder as promptly as possible following receipt by the
General Agent of notification of the amount paid by the Company.
C. As promptly as possible after December 15 of each year, or as soon
thereafter as can be determined, the General Agent shall prepare and forward
the Company a summary account showing all debits and credits in respect of
business written hereunder during
- 3 -
<PAGE> 9
the year. The amount shown by such summary account to be due the Company shall
be remitted by the General Agent with such report. D. The General Agent shall
be liable to the Company for any and all premiums on business written for
account of the Company hereunder, regardless of whether such premiums or any of
them have been collected by the General Agent. It is agreed, however, that all
premiums received by the General Agent (less ceding commission allowed under
reinsurance effected by the General Agent in accordance with Article II hereof)
on business written hereunder shall be deposited by the General Agent in a
special account in a bank approved by the Company. The General Agent shall
have the authority to draw checks against said bank account, but only for one
or more of the following purposes:
1. Payment of losses and loss adjustment expenses on business written pursuant
to this Agreement;
2. Payment of the net balance due reinsurers for reinsurance effected in
accordance with Article II hereof;
3. Payment of any final balance due the General Agent or the Company.
ARTICLE VII - ACCESS TO RECORDS
The Company, by its duly appointed representatives, shall have the right at any
reasonable time to examine all papers in the possession of the General Agent
referring to business effected hereunder.
- 4 -
<PAGE> 10
ARTICLE VIII - ARBITRATION
A. As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising with respect to this
Agreement, it is hereby mutually agreed that such dispute or difference of
opinion shall be submitted to arbitration. One Arbiter shall be chosen by the
Company, the other by the General Agent, and an Umpire shall be chosen by the
two Arbiters before they enter arbitration, all of whom shall be active or
retired disinterested executive officers of insurance or reinsurance companies
or Lloyd's of London Underwriters. In the event that either party should fail
to choose an Arbiter within 30 days following a written request by the other
party to do so, the requesting party may choose two Arbiters who shall in turn
choose an Umpire before entering upon arbitration.
If the two Arbiters fail to agree upon the selection of an Umpire within 30
days following their appointment, each Arbiter shall nominate three candidates
within 10 days thereafter, two of whom the other shall decline, and the
decision shall be made by drawing lots.
B. Each party shall present its case to the Arbiters within 30 days following
the date of appointment of the Umpire. The Arbiters shall consider this
Agreement as a honorable engagement rather than merely as a legal obligation
and they are relieved of all judicial formalities and may abstain from
following the strict rules of law. The decision of the Arbiters shall be final
and binding on both parties; but failing to agree, they shall call in the
Umpire and
- 5 -
<PAGE> 11
the decision of the majority shall be final and binding upon both parties.
Judgement upon the final decision of the Arbiters may be entered in any court
of competent jurisdiction.
C. Each part shall bear the expense of its own Arbiter, and shall jointly and
equally bear with the other the expense of the Umpire and of the arbitration.
In the event that the two Arbiters are chosen by one party, and above provided,
the expense of the Arbiters, the Umpire and the arbitration shall be equally
divided between the two parties.
D. Any arbitration proceedings shall take place at a location mutually agreed
upon by both parties to this Agreement, but notwithstanding the location of the
arbitration, all proceedings pursuant hereto shall be governed by the law of
the state in which the Company has its principal office.
ARTICLE IX - COMMENCEMENT AND TERMINATION
A. This Agreement shall become effective February 1, 1990, and shall remain in
force until terminated at any time by mutual consent of the parties hereto or
cancelled as of December 31 of any calendar year by either party hereto sending
to the other, by certified mail, not less than 30 days prior notice of its
desire to effect such cancellation. If cancelled under this Paragraph the
General Agent will be required to service the Policies which are presently in
force and that were issued through the General Agent while the Agreement was in
force. The General Agent's authority will be limited to these Policies. The
Company will continue its fronting agreement on these Policies for the
remainder of the crop
- 6 -
<PAGE> 12
year.
B. In the event of fraud or breach of any of its conditions or provisions on
the part of the General Agent, this Agreement may be cancelled by the Company
at any time thereafter by written notice effective immediately, and should be
General Agent be in any way indebted to the Company at such time, for premium
or any other obligations, such debt or debts shall immediately become due and
payable.
C. In the event of termination of this Agreement, and provided the General
(and/or the local agents appointed by him under authority of this Agreement)
has in accordance with the terms of this Agreement, accounted for and paid to
the Company all premiums and other monies due and owing the securities held for
on behalf of the Company, the records of the General Agent and of the local
agents, together with the use and control of expirations, shall remain the
property of the General Agent and the local agents, as their interest may
appear, and be left in their undisputed possession if there has not been such
accounting and payment by the General Agent (and/or local agent appointed by
him under the authority of this agreement), all such records and the right, use
and control of the expirations shall vest in the Company.
D. This Agreement shall be immediately terminated in the event the general
Agent becomes insolvent or makes any assignment for the benefit of creditors
and, in such an event, the right of the Company to use and profit of the agent
plant shall be conceded and held inviolate, it being further understood that
should the
- 7 -
<PAGE> 13
Company, at its option, effect the collection of monies from agents,
policyholders or others from whom monies may be due on account of the Company's
policies issued through the General Agent, the Company shall give the General
Agent credit for such sums in their mutual account.
ARTICLE X -
General Agent warrants that it now has and shall maintain throughout the term
of this Agreement an Insurance License of the type and nature required for the
authority granted herein in the state of General Agent's domicile and for any
other state(s) wherein Company authorizes General Agent to write business.
General Agent also warrants that it will abide by all rules and regulations for
MPCI and Crop Hail business as required by the insurance department of the
state in which the business is written. In the event that the aforesaid
license(s) expires or is cancelled for any reason, or the General Agent is
found to be out of compliance with state requirements, this Agreement shall
terminate automatically as respects the state having issued such license(s).
ARTICLE XI
General Agent may not assign, transfer, pledge, or sell this agreement.
General Agent's non-compliance with this clause, shall automatically terminate
this Agreement and all authority granted herein.
Inasmuch as the Company relies upon the integrity and judgement of the present
management and ownership of General Agent, should there
- 8 -
<PAGE> 14
be a change in the General Agent's management, or should there be a change in a
minority or majority of the ownership of the General Agent; said General Agent
warrants he will give Company written notice of such change at least sixty (60)
days prior to the effective date of any such change. General Agent's failure
to render such written notice shall terminate any and all authority extended to
General Agent by virtue of this Agreement.
ARTICLE XII -
A. General Agent does hereby hold the Company harmless of and from any and all
wrongful acts or conduct by its representatives, employees, and/or subagents as
respects improper licensing, failure to properly remit premium or any other
acts that would incur a financial obligation to the Company as a result of such
acts or omissions by said representatives, employees, and/or subagents,
including but not limited to all costs, expenses and attorneys fees incurred by
said Company as a result thereof.
B. General Agent is hereby required to have a current Errors and Omissions
policy in force during the term of this Agreement. IN WITNESS WHEREOF, the
parties hereto by their respective duly authorized representatives have
executed this Agreement as of the dated undermentioned at:
Indianapolis, Indiana, this 26th day of September, 1990.
/s/ Douglas Symons
------------------------------------
PAFCO GENERAL INSURANCE COMPANY
Des Moines, Iowa this 10th day of September, 1990.
/s/ William L. McDonald, Pres
------------------------------------
IGF INSURANCE COMPANY
- 9 -
<PAGE> 1
EXHIBIT 10.27(3)
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
issued to
IGF Insurance Company
Des Moines, Iowa
(hereinafter referred to as the "Company")
by
Pafco General Insurance Company
Indianapolis, Indiana
(hereinafter referred to as the "Reinsurer")
ARTICLE I - BUSINESS REINSURED
By this Contract the Reinsurer agrees to reinsure the liability which may
accrue to the Company under its contracts, agreements and binders of insurance
(hereinafter called "policies") which are inforce, issued or renewed on or
after the effective date hereof for Private Passenger Automobile and Motorcycle
Third Party Bodily Injury and Property Damage Liability including medical
payments, uninsured and underinsured motorists, and loss arising from no-fault
coverage as mandated by law which are underwritten by Pafco General Insurance
Company and classified as Automobile Liability business and to include
Automobile Physical Damage business.
ARTICLE II - COMMENCEMENT AND TERMINATION
A. This Contract shall become effective on 12:01 A.M. January 1, 1996,
with respect to losses occurring on in-force, new and renewal policies
and shall continue in force thereafter until terminated.
<PAGE> 2
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 2
B. Either party may terminate this Contract at any January 1 or July 1 by
giving the other party not less than 90 days prior notice in writing.
C. Upon termination, the Company may elect a cut-off or run-off basis.
1) "Run-off basis" - In the event of termination on a run-off
basis, the Reinsurer shall remain liable for
occurrences arising out of covered policies in force at the
date of cancellation until expiration, cancellation or next
renewal of such policies, but in no case shall this reinsurance
be extended for a period longer than 12 months plus odd time
after the date of cancellation of this Contract.
2) "Cut-off basis" - In the event of termination on a cut-off
basis the Reinsurer shall have no liability with
respect to loss occurrences happening after the effective time
and date of cancellation.
If the cut-off basis is elected, upon termination of this
reinsurance, the Reinsurers shall return the unearned
premium, if any, calculated on the monthly pro-rata basis, less
the appropriate ceding commission as provided for in Article
XII.
D. Should at any time the Reinsurer or the Company:
1) Be 100% reinsured without the previous written consent of the
other party;
2) Default in payment due under the terms of this Contract if not
rendered within 15 days; this provision shall not apply to any
items that may be in dispute;
3) Have a reduction of 20% or more of the paid-in capital for any
reason whatsoever;
4) Have proceedings instituted or filed against them by any
insurance regulatory authority for bankruptcy,
rehabilitation, conservation, liquidation or dissolution;
<PAGE> 3
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 3
5) Reach mutual agreement to do so;
this Contract may be terminated by either the Reinsurer or the
Company upon giving 30 days notice of cancellation in
writing by certified mail to the other party. In the event of
termination under the provision of this paragraph the Reinsurer
shall remain liable for losses arising from business written
prior to the effective time and date of cancellation, but shall
have no liability with respect to business written after that
time and date.
E. At the Company's request, this Contract may be commuted for any
Accident Year at terms To Be Agreed.
ARTICLE III - TERRITORY
The Coverage hereunder applies to policies written and providing coverage
within the United States of America except for such incidental foreign exposure
as may be covered under the territorial provisions of these policies.
ARTICLE IV - EXCLUSIONS
A) Excess Coverage, including coverage written over self insured
retentions or deductible amounts greater than $5,000.
B) Assumed reinsurance.
C) Nuclear Incident per the Nuclear Incident Exclusion Clauses attached
hereto and made a part of this Contract.
D) Pools, Associations or Syndicates, except losses from Assigned Risk
Plans or similar plans are not excluded.
E) Business classified by the Company as commercial, or normally
classified and rated as such by the applicable Insurance
Services Office Manual. However, this exclusion shall not apply to
Artisans' vehicles as defined in the underwriting guidelines.
<PAGE> 4
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 4
ARTICLE V - REINSURANCE LIMITS
A) The Company shall cede and the Reinsurer shall accept as Quota Share
reinsurance 100% of the Company's limit of liability as
specified in paragraph C of this Article.
B) Should any loss covered hereunder result in an Extra Contractual
Obligation or Excess of Policy Limit judgment, then the
combination of policy loss and Extra Contractual Obligation or Excess
of Policy Limit judgment and Loss Adjustment Expense shall not exceed
%500,000.
An Extra Contractual Obligation or Excess of Policy Limit loss shall be
covered hereunder at the proportionate share of 100% of any such loss.
C) For the purpose of determining the liability of the Reinsurer the
limits of liability of the Company with respect to any one
policy shall be deemed not to exceed:
1) Third Party bodily injury not to exceed
or death as respects $100,000 each person
automobile and motorcycle $300,000 each occurrence
liability including first
aid medical expense payments
supplementary to bodily injury
liability, inclusive of PIP
2) Third party property not to exceed
damage as respects $50,000 each occurrence
automobile and motorcycle
liability
3) Automobile Physical Damage not to exceed
$50,000 per vehicle
<PAGE> 5
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 5
ARTICLE VI - OTHER REINSURANCE
The Company maintains Contingency Excess of Loss Reinsurance of $850,000 excess
of $200,000 each and every occurrence which inures to the benefit of this
Contract whether collectible or not. The Reinsurer shall contribute their
proportionate share of the cost of such Contingency Excess of Loss Cover.
ARTICLE VII - DEFINITIONS
A) "Policies" shall mean all contracts, policies and binders of insurance.
B) "Occurrence" shall mean each accident or occurrence, or
series of accidents or occurrences, arising out of one event.
C) "Loss" shall mean the sum actually paid by the Company in
settlement of loss or liability after making deductions of all
salvages, recoveries and all amounts recoverable, whether collected or
not, from other reinsurances.
D) "Loss Adjustment Expenses" as used in this Contract will mean all
allocated expenses incurred by the Company in the
investigation, appraisal, adjustment, litigation and/or defense of
claims under policies reinsured hereunder, including court costs,
interest accrued after final verdicts, judgments or awards, first aid
medical expense payments supplementary to bodily injury liability, but
excluding internal office expenses, salaries, per diem, and other
remuneration of regular Company employees, and sums paid to attorneys
as retainers. Such expense, where incurred in connection with claims
involving this reinsured policies, will be apportioned between the
Company and the Reinsurers in proportion to their respective interests
as finally determined. Loss Adjustment Expenses shall be in addition
to the limits hereunder in the same proportion as the loss paid
hereunder, except as stipulated in Article V, Paragraph B.
<PAGE> 6
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 6
E) "Gross Net Written Premium Income" (GNWPI) shall mean the gross
premium and additional premium written for the business reinsured
hereunder, less cancellation and return premiums, and less premiums
paid for other reinsurance which inures to the benefit of this
Contract, if any.
F) "Gross Net Earned Premium Income" (GNEPI) shall mean the gross premium
and additional premium earned for business reinsured hereunder,
less cancellation and return premiums, and less ceded earned premiums
paid for other reinsurance which inures to the benefit of this
Contract, if any. GNEPI subject hereunder shall be the unearned
premium at the beginning of the accident year, plus the written premium
during the accident year, less the unearned premium at the end of the
accident year.
G) "Loss in Excess of Policy Limits" as used herein shall mean any amount
paid or payable by the Company in excess of its policy limits,
but otherwise within the terms of its policy, as a result of an action
against it by its insured or its insured's assignee to recover damages
the insured is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in discharging its duty
to defend or prepare the defense in the trial of an action against its
insured, or in discharging its duty to prepare or prosecute an appeal
consequent upon such an action.
H) "Extra Contractual Obligations" as used herein shall mean any punitive,
exemplary, compensatory or consequential damages paid or
payable by the Company as a result of an action against it by its
insured or its insured's assignee, which alleges negligence or bad
faith on the part of the Company in handling a claim under an original
policy subject to this Contract, it being understood that Extra
Contractual Obligations and/or Loss in Excess of Policy Limits payable
by the Company under the terms of its original policies shall be
covered as contractual losses hereunder. An Extra Contractual
Obligation shall be deemed to have occurred on the same date as the
loss covered or alleged to be covered under the original policy.
Notwithstanding anything stated herein, this Contract shall not apply
to any Extra Contractual Obligation incurred by the
<PAGE> 7
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 7
Company as a result of fraudulent and/or criminal act by any officer or
director of the Company acting individually or collectively or
in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
Coverage provided by the reinsurance afforded hereunder as regards
paragraphs (G) and (H) above shall be for the proportionate
share as provided by this Contract of 100% of any Excess of Policy
Limits or Extra Contractual Obligation award as defined in Article V,
paragraph B.
I) "Incurred Loss" shall mean the paid loss and loss adjustment expense
plus the outstanding loss and loss adjustment expense for each
accident year.
ARTICLE VIII - REPORTS AND REMITTANCES
A) The ceding Company shall render a monthly report within 45 days of the
close of each month showing the:
a) Ceded Gross Net Written Premium; less
b) Provisional Ceding Commission; less
c) Ceded Loss and Loss Adjustment Expense paid; plus
d) Preliminary loss recoveries, if any.
B) Any amounts shown to be due either party, shall be remitted monthly
within 60 days after the close of the month.
C) Each monthly report shall include a statement of the reserves for
Unearned Premium and Outstanding Losses and Loss Adjustment Expense.
ARTICLE IX - CASH LOSSES
It is understood that when the amount of loss paid by the Company under
policies subject to this Contract as a result of any one occurrence exceeds
$50,000, the Reinsurer's share will, at the option and demand of the Company,
be paid by special remittance immediately, but the Reinsurer shall have the
right to deduct from such special remittance any overdue balance due the
Reinsurer by
<PAGE> 8
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 8
the Company. Any special remittance made pursuant to this provision is to be
credited to the Reinsurer in the account in which the paid loss appears.
ARTICLE X - SALVAGE AND SUBROGATION
The Reinsurer shall be credited with its proportionate share of salvage or
subrogation recoveries (i.e., reimbursement obtained or recovery made by the
Company, less the actual cost, excluding salaries of officials and employees of
the Company, of obtaining such reimbursement or making such recovery) on
account of claims and settlements involving reinsurance hereunder.
ARTICLE XI - PREMIUM
The Company shall cede to the Reinsurers 100% of the Gross Net Written Premium
Income, plus 100% of the Unearned Premium at the beginning of each accident
year for the business covered hereunder less a ceding commission.
ARTICLE XII - CEDING COMMISSION
The Reinsurer shall allow the Company a provisional ceding commission of 30.5%
plus premium taxes on the Gross Net Written Premium ceded as set forth herein.
The commission allowance shall cover premium taxes of all kinds, local board
assessments, and all other expenses and charges whatsoever based upon premium
(except losses and loss adjustment expenses) ceded under this Contract.
The term "losses incurred" for the accident year shall be understood to mean
the loss and loss adjustment expense paid by the Reinsurer (less salvages,
subrogation and recoveries received) on losses ascribed to the accident year,
plus loss and loss adjustment expense reserves outstanding on the losses
ascribed to the accident year.
<PAGE> 9
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 9
ARTICLE XIII - LIABILITY OF THE REINSURER
The liability of the Reinsurer shall coincide with that of the Company,
provided same is within the terms and conditions of the original policies of
insurance and within the terms of this Contract. The liability of the
Reinsurer under this Contract or any endorsements attached hereto shall in no
event exceed the limits specified herein as defined under Article V paragraph A
and modified by paragraph B, nor be extended to cover any risks, perils or
classes of insurance generally or specifically excluded herein.
Nothing herein shall in any manner create any obligations or establish any
rights against the Reinsurer in favor of any third party or any persons not
parties to this Contract.
ARTICLE XIV - OFFSET
The Company or the Reinsurer shall have, and may exercise at any time and from
time to time, the right to offset any balance or balances, whether on account
of premiums or on account of losses or otherwise, due from one party to the
other under the terms of this Contract. However, in the event of the
insolvency of any party hereto, offset shall only be allowed in accordance with
the statutes and/or regulations of the state having jurisdiction over
insolvency.
ARTICLE XV - ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have the right at
any reasonable time to examine all papers in the possession of the Company
referring to business effected hereunder.
As soon as possible after the end of the calendar year, the Company shall
furnish the Reinsurer all statistical information necessary for the completion
of the Annual Statement in a form and with sufficient detail as to be
acceptable to the Reinsurer.
ARTICLE XVI - NET RETAINED LINES
This Contract applies only to that portion of any insurances covered by this
Contract which the Company retains net for its own account. In calculating the
amount of any loss hereunder only loss or losses in respect of that portion of
any insurance which the
<PAGE> 10
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 10
Company retains net for its own account shall be included. It being understood
and agreed that the amount of the Reinsurer's liability hereunder in respect of
any loss or losses shall not be increased by reason of the inability of the
Company to collect from any other reinsurers, whether specific or general, any
amounts which may have become due from them, whether such inability arises from
the insolvency of such other reinsurers or otherwise.
ARTICLE XVII - ERRORS AND OMISSIONS
A) Inadvertent delays, errors or omissions made in connection with this
Contract or any transaction hereunder shall not relieve either party
from any liability which would have attached had such delay, error or
omission not occurred, provided always that the error or omission is
rectified as soon as possible after discovery by management personnel of
the Company, but in no event shall either be bound by such delay, error
or omission for a period longer than thirty days after they receive
knowledge thereof.
B) The liability of the Reinsurer under this Contract or any exhibits or
endorsements attached thereto shall in no event exceed the limits
specified therein, nor be extended to cover any risks, perils, or
classes of insurance generally or specifically excluded therein.
C) Reinsurance which is reported but not covered by this Contract shall
obligate the Reinsurer only to return the premiums paid for such
reinsurance.
ARTICLE XVIII - CURRENCY
All retention and limits hereunder are expressed in United States dollars and
all premium and loss payments shall be made in United States currency. For the
purposes of this Contract amounts paid or received by the Company in any other
currency shall be converted into United States dollars at the rates of exchange
at which such transactions are converted on the books of the Company.
<PAGE> 11
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 11
ARTICLE XIX - TAXES
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax return, to any state or territory of
the United States of America or the District of Columbia.
ARTICLE XX - FEDERAL EXCISE TAX
If the Reinsurer is subject to the Federal Excise Tax, the Reinsurer agrees to
allow, for the purposes of paying the Tax, up to 1% of the premium payable
hereon to the extent such premium is subject to the Tax. In the event of any
return premium becoming due hereunder, the Reinsurer will deduct from the
amount of the return premium the same percentage as it allowed, and the Company
or its agent should take steps to recover the Tax from the U.S. Government.
ARTICLE XXI - UNAUTHORIZED REINSURERS
A) If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia, the Reinsurer agrees to fund its
share of the Company's ceded unearned premium, outstanding loss and loss
adjustment expense reserves (including incurred but not reported loss
reserves) by:
1. Clean, irrevocable and unconditional Letters of Credit; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding, a penalty would accrue to the Company on any
financial statement it is required to file with the insurance regulatory
authorities involved. The Reinsurer, at its sole option, may fund in
other than cash if its method of funding is acceptable to the insurance
regulatory authorities involved.
B) With regard to funding in whole or in part by Letters of Credit, it is
agreed that each Letter of Credit will be issued
<PAGE> 12
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 12
for a term of at least one year and will include an "evergreen clause",
which automatically extends the term for at least one additional year at
each expiration date. The Company and the Reinsurer further agree,
notwithstanding anything to the contrary in this Contract, that said
Letters of Credit may be drawn upon by the Company or its successors in
interest at any time, without diminution because of the insolvency of
the Company or the Reinsurer, but only for one or more of the following
purposes:
1. To reimburse itself for the Reinsurer's share of unearned
premium and/or losses and/or loss adjustment expenses paid
under the terms of original policies reinsured hereunder, unless
paid in cash by the Reinsurer;
2. To reimburse itself for the Reinsurer's share of any other
amounts claimed to be due hereunder, unless paid in cash by the
Reinsurer;
3. To fund a cash account in an amount equal to the Reinsurer's
share of any ceded unearned premium and/or loss and loss
adjustment expense reserves (including incurred but not reported
loss reserves) funded by means of a Letter of Credit which is
under non-renewal notice, if said Letter of Credit has not been
renewed or replaced by the Reinsurer 10 days prior to its
expiration date;
4. To refund to the Reinsurer any sum in excess of the actual
amount required to fund the Reinsurer's share of the Company's
ceded unearned premium and/or loss and loss adjustment expense
reserves (including incurred but not reported loss reserves), if
so requested by the Reinsurer.
In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for B(1) or B(3), or in the case of B(2),
the actual amount determined to be due, the Company shall promptly return to
the Reinsurer the excess amount so drawn.
The Reinsurers acknowledge that the Company is responsible to its regulated
jurisdiction to ceded reserves through licensed reinsurers or post security as
required in the appropriate regulated jurisdiction for which it is operating.
Should the Reinsurer not be
<PAGE> 13
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 13
accepted as licensed in any jurisdiction and the Company is required to post
security in accordance with the business written under this Contract, the
Reinsurer shall, upon 30 days notice, post security for reserves under this
Contract. The reserves shall be posted in accordance with the requirements of
the jurisdiction regulations. Should the Reinsurer fail to post the necessary
security for reserves within the 30 days of demand by the Company, then the
Company will post the necessary reserves and charge the Reinsurer and interest
expense of 1% per month on the amount of reserves posted on behalf of the
Reinsurer's share.
ARTICLE XXII - INSOLVENCY
A) In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver,
conservator or statutory successor on the basis of the liability of the
Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor of
the Company has failed to pay all or a portion of any claim. It is
agreed, however, that the liquidator, receiver, conservator or statutory
successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim against the Company indicating the original
policy reinsured which claim would involve a possible liability on the
part of the Reinsurer within a reasonable time after such claim is filed
in the conservation or liquidation proceeding or in the receivership,
and that during the pendency of such claim, the Reinsurer may
investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator,
receiver, conservator or statutory successor. The expense thus incurred
by the Reinsurer shall be chargeable, subject to the approval of the
Court, against the Company as apart of the expense of conservation or
liquidation to the extent of a pro-rata share of benefit which may
accrue to the Company solely as a result of the defense undertaken by
the reinsurer.
B) Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the
expense shall be apportioned in accordance with the
<PAGE> 14
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 14
terms of this Contract as though such expense had been incurred by the
Company.
C) It is further understood and agreed that, in the event of the
insolvency of the Company, the reinsurance under this Contract shall be
payable directly by the Reinsurer to the Company or to its liquidator,
receiver or statutory successor, except as provided by Section 4118(a)
of the New York Insurance Law or except (a) where this Contract
specifically provides another payee of such reinsurance in the event of
the insolvency of the Company or (b) where the Reinsurer with consent
of the direct insured or insureds has assumed such original contract
obligation of the Company as direct obligations of the Reinsurer to the
payees under such contracts and in substitution for the obligations of
the Company to such payees.
ARTICLE XXIII - ARBITRATION
A) As a condition precedent to any right of action hereunder, in the event
of any dispute or difference of opinion hereafter arising with respect
to this Contract, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration. One Arbiter
shall be chosen by the Company, the other by the Reinsurer, and an
Umpire shall be chosen by the two Arbiters before they enter upon
arbitration, all of whom shall be active or retired disinterested
executive officers of insurance or reinsurance companies. In the event
that either party should fail to choose an Arbiter within 30 days
following a written request by the other party to do so, the
requesting party may choose two Arbiters who shall in turn choose an
Umpire before entering upon arbitration. If the two parties fail to
agree upon the selection of an Umpire within 30 days following their
appointment, each Arbiter shall nominate three candidates within 10
days thereafter, two of whom the other shall decline, and the decision
shall be made drawing lots.
B) Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters shall
consider this Contract as an honorable engagement rather than merely
as a legal obligation and they are relieved of all judicial
formalities and may abstain from
<PAGE> 15
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
TERMS EFFECTIVE: JANUARY 1, 1996
PAGE 15
following the strict rules of law. The decision of the Arbiters shall be
final and binding on both parties, but failing to agree, they shall call in
the Umpire and the decision of the majority shall be final and binding upon
both parties. Judgement upon the final decision of the Arbiters may be
entered in any court of competent jurisdiction.
C) If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
Article and communications shall be made by the Company to each of the
reinsurers constituting one party, provided, however, that nothing herein
shall impair the rights of such reinsurers to assert several, rather than
joint, defenses or claims, nor be construed as changing the liability of
the reinsurers participating under the terms of this Contract from several
to joint.
D) Each party shall bear the expense of its own Arbiter, and shall jointly and
equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one party,
as above provided, the expense of the Arbiters, the Umpire and the
arbitration shall be equally divided between the two parties.
E) Any arbitration proceedings shall take place either at the location of the
Company's principal office or at a location mutually agreed upon by the
parties to this Contract, but notwithstanding the location of the
arbitration, all proceedings pursuant hereto shall be governed by the law
of the state in which the Company has its principal office.
F) Cancellation of this Contract shall not invalidate this arbitration
provision in respect of disputes arising after cancellation but resulting
from actions taken or transactions made during any period during which this
Contract was in effect.
<PAGE> 16
IGF INSURANCE COMPANY
AUTOMOBILE QUOTA SHARE REINSURANCE
EFFECTIVE: JANUARY 1, 1996
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this Agreement as of the dates undermentioned:
At Indianapolis, Indiana this 29th day of April, 1996.
IGF INSURANCE COMPANY
By: /s/ Alan G. Symons
-------------------------------
At Indianapolis, Indiana this 29th day of April, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Donald J. Goodenow
-------------------------------
<PAGE> 17
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE-LIABILITY-REINSURANCE
(Approved by Lloyd's Underwriters' Fire and Non-Marine Association)
(1) This reinsurance does not cover any loss or liability accruing to the
Reassured as a member of, or subscriber to, any association of insurers
or reinsurers formed for the purpose of covering nuclear risks or as a
direct or indirect reinsurer of any such member, subscriber or
association.
(2) Without in any way restricting the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this
reinsurance all the original policies of the Reassured (new, renewal
and replacement) of the classes specified in Clause II of this paragraph
(2) from the time specified in Clause III in this paragraph (2) shall be
deemed to include the following provision (specified as the Limited
Exclusion Provision):
LIMITED EXCLUSION PROVISION.*
I. It is agreed that the policy does not apply under any liability
coverage, to
[injury, sickness, disease, death, or destruction,
[bodily injury or property damage
with respect to which an insured under the policy is also an
insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic
Energy Liability Underwriters or Nuclear Insurance Association
of Canada, or would be an insured under any such policy but for
its termination upon exhaustion of its limit of liability.
II. Family Automobile Policies (liability only), Special Automobile
Policies (private passenger automobile, liability only),
Comprehensive Personal Liability Policies (liability only), or
policies of a similar nature; and the liability portion of
combination forms related to the four classes of policies stated
above, such as the Comprehensive Dwelling Policy and the
applicable types of Homeowner Policies.
III. The inception dates and thereafter of all original policies as
described in II above,
(a) become effective on or after 1st May, 1960, or
(b) become effective before that date and contain the
Limited Exclusion Provision set out above:
Provided this paragraph (2) shall not be applicable to
Family Automobile Policies, or policies or combination
policies of a similar nature, issued by the Reassured on
New York risks, until 90 days following approval of the
Limited Exclusion Provision by the Governmental
Authority having jurisdiction thereof.
<PAGE> 18
(3) Except for those classes of policies specified in Clause II of paragraph
(2) and without in any way restricting the operation of paragraph (1)
of this Clause, it is understood and agreed that for all purposed of
this reinsurance the original liability policies of the Reassured (new,
renewal and replacement) affording the following coverages:
Owners, Landlords and Tenants Liability, Contractual Liability,
Elevator Liability, Owners or Contractors (including railroad),
Protective Liability, Manufacturers and Contractors Liability,
Product Liability, Professional and Malpractice Liability,
Storekeepers Liability, Garage Liability, Automotive Liability
(including Massachusetts Motor Vehicle or Garage Liability)
shall be deemed to include, with respect to such coverages, from the
time specified in Clause V of this paragraph (3), the following
provision (specified as the Broad Exclusion Provision):
BROAD EXCLUSION PROVISION.*
It is agreed that the policy does not apply:
I. Under any liability coverage, to
[injury, sickness, disease, death or destruction
[bodily injury or property damage
(a) with respect to which an insured under the policy is
also an insured under a nuclear energy liability policy
issued by Nuclear Energy Liability Insurance
Association, Mutual Atomic Energy Liability Underwriters
or Nuclear Insurance Association of Canada, or would be
an insured under any such policy but for its termination
upon exhaustion of its limit of liability; or
(b) resulting from the hazardous properties of nuclear
material and with respect to which (1) any person or
organization is required to maintain financial
protection pursuant to the Atomic Energy Act of 1954, or
any law amendatory thereof, or (2) the insured is, or
had this policy not been issued would be, entitled to
indemnity from the United States of America, or any
agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with
any person or organization.
II. Under any Medical Payments Coverage, or under any Supplementary
Payments Provision relating to
[immediate medical or surgical relief,
[first aid,
to expenses incurred with respect to
[bodily injury, sickness, disease or death
[bodily injury
resulting from the hazardous properties of nuclear material and
arising out of the operation of a nuclear facility by any person
or organization.
<PAGE> 19
III. Under any Liability Coverage to
{injury, sickness, disease, death or destruction
{bodily injury or property damage
resulting from the hazardous properties of nuclear material if
(a) the nuclear material (1) is at any nuclear facility owned by,
or operated by or on behalf of, an insured or (2) has been
discharged or dispersed therefrom;
(b) the nuclear material is contained in spent fuel or waste at any
time possessed, handled, used, processed, stored, transported
or disposed of by or on behalf of an insured; or
(c) {the injury, sickness, disease, death or destruction
{bodily injury or property damage
arises out of the furnishing by an insured of services,
materials, parts or equipment in connection with planning,
construction, maintenance, operation or use of any nuclear
facility, but if such facility is located within the United
States of America, its territories, or possessions or Canada,
this exclusion (c) applies only to
{injury to or destruction of property at such nuclear facility.
{property damage to such nuclear facility and any property
threat.
IV. As used in this endorsement:
"hazardous properties" include radioactive, toxic or explosive
properties: "nuclear material" means source material, special nuclear
material or byproduct material: "source material", "special nuclear
material", and "byproduct material" have the meanings given to them
in the Atomic Energy Act of 1954 or in any law amendatory thereof:
"spent fuel" means any fuel element or fuel component, solid or
liquid, which has been used or exposed to radiation in a nuclear
reactor: "waste" means any waste material
(1) containing byproduct material and
(2) resulting from the operation by any person or organization or any
nuclear facility included within the definition of nuclear facility
under paragraph (a) or (b) thereof; "nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for
(1) separating the isotopes of uranium or plutonium, (2)
processing or utilizing spent fuel, or (3) handling processing
or packaging waste,
(c) any equipment or device used for the processing, fabricating or
alloying of special nuclear material if at any time the total
amount of such material in the custody of the insured at the
premises where such equipment or device is located consists of
or contains more than 25 grams of plutonium or uranium 233 or
any combination thereof, or more than 250 grams of uranium 235,
(d) any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste,
<PAGE> 20
and includes the site on which any of the foregoing is located,
all operations conducted on such site and all premises used for
such operations: "nuclear reactor" means any apparatus designed or used
to sustain nuclear fission in a self-supporting chain reaction or to
contain a critical mass of fissionable material;
{With respect to injury to or destruction of property, the word
"injury" or "destruction" "property damage" includes all forms of
radioactive contamination of property.
{includes all forms of radioactive contamination of property.
V. The inception dates and thereafter of all
original policies affording coverages specified in this
paragraph (3), whether new, renewal or replacement, being
policies which become effective on or after 1st May, 1960
provided this paragraph (3) shall not be applicable to
(I) Garage and Automobile Policies issued by the
Reassured on New York risks, or
(ii) statutory liability insurance required under
Chapter 90, General Laws of Massachusetts,
until 90 days following approval of the Broad Exclusion
Provision by the Governmental Authority having jurisdiction
thereof.
(4) Without in any way restricting the operation on paragraph (1) of this
Clause, it is understood and agreed that paragraphs (2) and (3) above
are not applicable to original liability policies of the Reassured in
Canada and that with respect to such policies this Clause shall be
deemed to include the Nuclear Energy Liability Exclusion Provisions
adopted by the Canadian Underwriters' Association or the Independent
Insurance Conference of Canada.
*Note: The words printed in bold in the Limited Exclusion Provision and in the
Broad Exclusion Provision shall apply only in relation to original
liability policies which include a Limited Exclusion Provision or a
Broad Exclusion Provision containing those words.
<PAGE> 21
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE
CANADA
1. This reinsurance does not cover any loss or liability accruing to the
Company as a member of, or subscriber to, any association of insurers or
reinsurers formed for the purpose of covering nuclear energy risks or as a
direct or indirect reinsurer of any such member, subscriber, or
association.
2. Without in any way restricting the operation or paragraph 1 of this clause
it is agreed that for all purposes of this reinsurance all the original
liability contracts of the Company, whether new, renewal or replacements,
of the following classes, namely,
Personal Liability,
Farmer Liability,
Storekeepers Liability,
Which become effective on or after 31st December 1962, shall be deemed to
include, from their inception dates and thereafter, the following
provision:
LIMITED EXCLUSION PROVISION
This Agreement does not apply to injury, sickness, disease, death, damage or
destruction with respect to which an insured under this Agreement is also
insured under a contract or nuclear energy liability insurance (whether the
insured is named in such Agreement or not or whether or not it is legally
enforceable by the insured) issued by the Nuclear Insurance Association of
Canada or any other group or pool of insurers or would be an insured under any
such policy but for its termination upon exhaustion of its limits of liability.
With respect to property, losses of use of such property shall be deemed to be
damage to or destruction of property.
3. Without in any way restricting the operation of paragraph 1 of this clause
it is agreed that for all purposes of this reinsurance all the original
liability contracts of the Company, whether new, renewal or replacement, of
any class whatsoever (other than personal liability, farmers liability,
storekeepers liability or automobile liability contracts), which become
effective on or after 31st December 1962, shall be deemed to include from
their inception dates and thereafter, the following provision:
BROAD EXCLUSION PROVISION
This agreement does not apply to injury, sickness, disease, death, damage or
destruction
(A) With respect to which an insured under this Agreement is also insured
under a contract of nuclear energy liability insurance (whether the insured
is named in such contract or not and whether or not it is legally
enforceable by the insured)
<PAGE> 22
issued by the Nuclear Insurance Association of Canada or any other group or
pool or insurers or would be an insured under any such policy but for its
termination upon exhaustion or its limit of liability; or
(B) Resulting directly or indirectly from the nuclear energy hazard arising
from:
(1) The ownership, maintenance, operation or use of nuclear facility by or
on behalf of an insured:
(2) The furnishing by an insured of services, materials, parts, or
equipment in connection with the planning, construction, maintenance,
operation or use of any nuclear facility; and
(3) The transportation, consumption, possession, handling, disposal or use
of radioactive material (other than radioisotopes away from a nuclear
facility) sold, handled, used or distributed by an insured.
As used in this Endorsement:
(I) The term "Nuclear Energy Hazard" means the radioactive, toxic, explosive
or other hazardous properties of radioactive material;
(II) The term "Radioactive Material" means uranium, thorium, plutonium,
neptunium, their respective derivatives and compounds, radioactive
isotopes of other elements and any other substances that the Atomic
Energy Control Board may, by regulation, designate as being prescribed
substances capable of releasing atomic energy, or being requisite for the
production, use or application of atomic energy;
(III) The term "Nuclear Facility" means:
(A) Any apparatus designed or used to sustain nuclear fission in a
self-supporting chain reaction or to contain a critical mass of
plutonium, thorium and uranium or any one or more of them;
(B) Any equipment or device designed or used for (I) separating and
isotopes of plutonium, thorium, and uranium or any one or more of
them, (II) processing or utilizing spent fuel, or (III) handling,
processing or packaging waste;
(C) Any equipment or device used for the processing, fabricating or
alloying of plutonium, thorium and uranium or any one or more of
them if at any time the total amount of such material in the custody
of the insured at the premises where such equipment or device is
located consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams of
uranium 235;
<PAGE> 23
(D) Any structure, basin, excavation, premises or place prepared or
used for the storage or disposal of waste radioactive material;
and includes the site on which any of the foregoing is located, together
with all operations conducted thereon and all premises used for such
operations.
(IV) With respect to property, loss of use of such property shall be deemed
to be damage to or destruction of property.
<PAGE> 24
U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE -- PHYSICAL DAMAGE --
REINSURANCE
1. This Reinsurance does not cover any loss or liability accruing to the
Reassured, directly or indirectly and whether as Insurer or Reinsurer, from
any Pool of Insurers of Reinsurers formed for the purpose of covering
Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph (l) of this
Clause, this Reinsurance does not cover any loss or liability accruing to
the Reassured, directly or indirectly and whether as Insurer or Reinsurer
from any insurance against Physical Damage (including business
interpretation or consequential loss arising out of such Physical Damage)
to:
I. Nuclear reactor power plants including all auxiliary property on the
site, or
II. Any other nuclear reactor installation, including laboratories
handling radioactive materials, in connection with reactor
installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing
substantial quantities of "special nuclear material", and for
reprocessing, salvaging, chemically separating, storing or disposing
of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using
substantial quantities of radioactive isotopes or other products of
nuclear fission.
3. Without in any way restricting the operations of paragraphs (1) and (2)
hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, from any nuclear
installation and which normally would be insured therewith except that this
paragraph (3) shall not operate
(a) where Reassured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where said insurance contains a provision excluding coverage for
damage to property caused by or resulting from radioactive
contamination, however caused.
However on and after 1st January, 1960 this subparagraph (b)
shall only apply provided the said radioactive contamination
exclusion provision has been approved by the Governmental
Authority having jurisdiction thereof.
4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by
radioactive contamination accruing to the Reassured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
<PAGE> 25
5. It is understood and agreed that this Clause shall not extend to risks
using radioactive isotopes in any form where the nuclear exposure is not
considered by the Reassured to be the primary hazard.
6. The term "special nuclear material" shall have the meaning given it in the
Atomic Energy Act of 1954 or by any law amendatory thereof.
7. Reassured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
Note: Without in any way restricting the operation of paragraph (1) hereof, it
is understood and agreed that
(a) all policies issued by the Reassured on or before 31st December 1957
shall be free from the application of the other provisions of this
Clause until expiry date or 31st December 1960 whichever first occurs
whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the
Reinsured on or before 31st December 1958 shall be free from the
application of the other provisions of this Clause until expiry date
or 31st December 1960 whichever first occurs whereupon all the
provisions of this Clause shall apply.
<PAGE> 26
CANADA
NUCLEAR INCIDENT EXCLUSION CLAUSE--PHYSICAL DAMAGE--
REINSURANCE
1. This Agreement does not cover any loss or liability accruing to the
Reinsured directly or indirectly, and whether as Insurer or Reinsurer, from
any Pool of Insurers or Reinsurers formed for the purpose of covering
Atomic or Nuclear Energy risks.
2. Without in any way restricting the operation of paragraph 1 of this clause,
this Agreement does not cover any loss or liability accruing to the
Reinsured, directly or indirectly and whether as Insurer or Reinsurer, from
any insurance against Physical Damage (including business interruption or
consequential loss arising out of such Physical Damage) to:
(1) Nuclear reactor power plants including all auxiliary property on the
site, or
(2) Any other nuclear reactor installation, "Including laboratories
handling radioactive materials in connection with reactor
installations, and critical facilities as such, or
(3) Installations for fabricating complete fuel elements or for processing
substantial quantities of prescribed substances, and for reprocessing,
salvaging, chemically separating, storing or disposing of spent
nuclear fuel or waste materials, or
(4) Installations other than those listed in (3) above using substantial
quantities of radioactive isotopes or other products of nuclear
fission.
3. Without in any way restricting the operation of paragraphs 1 and 2 of this
clause, this Agreement does not cover loss or liability by radioactive
contamination accruing to the Reinsured, directly or indirectly, and
whether as Insurer or Reinsurer, from any insurance on property which is on
the same site as a nuclear reactor power plant or other nuclear
installation and which normally would be insured therewith, except that
this paragraph 3 shall not operate.
(a) where the Reinsured does not have knowledge of such nuclear reactor
power plant or nuclear installation, or
(b) where the said insurance contains a provision excluding a coverage for
damage to property caused by or resulting from radioactive
contamination, however caused.
4. Without in any way restricting the operation of paragraphs 1, 2 and 3 of
this clause, the Agreement does not cover any loss or liability by
radioactive contamination accruing to the Reinsured, directly or
indirectly, and whether as Insurer or Reinsurer, when such radioactive
contamination is a named hazard specifically insured against.
<PAGE> 27
5. This clause shall not extend to risks using radioactive isotopes in any
form where the nuclear exposure is not considered by the Reinsured to be
the primary hazard.
6. The term "prescribed substances" shall have the meaning given to it by
the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory
thereof.
7. Reinsured to be sole judge of what constitutes:
(a) substantial quantities, and
(b) the extent of installation, plant or site.
8. Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, this Agreement does not cover any loss or liability
accruing to the Reinsured, directly or indirectly, and whether as
Insurer or Reinsurer caused by any nuclear incident as defined in The
Nuclear Liability Act, nuclear explosion or contamination by radioactive
material.
NOTE: Without in any way restricting the operation of paragraphs 1, 2, 3 and 4
of this clause, paragraph 8 or this clause shall only apply to all
original contracts of the Reinsured whether new, renewal or replacement
which become effective on or after December 31, 1984.
<PAGE> 28
ENDORSEMENT I
This Endorsement Attaches To and Becomes a Part of the
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Effective: January 1, 1995
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
IGF INSURANCE COMPANY
Des Moines, Iowa
by
CHARTWELL REINSURANCE COMPANY
Minneapolis, Minnesota
IT IS HEREBY MUTUALLY AGREED that effective 12:01 A.M. January 1, 1996 this
Contract is cancelled in accordance with ARTICLE II, COMMENCEMENT AND
TERMINATION, paragraph C, subsection 2 on a cut-off basis whereby Reinsurers
shall have no liability for loss occurrences happening after that date and
time. The unearned premium at December 31, 1995, less a 35% ceding commission,
shall be returned to the Company.
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 29
ENDORSEMENT I
PAGE 2
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this ENDORSEMENT I to the AUTOMOBILE THIRD PARTY
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE CONTRACT as of the dates
recorded below:
At Indianapolis, IN this 8th day of March, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Indianapolis, IN this 8th day of March, 1996
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Stanford, CT this 20th day of March, 1996
CHARTWELL REINSURANCE COMPANY
By: /s/ Thomas A. Greenberg
-------------------------------
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 30
ENDORSEMENT I
This Endorsement Attaches To and Becomes a Part of the
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Effective: January 1, 1995
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
IGF INSURANCE COMPANY
Des Moines, Iowa
by
CONSTITUTION REINSURANCE CORPORATION
New York, New York
IT IS HEREBY MUTUALLY AGREED that effective 12:01 A.M. January 1, 1996 this
Contract is cancelled in accordance with ARTICLE II, COMMENCEMENT AND
TERMINATION, paragraph C, subsection 2 on a cut-off basis whereby Reinsurers
shall have no liability for loss occurrences happening after that date and
time. The unearned premium at December 31, 1995, less a 35% ceding commission,
shall be returned to the Company.
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 31
ENDORSEMENT I
PAGE 2
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this ENDORSEMENT I to the AUTOMOBILE THIRD PARTY
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE CONTRACT as of the dates
recorded below:
At Indianapolis, IN this 8th day of March, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Indianapolis, IN this 8th day of March, 1996
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At New York, NY this 20th day of March, 1996
CONSTITUTION REINSURANCE COMPANY
By: /s/ CANNOT READ SIGNATURE
-------------------------------
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 32
ENDORSEMENT I
This Endorsement Attaches To and Becomes a Part of the
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Effective: January 1, 1995
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
IGF INSURANCE COMPANY
Des Moines, Iowa
by
SYDNEY REINSURANCE COMPANY
New York, New York
IT IS HEREBY MUTUALLY AGREED that effective 12:01 A.M. January 1, 1996 this
Contract is cancelled in accordance with ARTICLE II, COMMENCEMENT AND
TERMINATION, paragraph C, subsection 2 on a cut-off basis whereby Reinsurers
shall have no liability for loss occurrences happening after that date and
time. The unearned premium at December 31, 1995, less a 35% ceding commission,
shall be returned to the Company.
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 33
ENDORSEMENT I
PAGE 2
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this ENDORSEMENT I to the AUTOMOBILE THIRD PARTY
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE CONTRACT as of the dates
recorded below:
At Indianapolis, IN this 8th day of March, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Indianapolis, IN this 8th day of March, 1996
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At New York, NY this 15th day of April, 1996
SYDNEY REINSURANCE CORPORATION
By: /s/ James J. Frori
-------------------------------
Our Ref. #31224
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 34
ENDORSEMENT I
This Endorsement Attaches To and Becomes a Part of the
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Effective: January 1, 1995
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
IGF INSURANCE COMPANY
Des Moines, Iowa
by
SCOR REINSURANCE COMPANY
New York, New York
IT IS HEREBY MUTUALLY AGREED that effective 12:01 A.M. January 1, 1996 this
Contract is cancelled in accordance with ARTICLE II, COMMENCEMENT AND
TERMINATION, paragraph C, subsection 2 on a cut-off basis whereby Reinsurers
shall have no liability for loss occurrences happening after that date and
time. The unearned premium at December 31, 1995, less a 35% ceding commission,
shall be returned to the Company.
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 35
ENDORSEMENT I
PAGE 2
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this ENDORSEMENT I to the AUTOMOBILE THIRD PARTY
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE CONTRACT as of the dates
recorded below:
At Indianapolis, IN this 8th day of March, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Indianapolis, IN this 8th day of March, 1996
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At New York, NY this 15th day of March, 1996
SCOR REINSURANCE COMPANY
By: /s/ James A. Warten
-------------------------------
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 36
ENDORSEMENT I
This Endorsement Attaches To and Becomes a Part of the
AUTOMOBILE THIRD PARTY LIABILITY AND PHYSICAL DAMAGE
QUOTA SHARE REINSURANCE CONTRACT
Effective: January 1, 1995
issued to
PAFCO GENERAL INSURANCE COMPANY
Indianapolis, Indiana
and
IGF INSURANCE COMPANY
Des Moines, Iowa
by
WINTERTHUR REINSURANCE CORPORATION OF AMERICA
New York, New York
IT IS HEREBY MUTUALLY AGREED that effective 12:01 A.M. January 1, 1996 this
Contract is cancelled in accordance with ARTICLE II, COMMENCEMENT AND
TERMINATION, paragraph C, subsection 2 on a cut-off basis whereby Reinsurers
shall have no liability for loss occurrences happening after that date and
time. The unearned premium at December 31, 1995, less a 35% ceding commission,
shall be returned to the Company.
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 37
ENDORSEMENT I
PAGE 2
IN WITNESS WHEREOF, the parties hereto by their respective duly authorized
representatives have executed this ENDORSEMENT I to the AUTOMOBILE THIRD PARTY
LIABILITY AND PHYSICAL DAMAGE QUOTA SHARE REINSURANCE CONTRACT as of the dates
recorded below:
At Indianapolis, IN this 8th day of March, 1996
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At Indianapolis, IN this 8th day of March, 1996
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------
At NY, NY this 5th day of April, 1996
WITHERTHUR REINSURANCE CORPORATION OF AMERICA
By: /s/ Scott M. Emanuele
-------------------------------
Scott M. Emanuele
Assistant Vice President
Tanenbaum-Harber
Reinsurance Intermediaries, Inc.
<PAGE> 1
EXHIBIT 10.27(4)
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
ISSUED TO
PAFCO GENERAL INSURANCE COMPANY
INDIANAPOLIS, INDIANA
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C> <C>
PREAMBLE 1
I BUSINESS REINSURED 1
II COMMENCEMENT AND TERMINATION 2
III LIMIT 2
IV NET RETAINED LINES 2
V TERRITORY 3
VI EXCLUSIONS 3
VII PREMIUM 3
VIII CEDING COMMISSION 3
IX REPORTS AND REMITTANCES 4
X LOSSES AND LOSS ADJUSTMENT EXPENSES 4
XI DEFINITIONS 5
XII LIABILITY OF THE REINSURER 7
XIII ERRORS AND OMISSIONS 7
XIV ACCESS TO RECORDS 7
XV OFFSET 7
XVI TAXES 7
XVII LOSS RESERVES 8
XVIII UNEARNED PREMIUM RESERVES 9
XIX INSOLVENCY 9
XX ARBITRATION 10
XXI SERVICE OF SUIT CLAUSE (U.S.A.) 11
</TABLE>
<PAGE> 3
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
ISSUED TO
PAFCO GENERAL INSURANCE COMPANY
INDIANAPOLIS, INDIANA
(HEREINAFTER REFERRED TO AS THE "COMPANY")
BY
GRANITE REINSURANCE COMPANY
BARBADOS
(HEREINAFTER REFERRED TO AS THE "REINSURER")
PREAMBLE
In consideration of mutual convenants hereinafter contained and upon the terms
and conditions hereinafter set forth, the parties hereto mutually agree as
follows:
ARTICLE I-BUSINESS REINSURED
By this Contract the Reinsurer agrees to reinsure the net liability which may
accrue to the Company under its contracts, agreements and binders of insurance
(hereinafter called "original policies"), which are issued or renewed on or
after the effective date hereof, and classified by the Company as Property and
General Liability including but not limited to:
Broad Form Comprehensive General Liability,
Owners', Landlords' and Tenants,
Manufacturers and Contractors,
Products and Completed Operations (part of a package or CGL policy),
Special Events,
Owners and Contractors Protective,
Non-Owned Automobile
Jewelers' Block,
Agents' Errors & Omissions,
which are issued or renewed on or after January 1, 1996.
<PAGE> 4
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 2
ARTICLE II-COMMENCEMENT AND TERMINATION
A. With regard to Property, General Liability and Jewelers' Block, this
Contract shall become effective at 12:01 A.M. January 1, 1996 with
respect to losses occurring on risks attaching on or after that date,
and shall continue in force thereafter until terminated.
B. With regard to Agents' Errors and Omissions, this Contract shall become
effective at 12:01 A.M. January 1, 1996 for claims made on or after
January 1, 1996 with respect to policies effective on or after that
date. Retroactive coverage shall be provided for claims made policies
effective January 1, 1990 and subsequent.
C. Either party may terminate this Contract at any December 31 by giving
the other party not less than 90 days prior notice in writing.
D. The Reinsurer will continue to participate in all insurance coming
within the terms of this Contract granted or renewed by the Company
during the said 90 days.
E. Upon termination of this Contract, there will be a run-off of in force
business until natural expiration, cancellation or next premium
anniversary of such business. In no event shall this run-off exceed 12
months from the termination date of this Contract. At the option of the
Company, termination may be on a cut-off basis and the Company will
reassume the unearned premium for business in-force and the Reinsurer's
liability for losses occurring on or after the date of termination shall
cease.
ARTICLE III-LIMIT
The Reinsurer shall accept as Quota Share reinsurance 100% of the Company's Net
Retained Liabilities after the application of all appropriate reinsurances as
detailed in Appendix I, on business subject to this Contract.
ARTICLE IV-NET RETAINED LINES
This Contract applies only to that portion of any insurance covered by this
Contract and any Extra Contractual Obligations and/or Excess of Policy Limits
award which the Company retains net for its own account, after the application
of all appropriate reinsurances, and in calculating the amount of any loss
hereunder only loss or losses in respect of that portion of any insurance which
the Company retains net for its own account shall be included.
Attached hereto as Appendix I is the schedule of the appropriate reinsurances
for business subject to this Contract.
<PAGE> 5
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 3
ARTICLE V - TERRITORY
As regards all classes of business hereunder, coverage applies to policies
issued in the United States of America, its territories and possessions.
ARTICLE VI - EXCLUSIONS
This Contract does not apply to and specifically excludes the following:
1. Absolute Seepage and Pollution per Pafco original policies;
2. Animal Mortality;
3. Aviation;
4. Commercial Automobile;
5. Credit or Financial Guarantees, but not excluding Installment Floaters;
6. Insolvency Funds Liability;
7. Hired cars, except non-owned automobiles covered under CGL Policy;
8. Municipalities;
9. Nuclear Incident, per clauses attached;
10. Ocean Marine;
11. Pools, Associations & Syndicates, per clause attached;
12. Professional Liability, except for Agents' Errors & Omissions;
13. Reinsurance Assumed;
14. Umbrella and Excess Casualty;
15. War and Civil War;
16. Worker's Compensation except where incidental to provide residential
coverages;
17. Liquor Liability, except Host Liquor as defined by the standard ISO GL
form
ARTICLE VII - PREMIUM
The Company shall cede 100% of the Subject Gross Net Written Premium Income
charged by the Company less the cost of all appropriate reinsurances for
business protected hereunder.
ARTICLE VII - CEDING COMMISSION
The Reinsurer will allow to the Company a provisional ceding commission
allowance of 29% of the Subject Gross Net Written Premium Income ceded
hereunder. At the end of each quarter, the Company shall calculate the actual
cost of commissions paid and expenses incurred by the Company for processing
and handling all policy and claims files. The ceding commission will be
adjusted to cover these expenses plus a 2% fronting fee.
<PAGE> 6
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 4
ARTICLE IX-REPORTS AND REMITTANCES
A. Monthly within 45 days after the end of each month the Company shall
submit bordereaux detailing:
1. Policies and premium written during the month.
2. Losses incurred (paid and outstanding) during the month.
B. The Company shall simultaneously report within 45 days and remit within
45 days of the close of each month the positive balance of:
1. Ceded Gross Net Written Premium; less
2. Ceding Commission; less
3. Ceded loss and Loss Adjustment Expense paid; plus
4. Preliminary Loss Recoveries, if any, less
5. Cost of any appropriate reinsurances.
6. Premium Taxes
C. Any balance due the Company shall be remitted by the Reinsurers as
promptly as possible after receipt and verification of the report.
D. Monthly the Company shall report the Unearned Premium and Outstanding
Loss Reserves.
E. Annually, the Company shall provide any additional information as may
be required by the Reinsurer for completion of its Annual Statement.
ARTICLE X-LOSSES AND LOSS ADJUSTMENT EXPENSES
A. The Company at its sole discretion will adjust, settle or compromise all
claims and losses under this Contract. All adjustments, settlements and
compromises including ex-gratia payments will be binding on the
Reinsurer in proportion to its participation. The Company may likewise
commence, continue, defend, compromise, settle or withdraw from any
action, suit or
<PAGE> 7
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 5
proceeding and generally perform all such matters and things relating to
any claims or loss hereunder that in its judgment may be beneficial or
expedient.
All loss payments will be shared by the Reinsurer in proportion to its
participation, and the Reinsurer will benefit proportionately in all
subrogations, recoveries, compromises, etc.
B. The Reinsurer will be liable for its proportionate share of all expenses
incurred by the Company in connection with the investigation and
settlement or contesting of the validity of specific claims or losses or
alleged losses.
It is agreed that when the Company uses its own field employees or
officials in the settlement of the loss or losses under this Contract
the Company will be permitted to include the pro-rata share of the
salaries and expenses of these employees according to the time occupied
in adjusting such losses, and may include expenses of Company officials
incurred in connection with the loss or losses. The Company will not
include salaries of the Company's officials or normal overhead charges
such as rent, postage, lighting, cleaning, heating, etc.
The Reinsurer's portion of Loss Adjustment Expenses shall be in addition
to its limit of liability.
C. The Company may request a preliminary loss recovery when the paid loss
recoverable hereunder equals or exceeds $ per loss in respect of the
100% amount.
ARTICLE XI - DEFINITIONS
A. 1) Property Coverage/Jewelers' Block
The Company shall be the sole judge of what constitutes one
risk, except that in no event shall a building and its contents
be more than one risk.
The term "loss" as used herein shall be construed to mean any
one accident, disaster, act or occurrence or series of
accidents, disasters, acts or occurrences arising out of the one
event.
2) Liability Coverage
The term "occurrence" shall be defined as an accident or
occurrence or a series of accidents or occurrences arising out
of or caused by one event.
<PAGE> 8
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 6
3) Agents' Errors & Omissions Coverage
The term "occurrence" shall be defined as an accident or
occurrence or a series of Accidents or occurrences arising out
of or caused by one event.
B. "Loss Adjustment Expenses" as used in this Contract will mean all
allocated expenses incurred by the Company in the investigation,
appraisal, adjustment, litigation and/or defense of claims under
policies reinsured hereunder, including court costs, interest accrued
after final verdicts, judgments or awards, first aid medical expense
payments supplementary to bodily injury liability but excluding internal
office expenses, salaries, per diem, and other renumeration of regular
Company employees, and sums paid to attorneys as retainers.
C. "Subject Gross Net Written Premium" as used herein is defined as gross
written premium and additional premium for the classes of business
reinsured hereunder, less cancellation and return premiums, and less
premiums paid by the Company for facultative reinsurance, if any.
D. "Loss in Excess of Policy Limits" as used herein shall mean any amount
paid or payable by the Company, in excess of its policy limits, but
otherwise within the terms of its policy, as a result of an action
against it by its insured or its insured's assignee to recover damages
the insured is legally obligated to pay to a third party claimant
because of the Company's alleged or actual negligence or bad faith in
rejecting a settlement within policy limits, or in discharging its duty
to defend or prepare the defense in the trial of an action against its
insured, or in discharging its duty to prepare or prosecute an appeal
consequent upon such an action. Notwithstanding anything stated herein,
this Contract shall not apply to any Excess Policy Limits award incurred
by the Company as a result of fraudulent and/or criminal act by an
officer or director of the Company acting individually or collectively
or in collusion with any individual or corporation or any other
organization or party involved in the presentation, defense or
settlement of any claim covered hereunder.
E. "Extra Contractual Obligations" as used herein shall mean any punitive,
exemplary, compensatory or consequential damages paid or payable by the
Company as a result of an action against it by its insured or its
insured's assignee, which alleges negligence or bad faith on the part of
the Company in handling a claim under an original policy subject to this
Contract, it being understood that Extra Contractual Obligations and/or
Loss in Excess of Policy Limits payable by the Company under the terms
of its original policies shall be covered as contractual losses
hereunder. An Extra Contractual Obligation shall be deemed to have
occurred on the same date as the loss covered or alleged to be covered
under the original policy. Notwithstanding anything stated herein, this
Contract shall not apply to any Extra Contractual Obligation incurred by
the Company as a result of fraudulent and/or criminal act by
<PAGE> 9
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 7
an officer or director of the Company acting individually or
collectively or in collusion with any individual or corporation
or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.
ARTICLE XII - LIABILITY OF THE REINSURER
The liability of the Reinsurer shall follow that of the Company in every case,
and be subject in all respects to all the general and special stipulations,
clauses, waivers and modifications of the Company's original policies, and any
endorsements thereon.
ARTICLES XIII - ERRORS AND OMISSIONS
Inadvertent delays, errors or omissions made in connection with this Contract
or any transaction hereunder shall not relieve either part from any liability
which would have attached had such delay, error or omission not occurred,
provided always that such error or omission will be rectified as soon as
possible after discovery.
ARTICLE XIV - ACCESS TO RECORDS
The Reinsurer, by its duly appointed representatives, shall have the right at
any reasonable time to examine all papers in the possession of the Company to
business effected hereunder.
ARTICLE XV - OFFSET
The Company or the Reinsurer shall have, and may exercise at any time and from
time to time, the right to offset any balance or balances, whether on account of
premiums or on account of losses or otherwise, due from one party to the other
under the terms of this Contract. However, in the event of the insolvency of
any party hereto, offset shall only be allowed in accordance with the statues
and/or regulations of the state having jurisdiction over insolvency.
ARTICLE XVI - TAXES
In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory
of the United States of America or the District of Columbia.
<PAGE> 10
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 8
ARTICLE XVII - LOSS RESERVES
A. If the Reinsurer is unauthorized in any state of the United States of
America or the District of Columbia, the Reinsurer agrees to fund its
share of the Company's ceded outstanding loss and loss adjustment
expense reserves including incurred but not reported loss reserves by:
1. Clean, irrevocable and unconditional Letters of Credit; and/or
2. Escrow accounts for the benefit of the Company; and/or
3. Cash advances;
if, without such funding a penalty would accrue to the Company on any
financial statement it is required to file with the insurance
regulatory authorities involved. The Reinsurer, at its sole option,
may find in other than cash if its method of funding is acceptable to
the insurance regulatory authorities involved.
B. With regard to funding in whole or in part by Letters of Credit, it is
agreed that each Letter of Credit will be issued for a term of at
lease one year and will include an "evergreen clause", which
automatically extends the term for at lease one additional year at
each expiration date. The Company and the Reinsurer further agree,
notwithstanding anything to the contrary in this Contract, that said
Letters of Credit may be drawn upon by the Company or its successors in
interest at any time, without diminution because of the insolvency of
the Company or the Reinsurer, but only for one or more of the following
purposes:
1. To reimburse itself for the Reinsurer's share of losses and/or
loss adjustment expenses paid under the terms of original
contracts reinsured hereunder, unless paid in cash by the
Reinsurer;
2. To reimburse itself for the Reinsurer's share of any other
amounts claimed to be due hereunder, unless paid in cash by the
Reinsurer;
3. To find a cash account in an amount equal to the Reinsurer's
share of any ceded loss and loss adjustment expense reserves
(including incurred but not reported loss reserves) funded by
means of a Letter of Credit which is under non-renewal notice,
if said Letter of Credit has not been renewed or replaced by
the Reinsurer 10 days prior to its expiration date;
<PAGE> 11
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 9
4. To refund to the Reinsurer any sum in excess of the actual
amount required to fund the Reinsurer's share of the Company's
ceded loss and loss adjustment expense reserves (including
incurred but not reported loss reserves), if so requested by
the Reinsurer.
In the event the amount drawn by the Company on any letter of credit is
in excess of the actual amount required for B(1) or B(3), or in the
case of B(2), the actual amount determined to be due, the Company shall
promptly return to the Reinsurer the excess amount so drawn.
ARTICLE XVIII - UNEARNED PREMIUM RESERVES
(Applies to those Reinsurers who cannot qualify for credit by the State having
jurisdiction over the Company's Unearned Premium Reserves).
As regards policies or bonds issued by the Company coming within the scope of
this Contract, the Company agrees that when it shall set up on its books
reserves for unearned premiums which it shall be required to set up by law it
will forward to the Reinsurers a statement showing the proportion of such
unearned premium reserves which is applicable to them. The Reinsurers hereby
agree that they will apply for and secure delivery to the Company a clean
irrevocable Letter of Credit issued by any bank acceptable to the Governmental
Authority having jurisdiction over the Company's Unearned Premium Reserves in
an amount equal to Reinsurer's proportion of said Unearned Premium Reserves.
ARTICLE XIX - INSOLVENCY
A. In the event of the insolvency of the Company, this reinsurance shall
be payable directly to the Company or to its liquidator, receiver,
conservator or statutory successor on the basis of the liability of the
Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, conservator or statutory successor
of the Company has failed to pay all or a portion of any claim. It
is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the Company shall give written notice to the
Reinsurer of the pendency of a claim against the Company indicating
the original contract reinsured which claim would involve a
possible liability on the part of the Reinsurer within a reasonable
time after such claim is filed in the conservation or liquidation
proceeding or in the receivership, and that during the pendency of
such claim, the Reinsurer may investigate such claim and interpose, at
its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the
Company or its liquidator, receiver, conservator or statutory
successor. The expense thus incurred by the Reinsurer shall be
chargeable, subject to the approval of the Court, against the Company as
part of the expense of conservation or
<PAGE> 12
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 10
liquidation to the extent of a pro-rata share of benefit which may
accrue to the Company solely as a result of the defense undertaken by
the Reinsurer.
B. Where two or more reinsurers are involved in the same claim and a
majority in interest elect to interpose defense to such claim, the
expense shall be apportioned in accordance with the terms of this
Contract as though such expense had been incurred by the Company.
C. It is further understood and agreed that, in the event of the
insolvency of the Company, the reinsurance under this Contract shall be
payable directly by the Reinsurer to the Company or to its liquidator,
receiver or statutory, successor, in accordance with the insurance laws
of the State of Indiana except (a) where this Contract specifically
provides another payee or such reinsurance in the event of the
insolvency of the Company or (b) where the Reinsurer with consent of
the direct reinsured or reinsureds has assumed such original contract
obligation of the Company as direct obligations of the Reinsurer to
the payees under such contracts and in substitution for the obligations
of the Company to such payees.
ARTICLE XX - ARBITRATION
A. As a condition precedent to any right of action hereunder, in the event
of any dispute or difference of opinion here after arising with respect
to this Contract, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration. One Arbiter
shall be chosen by the Company, the other by the Reinsurer, and an
Umpire shall be chosen by the two Arbiters before they enter upon
arbitration, all of whom shall be active or retired disinterested
executive officers of insurance or reinsurance companies. In the event
that either party should fail to choose an Arbiter within 30 days
following a written request by the other party to do so, the requesting
party may choose two Arbiters who shall in turn choose an Umpire before
entering upon arbitration. If the two parties fail to agree upon the
selection of an Umpire within 30 days following their appointment,
each Arbiter shall nominate three candidates within 10 days thereafter,
two of whom the other shall decline, and the decision shall be made
drawing lots.
B. Each party shall present its case to the Arbiters within 30 days
following the date of appointment of the Umpire. The Arbiters shall
consider this Contract as an honorable engagement rather than merely
as a legal obligation and they are relieved of all judicial formalities
and may abstain from following the strict rules the law. The decision
of the Arbiters shall be final and binding on both parties; but failing
to agree, they shall call in the Umpire and the decision of the
majority shall be final and binding upon both parties. Judgment upon
the final decision of the Arbiters may be entered in any court of
competent jurisdiction.
PAFCO GENERAL INSURANCE COMPANY
<PAGE> 13
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 11
C. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this
Article and communications shall be made by the Company to each of the
reinsurers constituting one party, provided, however, that nothing
herein shall impair the rights of such reinsurers to assert several,
rather than joint, defenses or claims, nor be construed as changing
the liability of the reinsurers participating under the terms of this
Contract from several to joint.
D. Each party shall bear the expense of its own Arbiter, and shall jointly
and equally bear with the other the expense of the Umpire and of the
arbitration. In the event that the two Arbiters are chosen by one
party, as above provided, the expense of the Arbiters, the Umpire and
the arbitration shall be equally divided between the two parties.
E. Any arbitration proceedings shall take place either at the location of
the Company's principal office or at a location mutually agreed upon
by the parties to this Contract, but notwithstanding the location of
the arbitration, all proceedings pursuant hereto shall be governed by
the law of the state in which the Company has its principal office.
F. Cancellation of this Contract shall not invalidate this arbitration
provision in respect of disputes arising after cancellation but
resulting from actions taken or transactions made during any period
during which this agreement was in effect.
ARTICLE XXI - SERVICE OF SUIT CLAUSE (U.S.A.)
This Clause applies only to Reinsurers domiciled outside the United States of
America, or, should the Company be authorized to do business in the State of
New York, Reinsurers unauthorized in New York as respects suits instituted in
New York.
It is agreed that in the event of the failure of such Reinsurers hereon to pay
any amount claimed to be due hereunder, such Reinsurers hereon, at the request
of the Company, will submit to the jurisdiction of any Court of competent
jurisdiction within the United States and will comply with all requirements
necessary to give such Court jurisdiction and all matters arising hereunder
shall be determined in accordance with the law and practice of such Court.
It is further agreed that service of process in such suit may be made upon the
law firm of Dann Pecar Newman & Kleiman, 1 American Square, Suite 230,
Indianapolis, IN 46282, and that in any suit instituted against any one of them
upon this Agreement, such Reinsurers will abide by the final decision of such
Court or any Appellate Court in the event of an appeal.
PAFCO GENERAL INSURANCE COMPANY
<PAGE> 14
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
EFFECTIVE: JANUARY 1, 1996
PAGE 12
The above-named are authorized and directed to accept service of process on
behalf of such Reinsurers in any such suit and/or upon the request of the
Company to give a written undertaking to the Company that they will enter a
general appearance upon such Reinsurers' behalf in the event such a suit shall
be instituted.
Further, pursuant to any statute of any State, Territory or District of the
United States which makes provision therefor, such Reinsurers hereon hereby
designate the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as their true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement, and
hereby designate the above-named as the person to whom the said officer is
authorized to mail such process or a true copy thereof.
Note: Wherever used herein the terms:
"Company" shall be understood to mean "Company", "Reinsured", "Reassured"
or whatever other term is used in the attached reinsurance agreement to
designate the reinsured company. "Agreement" shall be understood to mean
"Contract", "Agreement", "Policy" or whatever other term is used to
designate the attached reinsurance document.
<PAGE> 15
APPENDIX 1
Listing of reinsurance contracts in place at January 1, 1996.
First Multiple-Line Excess of Loss Reinsurance effective June 1, 1995 to June
1, 1996. $250,000 excess of $250,000.
Second Multiple-Line Excess of Loss Reinsurance effective June 1, 1995 to June
1, 1996. $500,000 excess of $500,000.
Catastrophe Excess of Loss Reinsurance Agreement effective July 1, 1995 to July
1, 1996. $3,000,000 excess of $2,000,000. Placement is 90.5%.
50% Quota Share Reinsurance Agreement (Condominium and Apartment Program)
effective June 1, 1995, continuous agreement. Maximum limit being $2,000,000.
Special Facultative Reinsurance on individual risk.
Other Programs:
Liquor Liability Quota Share Treaty effective July 1, 1988 as amended with
United National Reinsurance Company.
Stop Loss Reinsurance Contract effective January 1, 1991 as amended with United
National Reinsurance Company.
<PAGE> 16
PAFCO GENERAL INSURANCE COMPANY
MULTIPLE LINE QUOTA SHARE REINSURANCE CONTRACT
ENDORSEMENT
IN WITNESS WHEREOF, the parties hereto have executed this Multiple Line Quota
Share Reinsurance Contract by their duly authorized representatives, as of the
dates recorded below:
At this day of , 1996.
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Donald J. Goodenow
---------------------------------------------
Donald J. Goodenow, Executive Vice President
At this day of , 1996.
GRANITE REINSURANCE COMPANY
By: /s/ A.G. Symons
---------------------------------------------
<PAGE> 1
[United States Department of Agriculture Letterhead]
EXHIBIT 10.27(5)
April 11, 1996
VIA FAX - (515) 276-8305
CERTIFIED MAIL - RETURN RECEIPT NO. Z 068 846 528
Mr. Dennis G. Daggett
Executive Vice President
IGF Insurance Company
2882 106th Street
Des Moines, IA 50322
RE: 1996 Standard Reinsurance Agreement - Approval
Dear Mr. Daggett:
The Federal Crop Insurance Corporation (FCIC) has completed its review
and evaluation of the 1996 Standard Reinsurance Agreement (Agreement) and Plan
of Operation (Plan) initially received on June 15, 1995, with revisions
received on August 31, and December 5, 1995, from IGF Insurance Company (IGF).
This review and evaluation was completed based on the requirements outlined in
the 1995 Agreement, Amendments, Plan, FCIC's Manual 14, and the Standards for
Approval contained in 7 CFR 400, Subpart L, as amended (Federal Register 57
34665, August 6, 1992). According to our analysis of the Plan, IGF meets the
financial requirements and possesses adequate surplus to cover IGF's requested
maximum reinsurable premium volume of $82,560,000.
Based on IGF's 1995 Annual Statement, IGF is authorized to write up to
$82,560,000 in requested reinsurable premium volume. IGF may not write any
reinsurable premium volume above this amount unless approval is obtained in
advance from FCIC. If you fail to obtain FCIC approval, any amount exceeding
the maximum reinsurable premium volume authorized may not be included under the
terms and conditions of the 1996 Agreement.
IGF's 1996 Escrow Agreement and Escrow Agreement are approved. The
Agreement Regarding Reinsurance Escrow Agreement (Arrangement), Exhibit 27 of
the Plan, states that the Company agrees to submit on a monthly basis, a
certified accurate report of reconciliation (reconciliation) of the Loss
Account and the Escrow Account. The reconciliation must be submitted to FCIC
within 20 business days of the cutoff date of the Bank Statements and is in
addition to the monthly reports required by the Agreement. If the
reconciliation is not received within 20 business days as required by the
Arrangement, FCIC will suspend funding of the Escrow Account until the
reconciliation is received.
<PAGE> 2
Mr. Dennis G. Daggett 2
If IGF intends to submit Private Sector Supplemental or Private Sector
Alternative policies for FCIC review and approval, it must do so in accordance
with Section V.E.2. of the Agreement and as directed in FCIC's Submission
Standards Handbook. If a Private Sector Supplemental or Private Sector
Alternative policy not approved by FCIC is attached to a FCIC-approved group
risk plan (GRP) or multiple peril crop insurance (MPCI) policy, the
FCIC-approved GRP or MPCI policy to which it is attached will not be reinsured
by FCIC.
IGF has complied with our request for corrections and revisions to the
1996 Agreement and Plan. The Agreement and Plan are approved. We appreciate you
cooperating with us to finalize and approve IGF's 1996 Agreement and Plan. A
copy of the 1996 Agreement and Plan is enclosed. If we can be of additional
assistance, please do not hesitate to contact your Account Executive, James
Jackson, at (202) 690-2092.
Sincerely,
E. Heyward Baker
E. Heyward Baker
Chief
Reinsurance Services Liaison Branch
Enclosures
cc: Mr. Robert Parkerson (cover letter only)
President
National Crop Insurance Services
7301 College Boulevard, Suite 170
Overland Park, Kansas 66210
<PAGE> 3
STANDARD REINSURANCE AGREEMENT
(July 1, 1994)
between the
FEDERAL CROP INSURANCE CORPORATION
and
IGF INSURANCE COMPANY
---------------------------------
(Insurance Company Name)
DES MOINES, IOWA
---------------------------------
(City and State)
This Standard Reinsurance Agreement, including the Appendixes, all referenced
documents and Federal Crop Insurance Corporation ("FCIC") Manual 13 and Manual
14 in effect at the start of the reinsurance year ("Agreement"), establishes
the terms and conditions under which the FCIC will provide premium subsidy,
expense reimbursement, and reinsurance on multiple peril crop insurance
policies sold or reinsured by the above named Insurance Company (the
"Company"). This Agreement is authorized by the Federal Crop Insurance Act, as
amended (7 U.S.C. 1501 et seq.) (the "Act"), and regulations promulgated
thereunder which are codified in title 7, chapter IV of the Code of Federal
Regulations (C.F.R.). Such regulations are incorporated into this Agreement by
reference. The provisions of this Agreement which are inconsistent with
provisions of state or local law or regulation will supersede such law or
regulation to the extent of the inconsistency. This is a cooperative financial
assistance agreement between the FCIC and the Company to deliver multiple peril
crop insurance under the authority of the Act. For the purposes of this
Agreement, use of the plural form of a word includes the singular and use of
the singular form of a word includes the plural unless the context indicates
otherwise.
SECTION I. DEFINITIONS
A. "Actuarial Data Master File" means the hard copy and electronic data
processing (EDP) compatible information distributed by FCIC which
contains premium rates, program dates, and related information
concerning the crop insurance program for a crop year.
B. "Annual settlement" means the preliminary settlement of accounts
between the Company and FCIC for the reinsurance year pursuant to Manual
13.
C. "Billing date" means the date specified in the Actuarial Data Master
File as the date on which FCIC provides that policyholders should be
invoiced for premium due on eligible crop insurance contracts.
D. "Book of business" means the aggregation of all eligible crop insurance
contracts in force between the Company and its policyholders which have
a sales closing date within the reinsurance year reinsured under this
Agreement.
<PAGE> 4
E. "Cancellation date" means the date by which the Company or policyholder
must notify the other that coverage under an eligible crop insurance
contract issued by the Company is cancelled for a succeeding crop year.
The day following this date is considered as the date an eligible crop
insurance contract carried over from the previous crop year is renewed
for the subsequent crop year.
F. "Carry-over crop insurance contract" means an eligible crop insurance
contract which has been in force for one policy term and which continues
in force for another policy term after the cancellation date.
G. "Company payment date" means the last business day of the month.
H. "Crop insurance contract" means a policy, provision, or endorsement, or
like instrument, and associated documents issued by the Company and held
by the policyholder to insure the interest of the policyholder in a
single crop.
I. "Eligible crop insurance contract" means a crop insurance contract
which is sold and serviced in a manner consistent with the Act, 7 C.F.R.
chapter IV., FCIC policy and procedure, and applicable rates, terms, and
special limitations; having a sales closing date within the reinsurance
year; to a person eligible to receive crop insurance protection; for a
crop and in areas approved by FCIC; and on forms that have been
approved by FCIC.
J. "Eligible producer" means a person who is determined to be in compliance
with the Food Security Act of 1985, and the regulations promulgated
thereunder, the Food, Agriculture, Conservation, and Trade Act of 1990,
and the regulations promulgated thereunder, and 7 C.F.R. chapter IV.
K. "FCIC payment date" means the first banking day following the fourteenth
calendar day after FCIC receives the accounting report and supporting
data upon which any payment is based.
L. "Group risk plan" means crop insurance coverage based on a county crop
yield experience rather than on individual yield history. Indemnities
are paid based on county yields rather than on individual yields during
a crop year.
M. "Ineligible crop insurance contract" means any crop insurance contract
determined by FCIC in accordance with its regulations to be ineligible
for reinsurance under this Agreement.
N. "Insurable interest" means the portion of an insured crop an insured has
at risk in the event of an insurable loss.
O. "Local agency" means the office in which the business of selling and
servicing eligible crop insurance contracts to the general public is
conducted.
-2-
<PAGE> 5
P. "Loss ratio" means the ratio of ultimate net loss to net book premium,
expressed as a percentage. For example, the ratio of one dollar ultimate net
loss to one dollar net book premium would be expressed as one hundred
percent (100%).
Q. "Multiple peril or Multi-peril Crop Insurance (MPCI)" means an eligible crop
insurance contract that provides coverage based on individual producer crop
yield experience or crop yield experience applicable to an individual farm
against more than one cause of loss set out in the contract and reinsured
under the Agreement.
R. "Net book premium" means total premium payable by the policyholder plus the
FCIC premium subsidy, less cancellations and adjustments.
S. "Person" means any individual or legal entity.
T. "Policyholder" means the person identified on an eligible crop insurance
contract issued by the Company subject to this Agreement.
U. "Producer premium" means that portion of the FCIC-approved insurance premium
that the policyholder must pay.
V. "Reinsurance account" means an account maintained by FCIC within the
Reinsurance Accounting System by which certain underwriting gains are
distributed.
W. "Reinsurance year" means the period from July 1 of any year through June 30
of the following year and identified by reference to the following year.
X. "Renewed crop insurance contract" (see Carry-over crop insurance contract).
Y. "Retained" as applied to ultimate net losses, net book premium, or book for
business, means remaining liability for ultimate net losses and the right
to associated net book premiums after all reinsurance cessions under this
Agreement.
Z. "Sales closing date" means the date approved by FCIC as the last date on
which a producer may apply for an eligible crop insurance contract on a
crop in a specific county. All terms and conditions of the insurance
contract other than those which must be established by the Contract Change
Date, must be established by this date.
AA. "Sales Supervisor" means any person who either supervises, coordinates, or
facilitates the activities of sales agents, local competing agencies or
local sales agents on behalf of the Company, whether as an employee, or a
contractor, and whose compensation is in whole or in part calculated as a
percentage of the gross premiums written.
AB. "Standards for Approval" means the minimum requirements the Company must
meet in order to be eligible to obtain this Agreement. Standards for
Approval are codified in 7 C.F.R. part 400, subpart L.
- 3 -
<PAGE> 6
AC. "Transaction Cut-off Date" for weekly data reporting is 11:59 PM central
time on Saturday of each week. The transaction cut-off date for Monthly
Summary Reports is 11:59 PM central time on the Saturday occurring
within the first full week of the month.
AD. "Ultimate net loss" means the amount paid by the Company under any
eligible crop insurance contract reinsured under this Agreement in
settlement of any claim and in satisfaction of any judgement rendered on
account of such claim, less any recovery or salvage by the Company.
"Ultimate net loss" may include interest and policyholder's court costs
related to the eligible crop insurance contract provisions or procedures
which are contained in a final judgement against the Company by a court
of competent jurisdiction if FCIC determines: (1) that such interest or
court costs resulted from the Company's substantial compliance with FCIC
procedures or instructions in the handling of the claim or in the
servicing of the insured; or (2) that the actions of the Company were in
accordance with accepted loss adjustment procedures; and (3) that the
award of such interest or court costs did not involve negligence or
culpability on the part of the Company. "Ultimate net loss" may also
include interest or policyholder's court costs related to the crop
insurance provisions or procedures which are included in the settlement
of any claim if FCIC, in addition to the determinations included above,
is advised of the terms of and the basis for the settlement and
determines that the settlement should be approved. Under no
circumstances are any punitive or consequential damages included in the
calculation of ultimate net loss.
AE. "Underwriting gain" means the amount by which retained net book premium
exceeds retained ultimate net losses.
AF. "Underwriting loss" means the amount by which retained ultimate net
losses exceed retained net book premium.
SECTION II. REINSURANCE
A. General Terms
1. The Company is required to make crop insurance available to all
eligible producers for the crops and in the areas which are
stated in its Plan of Operation as approved by FCIC. Only
eligible crop insurance contracts written under the authority of
the Act will be reinsured under this Agreement.
2. In exchange for the reinsurance premiums provided by the Company
in accordance with this Agreement, FCIC will provide the Company
with reinsurance pursuant to the provisions of this Agreement.
3. All crop Insurance contracts reinsured under this Agreement must
contain the following statement:
-4-
<PAGE> 7
This insurance policy is reinsured by the Federal Crop
Insurance Corporation under the provisions of the
Federal Crop Insurance Act, as amended (the "Act") (7
U.S.C. 1501 et seq.), and all terms of the policy and
rights and responsibilities of the parties are
specifically subject to the Act and the regulations
under the Act codified in chapter IV of title 7 of the
Code of Federal Regulations.
4. FCIC will not provide reinsurance, expense reimbursement, or
premium subsidy for any crop insurance contract which is not
eligible or which is sold or serviced in violation of the terms
of this Agreement. Ineligible crop insurance contracts will
include those sold or renewed after the date a person is placed
upon a list of ineligible persons maintained and provided by
FCIC periodically or who the Company has reason to know is
otherwise ineligible. Any application for crop insurance from
any person who is not identified on such listing of ineligible
persons, which the Company refuses to accept, must be
immediately referred to FCIC.
5. No portion of any payment made to the Company under this
Agreement may be rebated in any form to policyholders. Neither
the Company nor its agents shall assess service fees or
additional charges on eligible crop insurance contracts
reinsured under this Agreement.
6. The Company, in accordance with its Plan of Operation, may
designate eligible crop insurance contracts to one of three
funds for each reinsurance year: 1) Commercial Fund, 2)
Developmental Fund, and 3) Assigned Risk Fund.
B. Reinsurance Funds
1. Assigned Risk Fund
a. Within each individual state, the Company may designate
eligible crop insurance contracts which have an
aggregate net book premium not greater than the maximum
cession to the Assigned Risk Fund for that state as
published by FCIC in Appendix 2, Exhibit 15 to the Plan
of Operation. FCIC will assume eighty percent (80%) of
the liability for ultimate net losses on these
designated eligible crop insurance contracts in exchange
for eighty percent (80%) of the associated net book
premium except as provided in paragraphs II.B.1.c. and
II.B.4. The Company must retain twenty percent (20%) of
the net book premium and associated liability for
ultimate net losses on these designated eligible crop
insurance contracts except as provided in paragraphs
II.B.1.c. and II.B.4.
b. The Company must designate eligible crop insurance
contracts to the Assigned Risk Fund not later than the
transaction cut-off date for the week including the 30th
calendar day after the sales closing date for the
eligible crop insurance contract.
-5-
<PAGE> 8
c. In the event the aggregate net book premium for all such
eligible crop insurance contracts exceeds the maximum cession
allowed for an individual state, the amount ceded for each
eligible crop insurance contract in such state will be reduced
pro-rata to the maximum cession for that state. The net book
premium and associated liability for ultimate net losses which
exceeds the maximum cession for an individual state will be
placed in the Developmental Fund.
d. Eligible group risk plan crop insurance contracts which are
included in the Company's book of business for the 1995 crop
year under this Agreement may be designated to the Assigned
Risk Fund in excess of the Company's maximum cession permitted
under paragraph II.B.1.a.
2. Developmental Fund
a. The Company may designate net book premium and associated
liability for ultimate net losses to the Developmental Fund.
Such designation must be made in its Plan of Operation for
each reinsurance year.
b. Designations to the Developmental Fund may be made by crop or
by county, but not by both within a state. If designations are
by county, all eligible crop insurance contracts for all crops
in that county will be included. If designations are by crop,
all eligible crop insurance contracts for that crop in that
state will be included.
c. Eligible crop insurance contracts designated to the Assigned
Risk Fund will not be included in any designations to the
Developmental Fund except to the extent required by
paragraph II.B.1.c.
d. The Company must retain at least thirty-five percent (35%) of
the net book premium and associated liability for ultimate net
losses on eligible crop insurance contracts placed into the
Developmental Fund within each state. The Company may retain a
greater percentage of the net book premium and associated
liability for ultimate net losses within each state whenever it
designates a percentage greater than thirty-five percent (35%)
in its Plan of Operation for any reinsurance year. Such
percentage designations must be in five percent (5%)
increments. FCIC will assume the liability for ultimate net
losses not retained by the Company within each state in
exchange for any equal percentage of the associated net book
premium included in the Developmental Fund in that state.
3. Commercial Fund
a. Any eligible crop insurance contract reinsured under this
Agreement not included in designations to the Assigned Risk
Fund or the Developmental Fund will be included in the
Commercial Fund.
-6-
<PAGE> 9
b. The Company must retain at least fifty percent (50%) of
the net book premium and associated liability for
ultimate net losses on eligible crop insurance contracts
designated to the Commercial Fund within each state. The
Company may retain a greater percentage of the net book
premiums and associated liability for ultimate net
losses within each state whenever it designates a
percentage greater than fifty percent (50%) in its Plan
of Operation for any reinsurance year. Such percentage
designations must be made in five percent (5%)
increments. FCIC will assume the liability for ultimate
net losses not retained by the Company within each state
in exchange for an equal percentage of the associated
net book premiums included in the Commercial Fund in
that state.
4. Company Minimum Retention
a. After all proportional reinsurance cessions under this
Agreement, the Company must retain a percentage of net
book premiums and associated liability for ultimate net
losses that equals or exceeds thirty-five percent (35%)
of its net book of business, or twenty-two and one-half
percent (22.5%) of its net book of business if more than
fifty percent (50%) of the Company's net book of
business is in the Assigned Risk Fund.
b. In the event the Company fails to retain the required
minimum percentage of its book of business, the percent
of net book premiums and associated liability for
ultimate net losses retained for all eligible crop
insurance contracts included in the Assigned Risk Fund
in all states will be increased on a pro-rata basis from
the twenty percent (20%) retention stated in paragraph
II.B.1.a. to the retention necessary to meet the minimum
retention stated in paragraph II.B.4.a.
C. Ultimate Net Losses
1. Company's Responsibility for Ultimate Net Losses
The non-proportional reinsurance provided hereunder applies to
the Company's retained book of business in each individual Fund
and state after proportional cessions under subsection II.B. For
each Fund and state, the Company will retain ultimate net losses
as follows:
a. The Company will pay the following percentages of the
amount by which its retained ultimate net losses in each
individual state and Fund exceed one hundred percent
(100%) but are less than or equal to one hundred sixty
percent (160%) of the Company's retained net book
premium in that state and Fund for the reinsurance year.
i. Commercial Fund 30.0%
ii. Developmental Fund 14.0%
iii. Assigned Risk Fund 5.0%
-7-
<PAGE> 10
b. In addition to the amount determined under paragraph
II.C.1.a., the Company will pay the following
percentages of the amount by which it's retained
ultimate net losses in each individual state and Fund
exceed one hundred sixty percent (160%) but are less
than or equal to two hundred twenty percent (220%) of
the Company's retained net book premium in that state
and Fund for the reinsurance year.
i. Commercial Fund 25.0%
ii. Developmental Fund 10.0%
iii. Assigned Risk Fund 3.0%
c. In addition to the amounts determined under paragraphs
II.C.1.a. and b., the Company will pay the following
percentages of the amount by which it's retained
ultimate net losses in each individual state and Fund
exceed two hundred twenty percent (220%) but are less
than or equal to five hundred percent (500%) of the
Company's retained net book premium in that state and
Fund for the reinsurance year.
i. Commercial Fund 15.0%
ii. Developmental Fund 7.0%
iii. Assigned Risk Fund 2.0%
d. FCIC will assume ultimate net losses in excess of the
Company's retained ultimate losses as determined under
paragraphs II.C.1.a., b. and c. In addition, FCIC will
pay one hundred percent (100%) of the amount by which
the Company's retained ultimate net losses in each
individual state and Fund exceed five hundred percent
(500%) of the Company's retained net book premium in
that state and Fund for the reinsurance year.
D. Company's Retention of Underwriting Gain
1. The amount of underwriting gain retained by the Company will be
calculated separately for each Fund within each state as
follows:
a. When the loss ratio equals or exceeds sixty-five
percent (65%) but is less than one hundred percent
(100%) of the Company's retained net book premium in a
Fund and state for the reinsurance year, the Company
will retain the following percentages of the
underwriting gain:
i. Commercial Fund 94.0%
ii. Developmental Fund 45.0%
iii. Assigned Risk Fund 15.0%
-8-
<PAGE> 11
b. In addition to the amount of underwriting gain determined in the range
of loss ratios under paragraph II.D.1.a., when the loss ratio equals or
exceeds fifty-five percent (55%) but is less than sixty-five percent
(65%) of the Company's retained net book premium in a Fund and state for
the reinsurance year, the Company will retain in that Fund and state the
following percentages of the underwriting gain:
i. Commercial Fund 65.0%
ii. Developmental Fund 30.0%
iii. Assigned Risk Fund 9.0%
c. In addition to the amounts of underwriting gains determined in the range
of loss ratios under paragraphs II.D.1.a. and b., when the loss ratio
is less than fifty-five percent (55%) of the Company's retained net book
premium in a Fund and state for the reinsurance year, the Company will
retain in that Fund and state the following percentages of the
underwriting gain:
i. Commercial Fund 11.0%
ii. Developmental Fund 6.0%
iii. Assigned Risk Fund 2.0%
2. The retained underwriting gain or loss for each individual Fund is totalled
for each state to determine the gain or loss for that state.
3. The Company's overall gain or loss is determined by totalling the retained
underwriting gains or losses for all states. Any net underwriting gain will
be paid by FCIC to the Company at annual settlement except as provided in
paragraph II.D.4. Any net underwriting loss of the Company will be paid to
FCIC by the Company with each Monthly Summary Report.
4. Reinsurance Account (Applicable to 1992 and subsequent reinsurance years)
a. All calculations described in this section pertain only to annual
settlement, unless otherwise approved by FCIC. The Company's balance in
the Company's reinsurance account is subject to the provisions of
subsection V.S.
b. Whenever the Company's retained underwriting gain for all states in any
reinsurance year exceeds fifteen percent (15%) of its total retained net
book premium, the excess gain will be held in a Company reinsurance
account by FCIC.
-9-
<PAGE> 12
c. Whenever the Company retains an underwriting loss or an
underwriting gain that is less than fifteen percent
(15%) of its total retained net book premium in any
reinsurance year, FCIC will pay to the Company from the
Company's reinsurance account the difference between the
amount equal to fifteen percent (15%) of its total
retained net book premium for the same reinsurance year
and the amount of the Company's actual underwriting gain
or underwriting loss for that same reinsurance year, not
to exceed the balance in the Company's reinsurance
account.
d. FCIC will not pay in any reinsurance year an amount
greater than the balance available in the reinsurance
account. Negative balances in the Company reinsurance
account will not be carried over to a subsequent
reinsurance year.
e. Following the distribution permitted in paragraph
II.D.4.c., whenever the Company's retained underwriting
gain for the three (3) most recent reinsurance years
exceeds thirty percent (30%) of its average retained net
book premium for those same three (3) reinsurance years,
FCIC will pay to the Company from the Company's
reinsurance account any amount which exceeds thirty
percent (30%) of its average retained net book premium.
f. In the event this Agreement is terminated, any balance
in the reinsurance account will be paid as follows:
i. Whenever the Company terminates this Agreement,
any remaining balance in said account will be
paid to the Company by FCIC in two (2) equal
annual installments. The first installment will
be paid one year after the final Annual
Settlement of the last reinsurance year. The
second installment will be paid one year after
the first installment is paid. The Company must
cease reinsurance with the FCIC for at least one
(1) reinsurance year to be eligible for these
payments.
ii. Whenever FCIC terminates this Agreement, if may,
at its option, elect to pay any remaining
balance as described in paragraph II.D.4.f.(i)
above, or its may elect to transfer such balance
in said account to any subsequent Agreement it
may offer.
E. Commercial Reinsurance
The Company may reinsure commercially its liability for ultimate net
losses remaining after all cessions under this Agreement. The Company
must describe in the Plan of Operation its commercial reinsurance plan
and provide the necessary documentation as determined by FCIC to assure
that the potential liability for premiums retained under such commercial
reinsurance meets the requirements contained in 7 C.F.R. part 400 -
subpart L.
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<PAGE> 13
Section III. FCIC PREMIUM SUBSIDY
A portion of the premiums for crop insurance provided under this
Agreement will be subsidized by FCIC in accordance with the provisions
of the Act. Such premium subsidy will be credited against net book
premium on the accounting report which accompanies the annual
settlement.
Section IV. Expense Reimbursement
A. General
In accordance with provisions of the Act, FCIC agrees to pay the Company
an amount equal to thirty-one percent (31%) of the net book premium for
all eligible multiple peril crop insurance contracts included under this
Agreement except as this amount may be reduced by subsections IV.C. and
IV.D.4. and 5., or as may be increased by subsection IV.B., and except
for group risk plan policies. FCIC agrees to pay the Company an expense
reimbursement of twenty-seven percent (27.0%) for all eligible group
risk plan crop insurance contracts.
B. Reimbursement for Excess Loss Adjustment Expense
In addition to the expense reimbursement in subsection IV.A., if the
loss ratio on the Company's total book of business in any individual
Fund in a state for the reinsurance year is in excess of one-hundred
twenty-five percent (125%), FCIC will pay to the Company two hundredths
of one percent (.02%) of the net book premium on all eligible multiple
peril crop insurance contracts reinsured under this Agreement for that
individual Fund in a state, for each full point in excess of the
one-hundred twenty-five percent (125%) loss ratio. The excess loss
adjustment expense reimbursement under this section will not exceed four
percent (4%) of the net book premium in any individual Fund in a state
for all eligible multiple peril crop insurance contracts reinsured under
this Agreement. Group risk plan crop insurance contracts are
specifically excluded from this computation.
C. Adjustments to Expense Reimbursement
The expense reimbursement may be adjusted to a level that FCIC
determines to be equitable if issuing or servicing an eligible crop
insurance contract or group of such contracts involve expenses that vary
significantly from the basis used to determine the expense reimbursement
provided under this section.
D. Payment of Expense Reimbursement
1. The expense reimbursement provided in subsection IV.A. will be
paid to the Company in two installments. The first installment,
equal to twenty-two percent (22%) of the net book premium for
all eligible crop insurance contracts unless such amount is
reduced by paragraph IV.D.4. or 5., will be included in the
Monthly Summary Report containing the data obtained from
accepted acreage reports
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<PAGE> 14
(preliminary tonnage report for eligible raisin crop insurance
contracts). The second installment, equal to nine (9%) of net book
premium for all eligible multiple peril crop insurance contracts and
five percent (5.0%) of the net book premium for all eligible group risk
plan crop insurance contracts, unless such amount is reduced by
paragraph IV.D.5., will be included in the Monthly Summary Report on
which the Company reports the producer premium.
2. Excess loss adjustment expenses payable under subsection IV.B. will be
included in the Monthly Summary Report which reports losses exceeding
the thresholds specified therein.
3. The Company may, not sooner than the September Monthly Summary Report,
submit to FCIC estimated reports of raisin tonnage. These reports must
not exceed two (2) tons per acre. These reports will be used to
determine the first installment of the expense reimbursement for raisin
insurance. In the event the raisin premium is less than this estimate,
the Company will include the excess expense reimbursement as an amount
owed to FCIC in the first Monthly Summary Report after the actual raisin
tonnage is known. Interest on this amount at a rate of fifteen percent
(15%) simple interest per annum calculated from the date of payment by
FCIC to the date of the Monthly Summary Report upon which the actual
tonnage is reported must be included as an amount owed to FCIC.
4. With the exception of raisins, the Company must not submit estimated
data for the purpose of establishing the amount of expense reimbursement
due the Company.
5. All data on which liabilities and premiums are based must be reported by
the Company to and accepted by FCIC not later than the transaction
cut-off date for the tenth (10th) full week after the week which
includes the date the acreage report is due from the policyholder as
specified in the Actuarial Data Master File. The first installment of
the expense reimbursement for eligible crop insurance contracts
reinsured under this Agreement will be reduced if the data is delayed as
follows:
DATA RECEIVED FOR TRANSACTION CUT-OFF DATES FOR:
Weeks After Acreage Report Due Week Expense Reimbursement
----------------------------------- ---------------------
11th through 12th Weeks 20.5%
13th through 14th Weeks 19.0%
15th through 17th Weeks 17.5%
6. Expense reimbursement will not be paid on any eligible crop insurance
contract reinsured under this Agreement for which acreage report data is
received after the transaction cut-off date for the 17th week after the
acreage report due week.
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<PAGE> 15
SECTION V. GENERAL PROVISIONS
A. Collection of Information and Data
1. The Company is required to collect and provide to FCIC the Social
Security Account Number (SSN) or the Employer Identification Number
(EIN) as authorized by the Food, Agriculture, Conservation, and
Trade Act of 1990 (1990 Farm Act) (Pub. I. 101-624), and the
regulations promulgated thereunder which are codified in 7 C.F.R.
part 400, subpart Q.
2. The Company is required to collect program participation data by race,
sex, age, and disability from all policyholders, on the form and in the
manner prescribed by FCIC. Title VI of the Civil Rights Act of 1964, and
the regulations of the Department of Justice and of the Department of
Agriculture, require collection of such data to ensure crop insurance
program benefits are made available to all eligible persons regardless
of race, color, religion, sex, age, disability, or national origin.
B. Reports
1. The Company must submit accurate and detailed contract data to FCIC in
accordance with the requirements of Manual 13 which are in effect on
July 1 of the reinsurance year.
2. All reports submitted for reimbursement must be certified by an
authorized officer or authorized employee of the Company. The required
certification statements are contained in Manual 13.
3. In addition to the reporting requirements contained in Manual 13, the
Company will provide to FCIC any other information relating to its crop
insurance activities as may be requested by FCIC.
4. Failure of the Company to comply with the provisions of this Agreement,
including timely submission of the monthly and annual data and reports,
or any other report required by this Agreement does not excuse or delay
the requirement to pay any amount due to FCIC by the dates specified
herein. Failure of the Company to make payment in accordance with the
provisions of this Agreement is a default of this Agreement by the
Company. In addition to the payment of applicable interest, such actions
may be a basis to suspend or terminate this Agreement.
5. Producer premiums collected by the Company must be reported on the
Monthly Summary Report submitted during the next calendar month.
Producer premiums which are uncollected for each billing date must be
reported by the Company on the Monthly Summary Report for the month
following the month of the billing date.
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<PAGE> 16
6. All payments due FCIC will be netted on the Monthly and Annual
Summary Reports with amounts due the Company from FCIC. Any
amount due FCIC as a result of the netting affect, must be
deposited on or before the Company's payment date directly into
the Corporation's account in the U.S. Treasury by Electronic
Funds Transfer (EFT). FCIC will remit amounts due the Company by
EFT.
7. All payments and reports are subject to post audit by FCIC.
C. Interest
1. FCIC will pay interest to the Company in accordance with the
interest provisions of the Contract Disputes Act (41 U.S.C. 601
et seq).
2. The Company will pay FCIC interest on payments not timely
received in accordance to the terms of this Agreement at the
simple interest rate of fifteen percent (15%) per annum.
3. The Company will repay, with interest, any amount paid to the
Company by FCIC which FCIC or the Company subsequently
determines not due. Such interest will be calculated in
accordance with Manual 13 at the interest rate contained in
paragraph V.C.2.
D. Escrow Account
1. At the Company's request, FCIC will establish an escrow account
at a bank designated by the Company, and approved by FCIC, to
reimburse the Company for payment of indemnities by the Company.
The Company's bank must pledge collateral as required by 31
C.F.R. section 202 in the amount determined by FCIC. The
requirements for funding the escrow account and monthly
balancing are described in Manual 13 and the Escrow Agreement.
2. Any Company that elects not to utilize Escrow Funding will be
reimbursed for paid losses validated and accepted on the Monthly
Summary Report.
3. For the purpose of this Agreement, any loss will be considered
paid by the Company when the instrument or document issued as
payment has cleared the Company's bank account.
E. Policy and Form Approval
1. The Company must submit for FCIC's approval all multiple peril
contracts of insurance, crop policies, amendments, forms, and
procedures incorporated by reference into the eligible crop
insurance contracts of insurance reinsured under this Agreement
as FCIC may require. Any such documents may not be used by the
Company until approved by FCIC.
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<PAGE> 17
2. The Company may not sell any policy, contract of insurance,
endorsements, or other similar instrument that shifts or
increases risk to the eligible crop insurance contract offered
or reinsured by FCIC. Companies must submit contracts of
insurance to FCIC for review and consideration of compliance
with the provisions of this Agreement. FCIC will not reimburse
the company for any loss occurring on an eligible crop insurance
contract if the Company has sold a contract of insurance which
shifts or increases risk to the eligible crop insurance contract
reinsured under this Agreement.
3. The Company must maintain a record of policy numbers and
underwriting information pertaining to any additional risk
policies written in conjunction with eligible crop insurance
contracts reinsured under this Agreement, and a cross reference
to the eligible crop insurance contract.
4. The Company must utilize loss adjustment standards, procedures,
forms, methods, and instructions approved by FCIC.
F. Insurance Operations
1. Plan of Operations
a. This Agreement is not effective until FCIC has approved
the Company's Plan of Operation (Plan). The Plan must be
submitted to FCIC by April 1st preceding the reinsurance
year. FCIC will not renew the Agreement if a Plan is not
received by April 1st unless other arrangements are
mutually agreed upon. If the Plan is not approved by
July 1st of the reinsurance year, eligible crop
insurance contracts written or renewed with sales
closing dates between July 1st and the date the Plan is
approved will not be reinsured unless specifically
accepted by FCIC.
b. The Plan must meet the requirements and be in the format
as contained in Appendix 2.
c. The Company may submit a request to amend an approved
Plan at any time to reflect changing business
considerations and sales expectations. Such amendments
must be approved by FCIC before implementation by the
Company. The request will be evaluated following the
procedures applicable to a timely filed original Plan of
Operation, except that FCIC will consider, in addition,
the potential of adverse selection against FCIC.
Requests for amendment which are determined by FCIC to
increase the potential for adverse selection against
FCIC will be favorably considered only if FCIC
determines that its action or those of the United States
Department of Agriculture have substantially increased
the risk of underwriting loss on eligible crop insurance
contracts previously written by the Company with the
expectation that the current policies and procedures
would be continued.
d. The Plan is incorporated in this Agreement by reference.
Failure to follow the Plan may be a basis for FCIC to
terminate this Agreement.
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<PAGE> 18
e. The Plan must describe the Company's training and
evaluation programs by which knowledge and competency of
selling agents and loss adjusters will be assured. The
Plan must also include the Company's procedures for
implementing an audit program to address the Company's
program performance and compliance.
2. The Company must sell all eligible crop insurance contracts
reinsured under this Agreement through properly trained and
licensed agents. Agents, brokers, solicitors, or any other sales
representatives of the Company who are authorized to quote
premium rates and coverage or provide other information
pertaining to eligible crop insurance contracts must hold an
insurance license issued by the state in which each such
contract is written.
3. The Company may not permit its sales agents, local agency
employees, sales supervisors, or any spouse or family member
residing in the same household as any such sales agent, local
agency employee, or sales supervisor to adjust losses, or
supervise, or otherwise control loss adjusters, not to
participate in the determination of the amount or cause of any
loss nor to verify yields of applicants for the purpose of
establishing any insurance coverage or guarantee, if the
eligible crop insurance contracts involved are sold or serviced
by or through the sales agent, local agency employee, the local
agency, any competing agency, or by any agent or local agency
supervised by the sales supervisor.
4. The Company and FCIC agree that FCIC will assume and perform the
obligations of the Company if the FCIC determines that the
Company's loss adjustment performance and practices are not
carried out in accordance with this Agreement. If the FCIC
assumes the Company's loss adjustment obligations under this
subsection, the Company will pay the FCIC an amount equal to ten
percent (10%) of the net book premium on the Company's book of
business pro-rated by the ratio that the number of claims
adjusted by FCIC bears to the total number of claims adjusted
under this Agreement. The Company will remain liable for the
losses on such eligible crop insurance contracts reinsured under
this Agreement. This payment will be due at the Company payment
date. Loss adjustment responsibility will be restored to the
Company when FCIC determines that the Company is capable of
complying and will comply with FCIC approved loss adjustment
procedures and practices.
5. The Company must verify all yields and other information used to
establish insurance guarantees. The Company will describe in its
Plan of Operations the procedure and system it will use to
provide such verification.
6. The Company and its agents must use standards, procedures,
forms, methods and instructions approved by FCIC in the sale and
service of MPCI contracts of insurance reinsured under this
Agreement.
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<PAGE> 19
G. Access to Records and Operations
At FCIC's written request, the Company must provide FCIC access to its
offices, personnel (including agents and loss adjusters), and all records
that pertain to the business conducted under this Agreement for the purpose
of investigation, audit or examination, including access to records on the
operation of the Company. Records pertaining to premiums must be retained
for three (3) years after final adjustments of such premiums. Records
pertaining to indemnities must be available for a period of three (3) years
after final adjustment of a related claim for indemnity. FCIC may require on
a case-by-case basis the Company to retain certain specified records for a
period longer than three years. Even though records need not normally be
retained for longer than three years, the Company should be aware that the
statute of limitations for bringing a suit for any breach of the Standard
Reinsurance Agreement is six years. For the purpose of this paragraph the
term "FCIC" includes all U.S. Government agencies including but not limited
to USDA Office of Inspector General, the General Accounting Office, the
Comptroller General, and the Department of Labor.
H. Compliance and Corrective Action
1. The Company must be in compliance with the provisions of this Agreement,
the Standards for Approval as published by FCIC, the laws and
regulations of the United States, the laws and regulations of the state
in which the Company is conducting business under this Agreement, unless
such state laws and regulations are in conflict with this Agreement, and
all instructions of FCIC.
2. The Company must cooperate with FCIC in the review of Company operations
which are designed to assure policyholders are properly serviced,
that monies are distributed in accordance with the Act, and the FCIC
policies and procedures are being followed.
3. In lieu of termination of this agreement and in addition to suspension
of this agreement in accordance with the provisions of subsection V.I.,
if FCIC finds that the Company has not complied with the provisions of
paragraphs V.H.1. and 2. above, and the Company has not taken
appropriate steps to correct the non-compliance, FCIC may, at its
option:
a. Require, in writing, that the Company take corrective action within
forty-five (45) days of the date of such demand. The demand notice
shall state each contract violation or occurrence of non-compliance.
The Company must provide FCIC with satisfactory documentary evidence
of the corrective action taken to address the non-compliance or
reported violation, including but not limited to, appropriate
actions against any of its agents or other employees determined to
be responsible for the violation; and
b. Require that the Company refund or forfeit a share or all of the
expense reimbursement, premium subsidy, or reinsurance with respect
to the crop insurance contract violation identified.
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<PAGE> 20
I. Termination and Suspension
1. If the Company does not fulfill all of its obligations under
this Agreement, FCIC may immediately terminate this Agreement
for cause.
a. If the Agreement is terminated for cause, FCIC will not
provide reinsurance for any crop insurance contracts
issued or renewed after the date of the termination.
FCIC will provide reinsurance for all eligible crop
insurance contracts in effect as of the date of the
termination until the next cancellation date.
b. FCIC may, but is not required to, assume all loss
adjustment activity for all eligible crop insurance
contracts under the Agreement as of the date of
termination of this Agreement. The Company will pay FCIC
ten percent (10%) of the net book premium of all
eligible crop insurance contracts to reimburse FCIC for
such loss adjustment activity.
c. In addition to the provisions of paragraph I.1.b., if
this Agreement should be terminated for cause, and not
for the convenience of the government, FCIC will suffer
damage to its ability to deliver crop insurance
throughout the United States as required by the Act.
FCIC will incur additional administrative costs to
ensure that policyholders are not deprived of the
opportunity to obtain crop insurance. Both parties agree
such damage is difficult to measure at the time the
Company enters into this Agreement. Therefore, should
this Agreement be terminated by FCIC for cause, the
Company agrees to pay FCIC in the form of liquidated
damages the equivalent of ten percent (10%) of the net
book premium of all eligible crop insurance contracts
that are reinsured by FCIC under this Agreement for that
contract year at the time this Agreement is terminated.
2. If FCIC terminates this Agreement at anytime for the convenience
of the government, FCIC will not provide reinsurance for any
eligible crop insurance contracts renewed or issued after the
date of the termination. Subject to the limitations specified in
subsection V.K., FCIC will continue to provide expense
reimbursement, premium subsidy, and reinsurance for eligible
crop insurance contracts in effect as of the date of the
termination until the next cancellation date. No additional
damages or amounts will accrue to the Company because of such
termination.
3. In the event a Company fails to pay any amount when due under
this Agreement, any further payments from FCIC will be withheld
until the amounts due FCIC are paid with appropriate interest.
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J. Renewal
This Agreement will continue in effect from year to year with an annual
renewal date of July 1st of each succeeding year unless FCIC or the
Company gives at least one hundred eighty (180) days advance notice in
writing to the other party that the Agreement will not be renewed.
K. Appropriation Contingency
The payment of obligations of FCIC under this Agreement are contingent
upon the availability of appropriations. Notwithstanding any other
provision of this Agreement, FCIC's ability to sustain the Agreement
depends upon the FCIC's Appropriation. If FCIC's Appropriation is
insufficient to pay the obligations under this Agreement, FCIC will
reduce its payments to the Company on a pro rata basis or on such other
method as determined by FCIC.
L. Replacement
This Agreement replaces any previous Standard Reinsurance Agreement
between FCIC and the Company. However, any eligible crop insurance
contract which is reinsured under a Standard Reinsurance Agreement in
effect prior to July 1, 1994, will remain reinsured under such previous
agreement until the end of the insurance period for that eligible crop
insurance contract.
M. Cut-Through and Preemption of State Law
1. Whenever the Company (including for the purposes of this
provision, any entity responsible to the Company for carrying
out any part of this Agreement) is unable to fulfill its
obligations to any policyholder by reason of a directive or
order duly issued by any Department of Insurance, Commissioner
of Insurance, or by any court of law having competent
jurisdiction, or under similar authority of any jurisdiction to
which the Company is subject, all eligible crop insurance
contracts affected by such directive or order that are in force
and directly or indirectly subject to this Agreement as of the
date of such inability or failure to perform will be immediately
transferred to FCIC without further action of the Company by the
terms of this Agreement. FCIC will assume all obligations for
unpaid losses whether occurring before or after the date of
transfer, and the Company must pay FCIC all funds in its
possession with respect to all such eligible crop insurance
contracts transferred including, but not limited to, premiums
collected. The Company hereby assigns to FCIC the right to all
uncollected premiums on all such policies. No assessment for
such funds or programs may be computed or levied on the
Company by any state for or on account of any premiums payable
on eligible crop insurance contracts reinsured under this
Agreement.
2. The provisions of 7 C.F.R. part 400 - subpart P are specifically
incorporated herein and made a part hereof.
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<PAGE> 22
N. Litigation and Assistance
The Company's expenses incurred as a result of litigation are considered
part of the expense reimbursement paid in accordance with section IV, of the
Agreement. FCIC may, at its option, elect to provide assistance, and
direction, or it may elect to intervene in any legal action. The Company
agrees not to oppose such participation. Should the Company desire the
assistance, direction, or intervention of FCIC in a legal action it must do
the following:
1. immediately notify FCIC in writing of the requested action setting forth
the reasons such action would be in the best interests of FCIC;
2. retain legal counsel which is mutually acceptable to FCIC;
3. present all legal arguments favorable to its defense including those
suggested by FCIC; and
4. not join FCIC as a party to the action unless FCIC agrees in writing to
be joined as a party.
FCIC will at its sole discretion, determine if the requested action under
this section will be granted. The criteria to determine such action will be
whether such action is in the best interest of FCIC and the crop insurance
program.
O. Suspension and Debarment
Any person or business entity who has been determined by FCIC to be not
responsible or who has been debarred or suspended by FCIC or any other U.S.
Government Agency, may not be used by the Company in any manner which
involves performance under this Agreement if such suspension or debarment is
then in effect.
P. Member - Delegate
No member of or delegate to Congress nor any resident commissioner will be
admitted to any share or part of this Agreement or to any benefit that may
arise therefrom, except that this provision will not be construed to apply
to a benefit from this Agreement that accrues to a corporation for its
general benefit. Nor will this provision be construed to prohibit the
solicitation of any application for the crop insurance from or sale of any
eligible crop insurance contract to a member of or delegate to Congress or a
resident commissioner.
Q. Discrimination
The Company must not discriminate against any employee, applicant for
employment, insured, or applicant for insurance because of race, color,
religion, sex, age, physical handicap, marital status or national origin.
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<PAGE> 23
R. Disputes
If the Company disputes action taken by FCIC under any provision of this
Agreement, the Company may appeal to FCIC in accordance with the
provisions of 7 C.F.R. Section 400.169.
S. Set off
1. Subject to the provisions of paragraph V.S.2. respecting
assignments, if the Company is indebted to FCIC, the amount of
such indebtedness may be set off against the proceeds of this
Agreement or any other amount which may be due to the Company by
the Corporation. If the Company is indebted to the United States
for taxes and notice of lien has been filed in accordance with
the provisions of the Internal Revenue Code of 1954 (26 U.S.C.
Section 6323) or any amendments thereto or modifications thereto
or Notice of Levy has been served on the Department of
Agriculture or FCIC in accordance with the provisions of the
Internal Revenue Code (26 U.S.C. Section 6331) against money
payable to the Company or if the Company is indebted to any
other agency of the United States, the amount of such taxes or
debt may likewise be set off.
2. Where an assignment has been made pursuant to the provisions of
subsection V.T. the following provision will apply with respect
to set off:
a. Notwithstanding the assignment, FCIC may set off:
i. any amount due FCIC under the Agreement;
ii. any amount for which the Company is indebted to
the United States for taxes for which a notice
of lien was filed or a Notice of Levy was served
in accordance with the provisions of the
Internal Revenue Code of 1954 (26 U.S.C. Section
6323), or any amendments thereto or
modifications thereof, before acknowledgement by
FCIC of receipt of the notice of assignment;
and
iii. any amounts, other than amounts specified in
paragraphs V.S.2.a.i. and ii. due to FCIC or any
other agency of the United States, if FCIC
notified the assignee of such amounts to be set
off at or before the time acknowledgement was
made of receipt of the notice of assignment.
b. Any indebtedness of the Company to any agency of the
United States which cannot be set off under paragraph
V.S.2.a. may be set off against any amount payable under
this Agreement which remains after deduction of amounts
(including interest and other charges) owing by the
Company to the assignee for which the assignment was
made.
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<PAGE> 24
3. Any amount due the Company under this Agreement is not subject
to any lien, attachment, garnishment, or any other similar
process prior to that amount being paid under this Agreement,
unless such lien, attachment, or garnishment arises under title
26 of the United States Code.
4. Set off as provided in this section will not deprive the
Company of any right it might otherwise have to contest the
indebtedness involved in the set off action by administrative
appeal.
T. Assignment of Claims
No assignment by the Company shall be made of the Agreement, or the
rights thereunder, unless the Company assigns the proceeds of the
Agreement to a bank, trust company, or other financing institution,
including any federal lending agency, or to a person or firm that holds
a lien or encumbrance at the time of assignment, or, the Company
receives the prior approval of FCIC to assign the proceeds of this
Agreement to any other person or firm: Provided, That such assignment
will be recognized only if and when the assignee thereof files with FCIC
a written notice of the assignment together with a signed copy of the
instrument of assignment, and, provided further, that any such
assignment must cover all amounts payable and not already paid under the
Agreement, shall not be made to more than one party and shall not be
subject to further assignment, except that any such assignment may be
made to one party as agency or trustee for two or more parties.
U. Liability for Agents and Loss Adjusters
The Company is solely responsible for the conduct and training of its
personnel, agents and loss adjusters within the parameters of this
Agreement. Liability incurred, to the extent it is caused by agent or
loss adjuster error or omission, or for failure to follow FCIC approved
policy or procedure, is the sole responsibility of the Company.
Reinsurance of a policy or policies will not be denied unless: (1) there
exists a pattern of failure to follow FCIC approved policies or
procedures, or the allowance of errors or omissions; or (2) the Company
knew or should have known of the failure to follow FCIC approved
policies or procedures, or errors or omissions, and failed to take
appropriate action to correct the situation. Any amounts paid by FCIC to
the Company which are later determined to have been improperly paid
because of failure to follow FCIC approved policies or procedures or
because of error or omission, whether intentional or unintentional, will
be repaid by the Company to FCIC with appropriate interest on the next
monthly or annual report, whichever is applicable. If the Company shows,
to FCIC's satisfaction, that the agent or loss adjuster exercised
reasonable care in the sales and service of the policies under this
Agreement, FCIC may, at its sole discretion, waive, reduce or delay
repayment.
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V. Certification
The undersigned certifies that all information contained herein,
including the Plan of Operations with all appendixes, exhibits, and
supporting documentation is true, complete, and accurate. The
undersigned acknowledges that the Board of Directors has authorized the
Company to enter into this Agreement and the Plan of Operations. The
undersigned acknowledges any misrepresentation in the submission of this
Agreement and information contained in the Plan of Operations may result
in civil or criminal liability by the undersigned or their
representatives.
APPROVED AND ACCEPTED
for
FEDERAL CROP INSURANCE CORPORATION COMPANY
/s/ E. Heyward Baker /s/ Thomas F. Gowdy
- ---------------------------------- ------------------------------------
Signature Signature
/s/ E. Heyward Baker /s/ Thomas F. Gowdy
- ---------------------------------- ------------------------------------
Name Name
Vice President Marketing
Director IGF Insurance Co.
- ---------------------------------- ------------------------------------
Title Title
December 29, 1994 12-19-94
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Date Date
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APPENDIX 1
SECTION I. PROCUREMENT INTEGRITY
A. During this Agreement, the Company shall not knowingly:
1. make, directly or indirectly, any offer or promise of future
employment or business opportunity to, or engage, directly or
indirectly, in any discussion of future employment or business
opportunity with, any FCIC official;
2. offer, give, or promise to offer or give, directly or
indirectly, any money, gratuity, or other thing of value to any
FCIC official; or
3. solicit or obtain, directly or indirectly, from any officer or
employee of FCIC, prior to FCIC's acceptance of this Agreement
any proprietary or source selection information regarding the
Agreement.
B. During this Agreement, no FCIC official shall knowingly:
1. solicit or accept, directly or indirectly, any promise of future
employment or business opportunity from, or engage, directly or
indirectly, in any discussion of future employment or business
opportunity with, any officer, employee, representative, agent,
or consultant of the Company;
2. ask for, demand, exact, solicit, seek, accept, receive, or agree
to receive, directly or indirectly, any money, gratuity, or
other thing of value from any officer, employee, representative,
agent, or consultant of the Company; or
3. disclose any proprietary or source selection information
regarding the Agreement directly or indirectly to any person
other than a person authorized by FCIC to receive such
information.
C. During this Agreement, no person who is given authorized or unauthorized
access to proprietary information regarding the Agreement, shall
knowingly disclose such information, directly or indirectly, to any
person other than a person authorized by FCIC to receive such
information.
D. No Government official or employee who has participated personally and
substantially in the deliberation of the Agreement with the Company
shall:
1. participate in any manner, as an officer, employee, agent, or
representative of another party to this Agreement, in any
negotiations regarding such an Agreement, or
2. participate personally and substantially on behalf of another
party to this Agreement in the performance of such Agreement,
during the period ending 2 years after the last date such
individual participated personally and substantially in the
conduct of such Agreement.
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E. The definitions at 48 C.F.R. Section 3.104-4 are incorporated in this
Agreement for the purposes of this subsection.
F. If the Company fails to comply with this subsection, FCIC may terminate
this Agreement for cause.
G. For the purpose of this section, the term "FCIC Official" has the same
meaning as the term "Procurement Official" in section 6 of the Office of
Federal Procurement Policy Act Amendments of 1988 (Public Law 100-379).
SECTION II. DRUG FREE WORKPLACE
A. For the purposes of this section the following definitions apply:
1. "Controlled Substance" means a controlled substance contained
in schedules I through V of section 202 of the Controlled
Substances Act (21 U.S.C. Section 812) and as further defined at
21 C.F.R. Sections 1308.11-1308.15.
2. "Conviction" means a finding of guilt (including a plea of nolo
contendere) or imposition of sentence, or both, by any judicial
body charged with the responsibility to determine violations of
the Federal or state criminal drug statutes.
3. "Criminal Drug Statute" means a Federal or non-federal criminal
statute involving the manufacture, distribution, dispensing,
possession, or use of any controlled substance.
4. "Drug-free Workplace" means a site for the performance of work
done by the Company in connection with the Agreement at which
employees of the Company are prohibited from engaging in the
unlawful manufacture, distribution, dispensing, possession, or
use of a controlled substance.
5. "Directly Engaged" is defined to include all direct cost
employees and any other contract employee who has other than a
minimal impact or involvement in the Company's performance.
6. "Employee" means an employee of a Company directly engaged in
the performance of work under the Agreement.
B. The Company certifies and agrees, that with respect to all employees of
the Company to be employed pursuant to the Agreement, it will--no later
than thirty (30) days after the date this Agreement goes into effect;
complete the following:
1. Publish a statement notifying its employees that the unlawful
manufacture, distribution, dispensing, possession, or use of a
controlled substance is prohibited in the Company's workplace
and specifying actions that will be taken against employees for
violations of such prohibition;
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2. Establish an ongoing drug-free awareness program to inform
employees about the dangers of drug abuse in the workplace, the
Company's policy of maintaining a drug-free workplace, the
availability of drug counseling, rehabilitation, employee
assistance programs, and penalties that may be imposed upon
employees for drug abuse violations occurring in the workplace;
3. Provide all employees engaged in the performance of the
Agreement with a copy of the statement required by paragraph
(2);
4. Notify employees in writing of the statement required by
paragraph (2) of this provision that, as a condition of
continued employment on the Agreement resulting from this
solicitation, the employee will abide by the terms of this
statement, and notify the employer in writing of the employee's
conviction under a criminal drug statute for a violation
occurring in the workplace no later than five (5) days after
such conviction;
5. Notify FCIC in writing within ten (10) days after receiving
notice under paragraph (4), from any employee or otherwise
receiving actual notice of such conviction. The notice shall
include the position title of the employee; and
6. Within 30 days after receiving notice under paragraph (4) of a
conviction, take one of the following actions with respect to
any employee who is convicted of a drug abuse violation
occurring in the workplace: a) take appropriate personnel action
against such employee, up to and including termination or b)
require that such employee satisfactorily participate in a drug
abuse assistance or rehabilitation program approved for such
purposes by a federal, state, or local health, law enforcement,
or other appropriate agency.
7. Make a good faith effort to maintain a drug free workplace
through the implementation of this provision.
C. The Company certifies and agrees that it will not engage in the unlawful
manufacture, distribution, dispensing, possession, or use of a
controlled substance in the performance of this Agreement.
SECTION III. ANTI-LOBBYING
A. The following definitions apply only to the provisions of this section.
1. "Agency," as used in this article, means executive agency as
defined in 48 C.F.R. Section 2.101.
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2. "Covered Federal Action," means any of the following Federal actions:
i. The awarding of any Federal contract.
ii. The making of any Federal grant.
iii. The making of any Federal loan.
iv. The entering into of any cooperative agreement.
v. The extension, continuation, renewal, amendment, or modification
of any Federal contract, grant, loan, or cooperative agreement.
3. "Indian Tribe" and "Tribal Organization", has the meaning provided in
section 4 of the Indian Self-Determination and Education Assistance Act
(25 U.S.C. section 450B) and includes Alaskan Natives.
4. "Influencing or attempting to influence," means making, with the intent
to influence, any communication to or appearance before an officer or
employee of any agency, a Member of Congress, an officer or employee of
Congress, or an employee of a Member of Congress in connection with any
covered Federal action.
5. "Local government," means a unit of government in a state and, if
chartered, established, or otherwise recognized by a state for the
performance of a governmental duty, including a local public authority,
a special district, an intrastate district, a council of governments, a
sponsor group representative organization, and any other instrumentality
of a local government.
6. "Officer or employee of an agency," includes the following individuals
who are employed by an agency:
i. An individual who is appointed to a position in the Government
under title 5, United States Code, including a position under a
temporary appointment.
ii. A member of the uniformed services, as defined in subsection
101(3), title 37, United States Code.
iii. A special Government employee, as defined in section 202, title
18, United States Code.
iv. An individual who is a member of a Federal advisory committee,
as defined by the Federal Advisory Committee Act, title 5,
United States Code, appendix.
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7. "Person," means an individual, corporation, company,
association, authority, firm, partnership, society, state, and
local government, regardless of whether such entity is
operated for profit, or not for profit. This term excludes an
Indian tribe, tribal organization, or any other Indian
organization with respect to expenditures specifically
permitted by other Federal law.
8. "Reasonable compensation," means, with respect to a regularly
employed officer or employee of any person, compensation that
is consistent with the normal compensation for such officer or
employee for work that is not furnished to, not funded by, or
not furnished in cooperation with the Federal Government.
9. "Reasonable payment," means, with respect to professional and
other technical services, a payment in an amount that is
consistent with the amount normally paid for such services in
the private sector.
10. "Recipient," includes the Company and all related Company
representatives. This term excludes an Indian tribe, tribal
organization, or any other Indian organization with respect to
expenditures specifically permitted by other Federal law.
11. "Regularly employed," means, with respect to an officer or
employee of a person requesting or receiving a federal
contract, an officer or employee who is employed by such
person for at least 130 working days within 1 year immediately
preceding the date of the submission that initiates agency
consideration of such person for receipt of such contract. An
officer or employee who is employed by such person for less
than 130 working days within 1 year immediately preceding the
date of the submission that initiates agency consideration of
such person shall be considered to be regularly employed as
soon as he or she is employed by such person for 130 working
days.
12. "State," means a state of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, a territory or
possession of the United States, an agency or instrumentality
of a state, and multi-state, regional, or interstate entity
having governmental duties and powers.
B. The definitions and prohibitions contained in the Federal Acquisition
Regulation, at 48 C.F.R. Section 52.203-12, Limitation on Payments to
Influence Certain Federal Transactions, are hereby incorporated by
reference herein.
C. The Company hereby certifies to the best of his or her knowledge and
belief that:
1. No federal appropriated funds have been paid or will be paid to
any person for influencing or attempting to influence an
officer or employee of any agency, a Member of Congress, an
officer or employee of Congress, or an employee of a Member of
Congress on his or her behalf in connection with the awarding
of any federal contract, the making of any federal grant, the
making of any federal loan, the entering into of any
cooperative agreement, and the extension, continuation,
renewal, amendment or modification of any federal contract,
grant, loan, or cooperative agreement;
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2. If any funds other than federal appropriated funds (including profit
or fee received under a covered federal transaction) have been paid,
or will be paid, to any person for influencing or attempting to
influence an officer or employee of any agency, a Member of Congress,
an officer or employee of Congress, or an employee of a Member of
Congress on his or her behalf in connection with this Agreement, the
Company shall complete and submit OMB standard form LLL, Disclosure of
Lobbying Activities, to the FCIC; and
3. The Company will include the language of this certification in all
subcontract awards at any tier and require that all recipients of
subcontract awards in excess of $100,000 shall certify and disclose
accordingly.
D. Submission of this certification and disclosure is a prerequisite for
making or entering into this Agreement as imposed by section 1352, title
31, United States Code. Any person who makes an expenditure prohibited
under this provision or who fails to file or amend the disclosure form to
be filed or amended by this provision, shall be subject to a civil penalty
of not less than $10,000, and not more than $100,000, for each such
failure.
E. The prohibitions contained in section 1352 of title 31, United States Code,
are incorporated by reference and prohibit a recipient of a federal
contract, grant, loan, or cooperative agreement from using appropriated
funds to pay any person for influencing or attempting to influence an
officer or employee of any agency, a Member of Congress, an officer or
employee of Congress, or an employee of a Memeber of Congress in connection
with any of the following covered federal actions: the awarding of any
federal contract; the making of any federal grant; the making of any
federal loan; the entering into of any cooperative agreement; or the
modification of any federal contract, grant, loan, or cooperative
agreement. The Company is also required to furnish a disclosure if any
funds other than federal appropriated funds (including profit or fee
received under a covered federal transaction) have been paid, or will be
paid, to any person for influencing or attempting to influence an officer
or employee of any agency, a Member of Congress, an officer or employee of
Congress, or an employee of a Member of Congress in connection with a
federal contract, grant, loan, or cooperative agreement.
F. The prohibitions of paragraph E do not apply under the following
conditions:
I. Agency and legislative liaison by own employees
a. The prohibition on the use of appropriated funds, does not apply
in the case of a payment of reasonable compensation made to an
officer or employee of a person requesting or receiving a
covered federal action if the payment is for agency and
legislative liaison activities not directly related to a covered
federal action.
b. Providing any information specifically requested by an agency or
Congress is permitted at any time.
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c. The following agency and legislative liaison activities are permitted at
any time where they are not related to a specific solicitation for any
covered federal action: (i) discussing with an agency the qualities and
characteristics (including individual demonstrations) of the person's
products or services, conditions or terms of sale, and service
capabilities; and (ii) technical discussions and other activities
regarding the application or adaptation of the person's products or
services for an agency's use.
d. The following agency and legislative liaison activities are permitted
where they are prior to formal solicitation of any covered federal
action: (i) providing any information not specifically requested but
necessary for an agency to make an informed decision about initiation of
a covered federal action; (ii) technical discussions regarding the
preparation of an unsolicited proposal prior to its official submission;
and (iii) capability presentations by persons seeking awards from an
agency pursuant to the provisions of the Small Business Act, as amended
by Pub. L. 95-507, and subsequent amendments.
e. Only those services expressly authorized by subparagraph F.1 are
permitted.
2. Professional and technical services
a. The prohibition on the use of appropriated funds, in paragraph F.1.a,
does not apply in the case of: (i) a payment of reasonable compensation
made to an officer or employee of a person requesting or receiving a
covered federal action or an extension, continuation, renewal,
amendment, or modification of a covered federal action, if payment is
for professional or technical services rendered directly in the
preparation, submission, or negotiation of any bid, proposal, or
application for that federal action or for meeting requirements imposed
by or pursuant to law as a condition for receiving that federal action;
(ii) any reasonable payment to a person other than an officer or
employee of a person requesting or receiving a covered federal action or
an extension, continuation, renewal, amendment, or modification of a
covered federal action, if the payment is for professional or technical
services rendered directly in the preparation, submission, or
negotiation of any bid, proposal, or application for that federal action
or for meeting requirements imposed by or pursuant to law as a condition
for receiving that federal action. Persons other than officers or
employees of a person requesting or receiving a covered federal action
include consultants and trade associations.
b. For purposes of the provisions of (i) of the preceding paragraph,
"professional and technical services" shall be limited to advice and
analysis directly applying any professional or technical discipline. For
example, drafting of a legal document accompanying a bid or proposal by
a lawyer is allowable. Similarly, technical advice provided by an
engineer on the performance or
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operational capability of a piece of equipment rendered directly
in the negotiation of a contract is allowable. However,
communications with the intent to influence made by a
professional (such as a licensed lawyer) or a technical person
(such as a licensed accountant) are not allowable under this
section unless they provide advice and analysis directly
applying their professional or technical expertise and unless
the advice or analysis is rendered directly and solely in the
preparation, submission, or negotiation of a covered federal
action. Thus, for example, communications with the intent to
influence made by a lawyer that do not provide legal advice or
analysis directly and solely related to the legal aspects of his
or her client's proposal, but generally advocate one proposal
over another are not allowable under this section because the
lawyer is not providing professional legal services. Similarly,
communications with the intent to influence made by an engineer
providing an engineering analysis prior to the preparation or
submission of a bid or proposal are nor allowable under this
section since the engineer is providing technical services but
not directly in the preparation, submission, or negotiation of a
covered federal action.
c. Requirements imposed by or pursuant to law as a condition for
receiving a covered federal award include those required by law
or regulation and any other requirements in the actual award
documents.
d. Only those services expressly authorized by paragraph F.2.a.(i)
are permitted under this article.
e. The reporting requirements of 48 C.F.R. Section 3.803(a) shall
not apply with respect to payments of reasonable compensation
made to regularly employed officers or employees of a person.
3. Disclosure
a. The Company shall file with FCIC a disclosure form, OMB Standard
Form LLL, Disclosure of Lobbying Activities, if such person has
made or has agreed to make any payment using non-appropriated
funds (to include profits from any covered federal action),
which would be prohibited, if paid for with appropriated funds.
b. The Company shall file a disclosure form at the end of each
calendar quarter in which there occurs any event that materially
affects the accuracy of the information contained in any
disclosure form previously filed by the Company under this
section. An event that materially affects the accuracy of the
information reported includes-i) A cumulative increase of
$25,000 or more in the amount paid or expected to be paid for
influencing or attempting to influence a covered federal action;
or ii) A change in the person or individual influencing or
attempting to influence a covered federal action; or iii) A
change in the officer, employee, or Member contracted to
influence or attempt to influence a covered federal action.
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c. The Company shall require the submittal of a certification, and
if required, a disclosure form by any person who requests or
received any subcontract exceeding $100,000 under the federal
contract.
d. All subcontractor disclosure forms (but not certifications)
shall be forwarded from tier to tier until received by the
Company. The Company shall submit all disclosures to FCIC at the
end of the calendar quarter in which the disclosure form is
submitted by the subcontractor. Each subcontractor certification
shall be retained in the subcontract file of the Company.
4. Agreement. The Company agrees not to make any payment prohibited by
this Agreement.
5. Cost allocability. Nothing in this section makes allowable or
reasonable any costs which would otherwise be unallowable or
unreasonable. Conversely, costs made specifically unallowable by the
requirements in this section will not be made allowable under any other
provision.
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APPENDIX 2
PLAN OF OPERATION
STANDARD REINSURANCE AGREEMENT
REINSURANCE YEAR BEGINNING JULY 1, 1994
The Plan of Operation (Plan) is specified in the Standard Reinsurance Agreement
between the Federal Crop Insurance Corporation (FCIC) and the Company. This
Plan must contain the information requested herein and the Company must provide
its certification as to the accuracy and completeness of the Plan. The Plan
will be used by FCIC to determine the Company's qualifications for
participation in this reinsurance program. The Plan will be incorporated into
and become part of the Standard Reinsurance Agreement.
The Company must file a new Plan for each subsequent reinsurance year. Failure
by the Company to file a Plan for any subsequent reinsurance year will result
in the suspension of the Company's authority to issue or renew eligible crop
insurance contracts for subsidy or reinsurance by FCIC.
Any changes in the Plan must be reported by the Company to FCIC within fifteen
days from the date of the change. Information, documents, exhibits, or forms,
are to be numbered in the Plan of Operation to correspond with the paragraphs
herein to which they pertain. The information required is:
1. The name, address, phone number, and tax identification number of the
Company.
2. The names, addresses, and tax identification numbers of all other
insurance companies who will issue eligible crop insurance contracts
that are reinsured or insured by the Company.
3. The names, phone numbers, and addresses of a managing general agency,
or any other organization or established place of business, except as
listed in item 1 and 2 above, which is responsible for producing and
electronically processing any multiple peril crop insurance business
under this Agreement. Specify in what capacity each organization listed
will act on behalf of the Company. Organizational charts with
supervisory lines of authority for the managing general agency only.
4. If applicable, a letter of confirming authority from an officer of the
Company as listed in the Company's Annual Statement filed with any
state, authorizing and empowering a managing general agency or general
agency to secure insurance liability on behalf of the Company in
producing multiple peril crop insurance business.
5. The names, titles, addresses, and telephone numbers of at least two
persons designated by the Company as managers of the multiple peril crop
insurance program. Each person will act as liaison or contact for the
Company to the FCIC regarding this Agreement.
6. The addresses and telephone numbers of each regional office, general
agency, service center, or any other Company designated office other
than the Company's or managing general agency's home office.
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a. The identity of each regional office, general agency, service
center, and other Company designated office, which will retain
original insurance documents relative to policyholder servicing,
(i.e. applications, acreage reports, summaries of coverage,
proofs of loss and similar documents), and including the names
of the office managers and the identity of the states serviced.
b. The identity of the field or regional offices, general agencies,
service centers, or other Company designated office which will
key-punch, submit on data disk or tape, or electronically
process original insurance documents relative to policyholder
servicing, (i.e. applications, acreage reports, summaries of
coverage, proofs of loss and similar documents), including the
names of the office managers and the states serviced. (If
identical to 6. a., so state.)
c. The types of insurance documents key-punched, submitted on data
disk or tape, or electronically processed by each organization
indicated in items 6.a. and b.
d. The Company is required to provide FCIC access to Agent and Loss
Adjuster Identification Data maintained by the Company for the
purposes of issuing Agent Directory information, and a source
for agent and loss adjuster codes verification. This data shall
be provided in accordance with Manual 13.
7. The names and addresses of organizations other than the Company that
will provide the following services for the multiple peril crop
insurance programs of the Company.
a. Administration of rates and development of policies and forms.
b. Preparation of statistical data for transmission to FCIC.
c. Providing of training for loss adjusters.
d. Providing of training for sales personnel.
e. Issuance of FCIC approved policies and procedures.
8. All state licenses held by the Company and its policy issuing companies
under the insurance laws or regulations of any state or Insurance
Department of the state in which the Company produces its book of
business including, but not limited to, the date each license was issued
and its expiration date or renewal date. (If the license is considered
"perpetual", without renewal, this must be indicated.)
9. The Company's most recent annual and quarterly statement filed with the
Insurance Department for the state in which the Company is domiciled and
a copy of any report on internal controls or management recommendations
received from independent auditors. Statutory Management Discussion and
Analysis; most recent State Insurance Department Examination Report;
Actuarial Opinion of Reserves; Annual GAAP Statement or Form 10K (if
applicable); and the Audited Annual Report to Shareholders; and any
other information determined necessary by FCIC.
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10. The Company's eleven current financial ratios defined in the National
Association of Insurance Commissioners Insurance Regulatory Information
System (IRIS) as required by FCIC.
11. The maximum reinsurable premium volume for the reinsurance year.
(This may be more than the total provided in Item 12).
12. An estimate (Exhibit 12) of the multiple peril crop insurance net book
premium to be designated in each fund within each state for the
reinsurance year.
13. A declaration (Exhibit 13) of the percent of the net book premiums and
associated liability for ultimate net losses the Company will retain in
the Commercial Fund within each state.
14. A declaration (Exhibit 14) of the percent of net book premiums and
associated liability for ultimate net losses the Company will retain in
the Developmental Fund within each state. In addition, a declaration of
the net book premiums and associated liability for ultimate net losses
designated to the Developmental Fund by Crop or County within each
state.
15. A declaration as to the Company's intention to participate in the
Assigned Risk Fund within the limits outlined in Exhibit 15, Maximum
Cessions to Assigned Risk Fund.
16. The name and address of the Company or general agency and the bank that
will make electronic fund transfer (EFT) payments to FCIC for the
Company.
17. The name and address of the organization to whom payments from FCIC
should be remitted for amounts due on Monthly and Annual Summary
reports.
18. A declaration as to the Company's intention to use the Escrow
Agreement if reimbursements by FCIC for losses paid by the Company will
be made through the procedures covered by the Escrow Agreement. If
applicable, complete and attach Exhibit 27, Escrow
Agreement/Arrangement.
19. A declaration as to the Company's intention to place a portion of its
net (after FCIC reinsurance) multiple peril crop insurance liability in
the commercial reinsurance market. The following information is required
by January 31 each reinsurance year:
a. The name and principal of each commercial reinsurer.
b. A copy of the reinsurance treaties issued to the Company by the
principal reinsurers which outline the description of
reinsurance including type, attachment points and limits,
aggregate limits, minimum deposit, and variable premium rates.
c. The subscription of each reinsurer to each such treaty, or
reinsurance binder for each the reinsurer, the intermediaries,
or brokers of reinsurance.
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20. The Company must report their allowable MPCI expenses (Exhibit 20A) using
the National Association of Insurance Commissioners (NAIC) allocation
methods contained in the most recent Financial Condition Examiners Handbook
(Handbook), Uniform Accounting Section, Parts II through V.
Exhibit 20A. - Listing of Allowable Expenses.
Exhibit 20B. - NAIC Insurance Expense Exhibit (IEE), Part I, Allocation to
Expense Groups. MPCI expenses are to be shown before FCIC reimbursement by
expense group and classification. FCIC expense and tax reimbursement should
be shown on line 21. Miscellaneous Operating Expenses.
Exhibit 20C. - NAIC Insurance Expense Exhibit (IEE), Part 2, Allocation to
Lines of Business Net of Reinsurance. MPCI expenses are to be shown before
FCIC reimbursement net of commercial reinsurance, FCIC expense and tax
reimbursement shown on line 31, Aggregate Write-ins for Other Lines of
Business.
Exhibit 20D. - NAIC Insurance Expense Exhibit (IEE), Part 3, Allocation to
Lines of Direct Business Written. MPCI expenses are to be shown before FCIC
reimbursement. FCIC expense and tax reimbursement shown on line 31,
Aggregate Write-ins for Other Lines of Business.
21. The quality control (self-audit) plan which includes a copy of the
procedures and standards developed by the Company, or its service
organization and adopted by the Company as its quality control (self-audit)
procedure. This plan must meet the guidelines and expectations of FCIC
required by Manual 14. The quality control (self-audit) plan must include
the monitoring of producer certification, Company determination and
verification of yield data, or other information used to establish
insurance guarantees that meets the guidelines contained in Manual 14.
22. The training plan which includes an outline of the training programs
utilized by the Company to evaluate the knowledge and competency of sales
and loss adjustment personnel. This plan must meet the guidelines required
by Manual 14.
NOTE: Each assurance statement referenced in items 23 - 26 below must be
signed by the same officer of the Company accepting this Agreement and who
has signed for the Company on page 23 of the Agreement.
23. The Company must submit in accordance with section I. of Appendix I, its
assurance statement regarding procurement integrity. The statement must
provide FICC the assurance that requirements under this section are met.
24. The Company must submit in accordance with section II. of Appendix I, its
assurance statement regarding a drug free workplace. The assurance
statement should include an outline of the Company's procedure to ensure
that requirements of this section are met.
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25. The Company must submit in accordance with section III. of Appendix I, its
assurance statement regarding anti-lobbying. OMB Form LLL, Disclosure of
Lobbying Activities, (Exhibit 28), if applicable, must be filed with FCIC
in accordance with this section.
26. The Company must submit in accordance with section VI. of Appendix I, its
assurance statement regarding discrimination. The assurance statement must
meet the requirements contained in Manual 14.
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FIFTH THIRD BANK EXHIBIT 10.28
October 4, 1996
Mr. Douglas H. Symons, President
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, IN 46205
Dear Doug:
The purpose of this letter is to offer a proposal for the consideration of
Symons International Group, Inc. (the "Company", "Symons" or Guarantor"). In
light of the anticipated initial public offering of approximately three million
shares of Company stock within the next month or so, Fifth Third Bank of
Central Indiana ("Fifth Third" or the "Bank") is prepared to consider funding
individual shareholder loans for up to 100% of the cost of shares which may be
purchased by certain executives of the Company. Per our earlier conversation, it
was indicated that approximately 150,000 of the newly issued shares are to be
reserved for anticipated purchases by key members of management. Subject to a
complete review and concurrence by our legal counsel, we would anticipate
structuring the loans according to the following guidelines or conditions
(documentation details will need to be addressed over the next few weeks):
1. Each qualifying (per Symons) member of management ("Borrower") desiring to
purchase shares would provide the Bank with, at least, a current financial
statement indicating all assets personally owned, and annual income available
to cover required Bank debt service payments. The Bank will apply normal loan
underwriting standards to each individual stock loan purchase request, and
reserves the right to decline any request, regardless of the Symons guaranty,
if there is a blemished credit history or the individual appears unable to
cover required debt service. The minimum and maximum aggregate loan amounts the
Bank will consider for any individual are $25,000 and $400,000, respectively.
2. In order to consummate each executive stock purchase, Fifth Third would
structure two promissory notes. Both notes would be secured and supported by a
guaranty of repayment of 100% of the aggregate principal amount, including any
unpaid accrued interest, executed by Symons International Group, Inc., in favor
of the Bank.
3. One note would cover an advance of 50% of the principal required to effect
said stock purchase on or after the offering date secured by 100% of the
shares of Company stock purchased. This loan would be in conformity with the
requirements of Federal Reserve Regulation "U", covering loans secured by
Margin Stock. Fifth Third would then structure another unsecured note, funding
the remaining 50% of principal required to effect said stock purchase.
4. All individual loans would be evidenced by promissory notes with a maturity
of one year or less and require only the payment of accrued interest on a
monthly basis. In no event will the maturity date extend past September 30th of
the following year (see paragraph number 6 below). The interest rate for each
loan would be the Bank's floating Prime Rate, plus 50 basis points (one-half of
one percent). Total aggregate loan principal would be limited to the product of
the number of shares purchased, times the market price per share. Other fees or
costs related to the purchase (legal, brokerage, etc.), if any, would be borne
by the Borrower(s).
5. If any of the personal loans referenced above were to be in default of
required payments due to the Bank for a period in excess of 30 days, Fifth
Third would require the Guarantor to immediately repay to the Bank the
principal balance due on said note(s), plus any accrued and unpaid interest.
The Company would then be in a position to receive a direct assignment of any
and all interest the Bank had in the note(s) and any collateral securing the
note(s).
6. As mentioned above, all personal loans to executives would be booked on
notes maturing on September 30th of each ensuing year, and any renewals or
extensions thereof would be at the Bank's sole discretion. This annual renewal
cycle
Fifth Third Bank of Central Indiana
251 N. Illinois Street - Suite 1000 - Indianapolis, Indiana 48204
(317)383-2300
<PAGE> 2
would permit the Bank the opportunity to receive updated annual personal
financial information for each Borrower. It will also afford us the opportunity
to review the performances of Symons International Group, Inc. in order to
accurately assess the strength and value of the ongoing corporate guaranty of
said individual loans. If the Bank, in its sole discretion, deems itself
insecure, taking into account the financial condition of the Borrower(s) or the
Guarantor, the potential erosion of market value of the stock used as
collateral for the secured loan(s), erosion of the A.M. Best ratings of the
Guarantor's subsidiary insurance companies, or any other relevant factors, it
may chose not to renew any or all of the individual loans for an additional
year. If the Bank exercises its right not to review the loans, the Guarantor
will be advised no later than by June 30th of each year, so other arrangements
can be made to refinance the individual loans with sufficient advance warning.
In addition, if there is any breach of conditions or requirements outlined in
this proposal (an Event of Default), or if a material adverse change in the
financial condition of the Guarantor were to occur, the Bank would have the
right to demand immediate repayment of any and all individual loans guaranteed
by the Company within 30 days of receipt of written notice by the Bank. Unless
mutual agreement is reached in advance between the Borrower(s) and the Bank,
individual loans would have to be immediately repaid in full (or refinanced
with another institution) in the event of termination, retirement or
resignation from the Company.
7. Fifth Third would contemplate entering into such a financing arrangement
only if there is reasonable anticipation that it would be in a position to
provide other ancillary services to the Guarantor (such as operating accounts or
Trust/Investment services), commencing within the next three to six months. We
are a full-service institution and typically do not enter into corporate banking
relationships based solely upon credit accommodations.
8. If any individual Borrower(s), in conjunction with the Bank, determine
that there are other personal assets available to adequately secure loans to
purchase shares of Company stock, such that the Guarantor's support would not
be required, those determinations would be made on a case-by-case basis.
Otherwise, we would require each secured individual loan to be collateralized
by 100% of the Company's stock purchased, in addition to the Guarantor's 100%
coverage of principal and accrued interest on all personal loans to purchase
stock secured or unsecured.
9. Guarantor will provide the Bank with any and all applicable 10-K
Reports, annual GAAP and Statutory financial statements for itself and its
subsidiaries by April 30th of each year, all reports required by the SEC, and
applicable 10Q, GAAP quarterly and Statutory reports within 45 days after the
end of each fiscal quarter. Any changes (positive or negative) in any A.M. Best
Ratings for subsidiaries will be communicated to the Bank immediately.
This proposal is not a commitment to lend, but rather a sincere expression of
our desire to establish a relationship with Symons International Group, Inc. By
acceptance of this proposal, you acknowledge that this letter is being issued
at a time when we have not received formal approval to issue a firm commitment
letter. As a result of further investigation and analysis by us and our legal
counsel, information of which we are not currently aware may be revealed and/or
certain impediments to closing may come to our attention. Our commitment would
be subject to formal Loan Committee approval and execution of loan documents
satisfactory to both parties. Please acknowledge your acceptance by signing in
the spaces provided below, and returning a copy of this letter to my attention
before October 25, 1996, when this proposal will expire.
Sincerely,
Jonathan O. Speers
Vice President
Agreed to and accepted this 24th day of October, 1996
SYMONS INTERNATIONAL GROUP, INC.
<TABLE>
<S><C>
By: /s/ Samuel L. Bates /s/ David Bates Vice President & General Counsel
------------------------ --------------------------------------------
(Signature of authorized (Printed name and title)
Officer)
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-09129) of our report dated March 18, 1996, except for Note 1.a.;
the second, third and fourth paragraphs in Note 6; and Note 18, as to which the
date is July 29, 1996, and except for the third paragraph of Note 1.m., as to
which the date is October 21, 1996, and our report dated June 14, 1996, on our
audits of the consolidated financial statements and consolidated financial
statement schedules of Symons International Group, Inc. and Superior Insurance
Company, Inc., respectively. We also consent to the reference to our firm under
the captions "Selected Financial Data" and "Experts."
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
October 28, 1996
