<PAGE> 1
REGISTRATION NO. 333-9129
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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)
<TABLE>
<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.)
</TABLE>
<TABLE>
<S> <C>
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:
<TABLE>
<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
<TABLE>
<CAPTION>
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
- ---------------------------------------------------------- ---------------------------------
<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 SEPTEMBER 24, 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
<TABLE>
<CAPTION>
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
<S> <C> <C> <C>
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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 $ .
(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
SYMONS INTERNATIONAL
______GROUP, INC. FUNDS AFFILIATED WITH
| ("SIG" OR THE "COMPANY")(1) GOLDMAN, SACHS & CO.
| | ("GS FUNDS")(2)
| | |
|100% |52% |48%
IGF HOOLDINGS, INC. GGS MANAGEMENT |
("IGF HOLDINGS") HOLDINGS, INC.______________|
| ("GGS HOLDINGS")
| |
100% | |100%
| |
IGF INSURANCE |
COMPANY ("IGF") GGS MANAGEMENT, INC.
("GGS MANAGEMENT")
|
|
___________________|________
| |
| 100% | 100%
PAFCO GENERAL SUPERIOR INSURANCE COMPANY
INSURANCE COMPANY ("PAFCO") ("SUPERIOR")
|
|
|
__________|_________
| |
| 100% | 100%
SUPERIOR AMERICAN SUPERIOR GUARANTY
INSURANCE COMPANY INSURANCE COMPANY
Nonstandard Auto Insurance
Crop Insurance
- -------------------------
(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 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.
THE OFFERING
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<S> <C>
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>
- -------------------------
(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. See "Management -- Executive Compensation -- Employment
Contracts and Termination of Employment -- IGF" and "-- Stock Option Plans
-- SIG 1996 Stock Option Plan."
5
<PAGE> 8
SUMMARY COMPANY CONSOLIDATED FINANCIAL DATA
<TABLE>
<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 10,196 7,000 7,000 10,196
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
$3,300,000 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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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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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> 12
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 and meet the other related standards established by
insurance regulatory authorities and insurance rating bureaus.
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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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> 14
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."
14
<PAGE> 17
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
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.
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.
15
<PAGE> 18
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."
16
<PAGE> 19
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."
17
<PAGE> 20
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.
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. GGS Management funded the
purchase price 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 (the "GGS Senior Credit Facility"). 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
18
<PAGE> 21
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"). 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 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").
19
<PAGE> 22
USE OF PROCEEDS
Based on an estimated offering price of $11.00 per share and estimated
offering expenses of $3.3 million, the net proceeds to the Company of the
Offering are estimated to be approximately $29.7 million (approximately $34.3
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. 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.
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."
20
<PAGE> 23
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.
21
<PAGE> 24
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 37,209
Unrealized gain on investments.................................. 484 484
Retained earnings............................................... 9,754 7,601
------- --------
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. See "Management -- Executive Compensation -- Employment
Contracts and Termination of Employment -- IGF" and "-- Stock Option Plans
-- SIG 1996 Stock Option Plan."
22
<PAGE> 25
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 3,196L 10,196
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.
23
<PAGE> 26
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 3,196L 10,196
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.
24
<PAGE> 27
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.
25
<PAGE> 28
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>
26
<PAGE> 29
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 195,727 shares for the $2.2 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.
27
<PAGE> 30
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 10,196 7,000 7,000 10,196
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)
28
<PAGE> 31
<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 $3,300,000 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."
29
<PAGE> 32
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,
30
<PAGE> 33
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
31
<PAGE> 34
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> 35
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> 36
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> 37
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 will also be
affected by the savings on the cost of reinsurance and by the investment income
from potential increases in invested assets. 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.
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
35
<PAGE> 38
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.
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
36
<PAGE> 39
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.
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 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
37
<PAGE> 40
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.
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.
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<PAGE> 41
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.
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
44.3%, 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."
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
39
<PAGE> 42
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.
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. 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
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<PAGE> 43
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 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. 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 the Company anticipates that the holding company will have sufficient
funds to meet operating expenses and debt service requirements at the holding
company level, there can be no assurance given the
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<PAGE> 44
various restrictions and uncertainties related to the payment of dividends and
fees by its Subsidiaries that liquidity will be sufficient beyond the next
twelve months. Liquidity constraints may also 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.
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.
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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, 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.
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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> <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.
44
<PAGE> 47
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.
45
<PAGE> 48
On April 30, 1996, Superior was acquired by GGS Holdings. 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."
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.
46
<PAGE> 49
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.
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.
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.
47
<PAGE> 50
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.
48
<PAGE> 51
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 $28.6 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
49
<PAGE> 52
risks 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 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.
50
<PAGE> 53
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 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>
COMBINED
COMPANY SUPERIOR COMPANY AND SUPERIOR
-------------------------------------- ---------------------------------------- -----------------------------------------
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 1993 1994 1995 1996
------- ------- ------- -------- -------- -------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATE
Arkansas... $ 1,497 $ 1,619 $ 1,796 $ 1,286 -- -- -- $ 1,497 $ 1,619 $ 1,796 $ 1,286
California... -- -- -- -- $ 13,132 $ 13,422 $15,350 $ 9,561 13,132 13,422 15,350 9,561
Colorado... 9,634 5,629 9,257 5,572 -- -- -- -- 9,634 5,629 9,257 5,572
Florida... -- -- -- -- 49,262 55,282 54,535 39,126 49,262 55,282 54,535 39,126
Georgia... -- -- -- -- 6,149 7,342 5,927 3,707 6,149 7,342 5,927 3,707
Illinois... -- -- 80 534 3,906 3,894 2,403 851 3,906 3,894 2,483 1,385
Indiana... 16,559 13,648 13,710 9,087 57 414 132 -- 16,616 14,062 13,842 9,087
Iowa... 5,239 3,769 3,832 2,873 -- -- -- -- 5,239 3,769 3,832 2,873
Kentucky... 6,093 9,573 7,840 5,790 -- -- -- -- 6,093 9,573 7,840 5,790
Mississippi... -- -- -- -- 5,526 4,411 2,721 1,010 5,526 4,411 2,721 1,010
Missouri... 10,766 8,163 8,513 8,120 -- -- -- -- 10,766 8,163 8,513 8,120
Nebraska... 2,399 3,192 3,660 2,627 -- -- -- -- 2,399 3,192 3,660 2,627
Ohio... -- -- -- -- 7,312 4,325 3,164 1,639 7,312 4,325 3,164 1,639
Oklahoma... -- -- 317 1,199 -- -- -- -- -- -- 317 1,199
Tennessee... -- -- -- -- 891 1,829 332 (2) 891 1,829 332 (2)
Texas... -- -- -- -- 19,318 10,660 3,464 4,774 19,318 10,660 3,464 4,774
Virginia... -- -- -- -- 8,748 7,500 5,035 8,370 8,748 7,500 5,035 8,370
Washington... -- -- -- -- 1,359 3,827 1,693 83 1,359 3,827 1,693 83
------- ------- ------- ------- -------- -------- ------- ------- -------- -------- -------- --------
Totals... $52,187 $45,593 $49,005 $ 37,088 $115,660 $112,906 $94,756 $ 69,119 $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
51
<PAGE> 54
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.
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.
52
<PAGE> 55
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 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
53
<PAGE> 56
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 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
54
<PAGE> 57
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); 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
55
<PAGE> 58
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.
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.
56
<PAGE> 59
- 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.
- 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
57
<PAGE> 60
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 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.
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<PAGE> 61
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. The Company does not utilize its own resources to
pay MPCI or CAT losses. 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 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.
59
<PAGE> 62
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.
60
<PAGE> 63
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
61
<PAGE> 64
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 457
Scandinavian Reinsurance Company Ltd........................... A+(5) --(6)
</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) An A.M. Best rating of "A+" is the second highest of 15 ratings.
(6) 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.
62
<PAGE> 65
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
63
<PAGE> 66
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.
64
<PAGE> 67
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
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<PAGE> 68
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
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<PAGE> 69
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.
67
<PAGE> 70
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.
68
<PAGE> 71
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.
69
<PAGE> 72
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.
70
<PAGE> 73
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.
71
<PAGE> 74
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,
72
<PAGE> 75
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
73
<PAGE> 76
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> 77
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
75
<PAGE> 78
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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<PAGE> 79
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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<PAGE> 80
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.
<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 Executive
Officer of Superior since 1996. Prior to becoming the President and Chief
Executive Officer of
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<PAGE> 81
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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<PAGE> 82
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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<PAGE> 83
- -------------------------
(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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<PAGE> 84
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. Presently, there are no outstanding options to
acquire shares of Common Stock of the Company. The Company intends to adopt, and
Goran as the sole shareholder is expected to approve, the Company's 1996 Stock
Option Plan (the "Stock Option Plan"), which will contain provisions similar to
the provisions of the Share Option Plan of Goran. A total of 1,000,000 shares of
Common Stock has been reserved for issuance under the Stock Option Plan.
The Stock Option Plan authorizes the granting of (i) both incentive stock
options and non-qualified stock options to officers and other key employees of
the Company and its subsidiaries, and (ii) non-qualified stock options to
non-employee directors of the Company ("Outside Directors").
Stock option grants will provide the opportunity for officers and key
employees of the Company 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 period as shall be fixed by
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<PAGE> 85
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 each annual meeting of the Company's shareholders. The
exercise price of the non-qualified stock options so granted to Outside
Directors shall be the average of the high and low prices of the Common Stock as
traded on the Nasdaq National Market on the date of grant (or, if the date of
grant is not a trading date, then on the next succeeding trade date). 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. The provisions of the Stock Option Plan applicable to the administration,
construction or interpretation of options granted to Outside Directors shall be
administered, construed and interpreted by those members of the Company's Board
of Directors who are not Outside Directors (the "Inside Directors").
The Stock Option Plan provides that, in the event of any reorganization,
recapitalization, stock split, stock dividend, or other capital change, the
Compensation Committee and the Inside Directors, as appropriate, are empowered
to determine what changes, if any, are appropriate in the option price of, and
the number and kind of shares covered by, outstanding options granted
thereunder. For the most part, an option 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. If an employee optionee ceases to be an employee of the
Company, 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 three 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, as long as
the option is exercised within ten years of its date of grant.
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 between 1%
to 15% 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.
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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.
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
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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 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
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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 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. Torrence 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.
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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 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.
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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.
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
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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 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.
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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, 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
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<PAGE> 93
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.
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
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<PAGE> 94
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.
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 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"). 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
will have 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").
Goran will be entitled to an unlimited number of Demand Registrations,
provided that each Demand Registration is for a number of shares of Common Stock
exceeding 10% of the number of shares of Common Stock outstanding at the time
Goran requires the Demand Registration or Goran owns less than 10% of the number
of shares of Common Stock outstanding at the time it requires a Demand
Registration (unless the Company has been eligible to utilize a simplified form
of registration statement), and an unlimited number of
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<PAGE> 95
Piggyback Registrations. The registration rights will be assignable in whole or
in part. Generally, the Company will be required to file a registration
statement within 30 days of a request by Goran; however, the Company may defer
compliance with any Demand Registration request for up to 120 days if, in the
good faith judgment of its Board of Directors, the filing of a registration
statement would be seriously detrimental to the Company and its shareholders.
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 its pro rata
share of such expenses in excess of $100,000 in connection with any Piggyback
Registration. Goran will also bear all fees and expenses of its counsel and all
underwriting discounts and selling commissions applicable to its sales.
The Company and Goran will 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.
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.
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.
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
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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 1995 was $1,355,335. 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.
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.
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<PAGE> 99
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%.
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<PAGE> 100
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.
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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
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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
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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.
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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, 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.
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 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
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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.
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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
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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.
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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
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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
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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.
108
<PAGE> 111
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.
109
<PAGE> 112
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.
110
<PAGE> 113
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-26
SUPERIOR INSURANCE COMPANY AND SUBSIDIARIES
Report of Independent Accountants............................................... F-27
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996....................................................................... F-28
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-29
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-30
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-31
Notes to Consolidated Financial Statements...................................... F-32-F-44
</TABLE>
F-1
<PAGE> 114
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholder 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.
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
F-2
<PAGE> 115
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> 116
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
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(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> 117
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
------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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> 118
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
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(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> 119
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:
- GGS Management Holdings, Inc. ("GGSH") -- a holding company for GGS
Management, Inc.
- GGS Management, Inc. ("GGS") -- a holding company for the nonstandard
automobile operations which include PGIC, PPFC and Superior entities.
- 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 May 1, 1996, the Company 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> 120
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> 121
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> 122
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.
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.
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.
F-10
<PAGE> 123
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
======= ==== ======= =======
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.
F-11
<PAGE> 124
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED):
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>
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>
F-12
<PAGE> 125
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENTS (CONTINUED):
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.
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>
F-13
<PAGE> 126
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-14
<PAGE> 127
SYMONS INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT AND NOTES PAYABLE AND TERM DEBT (CONTINUED):
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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 May 1, 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> 137
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> 138
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.
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>
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-26
<PAGE> 139
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.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
June 14, 1996
F-27
<PAGE> 140
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,
---------------------
1994 1995
-------- --------
JUNE 30,
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-28
<PAGE> 141
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
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(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-29
<PAGE> 142
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
------ ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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-30
<PAGE> 143
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
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(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-31
<PAGE> 144
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-32
<PAGE> 145
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-33
<PAGE> 146
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-34
<PAGE> 147
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-35
<PAGE> 148
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-36
<PAGE> 149
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>
1995
1994 ------------------
-------------------- ESTIMATED
AMORTIZED ESTIMATED AMORTIZED 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-37
<PAGE> 150
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-38
<PAGE> 151
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 December 31, 1994 and 1992 liabilities,
respectively, emerged in the following year. 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 December 31, 1993 liability emerged in the
following year. 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-39
<PAGE> 152
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-40
<PAGE> 153
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-41
<PAGE> 154
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-42
<PAGE> 155
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-43
<PAGE> 156
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 May 1, 1996, the Symons International Group Incorporated 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.
In connection with the above transaction, 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.
F-44
<PAGE> 157
- ---------------------------------------------------------
- ---------------------------------------------------------
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................................ 7
The Company................................. 18
Use of Proceeds............................. 20
Dividend Policy............................. 20
Dilution.................................... 21
Capitalization.............................. 22
Unaudited Pro Forma Consolidated Statements
of Operations............................. 23
Selected Consolidated Historical Financial
Data of Symons International Group,
Inc....................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of the Company................. 30
Selected Consolidated Historical Financial
Data of Superior Insurance Company........ 44
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Superior.................... 45
Business.................................... 49
Management.................................. 78
Certain Relationships and Related
Transactions.............................. 86
Securities Ownership of Management and
Goran..................................... 96
Description of Capital Stock................ 98
Shares Eligible for Future Sale............. 100
Underwriting................................ 101
Legal Matters............................... 102
Experts..................................... 102
Available Information....................... 103
Glossary of Selected Insurance and Certain
Defined Terms............................. 104
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> 158
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.................................. 450,000
Transfer Agent Fee................................................
Printing and engraving costs......................................
Postage...........................................................
Other expenses....................................................
-------
TOTAL(2)................................................ $
=======
</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> 159
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:
<TABLE>
<S> <C> <C>
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
</TABLE>
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> 160
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 New York, State of New
York, on September 23, 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>
September 23, 1996
<PAGE> 161
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.
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
March 18, 1996
S-4
<PAGE> 162
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> 163
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> 164
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> 165
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> 166
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> 167
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> 168
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> 169
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> 170
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
</TABLE>
<TABLE>
<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............. -----
</TABLE>
E-1
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
10.10(4) Commercial Pledge and Security Agreement between IGF Holdings, Inc. and
Union Federal Savings Bank of Indianapolis dated April 29, 1996............. -----
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 .......................................................
**
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 ................................................
**
10.16(2) Employment Agreement between GGS Management Holdings, Inc. and Douglas H.
Symons dated ................................................
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 .........................................
**
10.19 Employment Agreement between Goran Capital, Inc. and Gary P. Hutchcraft
dated .......................................................
**
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.............................
**
10.27 Reinsurance Agreements by and between Registrant and Affiliates.............
</TABLE>
E-2
<PAGE> 172
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ---------------------------------------------------------------------------- -----
<C> <S> <C>
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 1
DRAFT
9/6/93
3,000,000 SHARES
(PLUS 450,000 SHARES TO COVER OVERALLOTMENTS, IF ANY)
SYMONS INTERNATIONAL GROUP, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________ __, 1996
ADVEST, INC.
MESIROW FINANCIAL, INC.
As Representatives (the "Representatives")
of the Several Underwriters
Named in Schedule I Hereto
c/o Advest, Inc.
90 State House Square
Hartford, CT 06103
Dear Sirs:
Symons International Group, Inc., an Indiana corporation (the
"Company") and a wholly owned subsidiary of Goran Capital Inc., a Canadian
federally chartered corporation ("Parent"), proposes, subject to the terms and
conditions stated herein, to sell to the Underwriters (the "Underwriters")
named in Schedule I hereto an aggregate of Three Million (3,000,000) shares
(the "Company Shares") of the Company's Common Stock, no par value ("Common
Stock").
In addition, in order to cover overallotments in the sale of the
Company Shares, the Underwriters may, at the Underwriters' election and subject
to the terms and conditions stated herein, purchase ratably in proportion to
the amounts set forth opposite their respective names in Schedule I hereto, up
to Four Hundred Fifty Thousand (450,000) additional shares of Common Stock from
the Company (such additional shares of Common Stock, the "Optional Shares").
The Company Shares and the Optional Shares are referred to collectively herein
as the "Shares."
Each of the Company and Parent, intending to be legally bound,
hereby confirms its agreement with the Underwriters as follows:
1. Representations and Warranties of the Company and Parent.
(a) Each of the Company and Parent, and each of the subsidiaries
of the Company listed in Exhibit A hereto, to the
<PAGE> 2
extent that the following representations and warranties relate directly to any
or all of such subsidiaries, jointly and severally represent and warrant to,
and agree with, each of the Underwriters that:
(i) A registration statement on Form S-1
(File No. 333-09129) with respect to the Shares, including a prospectus
subject to completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), and one or more amendments to such registration statement
may have been so filed. After the execution of this Agreement, the Company
will file with the Commission either (A) if such registration statement, as it
may have been amended, has become effective under the Act and information has
been omitted therefrom in accordance with Rule 430A under the Act, a prospectus
in the form most recently included in an amendment to such registration
statement (or, if no such amendment shall have been filed, in such registration
statement) with such changes or insertions as are required by Rule 430A or
permitted by Rule 424(b) under the Act and as have been provided to and
approved by the Representatives, or (B) if such registration statement, as it
may have been amended, has not become effective under the Act, an amendment to
such registration statement, including a form of prospectus, a copy of which
amendment has been provided to and approved by the Representatives prior to the
execution of this Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when it
was or is declared effective, including (i) all financial statements, schedules
and exhibits thereto, (ii) all documents (or portions thereof) incorporated by
reference therein, and (iii) any information omitted therefrom pursuant to Rule
430A under the Act and included in the Prospectus (as hereinafter defined); the
term "Preliminary Prospectus" means each prospectus subject to completion
included in such registration statement or any amendment or post-effective
amendment thereto (including the prospectus subject to completion, if any,
included in the Registration Statement at the time it was or is declared
effective), including all documents (or portions thereof) incorporated by
reference therein; and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus
is required to be so filed, such term means the prospectus included in the
Registration Statement, in either case, including all documents (or portions
thereof) incorporated by reference therein. As used herein, any reference to
any statement or information as being "made," "included," "contained,"
"disclosed" or "set forth" in any Preliminary Prospectus, a Prospectus or any
amendment or supplement thereto, or the Registration Statement or any amendment
thereto (or other similar references) shall refer both to information and
statements actually appearing in such document as well as information and
statements incorporated by reference therein.
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(ii) No order preventing or suspending
the use of any Preliminary Prospectus has been issued and no proceeding for
that purpose has been instituted or threatened by the Commission or the
securities authority of any state or other jurisdiction. If the Registration
Statement has become effective under the Act, no stop order suspending the
effectiveness of the Registration Statement or any part thereof has been issued
and no proceeding for that purpose has been instituted or threatened or, to the
best knowledge of the Company, contemplated by the Commission or the securities
authority of any state or other jurisdiction.
(iii) When any Preliminary Prospectus was
filed with the Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, and at each Time of Delivery (as hereinafter defined), it
(A) contained and will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (B) did not and will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any amendment or
supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if
the Prospectus or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and at
each Time of Delivery, the Prospectus, as amended or supplemented at any such
time, (A) contained and will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material
respects with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (B) did not and will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading. The foregoing provisions of this paragraph (iii) do
not apply to statements or omissions made in any Preliminary Prospectus, the
Registration Statement or any amendment thereto or the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through you
specifically for use therein. It is understood that the statements set forth
in each Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto (W) in
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<PAGE> 4
the last paragraph of the cover page, (X) on the inside cover page with respect
to stabilization and passive market making, (Y) under the section entitled
"Underwriting" regarding the Underwriters and the underwriting arrangements,
and (Z) under the section entitled "Legal Matters" regarding the identity of
the counsel for the Underwriters, constitute the only written information
furnished to the Company by or on behalf of any Underwriter through you
specifically for use in any Preliminary Prospectus, the Registration Statement
or any amendment thereto or the Prospectus and any amendment or supplement
thereto, as the case may be.
(iv) The descriptions in the Registration
Statement and the Prospectus of laws, statutes, regulations, legal and
governmental proceedings, contracts and other documents are accurate in all
material respects; and there are no laws, statutes, regulations, or legal or
governmental proceedings required to be described in the Registration Statement
or the Prospectus that are not described as required and no contracts or
documents of a character that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described and filed as required.
(v) Each of the Company and its
subsidiaries has been duly incorporated, is validly existing as a corporation
in good standing under the laws of its jurisdiction of incorporation and has
full power and authority (corporate and other) to own or lease its properties
and conduct its business as described in the Prospectus. Each of the Company
and Parent has full power and authority (corporate and other) to enter into
this Agreement and to perform its obligations hereunder. Each of the Company
and its subsidiaries is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other jurisdiction
in which it owns or leases properties, or conducts any business, so as to
require such qualification, except where the failure to so qualify would not
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole (a "Material
Adverse Event").
(vi) The Company's authorized, issued and
outstanding capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the descriptions of the
Common Stock contained in the Prospectus. None of the issued shares of capital
stock of the Company or any of its subsidiaries has been issued or is owned or
held in violation of any statutory (or to the knowledge of the Company, any
other) preemptive rights of shareholders, and no person or entity (including
any holder of outstanding shares of capital stock of the Company or its
subsidiaries) has any statutory (or to the knowledge of the
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<PAGE> 5
Company, any other) preemptive or other rights to subscribe for any of the
Shares. None of the capital stock of the Company has been issued in violation
of applicable federal or state securities laws.
(vii) All of the issued shares of capital
stock of each of the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable and are owned beneficially by
the Company or a subsidiary of the Company, free and clear of all liens,
security interests, pledges, charges, encumbrances, defects, shareholders'
agreements, voting agreements, proxies, voting trusts, equities or claims of
any nature whatsoever. Other than the subsidiaries listed on Exhibit 21 to the
Registration Statement and the equity securities held in the investment
portfolios of such subsidiaries (the composition of which is not materially
different than the disclosures in the Prospectus as of specific dates), the
Company does not own, directly or indirectly, any capital stock or other equity
securities of any other corporation or any ownership interest in any
partnership, joint venture or other association.
(viii) Except as disclosed in the
Prospectus, there are no outstanding (A) securities or obligations of the
Company or any of its subsidiaries convertible into or exchangeable for any
capital stock of the Company or any such subsidiary, (B) warrants, rights or
options to subscribe for or purchase from the Company or any such subsidiary
any such capital stock or any such convertible or exchangeable securities or
obligations or (C) obligations of the Company or any such subsidiary to issue
any shares of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(ix) Since the date of the most recent
audited financial statements included in the Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference
with its business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as disclosed in or contemplated by the
Prospectus and other than pursuant to claims made by insureds in the ordinary
course of business under policies issued by the Company's subsidiaries.
(x) Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
(A) neither the Company nor any of its subsidiaries has incurred any
liabilities or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business, that are material to the
Company and its subsidiaries, (B) the Company has not purchased any of its
outstanding capital stock or declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock,
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<PAGE> 6
(C) there has not been any change in the capital stock, long-term debt or
short-term debt of the Company or any of its subsidiaries, and (D) there has
not been any material adverse change, or any development involving a
prospective material adverse change, in or affecting the financial position,
results of operations or business of the Company and its subsidiaries, in each
case other than as disclosed in or contemplated by the Prospectus.
(xi) There are no contracts, agreements
or understandings between the Company and any person granting such person the
right to require the Company to file a registration statement under the Act
with respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the securities
registered pursuant to the Registration Statement (or any such right has been
effectively waived) or any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(xii) Neither the Company nor any of its
subsidiaries is, or with the giving of notice or passage of time or both would
be, in violation of its Articles of Incorporation or Bylaws or in default in
any material respect under any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or any
of its subsidiaries is a party or to which any of their respective properties
or assets are subject.
(xiii) The Company and its subsidiaries
have good and marketable title in fee simple to all real property, if any, and
good title to all personal property owned by them, in each case free and clear
of all liens, security interests, pledges, charges, encumbrances, mortgages and
defects, except such as are disclosed in the Prospectus or such as do not
constitute a Material Adverse Event and do not interfere with the use made or
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company or any of its
subsidiaries are held under valid, subsisting and enforceable leases, with such
exceptions as are disclosed in the Prospectus or are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary.
(xiv) Neither the Company nor Parent
requires any consent, approval, authorization, order or declaration of or from,
or registration, qualification or filing with, any court or governmental agency
or body in connection with the sale of the Shares or the consummation of the
transactions contemplated by this Agreement in order for the Company to be
permitted to increase the capital and surplus of the Company's insurance
company subsidiaries as contemplated in the "Use of Proceeds" section of the
Prospectus, the registration of the Shares under
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<PAGE> 7
the Act (which, if the Registration Statement is not effective as of the time
of execution hereof, shall be obtained as provided in this Agreement) and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and such as
may be required under state securities or blue sky laws in connection with the
offer, sale and distribution of the Shares by the Underwriters.
(xv) Other than as disclosed in the
Prospectus, there is no litigation, arbitration, claim, proceeding (formal or
informal) or investigation (including without limitation, any insurance
regulatory proceeding) pending or, to the best of the Company's or Parent's
knowledge, as the case may be, threatened in which the Company or any of its
subsidiaries or Parent is a party or of which any of their respective
properties or assets are the subject which, if determined adversely to the
Company or any such subsidiary or Parent, would individually or in the
aggregate constitute a Material Adverse Event. Neither the Company nor any of
its subsidiaries nor Parent is in violation of, or in default with respect to,
any law, statute, rule, regulation, order, judgment or decree, except as
described in the Prospectus or such as do not and will not individually or in
the aggregate constitute a Material Adverse Event, and neither the Company nor
any of its subsidiaries nor Parent is required to take any action in order to
avoid any such violation or default.
(xvi) To the best of the Company's
knowledge, Coopers & Lybrand L.L.P., who have certified certain financial
statements of the Company and its consolidated subsidiaries included in the
Registration Statement and the Prospectus, are independent public accountants
as required by the Act, the Exchange Act and the respective rules and
regulations of the Commission thereunder.
(xvii) The consolidated financial
statements and schedules (including the related notes) of the Company and its
consolidated subsidiaries included in the Registration Statement, the
Prospectus and/or any Preliminary Prospectus were prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved and fairly present the financial position and results of
operations of the Company and its subsidiaries, on a consolidated basis, at the
dates and for the periods presented. The selected financial data set forth
under the captions "Summary Company Consolidated Financial Data," "Summary
Superior Consolidated Financial Data," "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"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations of Superior" in the Prospectus fairly present, on the basis stated
in the Prospectus, the information included therein, and have
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<PAGE> 8
been compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement. The supporting notes and
schedules included in the Registration Statement, the Prospectus and/or any
Preliminary Prospectus fairly state in all material respects the information
required to be stated therein in relation to the financial statements taken as
a whole. The unaudited interim consolidated financial statements included in
the Registration Statement comply as to form in all material respects with the
applicable accounting requirements of Rule 10-01 of Regulation S-X under the
Act.
(xviii) This Agreement has been duly
authorized, executed and delivered by each of the Company and Parent, and,
assuming due execution by the Representatives of the Underwriters, constitutes
the valid and binding agreement of each of the Company and Parent, enforceable
against the Company and Parent in accordance with its terms, subject, as to
enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles and except as
the enforceability of rights to indemnity and contribution under this Agreement
may be limited under applicable securities laws or the public policy underlying
such laws.
(xix) The sale of the Shares and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not (with or without the giving of notice or the passage of
time or both) (A) conflict with any term or provision of the articles of
incorporation or bylaws, or other organizational documents, of the Company or
Parent, (B) result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which the Company or
Parent is a party or to which any of their respective properties or assets are
subject, (C) conflict with or violate any provision of the governing
instruments of the Company or Parent or any law, statute, rule or regulation or
any order, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or Parent or any of the properties or
assets of the Company or Parent or (D) result in a breach, termination or lapse
of the corporate power and authority of the Company or Parent to own or lease
and operate its assets and properties and conduct its business as described in
the Prospectus.
(xx) When the Shares have been duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be validly issued, fully paid and non-assessable, and the holders
thereof will not be subject to personal liability solely by reason of being
such holders. The certificates representing the Shares are in proper legal
form under, and conform in all respects to the requirements of, the Indiana
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<PAGE> 9
Business Corporation Law, as amended. Neither the filing of the Registration
Statement nor the offering or sale of Shares as contemplated by this Agreement
gives any security holder of the Company any rights for or relating to the
registration of any shares of Common Stock or any other capital stock of the
Company, except such as have been satisfied or waived.
(xxi) The Company has not distributed and
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, a Preliminary
Prospectus, the Prospectus and other material, if any, permitted by the Act.
(xxii) Neither the Company nor any of its
officers, directors or affiliates nor Parent has (A) taken, directly or
indirectly, any action designed to cause or result in, or that has constituted
or might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company or Parent to
facilitate the sale or resale of the Shares or (B) since the filing of the
Registration Statement (1) sold, bid for, purchased or paid anyone any
compensation for soliciting purchases of, the Shares or (2) paid or agreed to
pay to any person any compensation for soliciting another to purchase any other
securities of the Company or Parent.
(xxiii) Neither the Company, any of its
subsidiaries, nor any director, officer, employee or other person associated
with or acting on behalf of the Company or any such subsidiary has, directly or
indirectly, violated any provision of the Foreign Corrupt Practices Act of
1977, as amended.
(xxiv) The operations of the Company and
its subsidiaries with respect to any real property currently leased or owned or
by any means controlled by the Company or any subsidiary (the "Real Property")
are in compliance in all material respects with all federal, state, and local
laws, ordinances, rules, and regulations relating to occupational health and
safety and the environment (collectively, "Laws"), and the Company and its
subsidiaries have not violated any Laws in a way which would give rise to a
Material Adverse Event. Except as disclosed in the Prospectus, there is no
pending or, to the best of the Company's knowledge, threatened claim,
litigation or any administrative agency proceeding, nor has the Company or any
subsidiary received any written or oral notice from any governmental entity or
third party, that: (A) alleges a material violation of any Laws by the Company
or any subsidiary or (B) alleges the Company or any subsidiary is a liable
party under the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9601 et seq. or any state superfund law.
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<PAGE> 10
(xxv) The Company and each of its
subsidiaries owns or has the right to use patents, patent applications,
trademarks, trademark applications, trade names, service marks, copyrights,
franchises, trade secrets, proprietary or other confidential information and
intangible properties and assets (collectively, "Intangibles"); and, to the
best knowledge of the Company, neither the Company nor any subsidiary has
infringed or is infringing, and neither the Company nor any subsidiary has
received notice of infringement with respect to, asserted Intangibles of
others.
(xxvi) The Company and each of its
subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and customary
in the businesses in which they are engaged; and neither the Company nor any
such subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a comparable cost, except as disclosed in the Prospectus. The
foregoing representation is not intended to and does not relate to any
reinsurance contracts, agreements or treaties to which the Company or any of
its subsidiaries is a party.
(xxvii) Each of the Company and its
subsidiaries makes and keeps accurate books and records reflecting its assets
and maintains internal accounting controls which provide reasonable assurance
that (A) transactions are executed in accordance with management's
authorization, (B) transactions are recorded as necessary to permit preparation
of the Company's consolidated financial statements in accordance with generally
accepted accounting principles and to maintain accountability for the assets of
the Company, (C) access to the assets of the Company and each of its
subsidiaries is permitted only in accordance with management's authorization
and (D) the recorded accountability for assets of the Company and each of its
subsidiaries is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxviii) The Company and its subsidiaries
have filed all foreign, federal, state and local tax returns that are required
to be filed by them and have paid all taxes shown as due on such returns as
well as all other taxes, assessments and governmental charges that are due and
payable; and no material deficiency with respect to any such return has been
assessed or proposed.
(xxix) Except for such plans that are
expressly disclosed in the Prospectus, the Company and its subsidiaries do not
have any employee benefit plan, profit sharing plan, employee pension benefit
plan or employee welfare benefit plan or deferred
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<PAGE> 11
compensation arrangements ("Plans") that are subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended, or the rules and
regulations thereunder ("ERISA"). All Plans that are subject to ERISA are in
compliance with ERISA in all material respects, and, to the extent required by
the Internal Revenue Code of 1986, as amended (the "Code"), are in compliance
with the Code in all material respects. Neither the Company nor any subsidiary
has any employee pension benefit plan that is subject to Part 3 of Subtitle B
of Title I of ERISA or any defined benefit plan or multi-employer plan. The
Company does not maintain retired life and retired health insurance plans that
are employee welfare benefit plans providing for continuing benefit or coverage
for any employee or any beneficiary of any employee after such employee's
termination of employment, except as required by Section 4980B of the Code. No
fiduciary or other party in interest with respect to any of the Plans has
caused any of such Plans to engage in a prohibited transaction as defined in
Section 406 of ERISA. As used in this subsection, the terms "defined benefit
plan," "employee benefit plan," "employee pension benefit plan," "employee
welfare benefit plan," "fiduciary" and "multi-employer plan" shall have the
respective meanings assigned to such terms in Section 3 of ERISA.
(xxx) No material labor dispute exists
with the Company's or any of its subsidiary's employees, and no such labor
dispute is threatened. The Company has no knowledge of any existing or
threatened labor disturbance by the employees of any of its principal agents,
suppliers, contractors or customers that would give rise to a Material Adverse
Event.
(xxxi) Each contract or other instrument
(however characterized or described) to which the Company or any subsidiary is
a party or by which any of its properties or business is bound or affected and
which is material to the conduct of the Company's business as described in the
Prospectus has been duly and validly executed by the Company or such
subsidiary, and, to the knowledge of the Company, by the other parties thereto.
Each such contract or other instrument is in full force and effect and is
enforceable against the parties thereto in accordance with its terms, and the
Company and each of its subsidiaries are not, and to the knowledge of the
Company, no other party is, in default thereunder, nor has any event occurred
that, with the lapse of time or the giving of notice, or both, would constitute
a default under any such contract or other instrument. All necessary consents
under such contracts or other instruments to disclosure in the Prospectus with
respect thereto have been obtained.
(xxxii) The Company and its subsidiaries
have received all permits, licenses, franchises, authorizations, registrations,
qualifications and approvals (collectively, "Permits") of governmental or
regulatory authorities (including, without limitation, state and/or other
insurance regulatory
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<PAGE> 12
authorities) as may be required of them to own their properties and conduct
their businesses in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus; and the Company and its
subsidiaries have fulfilled and performed all of their material obligations
with respect to such Permits, and no event has occurred which allows or, after
notice or lapse of time or both, would allow revocation or termination thereof
or result in any other material impairment of the rights of the holder of any
such Permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, such Permits
contain no restrictions that materially affect the ability of the Company and
its subsidiaries to conduct their businesses.
(xxxiii) The Company and each of its
subsidiaries have filed, or has had filed on its behalf, on a timely basis, all
materials, reports, documents and information, including but not limited to
annual reports and reports of examination with each applicable insurance
regulatory authority, board or agency, which are required to be filed by it,
except where the failure to have timely filed such materials, reports,
documents and information would not constitute a Material Adverse Event.
(xxxiv) Neither Parent nor the Company nor
any of the Company's subsidiaries is an "investment company" or a company
"controlled" by an investment company as such terms are defined in Sections
3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and, if the Company conducts its
business as set forth in the Registration Statement and the Prospectus, will
not become an "investment company" and will not be required to register under
the Investment Company Act.
(xxxv) To the best knowledge of the
Company, none of the officers, directors or shareholders holding 5% or more of
any class of the Company's capital stock are affiliated with any member of the
National Association of Securities Dealers, Inc. (the "NASD").
Any certificate signed by any officer of the Company or any
subsidiary in such capacity and delivered to the Representatives or to counsel
for the Underwriters pursuant to this Agreement shall be deemed a
representation and warranty by the Company or such subsidiary to the several
Underwriters as to the matters covered thereby.
2. Purchase and Sale of Shares.
(a) Subject to the terms and conditions herein set
forth, the Company agrees to sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company,
at a purchase price of ________ Dollars and ________ cents ($_____) per share
(the "Per
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<PAGE> 13
Share Price"), the number of Company Shares (to be adjusted by you so as to
eliminate fractional shares) determined by multiplying the aggregate number of
Shares to be sold by the Company as set forth in the first paragraph of this
Agreement by a fraction, the numerator of which is the aggregate number of
Company Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto, and the denominator of which is
the aggregate number of Company Shares to be purchased by the several
Underwriters hereunder.
(b) The Company hereby grants to the Underwriters the
right to purchase at their election in whole or in part from time to time up to
Four Hundred Fifty Thousand (450,000) Optional Shares, at the Per Share Price,
for the sole purpose of covering overallotments in the sale of the Company
Shares. Any such election to purchase Optional Shares may be exercised by
written notice from the Representatives to the Company, given from time to time
within a period of 30 calendar days after the date of this Agreement and
setting forth the aggregate number of Optional Shares to be purchased and the
date on which such Optional Shares are to be delivered, as determined by you
but in no event earlier than the First Time of Delivery (as hereinafter
defined) or, unless you otherwise agree in writing, earlier than two or later
than ten business days after the date of such notice. In the event you elect
to purchase all or a portion of the Optional Shares, the Company agrees to
furnish or cause to be furnished to you the certificates, letters and opinions,
and to satisfy all conditions, set forth in Section 7 hereof at each Subsequent
Time of Delivery (as hereinafter defined).
(c) In making this Agreement, each Underwriter is
contracting severally, and not jointly, and except as provided in Sections 2(b)
and 9 hereof, the agreement of each Underwriter is to purchase only that number
of shares specified with respect to that Underwriter in Schedule I hereto. No
Underwriter shall be under any obligation to purchase any Optional Shares prior
to an exercise of the option with respect to such Shares granted pursuant to
Section 2(b) hereof.
3. Offering by the Underwriters. Upon the authorization by
you of the release of the Shares, the several Underwriters propose to offer the
Shares for sale upon the terms and conditions disclosed in the Prospectus.
4. Delivery of Shares; Closing.
(a) Certificates in definitive form for the Shares to
be purchased by each Underwriter hereunder, and in such denominations and
registered in such names as you may request upon at least 48 hours' prior
notice to the Company, shall be delivered by or on behalf of the Company, to
you for the account of such Underwriter, against payment by such Underwriter on
its behalf of the purchase price therefor by (at the Representatives'
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<PAGE> 14
election) wire transfer of immediately available funds to such accounts as the
Company (as the case may be) shall designate in writing, or by official bank
check or checks (payable in next day funds), payable to the order of the
Company in next-day available funds. The closing of the sale and purchase of
the Shares shall be held at the offices of LeBoeuf, Lamb, Greene & MacRae,
L.L.P., 125 West 55th Street, New York, New York 10019, except that physical
delivery of such certificates shall be made at the office of The Depository
Trust Company, 55 North Water Street, New York, New York 10041. The time and
date of such delivery and payment shall be, with respect to the Company Shares,
at 10:00 a.m., New York, New York time, on the third (3rd) full business day
after this Agreement is executed or at such other time and date as you and the
Company may agree upon in writing, and, with respect to the Optional Shares, at
10:00 a.m., New York, New York time, on the date specified by you in the
written notice given by you of the Underwriters' election to purchase all or
part of such Optional Shares, or at such other time and date as you and the
Company may agree upon in writing. Such time and date for delivery of the
Company Shares is herein called the "First Time of Delivery," such time and
date for delivery of any Optional Shares, if not the First Time of Delivery, is
herein called a "Subsequent Time of Delivery," and each such time and date for
delivery is herein called a "Time of Delivery." The Company will make such
certificates available for checking and packaging at least 24 hours prior to
each Time of Delivery at the office of The Depository Trust Company, 55 North
Water Street, New York, New York 10041 or at such other location specified by
you in writing at least 48 hours prior to such Time of Delivery.
5. Covenants of the Company. The Company and the Parent
covenant and agree with each of the Underwriters that:
(i) The Company will use its best
efforts to cause the Registration Statement, if not effective prior to the
execution and delivery of this Agreement, to become effective. If the
Registration Statement has been declared effective prior to the execution and
delivery of this Agreement, the Company will file the Prospectus with the
Commission pursuant to and in accordance with subparagraph (1) (or, if
applicable and if consented to by you, subparagraph (4)) of Rule 424(b) not
later than the earlier of (A) the second business day following the execution
and delivery of this Agreement or (B) the fifth business day after the date on
which the Registration Statement is declared effective. The Company will
advise you promptly of any such filing pursuant to Rule 424(b). The Company
will file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
the Prospectus and for so long as the delivery of a prospectus is required in
connection with the offering, sale and distribution of the Shares.
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(ii) The Company will not file with the
Commission the prospectus or the amendment referred to in the second sentence
of Section 1(a)(i) hereof, any amendment or supplement to the Prospectus or any
amendment to the Registration Statement unless you have received a reasonable
period of time to review any such proposed amendment or supplement and
consented to the filing thereof and will use its best efforts to cause any such
amendment to the Registration Statement to be declared effective as promptly as
possible. Upon the request of the Representatives or counsel for the
Underwriters, the Company will promptly prepare and file with the Commission,
in accordance with the rules and regulations of the Commission, any amendments
to the Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the distribution of the
Shares by the several Underwriters and will use its best efforts to cause any
such amendment to the Registration Statement to be declared effective as
promptly as possible. If required, the Company will file any amendment or
supplement to the Prospectus with the Commission in the manner and within the
time period required by Rule 424(b) under the Act. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence to the Representatives of each such filing or
effectiveness.
(iii) The Company will advise you promptly
after receiving notice or obtaining knowledge of (A) when any post-effective
amendment to the Registration Statement is filed with the Commission, (B) the
receipt of any comments from the Commission concerning the Registration
Statement, (C) when any post-effective amendment to the Registration Statement
becomes effective, or when any supplement to the Prospectus or any amended
Prospectus has been filed, (D) the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any part thereof
or any order preventing or suspending the use of any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, (E) the suspension of
the qualification of the Shares for offer or sale in any jurisdiction or of the
initiation or threatening of any proceeding for any such purpose, (F) any
request made by the Commission or any securities authority of any other
jurisdiction for amending the Registration Statement, for amending or
supplementing the Prospectus or for additional information. The Company will
use its best efforts to prevent the issuance of any such stop order or
suspension and, if any such stop order or suspension is issued, to obtain the
withdrawal thereof as promptly as possible.
(iv) If the delivery of a prospectus
relating to the Shares is required under the Act at any time prior to the
expiration of nine months after the date of the Prospectus and if
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<PAGE> 16
at such time any events have occurred as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any reason it is necessary during such same
period to amend or supplement the Prospectus, the Company will promptly notify
you and upon your request (but at the Company's expense) prepare and file with
the Commission an amendment or supplement to the Prospectus that corrects such
statement or omission or effects such compliance and will furnish without
charge to each Underwriter and to any dealer in securities as many copies of
such amended or supplemented Prospectus as you may from time to time reasonably
request. If the delivery of a prospectus relating to the Shares is required
under the Act at any time nine months or more after the date of the Prospectus,
upon your request but at the expense of such Underwriter, the Company will
prepare and deliver to such Underwriter as many copies as you may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of the Act.
(v) The Company promptly from time to
time will take such action as you may reasonably request to qualify the Shares
for offering and sale under the securities or blue sky laws of such
jurisdictions as you may request and will continue such qualifications in
effect for as long as may be necessary to complete the distribution of the
Shares, provided that in connection therewith the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction.
(vi) The Company will promptly provide
you, without charge, (A) three manually executed copies of the Registration
Statement as originally filed with the Commission and of each amendment
thereto, including all exhibits and all documents or information incorporated
by reference therein, (B) for each other Underwriter a conformed copy of the
Registration Statement as originally filed and of each amendment thereto,
without exhibits but including all documents or information incorporated by
reference therein and (C) so long as a prospectus relating to the Shares is
required to be delivered under the Act, as many copies of each Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto as you may
reasonably request.
(vii) As soon as practicable, but in any
event not later than the last day of the thirteenth month after the effective
date of the Registration Statement, the Company will make generally available
to its security holders an earnings statement of the Company and its
subsidiaries, if any, covering a period of at least 12 months beginning after
the effective date of the Registration Statement (which need not be audited)
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<PAGE> 17
complying with Section 11(a) of the Act and the rules and regulations
thereunder.
(viii) During the period beginning from the
date hereof and continuing to and including the date 180 days after the date of
the Prospectus, the Company and Parent will not, without your prior written
consent, offer, issue, sell, contract to sell, grant any option for the sale
of, or otherwise dispose of, directly or indirectly, any shares of Common Stock
or securities convertible into or exercisable or exchangeable for shares of
Common Stock, except as provided in Section 2.
(ix) During the period of three years
after the effective date of the Registration Statement, the Company will
furnish to you and, upon request, to each of the other Underwriters, without
charge, (A) copies of all reports or other communications (financial or other)
furnished to shareholders and (B) as soon as they are available, copies of any
reports and financial statements furnished to or filed with the Commission, the
National Association of Securities Dealers, Inc. or any national securities
exchange.
(x) Prior to the termination of the
underwriting syndicate contemplated by this Agreement, neither the Company nor
any of its officers, directors or affiliates nor Parent will (A) take, directly
or indirectly, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of any of
the Shares or (B) sell, bid for, purchase or pay anyone any compensation for
soliciting purchases of, the Shares.
(xi) If at any time during the period
beginning on the date the Registration Statement becomes effective and ending
on the later of (A) the date 30 days after such effective date and (B) the date
that is the earlier of (1) the date on which the Company first files with the
Commission a Quarterly Report on Form 10-Q after such effective date and (2)
the date on which the Company first issues a quarterly financial report to
shareholders after such effective date, (x) any publication or event relating
to or affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such publication or event
necessitates an amendment of or supplement to the Prospectus), or (y) any rumor
relating to or affecting the Company shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been or is likely
to be materially affected (regardless of whether such rumor necessitates an
amendment of or supplement to the Prospectus), the Company will consult with
you concerning the necessity of a press release or other public statement, and,
if the Company determines that a press release or other public
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<PAGE> 18
statement is necessary, the Company will forthwith prepare and consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
publication, event or rumor.
(xii) The Company will comply with the
Act, the Exchange Act and the rules and regulations thereunder so as to permit
the continuance of sales of and dealings in the Shares for as long as may be
necessary to complete the distribution of the Shares as contemplated hereby.
(xiii) In case of any event, at any time
within the period during which a prospectus is required to be delivered under
the Act, as a result of which any Preliminary Prospectus or the Prospectus, as
then amended or supplemented, would contain an untrue statement of a material
fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or, if it is necessary at any time to amend any Preliminary
Prospectus or the Prospectus to comply with the Act or any applicable
securities or blue sky laws, the Company promptly will prepare and file with
the Commission, and any applicable state securities commission, an amendment,
supplement or document that will correct such statement or omission or effect
such compliance and will furnish to the several Underwriters such number of
copies of such amendment(s), supplement(s) or document(s) as the
Representatives may reasonably request. For purposes of this subsection, the
Company will provide such information to the Representatives, the Underwriters'
counsel and counsel to the Company as shall be necessary to enable such persons
to consult with the Company with respect to the need to amend or supplement the
Registration Statement, any Preliminary Prospectus or the Prospectus or file
any document, and shall furnish to the Representatives and the Underwriters'
counsel such further information as each may from time to time reasonably
request.
(xiv) The Company will use its best
efforts to maintain the qualification or listing of the shares of Common Stock
(including, without limitation, the Shares) on the Nasdaq National Market.
6. Expenses. The Company will pay all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, whether or not the transactions contemplated hereby are consummated
or this Agreement is terminated pursuant to Section 10 hereof, including,
without limitation, all costs and expenses incident to (i) the printing of and
mailing expenses associated with the Registration Statement, the Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto, this
Agreement, the Agreement among Underwriters, the underwriters' questionnaire
submitted to
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<PAGE> 19
each of the Underwriters by the Representatives in connection herewith, the
power of attorney executed by each of the Underwriters in favor of Advest, Inc.
in connection herewith, the Dealer Agreement and related documents
(collectively, the "Underwriting Documents") and the preliminary Blue Sky
memorandum relating to the offering prepared by LeBoeuf, Lamb, Greene & MacRae,
L.L.P., counsel to the Underwriters (collectively with any supplement thereto,
the "Preliminary Blue Sky Memorandum"); (ii) the fees, disbursements and
expenses of the Company's counsel and accountants in connection with the
registration of the Shares under the Act and all other expenses in connection
with the preparation and, if applicable, filing of the Registration Statement
(including all amendments thereto), any Preliminary Prospectus, the Prospectus
and any amendments and supplements thereto, the Underwriting Documents and the
Preliminary Blue Sky Memorandum; (iii) the delivery of copies of the foregoing
documents to the Underwriters; (iv) the filing fees of the Commission and the
NASD relating to the Shares; (v) the preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Shares, including transfer
agent's and registrar's fees; (vi) the qualification of the Shares for offering
and sale under state securities and blue sky laws, including filing fees and
fees and disbursements of counsel for the Underwriters (and local counsel
therefor) relating thereto; (vii) any listing of the Shares on the Nasdaq
National Market; (viii) any expenses for travel, lodging and meals incurred by
the Company and any of its officers, directors and employees in connection with
any meetings with prospective investors in the Shares; (ix) the costs of
advertising the offering, including, without limitation, with respect to the
placement of "tombstone" advertisements in publications selected by the
Representatives; and (x) all other costs and expenses reasonably incident to
the performance of the Company's obligations hereunder that are not otherwise
specifically provided for in this Section 6.
7. Conditions of the Underwriters' Obligations. The
obligations of the Underwriters hereunder to purchase and pay for the Shares to
be delivered at each Time of Delivery shall be subject, in their discretion, to
the accuracy of the representations and warranties of each of the Company and
Parent contained herein as of the date hereof and as of such Time of Delivery,
to the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by each of the Company and Parent of its
covenants and agreements hereunder, and to the following additional conditions
precedent:
(a) If the registration statement as amended to date
has not become effective prior to the execution of this Agreement, such
registration statement shall have been declared effective not later than 11:00
a.m., Hartford, Connecticut time, on the date of this Agreement or such later
date and/or time as shall have been consented to by you in writing. The
Prospectus and any amendment or supplement thereto shall have been filed
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with the Commission pursuant to Rule 424(b) within the applicable time period
prescribed for such filing and in accordance with Section 5(a) of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceedings for
that purpose shall have been instituted, threatened or, to the knowledge of the
Company, Parent or the Representatives, contemplated by the Commission; and all
requests for additional information on the part of the Commission shall have
been complied with to your reasonable satisfaction.
(b) All corporate proceedings and other matters
incident to the authorization, form and validity of this Agreement, the Shares
and the form of the Registration Statement and the Prospectus, and all other
legal matters relating to this Agreement and the transactions contemplated
hereby, shall be satisfactory in all material respects to counsel to the
Underwriters.
(c) The Representatives shall have received copies of
executed lock-up agreements from each of Parent, the Company and the Company's
officers and directors who hold shares of Common Stock or who may be issued
shares of Common Stock under an option plan or other arrangement to the effect
that such individuals and entities will not offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock held by them for a period of
180 days after the date of the Prospectus without the written consent of
Advest, Inc.
(d) The Representatives shall have received at or prior
to the First Time of Delivery from the Underwriters' counsel the Preliminary
Blue Sky Memorandum, such memorandum to be in form and substance satisfactory
to the Representatives.
(e) LeBoeuf, Lamb, Greene & MacRae, L.L.P., counsel for
the Underwriters, shall have furnished to you such opinion or opinions, dated
such Time of Delivery, with respect to the incorporation of the Company, the
validity of the Shares being delivered at such Time of Delivery, the
Registration Statement, the Prospectus, and other related matters as you may
reasonably request, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(f) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of any of the
Shares.
(g) You shall have received an opinion, dated such Time
of Delivery, of Barnes & Thornburg, counsel for the Company, in form and
substance satisfactory to you and your counsel, to the effect that:
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(i) The Company has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the State of Indiana and has the corporate power and authority to own
or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus and to enter into this Agreement and
perform its obligations hereunder. The Company is duly qualified to transact
business as a foreign corporation and is in good standing under the laws of
each other jurisdiction in which it owns or leases property, or conducts any
business, so as to require such qualification, except where the failure to so
qualify would not have a material adverse effect on the financial position,
results of operations or business of the Company and its subsidiaries taken as
a whole. Parent has been duly incorporated, is validly existing as a federally
chartered corporation in good standing under the laws of Canada and has the
corporate power and authority to enter into this Agreement and perform its
obligations hereunder.
(ii) Each of the subsidiaries of the
Company is validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation and has the corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement and the Prospectus. Each such subsidiary is duly
qualified to transact business as a foreign corporation and is in good standing
under the laws of each other jurisdiction in which it owns or leases property,
or conducts any business, so as to require such qualification, except where the
failure to so qualify would not have a material adverse effect on the financial
position, results of operations or business of the Company and its subsidiaries
taken as a whole.
(iii) The Company's authorized, issued and
outstanding capital stock is as disclosed in the Prospectus. All of the issued
shares of capital stock of the Company have been duly authorized and validly
issued, are fully paid and nonassessable and conform to the description of the
Common Stock contained in the Prospectus. None of the issued shares of Common
Stock of the Company or capital stock of any of its subsidiaries has been
issued or is owned or held in violation of any statutory (or, to the knowledge
of such counsel, any other) preemptive rights of shareholders, and no person or
entity (including any holder of outstanding shares of Common Stock of the
Company or capital stock of its subsidiaries) has any statutory (or, to the
knowledge of such counsel, any other) preemptive or other rights to subscribe
for any of the Shares.
(iv) All of the issued shares of capital
stock of each of the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and nonassessable, and, to the best of such
counsel's knowledge, are owned beneficially by the Company or its subsidiaries,
free and clear of all liens, security interests, pledges, charges,
encumbrances,
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shareholders' agreements, voting agreements, proxies, voting trusts, defects,
equities or claims of any nature whatsoever (collectively, "Encumbrances"),
including, without limitation, Encumbrances arising or resulting from any
indenture, mortgage, deed of trust, loan agreement, lease or other agreement of
or entered into by Parent. To the best of such counsel's knowledge, other than
the subsidiaries listed on Exhibit 21 to the Registration Statement and the
equity securities held in the investment portfolios of the Company and such
subsidiaries, the Company does not own, directly or indirectly, any capital
stock or other equity securities of any other corporation or any ownership
interest in any partnership, joint venture or other association.
(v) Except as disclosed in the
Prospectus, there are, to the best of such counsel's knowledge, no outstanding
(A) securities or obligations of Parent, the Company or any of the Company's
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe
for or purchase from Parent, the Company or any such subsidiary any such
capital stock or any such convertible or exchangeable securities or obligations
or (C) obligations of Parent, the Company or any such subsidiary to issue any
shares of capital stock, any such convertible or exchangeable securities or
obligations, or any such warrants, rights or options.
(vi) When the Shares have been duly
delivered against payment therefor as contemplated by this Agreement, the
Shares will be duly authorized, validly issued and fully paid and
nonassessable, the holders thereof will not be subject to personal liability
solely by reason of being such holders and the Shares will conform to the
description of the Common Stock contained in the Prospectus; the certificates
evidencing the Shares will comply with all applicable requirements of Indiana
law; and the Shares will have been listed on the Nasdaq National Market.
(vii) To the best of such counsel's
knowledge, there are no contracts, agreements or understandings known to such
counsel between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with respect
to any securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities registered
pursuant to the Registration Statement (or any such right has been effectively
waived) or in any securities being registered pursuant to any other
registration statement filed by the Company under the Act.
(viii) To the best of such counsel's
knowledge, neither the Company nor any of its subsidiaries nor Parent is, or
with the giving of notice or passage of time or both, would be,
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in violation of its Articles of Incorporation or Bylaws, in each case as
amended to date, or, in default in any material respect under any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
known to such counsel to which the Company, any such subsidiary or Parent is a
party or to which any of their respective properties or assets is subject.
(ix) The sale of the Shares being sold at
such Time of Delivery and the performance of this Agreement and the
consummation of the transactions herein contemplated will not conflict with or
violate any provision of the Articles of Incorporation or Bylaws of the
Company, any of its subsidiaries or Parent, in each case as amended to date, or
to the best of such counsel's knowledge, any existing law, statute, rule or
regulation, or in any material respect, conflict with, or (with or without the
giving of notice or the passage of time or both) result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to such counsel to which the Company, any such
subsidiary or Parent is a party or to which any of their respective properties
or assets is subject, or, conflict with or violate any order, judgment or
decree known to such counsel, of any court or governmental agency or body
having jurisdiction over the Company, any of its subsidiaries or Parent or any
of their respective properties or assets, except with respect to any statute,
rule or regulation of any regulatory authority imposing any obligation on the
part of the Underwriters by way of their purchase of the Shares, as to which no
opinion need be rendered.
(x) To the best of such counsel's
knowledge, no consent, approval, authorization, order or declaration of or
from, or registration, qualification or filing with, any court or governmental
agency or body is required for the sale of the Shares or the consummation of
the transactions contemplated by this Agreement, except such as have been or
will have been obtained and are or will be in effect, and except the
registration of the Shares under the Act, the Exchange Act and such as may be
required under state securities or blue sky laws in connection with the offer,
sale and distribution of the Shares by the Underwriters.
(xi) To the best of such counsel's
knowledge and other than as disclosed in or contemplated by the Prospectus,
there is no litigation, arbitration, claim, proceeding (formal or informal) or
investigation pending or threatened, in which the Company, any of its
subsidiaries or Parent is a party or of which any of their respective
properties or assets is the subject which, if determined adversely to the
Company, any such subsidiary or Parent, would individually or in the aggregate
have a material adverse effect on the financial position, results of operations
or business of the Company and its subsidiaries taken as a whole; and, to the
best of such counsel's knowledge, neither
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<PAGE> 24
the Company nor any of its subsidiaries nor Parent is in violation of, or in
default with respect to, any law, statute, rule, regulation, order, judgment or
decree, except as described in the Prospectus or such as do not and will not
individually or in the aggregate have a material adverse effect on the
financial position, results of operations or business of the Company and its
subsidiaries taken as a whole, nor is the Company, any such subsidiary or
Parent required to take any action in order to avoid any such violation or
default.
(xii) The statements in the Prospectus
under "Business -- Regulation," "Business -- Legal Proceedings," "Description
of Capital Stock" and "Shares Eligible for Future Sale" have been reviewed by
such counsel, and insofar as they refer to statements of law, descriptions of
statutes, licenses, rules or regulations, or legal conclusions, are correct in
all material respects.
(xiii) This Agreement has been duly
authorized, executed and delivered by each of the Company and Parent and,
assuming due execution by the Representatives of the Underwriters, constitutes
the valid and binding agreement of each of the Company and Parent, enforceable
against each of the Company and Parent, in accordance with its terms, subject,
as to enforcement, to applicable bankruptcy, insolvency, reorganization and
moratorium laws and other laws relating to or affecting the enforcement of
creditors' rights generally and to general equitable principles and except as
the enforceability of rights to indemnity and contribution under this Agreement
may be limited under applicable securities laws or the public policy underlying
such laws.
(xiv) Neither the Company nor any of its
subsidiaries nor Parent is an "investment company" or a company "controlled" by
an investment company as such terms are defined in Sections 3(a) and 2(a)(9),
respectively, of the Investment Company Act of 1940, as amended, and, if the
Company conducts its business as set forth in the Registration Statement and
the Prospectus, will not become an "investment company" and will not be
required to register under the Investment Company Act of 1940, as amended.
(xv) All offers and sales of the
Company's capital stock prior to the date hereof were at all relevant times
duly registered or exempt from the registration requirements of the Act, and
were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or blue sky laws,
or any actions in respect thereof are barred by the applicable statutes of
limitations.
(xvi) To the best of such counsel's
knowledge, the Company, each of its subsidiaries and Parent have received all
permits, licenses, franchises, authorizations, registrations,
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qualifications and approvals (collectively, "permits") of governmental or
regulatory authorities (including, without limitation, state and/or other
insurance regulatory authorities) as may be required of them to own their
properties and to conduct their businesses in the manner described in the
Prospectus, subject to such qualification as may be set forth in the
Prospectus; to the best of such counsel's knowledge, the Company and each of
its subsidiaries have fulfilled and performed all of their material obligations
with respect to such permits and no event has occurred which allows, or after
notice or lapse of time or both would allow, revocation or termination thereof
or result in any other material impairment of the rights of the holder of any
such permits, subject in each case to such qualifications as may be set forth
in the Prospectus; and other than as described in the Prospectus, such permits
contain no restrictions that materially affect the ability of the Company and
its subsidiaries to conduct their businesses.
(xvii) The Registration Statement and the
Prospectus and each amendment or supplement thereto (other than the financial
statements, the notes and schedules thereto and other financial data included
therein, to which such counsel need express no opinion), as of their respective
effective or issue dates, complied as to form in all material respects with the
requirements of the Act and the respective rules and regulations thereunder.
The descriptions in the Registration Statement and the Prospectus of contracts
and other documents are accurate and fairly present the information required to
be shown; and such counsel do not know of any contracts or documents of a
character required to be described in the Registration Statement or Prospectus
or to be filed as exhibits to the Registration Statement which are not
described and filed as required.
(xviii) Such counsel has been advised by the
Division of Corporation Finance of the Commission that the Registration
Statement has become effective under the Act; any required filing of the
Prospectus pursuant to Rule 424(b) has been made in the manner and within the
time period required by Rule 424(b); and, to the best of such counsel's
knowledge, (A) no stop order suspending the effectiveness of the Registration
Statement or any part thereof has been issued and (B) no proceedings for that
purpose have been instituted or threatened or are contemplated by the
Commission.
Such counsel shall also state that they have participated in the
preparation of the Registration Statement and the Prospectus and in conferences
with officers and other representatives of the Company, representatives of the
independent public accountants for the Company, and representatives of and
counsel to the Underwriters at which the contents of the Registration
Statement, the Prospectus and related matters were discussed and, although such
counsel has not passed upon or assumed any responsibility for the accuracy,
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<PAGE> 26
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, and although such counsel has not undertaken to
verify independently the accuracy or completeness of the statements in the
Registration Statement or the Prospectus and, therefore, would not necessarily
have become aware of any material misstatement of fact or omission to state a
material fact, on the basis of and subject to the foregoing, nothing has come
to such counsel's attention to lead them to believe that the Registration
Statement, or any further amendment thereto made prior to such Time of
Delivery, on its effective date and as of such Time of Delivery, contained or
contains any untrue statement of a material fact or omitted 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, or that the Prospectus, or any amendment or supplement thereto
made prior to such Time of Delivery, as of its issue date and as of such Time
of Delivery, contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (provided that such counsel need express no belief
regarding the financial statements, the notes and schedules thereto and other
financial data contained in the Registration Statement, any amendment thereto,
or the Prospectus, or any amendment or supplement thereto).
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deem proper, on certificates of
officers of the Company and Parent, and public officials and letters from
officials of the NASD and on the opinions of other counsel reasonably
satisfactory to you and your counsel as to matters which are governed by laws
other than the laws of the State of Indiana and the Federal laws of the United
States; provided that such counsel shall state in their opinion that they are
so relying, and they are justified in relying on such other opinions. Copies
of such certificates of officers of the Company and Parent and other opinions
shall be addressed and furnished to the Underwriters and furnished to counsel
for the Underwriters.
(h) You shall have received from Coopers & Lybrand
L.L.P., letters dated, respectively, the date hereof (or, if the Registration
Statement has been declared effective prior to the execution and delivery of
this Agreement, dated such effective date and the date of this Agreement) and
each Time of Delivery, in form and substance satisfactory to you, which letters
shall cover such matters as you shall request as well as:
(i) confirming that they are independent
certified public accountants (within the meaning of the Act) with respect to
the Company and its subsidiaries;
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<PAGE> 27
(ii) stating that, in their opinion, the
financial statements, certain summary and selected consolidated financial and
operating data, and any supplementary financial information and schedules
audited by them and included in the Prospectus or the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act; and they have made a review in accordance with
standards established by the American Institute of Certified Public Accountants
of the unaudited consolidated interim financial statements, and any
supplementary financial information and schedules, selected financial data,
and/or condensed financial statements derived from audited financial statements
of the Company for the periods specified in such letter, and, as indicated in
their report thereon, copies of which have been furnished to the
Representatives;
(iii) stating that, on the basis of
specified procedures, which included the procedures specified by the American
Institute of Certified Public Accountants ("AICPA") for a review of interim
financial information, as described in SFAS No. 71, Interim Financial
Information (with respect to the latest unaudited consolidated financial
statements of the Company included in the Registration Statement), a reading of
the latest available unaudited interim consolidated financial statements of the
Company (with an indication of the date of the latest available unaudited
interim financial statements), a reading of the latest available minutes of the
meetings of the shareholders and the Board of Directors of the Company and its
subsidiaries, and audit and compensation committees of such Boards, if any, and
inquiries to certain officers and other employees of the Company and its
subsidiaries responsible for operational, financial and accounting matters and
other specified procedures and inquiries, nothing has come to their attention
that would cause them to believe that (A) the unaudited consolidated financial
statements included in the Registration Statement (1) do not comply in form in
all material respects with the applicable accounting requirements of the Act or
(2) any material modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted accounting
principles; (B) at the date of the latest available unaudited interim
consolidated financial statements of the Company and a specified date not more
than five business days prior to the date of such letter, there was any change
in the capital stock and other items specified by the Representatives, increase
in long-term debt, decrease in net current assets, total assets, investments or
shareholders' equity of the Company and its subsidiaries, as compared with the
amounts shown in the June 30, 1996 unaudited consolidated balance sheet of the
Company included in the Registration Statement, or that for the periods from
June 30, 1996 to the date of the latest available unaudited financial
statements of the Company and to a specified date not more than five days prior
to the date of the letter, there were any decreases, as compared to the
corresponding periods in the prior year, in gross premiums
-27-
<PAGE> 28
written, net investment income, net realized capital gains, or total or per
share amounts of net income, or other items specified by the Representatives,
except in all instances for changes, decreases or increases which the
Registration Statement discloses have occurred or may occur and except for such
other changes, decreases or increases which the Representatives shall in their
sole discretion accept; or (C) any other unaudited income statement data and
balance sheet items included in the Registration Statement do not agree with
the corresponding items in the unaudited financial statements from which such
data and items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited consolidated financial statements included
or incorporated by reference in the Registration Statement;
(iv) stating that, on the basis of a reading of
the unaudited pro forma financial statements included in the Registration
Statement and the Prospectus (the "pro forma financial statements"), carrying
out certain specified procedures, inquiries of certain officials of the Company
and its subsidiary, Superior Insurance Company who have responsibility for
financial and accounting matters, and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in the pro
forma financial statements, nothing has come to their attention that would
cause them to believe that the pro forma financial statements do not comply in
all material respects with the applicable accounting requirements of Rule 11-02
of Regulation S-X or that the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of such statements;
(v) stating that they have compared specific
dollar amounts, numbers of shares, percentage of revenues and earnings
statements and other numerical data and financial information pertaining to the
Company and its subsidiaries set forth in the Registration Statement and all of
the dollar amounts and percentages in the Registration Statement, in each case
to the extent that such information is derived from the accounting records
subject to the internal control structure, policies and procedures of the
Company's and its subsidiaries' accounting system, or has been otherwise
derived in a manner permitted by AICPA Statement on Auditing Standards No. 72
with the results obtained from the application of specific readings, inquiries
and other appropriate procedures (which procedures do not constitute an audit
in accordance with generally accepted auditing standards) set forth in the
letter and with the accounting records of the Company and its subsidiaries, and
found them to be in agreement.
In the event that the letters referred to in this Section 7(h) set forth any
changes, decreases or increases in the items identified by you, it shall be a
further condition to the
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<PAGE> 29
obligations of the Underwriters that (i) such letters shall be accompanied by a
written explanation by the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary and (ii) such changes,
decreases or increases do not, in your sole judgment, make it impracticable or
inadvisable to proceed with the purchase, sale and delivery of the Shares being
delivered at such Time of Delivery as contemplated by the Registration
Statement, as amended as of the date of such letter.
(i) Since the date of the latest audited financial
statements included in the Prospectus and except pursuant to claims made by
insureds in the ordinary course of business under policies of insurance issued
by the Company's subsidiaries which claims are reasonably consistent with the
Company's historical claims experience, neither the Company nor any of its
subsidiaries shall have sustained (i) any loss or interference with their
respective businesses from fire, explosion, flood, hurricane or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as disclosed in or
contemplated by the Prospectus, or (ii) any change, or any development
involving a prospective change (including, without limitation, a change in
management or control of the Company), in or affecting the position (financial
or otherwise), results of operations, net worth or business prospects of the
Company and its subsidiaries, otherwise than as disclosed in or contemplated by
the Prospectus, the effect of which, in either such case, is in your sole
judgment so material and adverse as to make it impracticable or inadvisable to
proceed with the purchase, sale and delivery of the Shares being delivered at
such Time of Delivery as contemplated by the Registration Statement, as amended
as of the date hereof.
(j) Subsequent to the date hereof, there shall not have
occurred any of the following: (i) any suspension or limitation in trading in
securities generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or in the Common Stock of the Company by
the Commission or the National Association of Securities Dealers Automated
Quotation National Market System (except for suspensions or limitations that
last only a portion of one business day); (ii) a moratorium on commercial
banking activities in New York, Indiana or Connecticut declared by either
federal or state authorities; or (iii) any outbreak or escalation of
hostilities involving the United States, declaration by the United States of a
national emergency or war or any other national or international calamity or
emergency if the effect of any such event specified in this clause (iii) in
your sole judgment makes it impracticable or inadvisable to proceed with the
purchase, sale and delivery of the Shares being delivered at such Time of
Delivery as contemplated by the Registration Statement, as amended as of the
date hereof.
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<PAGE> 30
(k) The Company shall have furnished to you at such
Time of Delivery certificates of the chief executive and chief financial
officers of the Company satisfactory to you, as to the accuracy in all material
respects of the respective representations and warranties of the Company herein
at and as of such Time of Delivery with the same effect as if made at such Time
of Delivery, as to the performance by the Company of all of their respective
obligations hereunder to be performed at or prior to such Time of Delivery, and
as to such other matters as you may reasonably request, and the Company shall
have furnished or caused to be furnished certificates of such officers as to
such matters as you may reasonably request.
(l) The representations and warranties of each of the
Company and Parent in this Agreement and in the certificates delivered by each
of the Company and Parent pursuant to this Agreement shall be true and correct
in all material respects when made and on and as of each Time of Delivery as if
made at such time, and each of the Company and Parent shall have performed all
covenants and agreements and satisfied all conditions contained in this
Agreement required to be performed or satisfied by each of the Company and
Parent at or before such Time of Delivery.
(m) The Shares shall continue to be listed on the
National Association of Securities Dealers Automated Quotation National Market
System.
(n) The Representatives shall have received copies of
executed lock-up agreements from each of Parent, Parent's principal
shareholders and Parent's officers and directors who hold shares of common
stock of Goran or securities convertible into or exchangeable or exercisable
for common stock of Goran to the effect that such individuals and entities will
not offer, sell, contract to sell, or otherwise dispose of, any such shares of
or securities convertible into or exchangeable or exercisable for common stock
of Goran for a period of 180 days after the date of the Prospectus without the
prior written consent of Advest, Inc.
8. Indemnification and Contribution.
(a) Each of the Company and Parent agrees to jointly
and severally indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon: (i) any untrue statement or alleged untrue statement made by the
Company or Parent in Section 1(a) of this Agreement; (ii) any untrue statement
or alleged untrue statement of any material fact contained in (A) the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or (B) any
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<PAGE> 31
application or other document, or amendment or supplement thereto, executed by
the Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Shares under the
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"); or (iii)
the omission of or alleged omission to state in the Registration Statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or any Application, a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that neither
the Company nor Parent shall be liable in any such case to the extent that any
such loss, claim, damage, liability or action (i) arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto
or any Application in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through you expressly for use
therein (which information is solely as set forth in Section 1(a)(iii) hereof)
or (ii) is asserted by a person who purchased any of the Shares which are the
subject thereof from an Underwriter and if a copy of the Prospectus (as amended
or supplemented) which corrected the untrue statement or alleged untrue
statement or omission or alleged omission which is the basis of the loss,
claim, damage, liability or action for which indemnification is sought was not
delivered or given to such person at or prior to the written confirmation of
the sale to such person. Neither the Company nor Parent will, without the
prior written consent of the Representatives of the Underwriters, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding (or related cause of action or portion
thereof) in respect of which indemnification may be sought hereunder (whether
or not any Underwriter is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes an unconditional release
of each Underwriter from all liability arising out of such claim, action, suit
or proceeding (or related cause of action or portion thereof).
(b) Each Underwriter, severally but not jointly, agrees
to indemnify and hold harmless the Company and Parent against any losses,
claims, damages or liabilities to which the Company and Parent may become
subject under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
-31-
<PAGE> 32
contained in the Registration Statement or any amendment thereto, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or any Application or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by such
Underwriter through you expressly for use therein; and will reimburse the
Company and Parent for any legal or other expenses reasonably incurred by the
Company and Parent in connection with investigating or defending any such loss,
claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party
under subsection (a) or (b) above of notice of the commencement of any action,
such indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
which it may have to any indemnified party otherwise than under such
subsection. In case any such action shall be brought against any indemnified
party and it shall notify the indemnifying party of the commencement thereof,
the indemnifying party shall be entitled to participate therein and, to the
extent that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party); provided, however, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be one or more legal defenses available to it or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action on behalf of such indemnified party and such
indemnified party shall have the right to select separate counsel to defend
such action on behalf of such indemnified party. After such notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by such indemnified party of counsel appointed to
defend such action, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses, other
than reasonable costs of investigation, subsequently incurred by such
indemnified party in connection with the defense thereof, unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence or (ii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense
of the indemnifying party.
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<PAGE> 33
Nothing in this Section 8(c) shall preclude an indemnified party from
participating at its own expense in the defense of any such action so assumed
by the indemnifying party.
(d) If the indemnification provided for in this Section
8 is unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company and Parent on the one hand and
the Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law or if the indemnified party failed to give the notice
required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but
also the relative fault of the Company and Parent on the one hand and the
Underwriters on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and Parent on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by
the Company and Parent bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company and Parent on the
one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company, Parent and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection
(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above
in this subsection (d). The amount paid or payable by an indemnified party as
a result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares
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<PAGE> 34
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company and Parent under
this Section 8 shall be in addition to any liability which the Company and
Parent may otherwise have and shall extend, upon the same terms and conditions,
and to each officer, director and employee of the Underwriters and to each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act; and the obligations of the Underwriters under this Section 8
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and Parent and to each person, if any, who
controls the Company or Parent within the meaning of the Act or the Exchange
Act.
9. Default of Underwriters.
(a) If any Underwriter defaults in its obligation to
purchase Shares at a Time of Delivery, you may in your discretion arrange for
you or another party or other parties to purchase such Shares on the terms
contained herein. If within thirty- six (36) hours after such default by any
Underwriter you do not arrange for the purchase of such Shares, the Company
shall be entitled to a further period of thirty-six (36) hours within which to
procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone a
Time of Delivery for a period of not more than seven (7) days in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus that in your opinion may thereby be made necessary. The cost of
preparing, printing and filing any such amendments shall be paid for by the
Underwriters. The term "Underwriter" as used in this Agreement shall include
any person substituted under this Section with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
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<PAGE> 35
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you or
the Company as provided in subsection (a) above, if any, the aggregate number
of such Shares which remains unpurchased does not exceed one-eleventh (1/11) of
the aggregate number of Shares to be purchased at such Time of Delivery, then
the Company shall have the right to require each non-defaulting Underwriter to
purchase the number of Shares which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the number
of Shares which such Underwriter agreed to purchase hereunder) of the Shares of
such defaulting Underwriter or Underwriters for which such arrangements have
not been made.
10. Termination.
(a) This Agreement may be terminated with respect to
the Company Shares or any Optional Shares in the sole discretion of the
Representatives by notice to the Company given prior to the First Time of
Delivery or any Subsequent Time of Delivery, respectively, in the event that
(i) any condition to the obligations of the Underwriters set forth in Section 7
hereof has not been satisfied, or (ii) the Company shall have failed, refused
or been unable to deliver such party's respective Shares or the Company or
Parent shall have failed, refused or been unable to perform all obligations and
satisfy all conditions on their respective parts to be performed or satisfied
hereunder at or prior to such Time of Delivery, in either case other than by
reason of a default by any of the Underwriters. If this Agreement is
terminated pursuant to this Section 10(a), the Company [and/or Parent] will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including counsel fees and disbursements) that shall have been incurred by
them in connection with the proposed purchase and sale of the Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter or Underwriters by you and
the Company as provided in Section 9(a), the aggregate number of such Shares
which remains unpurchased exceeds one-eleventh (1/11) of the aggregate number
of Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in Section 9(b) to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to a Subsequent Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of
any non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
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<PAGE> 36
11. Survival. The respective indemnities, agreements,
representations, warranties and other statements of the Company, Parent and
their officers and the several Underwriters, as set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation (or any
statement as to the results thereof) made by or on behalf of any Underwriter or
any controlling person referred to in Section 8(e) or the Company, Parent or
any officer or director or controlling person of the Company or Parent referred
to in Section 8(e), and shall survive delivery of and payment for the Shares.
The respective agreements, covenants, indemnities and other statements set
forth in Sections 6 and 8 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
12. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed, delivered or
telegraphed and confirmed in writing to you in care of Advest, Inc., 90 State
House Square, Hartford, CT 06103, Attention: David Minot (with a copy to
LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125 West 55th Street, New York, NY
10019, Attention: Robert S. Rachofsky, Esquire); and if sent to the Company,
shall be mailed, delivered or telegraphed and confirmed in writing to Symons
International Group, Inc., 4720 Kingsway Drive, Indianapolis, IN 46205,
Attention: Alan G. Symons (with a copy to Barnes & Thornburg, 11 South
Meridian Street, Indianapolis, IN 46205, Attention: Catherine Bridge,
Esquire).
13. Representatives. You will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by you jointly or by
Advest, Inc. will be binding upon all the Underwriters.
14. Binding Effect. This Agreement shall be binding upon, and
inure solely to the benefit of, the Underwriters, the Company, Parent and to
the extent provided in Sections 8 and 10 hereof, the officers, directors and
employees and controlling persons referred to therein and their respective
heirs, executors, administrators, successors and assigns, and no other person
shall acquire or have any right under or by virtue of this Agreement. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
15. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to any provisions regarding conflicts of laws.
16. Counterparts. This Agreement may be executed by any one
or more of the parties hereto in any number of
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<PAGE> 37
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us one of the counterparts hereof, and
upon the acceptance hereof by Advest, Inc., on behalf of each of the
Underwriters, this letter will constitute a binding agreement among the
Underwriters, Parent and the Company. It is understood that your acceptance of
this letter on behalf of each of the Underwriters is pursuant to the authority
set forth in the Agreement among Underwriters, a copy of which shall be
submitted to the Company for examination, upon request, but without warranty on
your part as to the authority of the signers thereof.
Very truly yours,
SYMONS INTERNATIONAL GROUP, INC.
By:
-----------------------------------
Name: Alan G. Symons
Title: Chief Executive Officer
GORAN CAPITAL INC.
By:
-----------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above at
Hartford, Connecticut.
ADVEST, INC.
MESIROW FINANCIAL, INC.
By: ADVEST, INC.
By:
-----------------------------------
Name: Phil M. Skidmore
Title: Group Vice President
Director Investment Banking
On behalf of each of the Underwriters
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<PAGE> 38
JOINDER
Each of the subsidiaries of the Company, intending to be legally
bound, hereby joins this Agreement for purposes of Sections 1 and 8 hereof.
IGF HOLDINGS, INC.
By:
-----------------------------------
Title
IGF INSURANCE COMPANY
By:
-----------------------------------
Title
GGS MANAGEMENT HOLDINGS, INC.
By:
-----------------------------------
Title
PAFCO GENERAL INSURANCE COMPANY
By:
-----------------------------------
Title
SUPERIOR INSURANCE COMPANY
By:
-----------------------------------
Title
<PAGE> 39
SCHEDULE I
<TABLE>
<CAPTION>
Number of
Optional
Shares to be
Total Number Purchased if
of Company Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- --------------
<S> <C> <C>
Advest, Inc.
Mesirow Financial, Inc.
------------- -----------
</TABLE>
<PAGE> 40
EXHIBIT A
SUBSIDIARIES
IGF Holdings, Inc.
IGF Insurance Company
GGS Management Holdings, Inc.
GGS Management, Inc.
Pafco General Insurance Company
Superior Insurance Company
Superior American Insurance Company
Superior Guaranty Insurance Company
Standard Plan, Inc.
<PAGE> 1
EXHIBIT 10.2(2)
FIRST AMENDMENT
TO THE
STOCK PURCHASE AGREEMENT
FIRST AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below),
dated as of March 28, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a
Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware
limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation
("Goran"), and SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a
wholly-owned subsidiary of Goran ("SIG").
WHEREAS, on January 31, 1996, the Company, GSCP, Goran and SIG entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to
which, among other things, (i) GSCP agreed to purchase for $20,000,000 in cash
479,975 shares of Company Common Stock (capitalized terms used herein and not
defined herein shall have the meanings assigned to such terms in the Stock
Purchase Agreement) and (ii) SIG agreed to contribute to the Company all of the
issued and outstanding shares of capital stock of Pafco, which was contemplated
to have, as of the Closing Date, a Book Value of $14,000,000; and
WHEREAS, the Company, GSCP, Goran and SIG desire to amend the Stock
Purchase Agreement and Exhibit J thereto to reflect that (i) GSCP will purchase
479,975 shares of Company Common Stock for $21,200,000 in cash and (ii) that
Pafco is contemplated to have, as of the Closing Date, a Book Value of
$15,300,000.
NOW, THEREFORE, the parties hereto agree to as follows:
1. Amendment to the Stock Purchase Agreement. The following Sections of
the Stock Purchase Agreement are hereby amended as follows:
(a) Section 1.2 is hereby amended to substitute "$21,200,000" for the
reference therein to "$20,000,000."
(b) Sections 1.7(a) and (b) are hereby amended to substitute "$15,300,000"
for the references therein to "$14,000,000."
(c) Section 9.2(f)(i) is hereby amended to substitute "$21,200,000" for
the reference therein to "$20,000,000" and to substitute "$44,166,667" for the
reference therein to "$41,666,667."
<PAGE> 2
2. Amendment to the Stock Option Plan. The form of Stock Option Plan
attached as Exhibit J to the Stock Purchase Agreement is hereby amended to
substitute "$44.17" for each reference therein to "$41.67."
3. Miscellaneous. Except as expressly set forth in this Amendment, the
Stock Purchase Agreement and the Exhibits thereto shall otherwise remain
unchanged and in full force and effect and remain binding upon the parties
hereto.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment
as of the date first above written.
GGS MANAGEMENT HOLDINGS, INC.
By: /s/ ALAN G. SYMONS
----------------------------------------
Name: Alan G. Symons
Title: President
GS CAPITAL PARTNERS II, L.P.
By:GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ TERENCE O'TOOLE
----------------------------------------
Name: Terence O'Toole
Title: Vice President
GORAN CAPITAL INC.
By: /s/ ALAN G. SYMONS
----------------------------------------
Name: Alan G. Symons
Title: President
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ ALAN G. SYMONS
---------------------------------------
Name: Alan G. Symons
Title: Treasurer
3
<PAGE> 1
EXHIBIT 10.2(3)
SECOND AMENDMENT
TO THE
STOCK PURCHASE AGREEMENT
SECOND AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below),
dated as of April 30, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a
Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware
limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation
("Goran"), and SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a
wholly-owned subsidiary of Goran ("SIG").
WHEREAS, on January 31, 1996, the Company, GSCP, Goran and SIG entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement");
WHEREAS, on March 28, 1996, the Company, GSCP, Goran and SIG entered
into the First Amendment to the Stock Purchase Agreement pursuant to which the
parties amended certain provisions of the Stock Purchase Agreement and Exhibit J
thereto; and
WHEREAS, the Company, GSCP, Goran and SIG desire to further amend the
Stock Purchase Agreement and to amend Exhibit H, Exhibit I and Exhibit N thereto
to reflect certain agreements reached by the parties.
NOW, THEREFORE, the parties hereto agree to as follows:
1. Amendment to the Stock Purchase Agreement. The Stock Purchase
Agreement is hereby amended as follows:
1.1 Section 4.15(a) is hereby amended as follows:
(a) by deleting "(the "IGF Amount")";
(b) by deleting "the greater of book value or the statutory surplus
of IGF as of December 31,1995, as set forth on the audited financial statements
of Pafco as of December 31, 1995, (b)" and substituting therefor "$7,500,000
and";
(c) by deleting the first reference to "the IGF Amount" therein and
substituting therefor "$3,475,269";
(d) by deleting "(c)" and substituting therefor "(b)";
<PAGE> 2
(e) by deleting the second reference to "the IGF Amount" therein and
substituting therefor "$10,975,269";
(f) by deleting "(with respect to clause (c), with an accompanying
agreement, which shall include a pledge agreement with terms similar to the
terms of the Pledge Agreement (as defined in 9.2(j)), providing Pafco with a
fully perfected first security interest in all of the issued and outstanding
shares of capital stock of IGF, to secure payment of such note) or such other
assets as shall be reasonably acceptable to Pafco"; and
(g) by deleting the last sentence thereof and substituting therefor
"An "IGF or SIG Company Sale" shall mean (i) a sale or public offering of any
shares of a capital stock of IGF, IGF Holdings or SIG (pursuant to a merger or
consolidation of IGF, IGF Holdings or SIG with, or sale of such stock to,
another person or entity) or (ii) a sale of any assets of IGF, IGF Holdings or
SIG not in the ordinary course of business consistent with past practice."
1.2 Each reference in the Stock Purchase Agreement to an "IGF Company
Sale" is hereby deleted and the term "IGF or SIG Company Sale" shall be
substituted in each case therefor.
1.3 Section 4.15(c) is amended by adding, after "except as expressly
contemplated by this Agreement", "and except as may be required pursuant to the
Credit Agreement (the "Union Revolving Credit Agreement"), dated April __, 1996,
between Union (as defined in Section 4.18) and IGF Holdings or pursuant to any
agreement ancillary thereto, including the pledge agreement (the "Union
Revolving Pledge Agreement"), dated April __, 1996, between Union and IGF
Holdings, entered into by IGF Holdings as of the date of the Union Revolving
Credit Agreement".
1.4 Section 4.18 is hereby amended by adding, after "Prior to", "or
within 30 days after".
1.5 Section 5.10 is hereby amended and restated to read in its
entirety as follows:
"5.10. Post-Closing Public Announcements. The Goran Entities
agree that, at all times after the Closing, they will not issue any press
release or make any public statement with respect to this Agreement or the
transactions contemplated hereby, or which makes reference to GSCP or any of its
affiliates without obtaining the prior consent of GSCP as to the timing, content
and wording thereof, except as required by applicable Law. In the event of any
disclosure required by applicable Law, the Goran Entities will consult with GSCP
as to the contents thereof prior to making such disclosure, if it is possible
(consistent with the applicable legal requirements) to do so."
2
<PAGE> 3
1.6 Section 9.2(c) is hereby amended by adding before the period at
the end thereof the following parenthetical:
"(it being understood that the dollar amount of a Loss suffered or incurred by
Goran or SIG or GSCP, as the case may be, indirectly through their ownership of
Company Common Stock, as a result of a Loss suffered or incurred directly by
the Company or any of its subsidiaries, shall be the dollar amount of the Loss
suffered or incurred directly by the Company or any of its subsidiaries (which
in the case of a Loss resulting from the failure of IGF Holdings to pay to
Pafco any amount of interest, principal or other amount owing pursuant to any
IGF Holdings Note shall be not less than the amount failed to be paid by IGF
Holdings) multiplied by, (a) in the case of GSCP, the Applicable Percentage at
the time of the determination of such Loss and, (b) in the case of Goran or
SIG, (x) one minus (y) the Applicable Percentage at the time of the
determination of such Loss)"
1.7 Section 9.2(g) is hereby amended by adding at the end thereof the
following paragraph:
"Notwithstanding anything in this Agreement to the contrary, except
with the prior consent of the GSCP, Goran and SIG shall not be entitled to issue
any promissory note in respect of any indemnification obligation of Goran or SIG
hereunder relating to, arising out of, or resulting from an Event of Default
with respect to any IGF Holdings Note or Section 11.5 hereof (to the extent such
Section relates to the IGF Holdings Note). In the event that in connection with
any such indemnification obligation, the Company shall issue to GSCP shares of
Company Common Stock pursuant to Section 9.2(f) hereof such that at any time
Goran, SIG and their Affiliates hold, in the aggregate, less than 50.01% of the
outstanding shares of Company Common Stock, then, notwithstanding anything in
this Agreement to the contrary, in the event that Goran or SIG is thereafter
required to indemnify and hold harmless any GSCP Indemnified Party, Goran and
SIG shall not be entitled to indemnify and hold harmless such GSCP Indemnified
Party by issuing any promissory note."
1.8 Section 9.2(j) is hereby amended by deleting "first".
1.9 Section 11.5 is amended by adding, after "the Pledge Agreement",
"and the IGF Holdings Notes (it being understood that the joint and several
guarantee of Goran and SIG of the obligations of IGF Holdings pursuant to the
IGF Holdings Notes and the Pledge Agreement shall be unaffected by any
invalidity, irregularity or unenforceability of any IGF Holdings Note or the
Pledge Agreement (as a result of a bankruptcy of IGF Holdings or otherwise), the
failure of Pafco to enforce its rights thereunder, or any subordination or
"blockage" provision contained therein or in any agreement ancillary thereto)".
3
<PAGE> 4
2. Amendment to the Exhibits to the Stock Purchase Agreement.
2.1 Exhibit H annexed to the Stock Purchase Agreement is hereby
amended by substituting therefor Exhibit H annexed hereto.
2.2 Exhibit N annexed to the Stock Purchase Agreement is hereby
amended by substituting therefor Exhibit N annexed hereto.
2.3 Subsection (a) of "Covenants" in Exhibit I annexed to the Stock
Purchase Agreement is hereby amended by adding, after "the Pledge Agreement",
"or the Union Revolving Pledge Agreement".
2.4 Subsection (f) of "Covenants" in Exhibit I annexed to the Stock
Purchase Agreement is hereby amended by adding, after "other than", "$7,500,000
under the Union Revolving Credit Agreement and other than".
2.5 "Events of Default" in Exhibit I annexed to the Stock Purchase
Agreement is hereby amended by adding the following subsection:
(f) The occurrence of any default of event or default or breach
of any provision of or under the Union Revolving Credit Agreement or any
agreement ancillary thereto, including the Union Revolving Pledge Agreement.
3. Miscellaneous. Except as expressly set forth in this Amendment,
the Stock Purchase Agreement and the Exhibits thereto shall otherwise remain
unchanged and in full force and effect and remain binding upon the parties
hereto.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first above written.
GGS MANAGEMENT HOLDINGS, INC.
By: /s/ Alan G. Symons
-------------------------------------------
Name:
Title:
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ Sanjay Patel
------------------------------------------
Name: Sanjay Patel
Title: Vice President
GORAN CAPITAL INC.
By: /s/ Alan G. Symons
-----------------------------------------
Name:
Title:
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ Alan G. Symons
-----------------------------------------
Name:
Title:
5
<PAGE> 1
EXHIBIT 10.2(4)
THIRD AMENDMENT
TO THE
STOCK PURCHASE AGREEMENT
THIRD AMENDMENT TO THE STOCK PURCHASE AGREEMENT (as defined below),
dated as of September 24, 1996, by and among GGS MANAGEMENT HOLDINGS, INC., a
Delaware corporation (the "Company"), GS CAPITAL PARTNERS II, L.P., a Delaware
limited partnership ("GSCP"), GORAN CAPITAL INC., a Canadian corporation
("Goran"), SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation and a
wholly-owned subsidiary of Goran ("SIG"), and PAFCO GENERAL INSURANCE COMPANY,
an Indiana Corporation ("Pafco").
WHEREAS, as of January 31, 1996, the Company, GSCP, Goran and SIG
entered into a Stock Purchase Agreement (the "Stock Purchase Agreement");
WHEREAS, as of March 28, 1996, the Company, GSCP, Goran and SIG
entered into the First Amendment to the Stock Purchase Agreement pursuant to
which the parties amended certain provisions of the Stock Purchase Agreement and
Exhibit J thereto;
WHEREAS, as of April 30, 1996, the Company, GSCP, Goran and SIG
entered into the Second Amendment to the Stock Purchase Agreement pursuant to
which the parties amended certain provisions of the Stock Purchase Agreement and
Exhibit H, Exhibit I and Exhibit N thereto;
WHEREAS, on April 30, 1996, the Company, GSCP, Goran and SIG entered
into a letter agreement (the "Letter Agreement") pursuant to which the parties
(a) agreed that Section 1.7(b) of the Stock Purchase Agreement shall have no
further force and effect and (b) acknowledged that Pafco had declared a dividend
payable to SIG in the amount, if any, by which the Book Value of Pafco as
reflected on the Closing Date Balance Sheet exceeded $15,300,000, as such excess
amount shall have been adjusted pursuant to the terms of the Letter Agreement;
WHEREAS, the parties hereto now desire to declare the Letter Agreement
null and void and of no further force and effect, to cause SIG to relinquish all
rights to payment in respect of any dividend declared by Pafco prior to the date
hereof, and to amend certain provisions of the Stock Purchase Agreement; and
<PAGE> 2
WHEREAS, simultaneously herewith the Company, GSCP, Goran and SIG are
entering into an Amended and Restated Stockholder Agreement (the "Amended
Stockholder Agreement").
NOW, THEREFORE, in consideration of the Company, GSCP, Goran and SIG
executing and delivering the Amended Stockholder Agreement simultaneously
herewith, and in respect of other consideration the validity and sufficiency of
which is hereby acknowledged, the parties hereto agree to as follows:
1. Voidance of the Letter Agreement. The parties hereto agree and
acknowledge that the Letter Agreement shall be null and void and of no further
force and effect.
2. Relinquishment and Cancellation of Dividend. SIG hereby
relinquishes any and all rights it may have to receive any payment in respect to
any dividend declared by Pafco prior to the date hereof, and Pafco hereby
cancels each such dividend.
3. Amendment of Stock Purchase Agreement. The Stock Purchase
Agreement is hereby amended as follows:
3.1. Section 1.7(b) is hereby deleted in its entirety (except that any
terms defined in Section 1.7(b) shall retain the meanings set forth therein
whenever elsewhere used in the Stock Purchase Agreement).
3.2. Section 9.2(f) is hereby amended to read in its entirety as
follows:
"(f) In the event that a GSCP Indemnified Party shall at any
time be entitled to be indemnified or held harmless for any Loss pursuant to
this Agreement, such obligation shall be satisfied as follows:
(i) If prior to the earlier of (x) an IGF Company Sale and
(y) the first anniversary of the Closing Date, Goran or SIG shall issue to GSCP
a promissory note in an amount (the "Note Amount") equal to the amount of such
Loss (or, at GSCP's election, in lieu of Goran or SIG issuing such note to GSCP,
(1) Goran or SIG shall issue a promissory note to the Company in such amount as
is necessary for the GSCP Indemnified Party to be fully indemnified and held
harmless for such Loss, or (2) subject to paragraph (g) below, the Company shall
issue to GSCP a number of shares of Company Common Stock such that after issuing
such shares GSCP and its Affiliates, in the aggregate, will own the Applicable
Percentage of the Investment Company Common Stock). The "Applicable Percentage"
shall mean (a) $21,200,000 divided by, (b) the Total Investment less (i) the
Note Amount, (ii) in the case of an issuance of shares of Company Stock pursuant
to Section 9.2(f)(ii), the Section 9.2(f)(ii) Loss Amount (as
2
<PAGE> 3
defined in Section 9.2(f)(ii)), or (iii) in the case of an issuance of shares
of Company Common Stock pursuant to Section 9.2(i), the amount owing pursuant
to a promissory note issued by Goran or SIG and not paid in full when due. The
"Total Investment" means $44,166,667 less (a) the aggregate amount of all Note
Amounts and Excess Amounts which, in lieu of Goran or SIG issuing a promissory
note or paying cash to the Company pursuant to Section 9.2(f)(i) or Section
9.2(f)(ii), respectively, the Company issued shares of Company Common Stock to
GSCP and (b) the aggregate amount owed pursuant to all promissory notes issued
by Goran or SIG pursuant to Section 9.2 and not paid in full when due and in
respect of which the Company issued shares of Company Common Stock to GSCP.
"Investment Company Common Stock" shall mean the shares of Company Common Stock
held as of the Closing and any shares of Company Common Stock issued pursuant
to Section 9.2 hereof, in each case, as adjusted as appropriate to reflect
stock dividends paid, stock splits effected or other similar transactions, by
the Company.
(ii) If after the earlier of (x) an IGF Company Sale and
(y) the first anniversary of the Closing Date, Goran or SIG shall pay to GSCP in
cash an amount equal to such Loss (the "Section 9.2(f)(ii) Loss Amount") (or, at
GSCP's election, in lieu of Goran or SIG paying to GSCP such amount of cash, (1)
Goran or SIG shall contribute to the Company in such amount as is necessary for
the GSCP Indemnified Party to be fully indemnified and held harmless for such
Loss or, (2) if such amount is not contributed to the Company, the Company shall
issue to GSCP a number of shares of Company Common Stock such that after issuing
such shares GSCP and its Affiliates, in the aggregate, will own the Applicable
Percentage of the Investment Company Common Stock)."
4. Miscellaneous. Except as expressly set forth in this Amendment,
the Stock Purchase Agreement, as amended, and the Exhibits thereto shall
otherwise remain unchanged and in full force and effect and remain binding upon
the parties hereto.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first above written.
GGS MANAGEMENT HOLDINGS, INC.
By: /s/ Alan G. Symons
-------------------------------------------
Name: Alan Symons
Title: President
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ Terence M. O'Toole
-------------------------------------------
Name: Terence M. O'Toole
Title: Vice President
GORAN CAPITAL INC.
By: /s/ Alan G. Symons
-------------------------------------------
Name: Alan Symons
Title: President
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ Douglas H. Symons
-------------------------------------------
Name: Douglas H. Symons
Title: President
PAFCO GENERAL INSURANCE COMPANY
By: /s/ Douglas H. Symons
-------------------------------------------
Name: Douglas H. Symons
Title: President
4
<PAGE> 1
EXHIBIT 10.3(2)
AMENDED AND RESTATED
STOCKHOLDER AGREEMENT
BY AND AMONG
GGS MANAGEMENT HOLDINGS, INC.,
GS CAPITAL PARTNERS II, L.P.,
SYMONS INTERNATIONAL GROUP, INC.
AND
GORAN CAPITAL INC.
DATED AS OF
SEPTEMBER 24, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. Certain Definitions ......................................... 1
"Acceleration Event" ................................................. 1
"Affiliate" .......................................................... 2
"Beneficially Own" or "Beneficial Ownership" ......................... 2
"Company Sale" ....................................................... 2
"Credit Agreement" ................................................... 2
"Equity Securities" .................................................. 2
"Goran Stock" ........................................................ 2
"Group" .............................................................. 2
"Initial Public Offering" ............................................ 2
"Other Stockholders," ................................................ 3
"Person" ............................................................. 3
"Proportionate Percentage" ........................................... 3
"Public Sale" ........................................................ 3
"Registration Rights Agreement" ...................................... 3
"Sell" ............................................................... 3
"Selling Stockholder" ................................................ 4
"Stockholders" ....................................................... 4
"Subsidiary" ......................................................... 4
"Termination Date" ................................................... 4
SECTION 2. Corporate Governance. ....................................... 4
2.1. Board of Directors. ............................................ 4
2.2. Management. .................................................... 6
2.3. Actions Requiring Special Approval ............................. 7
SECTION 3. Limitations on Sales of Stock by Stockholders. .............. 9
3.1. Transfer Restriction ........................................... 9
3.2. Rights of First Offer .......................................... 10
3.3. Tag-Along Rights ............................................... 11
3.4. Procedures...................................................... 13
3.5. Transferees .................................................... 13
SECTION 4. Company Sale ................................................ 14
SECTION 5. Representations and Warranties .............................. 14
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 6. Miscellaneous................................................ 15
6.1. No Inconsistent Agreements; Further Assurances ................. 15
6.2. Legends ........................................................ 15
6.3. Termination .................................................... 16
6.4. Severability ................................................... 16
6.5. Governing Law .................................................. 17
6.6. Successors and Assigns ......................................... 17
6.7. Notices ........................................................ 17
6.8. Amendments ..................................................... 18
6.9. Headings ....................................................... 19
6.10. Remedies ....................................................... 19
6.11. No Third Party Beneficiaries ................................... 19
6.12. Guarantee ...................................................... 19
6.13. Entire Agreement ............................................... 19
6.14. Newsub ......................................................... 19
6.15. Counterparts ................................................... 19
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED
STOCKHOLDER AGREEMENT
AMENDED AND RESTATED STOCKHOLDER AGREEMENT, dated as of September 24,
1996, by and between GGS MANAGEMENT HOLDINGS, INC., a Delaware corporation (the
"Company"), GS CAPITAL PARTNERS II, L.P., a Delaware limited partnership
("GSCP"), SYMONS INTERNATIONAL GROUP, INC., an Indiana corporation ("SIG"), and
GORAN CAPITAL INC., a Canadian corporation ("Goran"), and the other parties
that may be listed on Schedule A hereto.
W I T N E S S E T H :
WHEREAS, the Company, GSCP, Goran and SIG are parties to that certain
Stock Purchase Agreement, dated as of January 31, 1996 (the "Stock Purchase
Agreement"), as amended, pursuant to which GSCP purchased from the Company
shares of Common Stock, par value $.01 per share, of the Company ("Stock");
WHEREAS, on April 30, 1996, the Company, GSCP, Goran and SIG entered into
a Stockholder Agreement (the "Original Agreement") establishing certain rights
and obligations with respect to the management of the Company and the ownership
of shares of Stock; and
WHEREAS, the Company, GSCP, Goran and SIG now desire to amend and restate
the Original Agreement to reflect certain agreements they have reached with
respect to the management of the Company.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and obligations hereinafter set forth, the parties hereto hereby
agree as follows:
SECTION 1. Certain Definitions. As used herein, the following terms shall
have the following meanings (capitalized terms used herein and not defined
herein shall have the meanings assigned to such terms in the Stock Purchase
Agreement):
"Acceleration Event" shall mean either (i) the third separate
occasion on which GSCP in good faith proposes to the Board an
equity financing or acquisition transaction which the Board does
not approve, or (ii) any time at which Alan G. Symons, family
members of Alan G. Symons (including, without limitation, G. Gordon
Symons), and entities controlled by Alan G. Symons and such family
members no longer have voting control of either SIG or Goran (it
being understood that Alan G. Symons and such family members (x)
shall be deemed to have voting control of Goran only for so long as
either (a) in the aggregate they hold directly or indirectly in
excess of 40% of the Goran Stock or (b)(i) in the aggregate they
hold directly or
<PAGE> 5
indirectly in excess of 25% of the Goran Stock and (ii) no other
holder or "group" (as such term is defined in the Securities
Exchange Act of 1934, as amended) of holders holds in excess of 10%
of the Goran Stock, and (y) shall be deemed to have voting control
of SIG only for so long as (a) Goran holds directly in excess of 50%
of the SIG Stock and (b) Alan G. Symons and family members of Alan
G. Symons have voting control of Goran).
"Affiliate" shall mean with respect to any Person, any other Person
directly or indirectly controlling or controlled by or under direct
or indirect common control with such specified Person.
"Beneficially Own" or "Beneficial Ownership" shall have the meaning
set forth in Rule 13d-3 under the Securities Exchange Act of 1934,
as amended.
"Company Sale" shall mean a merger or consolidation of the Company
and any other Person, a sale or transfer of all or substantially
all of the assets or capital stock of the Company to another
Person, or any other similar business combination transaction or
series of transactions.
"Credit Agreement" shall mean the Credit Agreement, dated April 30,
1996, between GGS Management, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company ("GGS Sub"), the banks party
hereto and The Chase Manhattan Bank (National Association), as
administrative agent.
"Equity Securities" shall mean (i) Stock and (ii) all securities
convertible into, or exchangeable or exercisable for, shares of
Stock.
"Goran Stock" shall mean the outstanding capital stock at any time
of Goran the holders of which are entitled to vote generally in the
election of directors of Goran.
"Group" shall mean two or more Persons who agree to act together
for the purpose of acquiring, holding, voting or disposing of
Stock.
"Initial Public Offering" shall mean an underwritten public
offering of Stock which (i) is effected pursuant to an effective
registration statement filed under the Securities Act of 1933, as
amended (the "Securities Act"), (ii) involves Equities Securities
representing, on a fully-diluted basis, at least 20% of all issued
and outstanding Stock of the Company, and (iii) generates net
proceeds to the sellers in such underwritten public offering of at
least $25,000,000.
-2-
<PAGE> 6
"Other Stockholders," with respect to any Selling Stockholder,
shall mean the Stockholders other than the Selling Stockholder
(provided, however, that GSCP and its Affiliates shall be
considered collectively as one Other Stockholder for all purposes
under Section 5 hereof).
"Person" shall mean any individual, corporation, limited liability
company, limited or general partnership, joint venture,
association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivisions
thereof, and any Group.
"Proportionate Percentage" shall mean, as to each Stockholder, the
quotient obtained (expressed as a percentage) by dividing (A) the
number of shares of Stock owned by such Stockholder on the first
day of the Acceptance Period (as defined in Section 3.2(a)) or the
Tag-Along Offer Period (as defined in Section 3.3(a)), as the case
may be, by (B) the aggregate number of shares of Stock owned on the
first day of the Acceptance Period or the Tag-Along Offer Period,
as the case may be, by all Stockholders who deliver Acceptance
Notices to purchase Subject Stock (as defined in Section 3.2(a)) or
who elect to Sell Stock to a Tag-Along Offeror (as defined in
Section 3.3(a)).
"Public Sale" shall mean a Sale pursuant to a bona fide
underwritten public offering pursuant to an effective registration
statement filed under the Securities Act or a Sale pursuant to Rule
144 under the Securities Act.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement, dated April 30, 1996, between the Company, GSCP, SIG and
Goran.
"Sell", as to any Stock, shall mean to sell, or in any other way
directly or indirectly transfer, assign, distribute, encumber or
otherwise dispose of, such Stock, either voluntarily or
involuntarily; and the terms Sale and Sold shall have meanings
correlative to the foregoing.
"Selling Stockholder" shall mean any Stockholder who proposes to
Sell shares of Stock pursuant to Section 3.2 or 3.3 hereof.
"SIG Stock" shall mean the outstanding capital stock at any time of
SIG the holders of which are entitled to vote generally in the
election of directors of SIG.
-3-
<PAGE> 7
"Stockholders" shall mean the parties to this Agreement (other than
the Company) and any other person who executes and agrees to be
bound by the terms of this Agreement.
"Subsidiary" shall mean, with respect to any Person, (i) any
corporation, partnership or other entity of which shares of stock
or other ownership interests having ordinary voting power to elect
a majority of the board of directors or other managers of such
corporation, partnership or other entity are at the time owned,
directly or indirectly, or (ii) the management of which is
otherwise controlled, directly or indirectly through one or more
intermediaries, or both, by such Person.
"Termination Date" shall mean the earliest of (i) the date of
consummation of an Initial Public Offering, (ii) the date of
consummation of a Company Sale and (iii) the tenth anniversary of
the date hereof.
SECTION 2. Corporate Governance.
2.1. Board of Directors.
(a) Members. The Board of Directors of the Company (the
"Board") shall consist of five members, of whom two shall be designated by GSCP
(such persons being so designated, and their successors, being referred to
herein as the "GSCP Designees") and three shall be designated by SIG (such
persons being so designated, and their successors, being referred to herein as
the "SIG Designees"). Notwithstanding the foregoing, in the event that (x) at
any time SIG and its Affiliates shall own less than 25% of the then issued and
outstanding shares of Stock by reason of the issuance by the Company of shares
of Stock to GSCP or its Affiliates in satisfaction of the indemnification
obligations of Goran and SIG pursuant to the Stock Purchase Agreement (the date
on which such condition occurs being referred to as the "Indemnity Date"), or
(y) at any time (i) SIG, Goran or the Company shall be in violation of any term
or provision of this Agreement, or (ii) the Company or GGS-Sub shall remain in
violation of any covenant contained in the Credit Agreement or in any agreement
ancillary thereto (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 Credit Agreement (whether or not such event of default is waived), the size
of the Board shall be forthwith reduced (such reduction, a "Board Reduction")
to four members. In the event of a Board Reduction, so long as the Indemnity
Date has not occurred, SIG shall be entitled to designate only two directors
(and there shall be only two SIG Designees) and GSCP shall be entitled to
designate two directors (and there shall be two GSCP Designees), and after
the occurrence of the Indemnity Date, SIG shall be entitled to designate only
one director (and there shall be only one SIG Designee), and GSCP shall
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be entitled to designate three directors (and there shall be three GSCP
Designees). At each meeting of the stockholders of the Company held for the
purpose of electing directors, GSCP and SIG, respectively, shall cause the GSCP
Designees and the SIG Designees to be elected as directors.
(b) Vacancies. Each of the GSCP Designees and SIG Designees
shall hold office until his death, resignation or removal or until his successor
shall have been duly elected and qualified. If any GSCP Designee shall cease to
serve as a director of the Company for any reason, the vacancy resulting thereby
shall be filled by another person designated by GSCP. If any SIG Designee shall
cease to serve as a director of the Company for any reason (other than pursuant
to Section 2.1(a)), the vacancy resulting thereby shall be filled by another
person designated by SIG. In the event that at any time there exists vacancies
on the Board such that there is either no GSCP Designee or no SIG Designee, no
action may be taken by the Board until such vacancy is filled.
(c) Removal. No GSCP Designee may be removed from office
except by GSCP and no SIG Designee may be removed from office except by SIG
(except pursuant to Section 2.1(a)). GSCP shall have the right to remove any
GSCP Designee, and SIG shall have the right to remove any SIG Designee, with or
without cause, at any time.
(d) Quorum Requirements. The quorum (the "Required Quorum")
which shall be required for action to be taken by the Board (other than an
adjournment of any meeting of the Board) shall be, prior to a Board Reduction, a
majority of the members of the Board, including at least one GSCP Designee.
After a Board Reduction, prior to the Indemnity Date, the Required Quorum shall
be one GSCPDesignee and one SIG Designee. After the Indemnity Date, the
Required Quorum shall be any two directors. Directors participating by
telephone conference in any meeting of the Board shall be considered in
determining whether a quorum of directors is present.
(e) Voting Requirements. 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 be
taken by the Board with the approval of at least one GSCP Designee and one
SIG Designee, After the Indemnity Date, action may be taken by the Board
with the approval of a majority of the entire Board.
(f) Committees. The Company shall cause a GSCP Designee
designated by GSCP to be appointed to each of the committees of the Board as may
be requested at any time or from time to time by GSCP.
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(g) Chairman of the Board. GSCP shall have the right to
designate the Chairman of the Board.
(h) Directors' Indemnification. The Company's Certificate of
Incorporation and By-Laws shall, to the fullest extent permitted by law,
provide for indemnification of, and advancement of expenses to, and
limitation of the personal liability of, the directors of the Company or such
other person or persons, if any, who, pursuant to a provision of such
Certificate of Incorporation, exercise or perform any of the powers or duties
otherwise conferred or imposed upon such directors, which provisions shall
not be amended, repealed or otherwise modified in any manner adverse to the
directors until at least six years following the Termination Date.
(i) Expenses. The Company shall, promptly after receipt of
satisfactory evidence therefor, reimburse each member of the Board for his
reasonable travel and other out-of-pocket expenses incurred to attend meetings
of the Board or of any committees thereof.
(j) Access to Information. The Company shall cause its
management at all times to provide to the GSCP Designees all information made
available to the SIG Designees.
2.2. Management.
(a) Chief Executive Officer. Subject to the provisions of
this Agreement and the Employment Agreement, dated the date hereof, between the
Company and Alan G. Symons, Alan G. Symons shall be the Chief Executive
Officer of the Company.
(b) Appointment of Management. All management members of the
Company (other than the Chief Executive Officer) shall be designated by, their
compensation shall be determined by, and they may be removed, promoted or
demoted by, the Chief Executive Officer of the Company; provided, however,
that (i) the designation of, setting of compensation for, or removal,
promotion or demotion of, any person who will earn compensation from the
Company and its Subsidiaries of $100,000 or more per annum shall be subject
to the prior approval of the Board and (ii) the GSCP Designees shall have the
right at any time to designate a Chief Operating Officer of the Company, to
remove any person so designated, with or without cause, at any time, and to
designate successors thereto. The Chief Operating Officer of the Company
shall be required to report directly to the Board.
2.3. Actions Requiring Special Approval. The Company shall not,
and shall not permit any of its Subsidiaries to, directly or indirectly, take
any of the following actions without first obtaining approval of such action by
the Board and at least one
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GSCP Designee (except to the extent otherwise specifically provided for in this
Agreement, the Stock Purchase Agreement or the Registration Rights Agreement):
(a) (x) consolidate or merge with or into any other Person,
or enter into any other similar business combination transaction, (y) purchase,
acquire or obtain any capital stock or other proprietary interest, directly
or indirectly, in any other entity or all or a substantial portion of the
business or assets of another Person or enter or commit to enter into any
joint ventures or partnerships or establish any non-wholly-owned
subsidiaries, in each case, where the consideration paid by, or the
contribution or investment of, the Company and all of its Subsidiaries taken
together (including assumed liabilities) is in excess of $1,000,000 in the
aggregate in cash or assets, or (z) voluntarily liquidate, dissolve or
windup;
(b) offer any type of insurance other than non-standard
automobile insurance (other than insurance policies issued by the Company or any
of its Subsidiaries on behalf of IGF Insurance Company or SIG - Florida in
compliance with Section 5.7 of the Stock Purchase Agreement) or expand into
new lines of business;
(c) sell, lease, transfer or otherwise dispose of any asset or
group of assets, for aggregate consideration (as to the Company and all of its
Subsidiaries taken together), in excess of $1,000,000 (excluding asset sales
effected in the ordinary course of business pursuant to and in accordance
with the Company's or any of its Subsidiary's investment policies);
(d) enter into any transaction with a director or officer of
Goran (or any relative or Affiliate of any such Person) or with any Affiliate of
Goran (provided, however, that the Company and any of its Subsidiaries may enter
into reinsurance arrangements with Granite Reinsurance Company Ltd.
("GraniteRe") so long as (i) each such arrangement is on arm's length market
terms and (ii) with respect to each such arrangement, GraniteRe posts cash
collateral in an amount equal to the total liabilities assumed by GraniteRe
pursuant thereto, pursuant to written collateral arrangements in form and
substance satisfactory to the Board);
(e) enter into one or more agreements to reinsure a substantial
portion of the Company's or any of its Subsidiary's liabilities;
(f) adopt or change the reserve policy or the investment policy
of the Company or any of its Subsidiaries;
(g) create, incur, assume or suffer to exist any indebtedness
of the Company or any of its Subsidiaries for borrowed money (which shall
include for purposes hereof capitalized lease obligations and guarantees or
other contingent obligations for indebtedness for borrowed money) in an
aggregate amount (as to the
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<PAGE> 11
Company and all of its Subsidiaries taken together) in excess of $1,000,000
excluding such indebtedness that exists as of the date hereof;
(h) mortgage, encumber, create, incur or suffer to exist, liens
on its assets, in an aggregate amount (as to the Company and all of its
Subsidiaries taken together) in excess of $1,000,000 (excluding liens on assets
that exist as of the date hereof);
(i) redeem, repurchase or otherwise acquire any outstanding
shares of its capital stock or any other of its outstanding securities or debt
for borrowed money (including capital leases) (except for indebtedness to the
extent it becomes due in accordance with its terms and except for the repayment
of indebtedness in an aggregate amount (as to the Company and all of its
Subsidiaries taken together) of up to $1,000,000);
(j) make or commit to make (with respect to the Company and all
of its Subsidiaries taken together) any one capital expenditure in an amount in
excess of $1,000,000, or make or commit to make capital expenditures (with
respect to the Company and all of its Subsidiaries taken together) in any
year in an aggregate amount in excess of the amount contemplated by the
Company's business plan;
(k) issue or sell any Equity Securities or any shares of
capital stock of any of the Company's Subsidiaries;
(l) enter into, adopt or amend any employment contract or
benefit plan, policy or arrangement (other than non-material changes to the
Company's health, life and non-contributory 401(k) plans);
(m) amend its Certificate of Incorporation or By-laws,
including, without limitation, any change in the number of directors comprising
its Board of Directors;
(n) amend, modify or waive any provision of this Agreement, the
Stock Purchase Agreement or the agreements ancillary thereto or the Credit
Agreement, or become a party to any agreement which by its terms restricts
the Company's or any of its Subsidiary's, or any Stockholder's, performance
of the terms of any of such agreements;
(o) change its independent certified accountants or actuaries;
(p) register any securities under the Securities Act or grant
any registration rights therefor; or
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(q) agree or otherwise commit to take any of the actions set
forth in the foregoing subparagraphs (a) through (p).
Notwithstanding any other provision of this Agreement or the Stock
Purchase Agreement, approval of the Board hereunder will not be required with
respect to any obligation of the Company set forth in the Stock Purchase
Agreement or any agreement ancillary thereto (the "Ancillary Agreements") and,
if such approval by the Board is required by law, the SIG Designees and the GSCP
Designees shall cause such approval to be provided, and the Stockholders, the
SIG Designees and the GSCP Designees shall cause the Company to take such
actions as may be necessary for the Company to meet its obligations under the
Stock Purchase Agreement and the Ancillary Agreements.
Notwithstanding any other provision of this Agreement, the GSCP
Designees (in that the consent or vote of the SIG Designees) may cause the
Company, or may cause the Company to cause Newsub to cause Pafco General
Insurance Company ("Pafco"), to take any action under the Pledge Agreement,
dated the date, hereof, by IGF Holdings, Inc. in favor of Pafco.
[Notwithstanding any other provision of this Agreement, neither Goran,
SIG nor the Company shall (and each shall cause its direct and indirect
Subsidiaries and its Affiliates not to), without the prior written approval of
GSCP, furnish to any employee of the Company or any of its direct or indirect
Subsidiaries (whether in his capacity as an employee of the Company or of any of
the Company's direct or indirect Subsidiaries or otherwise) (x) any
"performance based" compensation the amount of which is determined in any part
based on the performance of any entity other than the Company and its direct and
indirect Subsidiaries, or (y) any stock options or equity securities of any
entity other than the Company.]
SECTION 3. Limitations on Sales of Stock by Stockholders.
3.1. Transfer Restriction. Except as set forth on Schedule 3.1, no
Stockholder shall Sell any Stock (whether owned on the date hereof or acquired
hereafter) for a period of two years from the date hereof (the "Mandatory
Holding Period"); provided, however, that (i) the foregoing restriction shall
not apply to (x) any Sale of Stock to an Affiliate of such Stockholder, (y) any
Sale that is a Public Sale or (z) a Company Sale pursuant to Section 4, and (ii)
the foregoing restriction shall not apply to GSCP in the event that an
Acceleration Event occurs.
3.2. Rights of First Offer. In addition to (and not in limitation of)
any other restrictions on Sales of Stock contained in this Agreement, and
subject to
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Section 3.2(e), any Sale by a Stockholder shall be solely for cash
consideration and shall be consummated only in accordance with the following
procedures:
(a) The Selling Stockholder shall first deliver to each Other
Stockholder a written notice (an "Offer Notice"), which shall (i) state such
Selling Stockholder's intention to sell Stock to one or more Persons, the
amount of Stock to be sold (the "Subject Stock"), the proposed purchase price
therefor and a summary of the other material terms and conditions of the
proposed Sale and (ii) offer to each such Other Stockholder the option to
acquire all or any portion of such Subject Stock upon the terms and subject
to the conditions of the proposed Sale as set forth in the Offer Notice (the
"Offer"); provided, however, that the Offer may provide that such Offer will
be revoked if less than all of the Subject Stock will be purchased by Other
Stockholders pursuant to this Section 3.2 (an Offer with such qualifications
being referred to herein as a "Conditional Offer"). Each Other Stockholder
shall have the right, for a period of 45 days after receipt of an Offer
Notice (the "Acceptance Period"), by written notice to the Selling
Stockholder (an "Acceptance Notice"), to accept all or any portion of the
Subject Stock so offered, at the purchase price and on the terms stated in
the Offer Notice. Each Acceptance Notice must specify the number of shares
of Subject Stock which the Other Stockholder wishes to purchase pursuant to
the Offer (such number of shares being referred to herein as the "Specified
Shares" with respect to each Acceptance Notice, and the "Aggregate Specified
Shares" with respect to all of the Acceptance Notices taken together).
(b) In the event of a Conditional Offer, the Selling
Stockholder shall not be obligated to sell any Subject Stock to any Other
Stockholders pursuant to this Section 3.2 if the number of Aggregate Specified
Shares is less than the number of shares of Subject Stock, and the Selling
Stockholder shall be free to Sell the Subject Stock, at any time within 90 days
after expiration of the Acceptance Period (the "Sale Period"), at a price not
less than the price, and on terms not more favorable to the purchaser thereof
than the terms, stated in the Offer Notice.
(c) In the event of an Offer which is not a Conditional Offer
(or in the event of a Conditional Offer where the number of Aggregate Specified
Shares equals or exceeds the number of shares of Subject Stock), the Selling
Stockholder shall sell to each Other Stockholder who delivered an Acceptance
Notice a number of shares of Subject Stock which is equal to such Other
Stockholder's number of Specified Shares, and the Selling Stockholder shall
be free to sell any remaining unsold shares of Subject Stock, at any time
during the Sale Period, at a price not less than the price, and on terms not
more favorable to the purchaser thereof than the terms, set forth in the
Offer Notice.
(d) In the event that the number of Aggregate Specified Shares
exceeds the number of shares of Subject Stock, then the Subject Stock shall be
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allocated among such Other Stockholders as follows: (i) First, each such
Other Stockholder shall be entitled to purchase a number of shares of Subject
Stock equal to the lesser of the number of such Other Stockholder's Specified
Shares or such Other Stockholder's Proportionate Percentage of Subject Stock;
(ii) Second, if any Subject Stock remains unallocated ("Remaining Shares"),
each Other Stockholder whose number of Specified Shares exceeded the number
of shares of Subject Stock allocated to it pursuant to (i) above (the amount
of such excess being referred to herein as the "Excess Amount") (each, an
"Oversubscribed Stockholder") shall be entitled to purchase a number of
Remaining Shares equal to the lesser of the Excess Amount and such
Oversubscribed Stockholder's Proportionate Percentage (treating only
Oversubscribed Stockholders as Other Stockholders for these purposes) of the
Remaining Shares; and (iii) Third, the process set forth in (ii) above shall
be repeated with respect to any Subject Stock not allocated for purchase,
until all shares of Subject Stock are allocated for purchase.
(e) The requirements of this Section 3.2 shall not apply to (i)
any Sale of Stock by a Stockholder to an Affiliate of such Stockholder, (ii) any
Sale of Stock which is a Public Sale or (iii) a Company Sale pursuant to Section
4.
3.3. Tag-Along Rights. In addition to (and not in limitation of) any
other restrictions on Sales of Stock contained in this Agreement, and subject to
Section 3.3(d), no Stockholder may, in any transaction or series of
transactions, Sell Stock representing more than 20% of the then issued and
outstanding Stock to another Person, except in accordance with the following
procedures:
(a) The Selling Stockholder shall first deliver to each Other
Stockholder a written notice (a "Tag-Along Notice"), which shall (i)
specifically identify the proposed transferee of the Stock (the "Tag-Along
Offeror"), the amount of Stock proposed to be Sold (the "Tag-Along Subject
Stock"), the purchase price therefor and a summary of the other material
terms and conditions of the proposed Sale, and (ii) contain an offer (the
"Tag-Along Offer") from the Tag-Along Offeror to each such Other Stockholder
to purchase from the Stockholders (including the Selling Stockholder and the
Other Stockholders), in the aggregate, up to the number of shares of
Tag-Along Subject Stock, upon the terms and subject to the conditions of the
proposed Sale as set forth in the Tag-Along Notice. The Tag-Along Offer may
be accepted in whole or in part at the option of each of the Stockholders.
Acceptance of a Tag-Along Offer, in whole or in part, shall be made by
delivery of a written notice (a "Tag-Along Acceptance Notice") to the
Tag-Along Offeror within 15 days after receipt of the Tag-Along Notice (the
"Tag-Along Offer Period"), setting forth the maximum number of shares of
Stock that such Stockholder elects to Sell pursuant thereto (such number of
shares being referred to herein as the "Specified Tag-Along Shares" with
respect to each
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Tag-Along Acceptance Notice, and the "Aggregate Specified Tag-Along Shares"
with respect to all of the Tag-Along Acceptance Notices taken together).
(b) In the event that the Aggregate Specified Tag-Along Shares
exceed the number of shares of Tag-Along Subject Stock, each Stockholder
(including the Selling Stockholder and each Other Stockholder who delivers a
Tag-Along Acceptance Notice) shall be entitled to Sell Stock to the Tag-Along
Offeror pursuant to this Section 3.3, as follows: (i) First, each Stockholder
shall be entitled to Sell a number of shares of Stock equal to the lesser of the
number of such Stockholder's Specified Tag-Along Shares or such Stockholder's
Proportionate Percentage of Tag-Along Subject Stock; (ii) Second, if any
Tag-Along Subject Stock remains unallocated ("Remaining Tag-Along Shares"),
each Stockholder whose number of Specified Tag-Along Shares exceeded the
number of shares of Stock Sold pursuant to (i) above (the amount of such
excess being referred to herein as the "Excess Tag-Along Amount") (each, a
"Remaining Tag-Along Stockholder") shall be entitled to Sell to the Tag-Along
Offeror a number of shares of Stock equal to the lesser of the Excess Amount
and such Remaining Tag-Along Stockholder's Proportionate Percentage (treating
only Remaining Tag-Along Stockholders as Stockholders for these purposes) of
the Remaining Tag Along Shares; and (iii) Third, the process set forth in
(ii) above shall be repeated with respect to any Tag-Along Stock not sold to
the Tag-Along Offeror, until all specified Tag-Along Shares are so Sold.
(c) No Other Stockholder who delivers an Acceptance Notice
with respect to a proposed Sale of Stock by a Selling Stockholder shall have
the right to deliver a Tag-Along Acceptance Notice with respect to such
proposed Sale of Stock.
(d) The requirements of this Section 3.3 shall not apply to
(i) any Sale of Stock by a Stockholder to an Affiliate of such Stockholder,
(ii) any Sale of Stock which is a Public Sale or (iii) a Company Sale pursuant
to Section 4.
3.4. Procedures.
(a) All Sales of Subject Stock to Other Stockholders pursuant
to an Offer Notice, or of Tag-Along Subject Stock to a Tag-Along Offeror
pursuant to a Tag-Along Notice, shall be consummated on the later of (i) a
mutually satisfactory business day within 30 days after the expiration of the
Acceptance Period or the Tag-Along Acceptance Period, as the case may be, or
(ii) the fifth business day following the expiration or termination of all
waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the receipt of all other necessary governmental
approvals, including, without limitation, insurance regulatory approvals,
applicable to such Sale, or at such other time and/or place as the parties to
such Sale may agree. The delivery of certificates or other instruments
evidencing such Subject
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Stock, or Tag-Along Subject Stock, as the case may be, duly endorsed for
transfer, shall be made on such date against payment of the purchase price for
such Stock.
(b) If a Selling Stockholder sells Subject Stock during the
Sale Period, or sells Tag-Along Subject Stock to a Tag-Along Offeror, the
Selling Stockholder shall promptly notify the Other Stockholders, as to (i) the
number of shares of Stock, if any, that the Selling Stockholder owns after
such Sale, (ii) the number of shares of Stock that the Selling Stockholder
has Sold, (iii) the terms of such Sale and (iv) the name of the owner(s) of
any shares of Stock Sold.
(c) In the event that Subject Stock is not Sold by the Selling
Stockholder during the Sale Period, the right of the Selling Stockholder to
Sell such unsold Stock shall expire and the obligations of Section 3.2 shall
be reinstated upon expiration of the Sale Period.
3.5. Transferees. Any transferee of Stock (other than a transferee
pursuant to a Public Sale or a Company Sale) who is not (immediately prior to
the time of such transfer) a Stockholder shall, upon consummation of, and as a
condition to, such Sale, (A) execute, and agree to be bound by the terms of,
this Agreement and shall thereafter be listed as a party on Schedule A hereto
and deemed a Stockholder for purposes of this Agreement and (B) execute and
deliver a certificate, in form and substance reasonably satisfactory to the
Company, to the effect that (i) such Person is purchasing the Stock for its own
account, for investment and not with a view to the distribution thereof and
(ii) such Sale is otherwise being made in compliance with all applicable
federal and state laws (including, without limitation, federal and state
securities laws and "blue sky" laws). Upon the Sale by GSCP of all of its
Stock, any transferees thereof (to the extent the rights are assigned by GSCP)
shall have all of the rights of GSCP under this Agreement, but excluding (x)
the right pursuant to Section 2.2(b) to designate or remove the Chief Operating
Officer of the Company and (y) the right pursuant to Section 2.1(f) to
designate the Chairman of the Board.
SECTION 4. Company Sale. Notwithstanding any other provision of this
Agreement, in the event that (i) the Termination Date has not occurred within
five years from the date hereof, (ii) an Acceleration Event occurs or (iii) Mr.
Alan G. Symons ceases to be employed as the Chief Executive Officer of the
Company for any reason whatsoever, GSCP shall have the right to provide to SIG,
at any time or from time to time thereafter, a written notice (a "Company Sale
Notice"), which shall state GSCP's intention to seek to effect a Company Sale
and shall offer to SIG the opportunity to provide to GSCP, within 30 days after
receipt of the Company Sale Notice, a written notice (a "SIG Purchase Notice")
to the effect that SIG wishes to acquire or combine with the Company in a
Company Sale transaction. The SIG Purchase Notice shall include the proposed
purchase price and other material terms and conditions of the Company Sale
being
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proposed by SIG, with such specificity as is necessary for GSCP, in its
reasonable discretion, to be able to compare such terms and conditions with
those which may be proposed by other potential bidders. After delivery of a
Company Sale Notice, GSCP may conduct such sale process to seek to effect a
Company Sale as GSCP shall determine in its sole discretion, and GSCP is hereby
authorized to execute on behalf of the Company and the Stockholders an
agreement with respect to any Company Sale which contains terms and conditions
acceptable to GSCP in its sole discretion (any such agreement being referred to
herein as the "Company Sale Agreement"); provided, however, that (i) for a
period of 180 days after receipt of a SIG Purchase Notice, GSCP may not effect
a Company Sale with any Person on terms which, in the aggregate, are less
favorable to the Stockholders than the terms set forth in the SIG Purchase
Notice, (ii) any Company Sale effected by GSCP must provide that each
Stockholder will receive the same consideration per share of Stock owned by it,
and (iii) GSCP may not effect a Company Sale pursuant to which the Company will
be acquired by or combined with any Affiliate of GSCP. Upon delivery of a SIG
Purchase Notice, SIG will be obligated to effect a Company Sale on the terms
and conditions set forth therein if, within 90 days after delivery of the SIG
Purchase Notice, GSCP accepts such terms and conditions by written notice to
SIG.
SECTION 5. Representations and Warranties. Each party hereto represents
and warrants to the other parties hereto as follows:
(i) It has full power and authority to execute, deliver and
perform its obligations under this Agreement.
(ii) This Agreement has been duly and validly authorized,
executed and delivered by it, and constitutes a valid and binding obligation of
it, enforceable against it in accordance with its terms.
(iii) The execution, delivery and performance of this
Agreement by it does not (x) violate, conflict with, or constitute a breach of
or default under its organizational documents, if any, or any material
agreement to which it is a party or by which it is bound or (y) violate any
law, regulation, order, writ, judgment, injunction or decree applicable to it.
(iv) Except for (i) the approval of the Department of
Insurance of the State of Indiana and (ii) expiration or termination of any
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvement
Act of 1976, as amended, no consent or approval of, or filing with, any
governmental or regulatory body is required to be obtained or made by it in
connection with the transactions contemplated hereby.
(v) It is not a party to any agreement which is inconsistent
with the rights of any party hereunder or otherwise conflicts with the
provisions hereof.
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SECTION 6. Miscellaneous.
6.1. No Inconsistent Agreements; Further Assurances. Neither the
Company nor any Stockholder shall take any action or enter into any agreement
which is inconsistent with the rights of any party hereunder or otherwise
conflicts with the provisions hereof. Each Stockholder agrees to vote all
shares of Stock of the Company Beneficially Owned by it (including, without
limitation, any shares of Stock of another Stockholder with respect to which it
has voting control, whether as a result of a voting trust or otherwise), and to
take all necessary action within its control, to cause the provisions of this
Agreement to be effected (including, without limitation, voting to approve a
Company Sale Agreement and a Company Sale effected by GSCP pursuant to Section
4). Each Stockholder agrees not to vote any Stock, take any action by written
consent, or take any other action as a stockholder of the Company, to take or
approve any corporate action or transaction by the Company not previously
approved by the Board. At any time and from time to time after the date hereof,
the parties agree to cooperate with each other, and at the request of any other
party, to execute and deliver any further instruments or documents and to take
all such further action as the other party may reasonably request in order to
evidence or effectuate the consummation of the transactions contemplated hereby
and to otherwise carry out the intent of the parties hereunder.
6.2. Legends. Each certificate representing shares of Common Stock
shall bear a legend containing the following words:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN COMPLIANCE WITH SUCH ACT."
"IN ADDITION, THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO THE RESTRICTIONS ON
TRANSFER SET FORTH IN THE STOCKHOLDER AGREEMENT
DATED AS OF HOLDING COMPANY, 1995 BY AND AMONG
GGS MANAGEMENT HOLDINGS, INC. AND THE PARTIES
THERETO, A COPY OF WHICH IS ON FILE IN THE
OFFICE OF GGS MANAGEMENT HOLDINGS, INC."
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The requirement that the above securities legend be placed upon
certificates evidencing any such securities shall cease and terminate upon the
earliest of the following events: (i) when such shares are transferred in an
underwritten public offering, (ii) when such shares are transferred pursuant to
Rule 144 under the Securities Act or (iii) when such shares are transferred in
any other transaction if the seller delivers to the Company an opinion of its
counsel, which counsel and opinion shall be reasonably satisfactory to the
Company, or a "no-action" letter from the staff of the Securities and Exchange
Commission, in either case to the effect that such legend is no longer necessary
in order to protect the Company against a violation by it of the Securities Act
upon any sale or other disposition of such shares without registration
thereunder. The requirement that the above legend regarding the Stockholder
Agreement be placed upon certificates evidencing any such securities shall cease
and terminate upon the termination of this Agreement. Upon the occurrence of any
event requiring the removal of a legend hereunder, the Company, upon the
surrender of certificates containing such legend, shall, at its own expense,
deliver to the holder of any such shares as to which the requirement for such
legend shall have terminated, one or more new certificates evidencing such
shares not bearing such legend.
6.3. Termination. This Agreement shall terminate on the Termination
Date, except with respect to the Company's obligations pursuant to Section
2.1(g), which shall terminate pursuant to its terms.
6.4. Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid, but if any
provision of this Agreement is held to be invalid or unenforceable in any
respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Agreement.
6.5. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York without giving effect to
the principles of conflicts of law thereof. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the United States of America located in the County of New York,
for any action, proceeding or investigation in any court or before any
governmental authority ("Litigation") arising out of or relating to this
Agreement and the transactions contemplated hereby (and agrees not to commence
any Litigation relating thereto except in such courts), and further agrees that
service of any process, summons, notice or document by U.S. registered mail to
its respective address set forth in this Agreement shall be effective service of
process for any Litigation brought against it in any such court. Each of the
parties hereto hereby irrevocably and unconditionally waives any objection to
the laying of venue of any Litigation arising out of this Agreement or the
transactions contemplated hereby in the courts of the United States of America
located in the County of New York, and hereby
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<PAGE> 20
further irrevocably and unconditionally waives and agrees not to plead or claim
in any such court that any such Litigation brought in any such court has been
brought in an inconvenient forum.
6.6. Successors and Assigns. This Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their
respective successors, assigns, heirs and personal representatives. No
Stockholder shall have the right to assign its rights and obligations under
this Agreement without the consent of the other Stockholders; provided,
however, that GSCP may assign its rights and obligations hereunder, in whole or
in part, to any Affiliate of GSCP. Upon any permitted assignment, such
assignee shall have and be able to exercise all rights of the assigning
Stockholder, to the extent so assigned.
6.7. Notices. All notices, requests, consents and other
communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or by telecopy,
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
(i) if to the Company, to:
GGS MANAGEMENT HOLDINGS, INC.
c/o Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Telecopy: (317) 259-6395
Attention: Mr. Alan G. Symons
with copies to each of GSCP, SIG and Goran.
(ii) if to GSCP, to:
GS Capital Partners II, L.P.
85 Broad Street
New York, New York 10004
Telecopy: (212) 902-3000
Attention: Mr. Michael A. Pruzan
with a copy to:
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<PAGE> 21
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
Telecopy: (212) 859-8585
Attention: Gail Weinstein, Esq.
(iii) if to SIG or Goran, to:
Goran Capital Inc.
Symons International Group, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Telecopy: (317) 259-6395
Attention: David L. Bates, Esq.
All such notices, requests, consents and other communications shall be deemed
to have been given when received.
6.8. Amendments. The terms and provisions of this Agreement
may be modified or amended, or any of the provisions hereof waived, temporarily
or permanently, only pursuant to the written consent of the Company, GSCP and
SIG.
6.9. Headings. The headings of the Sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed to
be a part of this Agreement.
6.10. Remedies. Without intending to limit the remedies
available to any party hereto, each party (i) acknowledges that breach of this
Agreement will result in irreparable harm for which there is no adequate remedy
at law, and (ii) agrees that any party seeking to enforce this Agreement shall
be entitled to injunctive relief or other equitable remedies upon any such
breach.
6.11. No Third Party Beneficiaries. Nothing in this Agreement
is intended to or shall create any third party beneficiary rights in any
person or entity (other than the GSCP Designees and the Goran Designees under
Section 2.1(h)).
6.12. Guarantee. Goran hereby guarantees all of the
representations and warranties, covenants, agreements, commitments and
obligations of SIG hereunder.
6.13. Entire Agreement. This Agreement, the Stock Purchase
Agreement and the Ancillary Agreements (and the other writings referred to
herein or therein or delivered pursuant hereto or thereto which form a
part hereof or thereof) contain the entire agreement among the parties hereto
with respect to the subject matter hereof and
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<PAGE> 22
supersede all prior and contemporaneous agreements and understandings with
respect thereto.
6.14. Newsub. The parties agree that they will cause a
Stockholder Agreement by and between GGS Management, Inc. and the Company to
be entered into promptly after the date hereof, substantially in the form of
this Agreement, but with GGS Management, Inc. substituted for the Company.
6.15. Counterparts. This Agreement may be executed in any
number of counterparts, and each such counterpart shall be deemed to be an
original instrument, but all such counterparts together shall constitute but
one agreement.
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<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
GGS MANAGEMENT HOLDINGS, INC.
By: /s/ Alan G. Symons
------------------------------------
Name: Alan G. Symons
Title: President
GS CAPITAL PARTNERS II, L.P.
By: GS Advisors, L.P., its general partner
By: GS Advisors, Inc., its general partner
By: /s/ Terence M. O'Toole
------------------------------------
Name: Terence M. O'Toole
Title: Vice President
SYMONS INTERNATIONAL GROUP, INC.
By: /s/ Alan G. Symons
------------------------------------
Name: Alan G. Symons
Title: Chief Executive Officer
GORAN CAPITAL INC.
By: /s/ Alan G. Symons
------------------------------------
Name: Alan G. Symons
Title: President
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<PAGE> 24
SCHEDULE A
<PAGE> 1
EXHIBIT 10.9
THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO ANY FEDERAL OR STATE SECURITIES
LAWS AND MAY NOT BE SOLD OR TRANSFERRED IN VIOLATION OF ANY FEDERAL OR STATE
SECURITIES LAWS AND THIS NOTE IS SUBJECT TO RESTRICTIONS ON TRANSFERS SET FORTH
IN THE AGREEMENT REFERRED TO BELOW.
IGF Holdings, Inc.
SUBORDINATED PROMISSORY NOTE
$3,475,269.00 Indianapolis, Indiana
April 29, 1996
FOR VALUE RECEIVED, IGF Holdings, Inc. ("IGF Holdings"), hereby
promises to pay to Pafco General Insurance Company ("Pafco"), or its registered
assigns, the principal sum of Three Million Four Hundred Seventy-Five Thousand,
Two Hundred Sixty-Nine Dollars ($3,475,269) on the earlier of (i) November 30,
1996, or (ii) a IGF or SIG Company Sale (as defined in the Agreement referred to
below), together with accrued but unpaid interest, computed on the basis of the
actual number of days elapsed over a 360-day year, on the unpaid principal
balance hereof until paid in full at the rate per annum of 1.00 percentage point
over the Index described below from the date hereof until October 1, 1996 and
thereafter until the entire principal balance is paid in full at the rate of
2.00 percentage points over the Index described below, payable in cash quarterly
in arrears on July 1, 1996 and October 1, 1996. IGF Holdings may pay without
penalty or premium all or a portion of the amount owed hereunder earlier than it
is due, but only with the prior written consent of Union Federal (as hereinafter
defined).
The interest rate on this Note is subject to change from time to time
based on changes in an independent index which is the Wall Street Journal Prime
Rate (the "Index"). If the Index becomes unavailable during the term of this
loan, Pafco may designate a substitute Index after notice to IGF Holdings. The
interest rate change will not occur more often than each day. The Index
currently is 8.250% per annum. The interest rate or rates to be applied to the
unpaid principal balance of this Note will be the rate or rates set forth above.
NOTICE: Under no circumstances, will the interest rate on this Note be more than
the maximum rate allowed by applicable law.
All payments of principal (including any prepayments or redemptions),
interest and premium (if any) hereunder shall be made by IGF Holdings in lawful
money of the United States of America in immediately available funds (or at the
written request of Pafco or any successor holder of this Note, by certified or
bank check) not later than 12:00 noon, Indiana time, on the date each such
payment is due, by crediting such account in such bank as Pafco or any successor
holder of this Note may designate in writing to IGF Holdings.
This Note is issued pursuant to a Stock Purchase Agreement, dated as of
January 31, 1996, as amended (the "Agreement"), by and among Newco Holdings
Company, GS Capital Partners II, L.P., Goran Capital, Inc. and Symons
International Group, Inc., and Pafco or any successor holder of this Note is
entitled to the benefits thereof and may enforce the agreements of IGF Holdings
contained therein and
<PAGE> 2
exercise the remedies provided for thereby or otherwise available in respect
thereof or of any of the other Purchaser Documents. Capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to them
in the Agreement and the Exhibits attached thereto. Neither this reference to
the Agreement nor any provision thereof shall affect or impair the absolute and
unconditional obligation of IGF Holdings to pay the principal of and interest on
this Note as provided herein.
If an Event of Default shall occur and be continuing, the unpaid
balance of the principal of this Note may be declared due and payable in the
manner and with the effect provided in the Agreement.
IGF Holdings and all endorsers of this Note hereby waive presentment,
demand, notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance, default, or enforcement of this Note, assent
to any and all extensions or postponements of the time of payment or any other
indulgence to any substitution, exchange, or release of collateral, and/or to
the addition or release of any other party or person primarily or secondarily
liable, and generally waive all suretyship defenses and defenses in the nature
thereof. IGF Holdings and all endorsers of this Note hereby waive any and all
rights they may have to reduce the amount of principal and interest owing
pursuant to this Note to satisfy any obligation or liability of Pafco or its
assigns.
IGF Holdings will pay all costs and expenses of collection, including
Attorneys' fees and court costs, incurred or paid by the holder hereof enforcing
this Note or the obligations evidenced hereby, to the extent permitted by law,
all as provided in the Agreement.
It is expressly understood and agreed that this Subordinated Promissory
Note shall be subordinated to that certain Promissory Note issued by IGF
Holdings, Inc. to Union Federal Savings Bank of Indianapolis, Indiana ("Union
Federal") in the principal amount of Seven Million Five Hundred Thousand
($7,500,000) pursuant to the terms of a certain Intercreditor and Subordination
Agreement entered into as of April 29, 1996 by and among IGF Holdings, Pafco and
Union Federal. Further this Note is secured by and entitled to the benefits of a
Pledge Agreement, dated April 29, 1996 between IGF Holdings and Pafco.
This Note is being delivered and shall take effect as a sealed
instrument and shall be governed by and construed in accordance with the laws of
the State of New York.
Pafco has the right to request that IGF Holdings substitute for this
Note any number of notes with terms identical to the terms of this Note (other
than the principal amount hereof) in an aggregate amount for all such substitute
notes equal to the principal amount of this Note.
Executed under seal as of the date first above written.
Witness: IGF Holdings, Inc.
By: /s/ Bruce Dwyer By: /s/ Douglas H. Symons
Douglas H. Symons,
Title: Vice President & CFO Vice President
<PAGE> 1
EXHIBIT 10.10(1)
PROMISSORY NOTE
Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank
4720 Kingsway Drive of Indianapolis
Indianapolis, IN 46205 Private Banking Department
45 N. Pennsylvania
Suite 600
Indianapolis, IN 46204
Principal Amount: $7,500,000.00 Date of Note: April 29, 1996
PROMISE TO PAY. IGF Holdings, Inc. ("Borrower") promises to pay to Union Federal
Savings Bank of Indianapolis ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Seven Million Five Hundred Thousand &
00/100 Dollars ($7,500,000.00), together with interest on the unpaid principal
balance from April 29,1996, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in accordance with the following payment schedule:
2 consecutive quarterly interest payments, beginning July 1,
1996, with interest calculated on the unpaid principal balances at an
interest rate of 0.00 percentage points over the index described below;
17 consecutive quarterly interest payments, beginning January 1, 1997,
with interest calculated on the unpaid principal balances at an
interest rate of 1.000 percentage points over the Index described
below; 15 consecutive quarterly principal payments of $468,750.00 each,
beginning April 1, 1997, with interest calculated on the unpaid
principal balances at an interest rate of 1.000 percentage points over
the Index described below; and 1 principal payment of $468,750.00 on
January 1, 2001, with interest calculated on the unpaid principal
balances at an interest rate of 1.000 percentage points over the Index
described below. This estimated final payment is based on the
assumption that all payments will be made exactly as scheduled and that
the Index does not change; the actual final payment will be for all
principal and accrued interest not yet paid, together with any other
unpaid amounts under this Note.
Interest on this Note is computed on a 30/360 simple interest basis; that is,
with the exception of odd days in the first payment period, monthly interest is
calculated by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by a month of
30 days. Interest for the odd days is calculated on the basis of the actual days
to the next full month and a 360-day year. Borrower will pay Lender at Lender's
address shown above or at such other place as Lender may designate in writing.
Unless otherwise agreed or required by applicable law, payments will be applied
first to accrued unpaid interest, then to principal, and any remaining amount to
any unpaid collection costs and late charges.
DEMAND FEATURE. In the event of an Initial Public Offering (IPO) of the stock of
Borrower or Symons International Group, Inc., or a secondary offering of Goran
Capital, Inc., all outstanding principal and accrued unpaid interest on this
Note shall become due and payable. In the event there is no Initial Public
Offering or secondary offering as contemplated above, then with respect to that
certain Subordinated Promissory Note from Borrower to Pafco General Insurance
Company dated April 29, 1996, and subject to the Subordination and Intercreditor
Agreement of the same date, Borrower hereby agrees that payment in full of the
Subordinated Promissory Note will be made from the proceeds from a capital
infusion. Should Borrower fail to demonstrate the infusion of capital for the
express purpose of payment of the Subordinated Promissory Note, then the entire
balance of principal together with the accrued, unpaid interest shall become due
and payable November 29, 1996. Further, the failure to make a payment due under
the Subordinated Promissory Note from Borrower to Pafco General Insurance
Company dated the date hereof within thirty (30) days of the date such payment
is due will constitute an event of default under this Agreement for all purposes
under this Agreement. Such an event of default will not be waived by the Lender,
all Indebtedness hereunder will become automatically due and payable and the
Lender will exercise its rights and remedies under the Commercial Pledge and
Security Agreement, dated the date hereof, with respect to the shares of IGF
Insurance Company.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the The Wall
Street Journal Prime Rate (the "Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans. If the Index becomes unavailable during the
term of this loan, Lender may designate a substitute index after notice to
Borrower. Lender will tell Borrower the current Index rate upon Borrower's
request. Borrower understands that Lender may make loans based on other rates as
well. The interest rate change will not occur more often than each day. The
Index currently is 8.250% per annum. The interest rate or rates to be applied to
the unpaid principal balance of this Note will be the rate or rates set forth
above in the "Payment" section. NOTICE: Under no circumstances will the interest
rate on this Note be more than the maximum rate allowed by applicable law.
Whenever increases occur in the interest rate, Lender, at its option, may do one
or more of the following: (a) increase Borrower's payments to ensure Borrower's
loan will pay off by its original final maturity date, (b) increase Borrower's
payments to cover accruing interest, (c) increase the number of Borrower's
payments, and (d) continue Borrower's payments at the same amount and increase
Borrower's final payment.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
under the payment schedule. Rather, they will reduce the principal balance due
and may result in Borrower making fewer payments.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (i) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
<PAGE> 2
Page 2
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note by 2.000
percentage points. The interest rate will not exceed the maximum rate permitted
by applicable law. Lender may hire or pay someone else to help collect this Note
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys' fees
and Lender's legal expenses whether or not there is a lawsuit, including
attorneys' fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note will be repaid under all circumstances without relief
from any Indiana or other valuation and appraisement laws. This Note has been
delivered to Lender and accepted by Lender in the State of Indiana. If there is
a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction
of the courts of Marion County, the State of Indiana. Lender and Borrower hereby
waive the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Borrower against the other. This Note shall be
governed by and construed in accordance with the laws of the State of Indiana.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $19.00 if Borrower
makes a payment on Borrowers loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts, and, at Lender's option, to administratively freeze all such
accounts to allow Lender to protect Lender's charge and setoff rights provided
on this paragraph.
COLLATERAL. This Note is secured by Security Agreements from IGF Holdings, Inc.,
Borrower, and Symons International Group LTD, Grantor, to Lender dated April 29,
1996.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL
THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
IGF Holdings, Inc.
By: /s/ Douglas H. Symons
Douglas H. Symons, Vice President
<PAGE> 1
EXHIBIT 10.10(2)
COMMERCIAL GUARANTY
Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank
4720 Kingsway Drive of Indianapolis
Indianapolis, IN 46205 Private Banking Department
45 N. Pennsylvania
Suite 600
Indianapolis, IN 46204
Guarantor: Symons International Group, LTD
212 King Street West
Toronto, ON AN 46
AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, Symons
International Group, LTD ("Guarantor") absolutely and unconditionally guarantees
and promises to pay to Union Federal Savings Bank of Indianapolis ("Lender") or
its order, in legal tender of the United States of America, the Indebtedness (as
that term is defined below) of IGF Holdings, Inc. ("Borrower") to Lender on the
terms and conditions set forth in this Guaranty. Under this Guaranty, the
liability of Guarantor is unlimited and the obligations of Guarantor are
continuing.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
Borrower. The word "Borrower" means IGF Holdings, Inc.
Guarantor. The word "Guarantor" means Symons International Group, LTD.
Guaranty. The word "Guaranty" means this Guaranty made by Guarantor
for the benefit of Lender dated April 29, 1996.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or
hereinafter incurred or created, including, without limitation, all
loans, advances, interest, costs, debts, overdraft indebtedness, credit
card indebtedness, lease obligations, other obligations, and
liabilities of Borrower, or any of them, and any present or future
judgments against Borrower, or any of them; and whether any such
Indebtedness is voluntarily or involuntarily incurred, due or not due,
absolute or contingent, liquidated or unliquidated, determined or
undetermined; whether Borrower may be liable individually or jointly
with others, or primarily or secondarily, or as guarantor or surety;
whether recovery on the Indebtedness may be or may become barred or
unenforceable against Borrower for any reason whatsoever; and whether
the Indebtedness arises from transactions which may be voidable on
account of infancy, insanity, ultra vires, or otherwise.
Lender. The word "Lender" means Union Federal Savings Bank of
Indianapolis, its successors and assigns.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the address
of Lender listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new Indebtedness"
does not include Indebtedness which at the time of notice of revocation is
contingent, unliquidated, undetermined or not due and which later becomes
absolute, liquidated, determined or due. This Guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created both before and after
the death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more Guarantors shall
not affect the liability of any remaining Guarantors under this Guaranty. It is
anticipated that fluctuations may occur in the aggregate amount of Indebtedness
covered by this Guaranty, and it is specifically acknowledged and agreed by
Guarantor that reductions In the amount of Indebtedness, even to zero dollars
($0.00), prior to written revocation of this Guaranty by Guarantor shall not
constitute a termination of this Guaranty. This Guaranty is binding upon
Guarantor and Guarantor's heirs, successors and assigns so long as any of the
guaranteed Indebtedness remains unpaid and even though the Indebtedness
guaranteed may from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (d) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (e) to determine how, when and what application
of payments and credits shall be made on the Indebtedness; (f) to apply such
security and direct the order or manner of sale thereof, including without
limitation, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine;
(g) to sell, transfer, assign, or grant participations in all or any part of the
Indebtedness; and (h) to assign or transfer this Guaranty in whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present the financial condition of Guarantor as
of the dates the financial information is provided; (g) no material adverse
change has occurred in Guarantor's financial condition since the date of the
most recent financial statements provided to Lender and no event has occurred
which may materially adversely affect Guarantor's financial condition; (h) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened;
(i) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (j) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower's financial
condition. Guarantor agrees to keep adequately informed from such means of any
<PAGE> 2
Page 2
facts, events, or circumstances which might in any way affect Guarantor's risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrowers
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty. In addition
to the waivers set forth above, Guarantor expressly waives, to the extent
permitted by Indiana law, all relief under any Indiana or other valuation and
appraisement laws.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor
warrants and agrees that each of the waivers set forth above is made with
Guarantor's full knowledge of its significance and consequences and that, under
the circumstances, the waivers are reasonable and not contrary to public policy
or law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees
that the Indebtedness of Borrower to Lender, whether now existing or hereafter
created, shall be prior to any claim that Guarantor may now have or hereafter
acquire against Borrower, whether or not Borrower becomes insolvent. Guarantor
hereby expressly subordinates any claim Guarantor may have against Borrower,
upon any account whatsoever, to any claim that Lender may now or hereafter have
against Borrower. In the event of insolvency and consequent liquidation of the
assets of Borrower, through bankruptcy, by an assignment for the benefit of
creditors, by voluntary liquidation, or otherwise, the assets of Borrower
applicable to the payment of the claims of both Lender and Guarantor shall be
paid to Lender and shall be first applied by Lender to the Indebtedness of
Borrower to Lender. Guarantor does hereby assign to Lender all claims which it
may have or acquire against Borrower or against any assignee or trustee in
bankruptcy of Borrower; provided however, that such assignment shall be
effective only for the purpose of assuring to Lender full payment in legal
tender of the Indebtedness. If Lender so requests, any notes or credit
agreements now or hereafter evidencing any debts or obligations of Borrower to
Guarantor shall be marked with a legend that the same are subject to this
Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby
is authorized, in the name of Guarantor, from time to time to execute and file
financing statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
<PAGE> 3
Page 3
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
Amendments. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment
to this Guaranty shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Guaranty has been delivered to Lender and accepted
by Lender in the State of Indiana. If there is a lawsuit, Guarantor
agrees upon Lenders request to submit to the jurisdiction of the courts
of Marion County, State of Indiana. Lender and Guarantor hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Guarantor against the other. This Guaranty
shall be governed by and construed in accordance with the laws of the
State of Indiana.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Guaranty. Lender may pay someone else to help enforce this Guaranty,
and Guarantor shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Guarantor also shall pay all court
costs and such additional fees as may be directed by the court.
Notices. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimilie,
and, except for revocation notices by Guarantor, shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier, or when deposited in the United States mail, first
class postage prepaid, addressed to the party to whom the notice is to
be given at the address shown above or to such other addresses as
either party may designate to the other in writing. All revocation
notices by Guarantor shall be in writing and shall be effective only
upon delivery to Lender as provided above in the section titled
"DURATION OF GUARANTY." If there is more than one Guarantor, notice to
any Guarantor will constitute notice to all Guarantors. For notice
purposes, Guarantor agrees to keep Lender informed at all times of
Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall
be deemed to have been used in the plural where the context and
construction so require; and where there is more than one Borrower
named in this Guaranty or when this Guaranty is executed by more than
one Guarantor, the words "Borrower" and "Guarantor" respectively shall
mean all and any one or more of them. The words "Guarantor,"
"Borrower," and "Lender" include the heirs, successors, assigns, and
transferees of each of them. Caption headings in this Guaranty are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Guaranty. If a court of competent jurisdiction
finds any provision of this Guaranty to be invalid or unenforceable as
to any person or circumstance, such finding shall not render that
provision invalid or unenforceable as to any other persons or
circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of
Borrower or Guarantor are corporations or partnerships, it is not
necessary for Lender to inquire into the powers of Borrower or
Guarantor or of the officers, directors, partners, or agents acting or
purporting to act on their behalf, and any Indebtedness made or created
in reliance upon the professed exercise of such powers shall be
guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Guaranty shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Guaranty.
No prior waiver by Lender, nor any course of dealing between Lender and
Guarantor, shall constitute a waiver of any of Lender's rights or of
any of Guarantor's obligations as to any future transactions. Whenever
the consent of Lender is required under this Guaranty, the granting of
such consent by Lender in any instance shall not constitute continuing
consent to subsequent instances where such consent is required and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED APRIL 29,1996.
GUARANTOR:
Symons International Group, LTD
By: /s/ Douglas H. Symons
Douglas H. Symons, Vice President
<PAGE> 4
Page 4
CORPORATE ACKNOWLEDGMENT
STATE OF INDIANA )
) SS
COUNTY OF MARION )
On this 29th day of April, 1996, before me, the undersigned Notary Public,
personally appeared Douglas H. Symons, Vice President of Symons International
Group, LTD, and known to me to be an authorized agent of the corporation that
executed the Commercial Guaranty and acknowledged the Guaranty to be the free
and voluntary act and deed of the corporation, by authority of its Bylaws or by
resolution of its board of directors, for the uses and purposes therein
mentioned, and on oath stated that he or she is authorized to execute this
Guaranty and in fact executed the Guaranty on behalf of the corporation.
By /s/ [Signature Illegible] Residing at 7060 N. Park, Marion County
Notary Public in and for the State of Indiana My commission expires
Sept. 15, 1999
<PAGE> 1
EXHIBIT 10.10(3)
INTERCREDITOR AND SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT is entered into as of April 29, 1996 among IGF
Holdings, Inc. ("Borrower"), whose address Is 4720 Kingsway Drive, Indianapolis,
IN 46205; Union Federal Savings Bank of Indianapolis ("Lender"), whose address
is 45 N. Pennsylvania, Suite 600, Indianapolis, IN 46204; and Pafco General
Insurance Company ("Creditor"), whose address Is 4720 Kingsway Drive,
Indianapolis, IN 46205.
RECITALS. Borrower is indebted to Creditor in the aggregate amount of
$3,500,000.00. This amount is the total indebtedness of every kind from Borrower
to Creditor. Borrower and Creditor each want Lender to provide financial
accommodations to Borrower in the form of a term loan in the amount of
$7,500,000.00. Borrower and Creditor each represent and acknowledge to Lender
that Creditor will benefit as a result of these financial accommodations from
Lender to Borrower, and Creditor acknowledges receipt of valuable consideration
for entering into this Agreement. Based on the representations and
acknowledgments contained in this Agreement, Creditor and Borrower agree with
Lender as follows:
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Intercreditor and
Subordination Agreement, as this Intercreditor and Subordination
Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Intercreditor and
Subordination Agreement from time to time.
Borrower. The word "Borrower" means IGF Holdings, Inc.
Creditor. The word "Creditor" means Pafco General Insurance Company.
Lender. The word "Lender" means Union Federal Savings Bank of
Indianapolis, its successors and assigns.
Security interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or lien retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract or
otherwise.
Subordinated Indebtedness. The words "Subordinated Indebtedness" mean
and include without limitation all amounts outstanding under the terms
of that certain promissory note dated as of April 29, 1996 in the
<PAGE> 2
aggregate principal amount of $3,500,000.00 from Borrower to Creditor.
The term "Subordinated Indebtedness" is used in its broadest sense and
includes without limitation all principal, all interest, all costs and
attorney's, fees, and all sums paid for the purpose of protecting the
rights of a holder of security (such as a secured party paying for
insurance on collateral if the owner fails to do so).
Superior Indebtedness. The words "Superior Indebtedness" mean and
include without limitation all amounts outstanding under the terms of
that certain promissory note dated as of April 29, 1996 in the
aggregate principal amount of $7,500,000.00 from the Borrower to the
Lender. The term "Superior Indebtedness" is used in its broadest sense
and includes without limitation all principal, all interest all costs
and attorney fees and all sums paid for the purpose of protecting
Lender's rights in security (such as paying for insurance on collateral
if the owner fails to do so).
SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and
shall be subordinated in all respects to the prior payment and satisfaction in
full of all Superior Indebtedness of Borrower to Lender. If Creditor holds one
or more Security Interests, whether now existing or hereafter acquired, in any
of Borrower's property, Creditor also subordinates all its Security Interests to
all Security Interests held by Lender, whether the Lender's Security Interest or
Interests exist now or are acquired later. The Creditor hereby agrees not to
take any action to foreclose or otherwise realize upon any property in which the
Lender maintains an Security Interest before the earlier of (a) a Proceeding,
(b) payment in full of the Superior Indebtedness, or (c) the commencement by the
Lender of the exercise of its remedies with respect to the property in which the
Lender maintains a Security Interest, or (d) ninety (90) days after the
occurrence of both (i) an "event of default" under the terms of the Superior
Indebtedness, and (ii) a payment default under these Subordinated Indebtedness.
As used herein, the term "Proceeding" means the making of an assignment for the
benefit of creditors of the Borrower; the voluntary or involuntary dissolution,
winding up, total or partial liquidation, reorganization, bankruptcy,
insolvency, receivership, or marshalling of assets or liabilities of the
Borrower; or any other statutory, common law or other contractual proceeding or
arrangement for the postponement or adjustment of all or substantial part of the
liabilities of the Borrower.
PAYMENTS TO CREDITOR. Except as provided below, Borrower will not make and
Creditor will not accept, at any time while any Superior Indebtedness is owing
to Lender, (a) any payment upon any Subordinated Indebtedness, (b) any advance,
transfer, or assignment of assets to Creditor in any form whatsoever that would
reduce at any time or in any way the amount at Subordinated Indebtedness, or (c)
any transfer of any assets as security for the Subordinated Indebtedness.
Notwithstanding the foregoing, Borrower may make payments of principal and
interest to Creditor in accordance with the terms of the Subordinated
Indebtedness if and only if at the time of making such payment and immediately
after giving effect thereto no "event of default" with respect to the Superior
Indebtedness or the documents or instruments executed in connection therewith,
or an event which, with the giving of notice or the lapse of time, or both,
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would become such an event of default, shall occur or have occurred and be
continuing unremedied or unwaived in a writing signed by Lender in which Lender
expressly consents to resumption of such payments on the Subordinated
Indebtedness. Creditor may not accelerate any amounts owed to Creditor without
Lender's prior written consent.
In the event of any distribution, division, or application, whether partial or
complete, voluntary or involuntary, by operation of law or otherwise, of all or
any part of Borrower's assets, or the proceeds of Borrowers assets, in whatever
form, to creditors of Borrower or upon any indebtedness of Borrower, whether by
reason of the liquidation, dissolution or other winding-up of Borrower, or by
reason of any execution, sale, receivership, insolvency, or bankruptcy
proceeding, assignment for the benefit of creditors, proceedings for
reorganization, or readjustment of Borrower or Borrower's properties, then and
in such event (a) the Superior Indebtedness shall be paid in full before any
payment is made upon the Subordinated Indebtedness, and (b) all payments and
distributions, of any kind or character and whether in cash, property, or
securities, which shall be payable or deliverable upon or in respect of the
Subordinated Indebtedness shall be paid or delivered directly to Lender for
application in payment of the amounts then due on the Superior Indebtedness
until the Superior Indebtedness shall have been paid in full.
Should any payment, distribution, security, or proceeds thereof be received by
Creditor at any time on the Subordinated Indebtedness contrary to the terms of
this Agreement, Creditor immediately will deliver the same to Lender in
precisely the form received (except for the endorsement or assignment of
Creditor where necessary), for application on or to secure the Superior
Indebtedness, whether it is due or not due, and until so delivered the same
shall be held in trust by Creditor as property of Lender. In the event Creditor
fails to make any such endorsement or assignment, Lender, or any of its officers
on behalf of Lender, is hereby irrevocably authorized by Creditor to make the
same.
CREDITOR'S NOTES. Creditor or Borrower shall mark any note or other instrument
evidencing Subordinated Indebtedness with a notation indicating that the debt
evidenced thereby is subordinated under the terms of this Agreement. Creditor
shall not assign, pledge or otherwise transfer any such note or instrument
without the prior written approval of Lender, unless the person or entity to
whom the note or instrument is otherwise assigned, pledged or transferred agrees
in writing to be bound by the terms of this Agreement. Creditor shall notify
Lender within five business days after such assignment, pledge or transfer of
the name and address of the assignee, pledgee or transferee.
COLLATERAL AGENT. Creditor hereby appoints Lender as its agent to hold shares of
common stock in IGF Insurance Company identified on Schedule A hereto (the
"Pledged Shares"), in which both Lender and Creditor have obtained a Security
Interest. The sole purpose of this appointment shall be to permit Creditor to
perfect its security interest in the Pledged Shares. The Lender's only duty in
its capacity as collateral agent for Creditor shall be to hold the Pledged
Shares for its own account and the account of the Creditor. It is agreed that
the duties of the Lender in its capacity as collateral agent are only as set
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<PAGE> 4
forth herein and that it shall incur no liability whatever in connection with
its acting as collateral agent. After the repayment of the Superior Indebtedness
or the release of Lender's Security Interest in the Pledged Shares, the Lender
may resign and be discharged from its duties as collateral agent hereunder by
giving notice in writing of such resignation and delivering the Pledged Shares
to the Creditor. Upon the resignation of the Lender from its capacity as
collateral agent for Creditor, Creditor shall hold the Pledged Shares on its own
behalf. Lender's acceptance of the appointment as collateral agent for Creditor
shall in no way impair or restrict its ability to deal with the Pledged Shares
as contemplated under that certain Pledge Agreement dated as of April 29, 1996
between Lender and Borrower. Creditor hereby agrees to indemnify and hold
harmless Lender against any damages, costs or expenses incurred by Lender as a
result of its acting as collateral agent for Creditor with respect to the
Pledged Shares.
CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to
Lender that: (a) no representations or agreements of any kind have been made to
Creditor which would limit or qualify in any way the terms of this Agreement;
(b) this Agreement is executed at Borrower's request and not at the request of
Lender; (c) Lender has made no representation to Creditor as to the
creditworthiness of Borrower; and (d) Creditor has established adequate means of
obtaining from Borrower on a continuing basis information regarding Borrower's,
financial condition. Creditor agrees to keep adequately informed from such means
of any facts, events, or circumstances which might in any way affect Creditor's
risks under this Agreement, and Creditor further agrees that Lender shall have
no obligation to disclose to Creditor information or material acquired by Lender
in the course of its relationship with Borrower.
CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (a) to make,
extend, renew, or modify any loan to Borrower or to grant any other financial
accommodations to Borrower whatsoever, (b) to make any presentment, protest,
demand, or notice of any kind, including notice of any nonpayment of the
Superior Indebtedness or of any nonpayment related to any Security Interests, or
notice of any action or non-action on the part of Borrower, Lender, any surety,
endorser, or other guarantor in connection with the Superior Indebtedness; (c)
to resort for payment or to proceed directly or at once against any person,
including Borrower; (d) to proceed directly against or exhaust any Security
Interests held by Lender from Borrower, any other guarantor, or any other
person; (e) to give notice of the terms, time, and place of any public or
private sale of personal property security held by Lender from Borrower or to
comply with any other applicable provisions of the Uniform Commercial Code; (f)
to pursue any other remedy within Lender's power; or (g) to commit any act or
omission of any kind, at any time, with respect to any matter whatsoever.
LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the
Superior Indebtedness or any Security Interests for the Superior Indebtedness
without affecting whatsoever any of Lender's rights under this Agreement. In
particular, without limitation, Lender may, without notice of any kind to
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<PAGE> 5
Creditor, (a) alter, compromise, renew, extend, accelerate, or otherwise change
the time for payment or other terms of the Superior Indebtedness or any part
thereof, including increases and decreases of the rate of interest on the
Superior Indebtedness; (b) take and hold Security Interests for the payment of
the Superior Indebtedness, and exchange, enforce, waive, and release any such
Security Interests, with or without the substitution of new collateral; (c)
release, substitute, agree not to sue, or deal with any one or more of
Borrower's sureties, endorses, or guarantors on any terms or manner Lender
chooses; (d) determine how, when and what application of payments and credits,
shall be made on the Superior Indebtedness; (e) apply such security and direct
the order or manner of sale thereof, as Lender in its discretion may determine;
and (f) assign this Agreement in whole or in part.
DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement
shall remain in full force and effect. In the event of a corporate
reorganization or corporate arrangement of Borrower under the provisions of the
Bankruptcy Code, as amended, this Agreement shall remain in full force and
effect and the court having jurisdiction over the reorganization or arrangement
is hereby authorized to preserve such priority and subordination in approving
any such plan of reorganization or arrangement. Any default by Borrower under
the terms of the Subordinated Indebtedness also shall be a default under the
terms of the Superior Indebtedness to Lender.
DURATION AND TERMINATION. This Agreement will take effect when received by
Lender, without the necessity of any acceptance by Lender, in writing or
otherwise, and will remain in full force and effect until Creditor shall notify
Lender in writing at the address shown above to the contrary. Any such notice
shall not affect the Superior Indebtedness owed Lender by Borrower at the time
of such notice, nor shall such notice affect Superior Indebtedness thereafter
granted in compliance with a commitment made by Lender to Borrower prior to
receipt of such notice, nor shall such notice affect any renewals of or
substitutions for any of the foregoing. Such notice shall affect only
indebtedness of Borrower to Lender arising after receipt of such notice and not
arising from financial assistance granted by Lender to Borrower in compliance
with Lender's obligations under a commitment.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Indiana. If there is a lawsuit,
Creditor and Borrower agree upon Lender's request to submit to the
jurisdiction of the courts of Marion County, State of Indiana. Lender,
Creditor and Borrower hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender, Creditor
or Borrower against the other. This Agreement shall be governed by and
construed in accordance with the laws of the State of Indiana. No
provision contained in this Agreement shall be construed (a) as
requiring Lender to grant to Borrower or to Creditor any financial
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<PAGE> 6
assistance or other accommodations, or (b) as limiting or precluding
Lender from the exercise of Lender's own judgment and discretion about
amounts and times of payment in making loans or extending
accommodations to Borrower.
Amendments. This Agreement constitutes the entire understanding and
agreement of the parties as to the matters set forth in this Agreement.
No alteration of or amendment to this Agreement shall be effective
unless made in writing and signed by Lender, Borrower, and Creditor.
Attorneys' Fees; Expenses. Creditor and Borrower agree to pay upon
demand all of Lender's costs and expenses, including attorneys' fees
and Lender's legal expenses, incurred in connection with the
enforcement of this Agreement. Lender may pay someone else to help
enforce this Agreement, and Creditor and Borrower shall pay the costs
and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(and including efforts to modify or vacate any automatic stay or
Injunction), appeals, and any anticipated post-judgment collection
services. Creditor and Borrower also shall pay all court costs and such
additional fees as may be directed by the court.
Successors. This Agreement shall extend to and bind the respective
heirs, personal representatives, successors and assigns of the parties
to this Agreement, and the covenants of Borrower and Creditor
respecting subordination of the Subordinated Indebtedness in favor of
Lender shall extend to, include, and be enforceable by any transferee
or endorsee to whom Lender may transfer any or all of the Superior
Indebtedness.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Creditor, shall constitute a waiver of any of Lender's
rights or of any of Creditor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent to subsequent instances where such
consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
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BORROWER AND CREDITOR ACKNOWLEDGE HAVING READ ALL THE
PROVISIONS OF THIS INTERCREDITOR AND SUBORDINATION AGREEMENT,
AND BORROWER AND CREDITOR AGREE TO ITS TERMS. THIS AGREEMENT
IS DATED AS OF APRIL 29, 1996.
BORROWER:
IGF Holdings, Inc.
By: /s/ Douglas H. Symons
Douglas H. Symons, Vice President
CREDITOR:
Pafco General Insurance Company
By: /s/ Douglas H. Symons
Douglas H. Symons, President
LENDER:
Union Federal Savings Bank of Indianapolis
By: /s/ Christopher K. Stark
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<PAGE> 1
EXHIBIT 10.10(4)
COMMERCIAL PLEDGE AND SECURITY AGREEMENT
Borrower: IGF Holdings, Inc. (TIN: ) Lender: Union Federal Savings Bank
4720 Kingsway Drive of Indianapolis
Indianapolis, IN 46205 Private Banking Department
45 N. Pennsylvania
Suite 600
Indianapolis, IN 46204
THIS COMMERCIAL PLEDGE AND SECURITY AGREEMENT is entered into
between IGF Holdings, Inc. (referred to below as "Grantor"); and Union Federal
Savings Bank of Indianapolis (referred to below as "Lender").
GRANT OF SECURITY INTEREST. For valuable consideration, Grantor grants to Lender
a security interest in the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement:
Agreement. The word "Agreement" means this Commercial Pledge and
Security Agreement, as this Commercial Pledge and Security Agreement
may be amended or modified from time to time, together with all
exhibits and schedules attached to this Commercial Pledge and Security
Agreement from time to time.
Collateral. The word "Collateral" means the following specifically
described property, which Grantor has delivered or agrees to deliver
(or cause to be delivered or appropriate book-entries made) immediately
to Lender, together with all Income and Proceeds as described below:
29614.000 shares of IGF Insurance Company Common Stock, which
is all of the issued and outstanding common stock of IGF
Insurance Company
2494000.000 shares of IGF Insurance Company Preferred Stock,
which is all of the issued and outstanding preferred stock of
IGF Insurance Company Stock
In addition, the word "Collateral" includes all property of Grantor, in
the possession of, or subject to the control of, Lender (or in the
possession of, or subject to the control of, a third party subject to
the control of Lender), whether now or hereafter existing and whether
tangible or intangible in character, including without limitation each
of the following:
(a) All property to which Lender acquires title or
documents of title.
(b) All property assigned to Lender.
(c) All promissory notes, bills of exchange, stock
certificates, bonds, investment property, savings passbooks,
time certificates of deposit, insurance policies, and all
other instruments and evidences of an obligation.
(d) All records relating to any of the property described in
this Collateral section, whether in the form of a writing,
microfilm, microfiche, or electronic media.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "Events of Default."
Grantor. The word "Grantor" means IGF Holdings, Inc., as successors
and assigns.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Income and Proceeds. The words "Income and Proceeds" mean all present
and future income, proceeds, earnings, increases, and substitutions
from or for the Collateral of every kind and nature, including without
limitation all payments, interest, profits, distributions, benefits,
rights, options, warrants, dividends, stock dividends, stock splits,
stock rights, regulatory dividends, distributions, subscriptions,
monies, claims for money due and to become due, proceeds of any
insurance on the Collateral, shares of stock of different par value or
no par value issued in substitution or exchange for shares included in
the Collateral, and all other property Grantor is entitled to receive
on account of such Collateral, including accounts, documents,
instruments, chattel paper, investment property, and general
intangibles.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and interest, together with all
other indebtedness and costs and expenses for which Grantor is
responsible under this Agreement or under any of the Related Documents.
Lender. The word "Lender" means Union Federal Savings Bank of
Indianapolis, its successors and assigns.
Note. The word "Note" means the note or credit agreement dated April
29, 1996, in the principal amount of $7,500,000.00 from IGF Holdings,
Inc. to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and substitutions
for the note or credit agreement.
Obligor. The word "Obligor" means and includes without limitation any
and all persons or entities obligated to pay money or to perform some
other act under the Collateral.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
GRANTOR'S REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE
COLLATERAL. Grantor represents and warrants to Lender that:
Ownership. Grantor is the lawful owner of the Collateral free and clear
of all security interests, liens, encumbrances and claims of others
<PAGE> 2
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except as disclosed to and accepted by Lender in writing prior to
execution of this Agreement.
Right to Pledge. Grantor has the full right, power and authority to
enter into this Agreement and to pledge the Collateral.
Binding Effect. This Agreement is binding upon Grantor, as well as
Grantor's heirs, successors, representatives and assigns, and is
legally enforceable in accordance with its terms.
No Further Assignment. Grantor has not, and will not, sell, assign,
transfer, encumber or otherwise dispose of any of Grantor's rights in
the Collateral except as provided in this Agreement.
No Defaults. There are no defaults existing under the Collateral, and
there are no offsets or counterclaims to the same. Grantor will
strictly and promptly perform each of the terms, conditions, covenants
and agreements contained in the Collateral which are to be performed by
Grantor, if any.
No Violation. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is
a party, and its certificate or articles of incorporation and bylaws
do not prohibit any term or condition of this Agreement.
LENDER'S RIGHTS AND OBLIGATIONS WITH RESPECT TO COLLATERAL.
Lender may hold the Collateral until all the Indebtedness has been paid and
satisfied and thereafter may deliver the Collateral to any Grantor. Lender shall
have the following rights in addition to all other rights it may have by law:
Maintenance and Protection of Collateral. Lender may, but shall not be
obligated to, take such steps as it deems necessary or desirable to
protect, maintain, insure, store, or care for the Collateral, including
payment of any liens or claims against the Collateral. Lender may
charge any cost incurred in so doing to Grantor.
Income and Proceeds from the Collateral. Lender may receive all Income
and Proceeds and add it to the Collateral. Grantor agrees to deliver to
Lender immediately upon receipt, in the exact form received and without
commingling with other property, all Income and Proceeds from the
Collateral which may be received by, paid, or delivered to Grantor or
for Grantor's account, whether as an addition to, in discharge of, in
substitution of, or in exchange for any of the Collateral.
Application of Cash. At Lender's option, Lender may apply any cash,
whether included in the Collateral or received as Income and Proceeds
or through liquidation, sale, or retirement, of the Collateral, to the
satisfaction of the Indebtedness or such portion thereof as Lender
shall choose, whether or not matured.
Transactions with Others. Lender may (a) extend time for payment or
other performance, (b) grant a renewal or change in terms or
conditions, or (c) compromise, compound or release any obligation, with
any one or more Obligors, endorsers, or Guarantors of the Indebtedness
as Lender deems advisable, without obtaining the prior written consent
of Grantor, and no such act or failure to act shall affect Lender's
rights against Grantor or the Collateral.
All Collateral Secures Indebtedness. All Collateral shall be security
for the Indebtedness, whether the Collateral is located at one or more
offices or branches of Lender and whether or not the office or branch
where the Indebtedness is created is aware of or relies upon the
Collateral.
Collection of Collateral. Lender, at Lenders option may, but need not,
collect directly from the Obligors on any of the Collateral all Income
and Proceeds or other sums of money and other property due and to
become due under the Collateral, and Grantor authorizes and directs the
Obligors, if Lender exercises such option, to pay and deliver to Lender
all Income and Proceeds and other sums of money and other property
payable by the terms of the Collateral and to accept Lender's receipt
for the payments.
Power of Attorney. Grantor irrevocably appoints Lender as Grantor's
attorney-in-fact, with full power of substitution, (a) to demand,
collect, receive, receipt for, sue and recover all Income and Proceeds
and other sums of money and other property which may now or hereafter
become due, owing or payable from the Obligors in accordance with the
terms of the Collateral; (b) to execute, sign and endorse any and all
Instruments, receipts, checks, drafts and warrants issued in payment
for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and in the place and stead of Grantor,
execute and deliver Grantor's release and acquittance for Grantor; (d)
to file any claim or claims or to take any action or institute or take
part in any proceedings, either in Lender's own name or in the name of
Grantor, or otherwise, which in the discretion of Lender may seem to be
necessary or advisable; and (e) to execute in Grantor's name and to
deliver to the Obligors on Grantor's behalf, at the time and in the
manner specified by the Collateral, any necessary instruments or
documents.
Perfection of Security Interest. Upon request of Lender, Grantor will
deliver to Lender any and all of the documents evidencing or
constituting the Collateral. When applicable law provides more than one
method of perfection of Lender's security interest, Lender may choose
the method(s) to be used. Upon request of Lender, Grantor will sign and
deliver any writings necessary to perfect Lender's security interest.
If the Collateral consists of investment property for which no
certificate has been issued, Grantor agrees, at Lender's option, either
to request issuance of an appropriate certificate or to execute
appropriate instructions on Lender's forms instructing the issuer,
transfer agent, mutual fund company, or broker, as the case may be, to
record on its books or records, by book-entry or otherwise, Lender's
security interest in the Collateral. Grantor hereby appoints Lender as
Grantor's irrevocable attorney-in-fact for the purpose of executing any
documents necessary to perfect or to continue the security interest
granted in this Agreement.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any instalment payments to become due
during either (i) the term of any applicable insurance policy or, (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
LIMITATIONS ON OBLIGATIONS OF LENDER. Lender shall use ordinary reasonable care
in the physical preservation and custody of the Collateral in Lender's
possession, but shall have no other obligation to protect the Collateral or its
value. In particular, but without limitation, Lender shall have no
responsibility for (a) any depreciation in value of the Collateral or for the
collection or protection of any Income and Proceeds from the Collateral, (b)
preservation of rights against parties to the Collateral or against third
persons, (c) ascertaining any maturities, calls, conversions, exchanges, offers,
tenders, or similar matters relating to any of the Collateral, or (d) informing
Grantor about any of the above, whether or not Lender has or is deemed to have
knowledge of such matters. Except as provided above, Lender shall have no
liability for depreciation or deterioration of the Collateral.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when
due on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or in any other agreement
between Lender and Grantor.
Default in Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
<PAGE> 3
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purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement,
the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any collateral documents to create a valid and perfected security
interest or lien) at any time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a
receiver for any part of Grantor's property, any assignment for the
benefit of creditors, any type of creditor workout, or the commencement
of any proceeding under any bankruptcy or insolvency laws by or against
Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, this Event of Default
shall not apply if there is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor gives Lender written
notice of the creditor or forfeiture proceeding and deposits with
Lender monies or a surety bond for the creditor or forfeiture
proceeding, in an amount determined by Lender, in its sole discretion,
as being an adequate reserve or bond for the dispute.
Deterioration of Collateral Value. The market value of the Collateral
falls below $7,500,000.00, and Grantor does not, by the close of
business on the next business day after Lender has sent written notice
to Grantor of the deterioration, either (a) reduce the amount of the
Indebtedness to the amount required by Lender or (b) increase the cash
value of Collateral to the amount required by Lender by lodging with
Lender additional collateral security acceptable to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent. Lender, at its option, may, but shall not
be required to, permit the Guarantor's estate to assume unconditionally
the obligations arising under the guaranty in a manner satisfactory to
Lender, and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of
the same provision of this Agreement, it may be cured (and no Event of
Default will have occurred) if Grantor, after Lender sends written
notice demanding cure of such default, (a) cures the default within
fifteen (15) days; or (b), if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender may exercise any one or more of the
following rights and remedies:
Accelerate Indebtedness. Declare all Indebtedness, including any
prepayment penalty which Grantor would be required to pay, immediately
due and payable, without notice of any kind to Grantor.
Collect the Collateral. Collect any of the Collateral and, at Lender's
option and to the extent permitted by applicable law, retain possession
of the Collateral while suing on the Indebtedness.
Sell the Collateral. Sell the Collateral, at Lender's discretion, as a
unit or in parcels, at one or more public or private sales. Unless the
Collateral is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market, Lender shall give
or mail to Grantor, or any of them, notice at least ten (10) days in
advance of the time and place of any public sale, or of the date after
which any private sale may be made. Grantor agrees that any requirement
of reasonable notice is satisfied if Lender mails notice by ordinary
mail addressed to Grantor, or any of them, at the last address Grantor
has given Lender in writing. If a public sale is held, there shall be
sufficient compliance with all requirements of notice to the public by
a single publication in any newspaper of general circulation in the
county where the Collateral is located, setting forth the time and
place of sale and a brief description of the property to be sold.
Lender may be a purchaser at any public sale. Under all circumstances,
the Indebtedness will be repaid without relief from any Indiana or
other valuation and appraisement laws.
Dealing with Collateral. Register any or all investment property in
Lender's sole name or in the name of its broker, agent, or nominee.
Remove any or all Collateral from Brokerage Accounts. Exercise all
rights of Lender under any control agreement relating to investment
property. Exercise any voting, conversion, registration, purchase, or
other rights of a holder of any Collateral (and any reasonable expense
in that connection shall be an expense of preserving the value of the
Collateral). Collect, with or without legal action, any notes, checks
or other instruments for the payment of money that are included in the
Collateral and compromise or settle with any obligor.
Sell Securities. Sell any securities included in the Collateral in a
manner consistent with applicable federal and state securities laws,
notwithstanding any other provision of this or any other agreement.
If, because of restrictions under such laws, Lender is or believes it
is unable to sell the securities in an open market transaction,
Grantor agrees that Lender shall have no obligation to delay sale
until the securities can be registered, and may make a private sale to
one or more persons or to a restricted group of persons, even though
such sale may result in a price that is less favorable than might be
obtained in an open market transaction, and such a sale shall be
considered commercially reasonable. If any securities held as
Collateral are "restricted securities" as defined in the Rules of the
Securities and Exchange Commission (such as Regulation D or Rule 144)
or state securities departments under state "Blue Sky" laws, or if
Grantor is an affiliate of the issuer of the securities, Grantor
agrees that neither Grantor nor any member of Grantor's family will
sell or dispose of any securities of such issuer without obtaining
Lenders prior written consent.
Foreclosure. Maintain a judicial suit for foreclosure and sale of the
Collateral.
Transfer Title. Effect transfer of title upon sale of all or part of
the Collateral. For this purpose, Grantor irrevocably appoints Lender
as its attorney-in-fact to execute endorsements, assignments and
instruments in the name of Grantor and each of them (if more than one)
as shall be necessary or reasonable.
Other Rights and Remedies. Have and exercise any or all of the rights
and remedies of a secured creditor under the provisions of the Uniform
Commercial Code, at law, in equity, or otherwise.
Application of Proceeds. Apply any cash which is part of the
Collateral, or which is received from the collection or sale of the
Collateral, to reimbursement of any expenses, including any costs for
registration of securities, commissions incurred in connection with a
sale, attorney fees as provided below, as provided below, and court
costs, whether or not there is a lawsuit and including any fees on
appeal, incurred by Lender in connection with the collection and sale
of such Collateral and to the payment of the Indebtedness of Grantor to
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Lender, with any excess funds to be paid to Grantor as the interests of
Grantor may appear. Grantor agrees, to the extent permitted by law, to
pay any deficiency after application of the proceeds of the Collateral
to the Indebtedness.
Cumulative Remedies. All of Lender's rights and remedies, whether
evidenced by this Agreement or by any other writing, shall be
cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to
perform an obligation of Grantor under this Agreement, after Grantor's
failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Indiana. If there is a lawsuit,
Grantor agrees upon Lender's request to submit to the jurisdiction of
the courts of Marion County, the State of Indiana. Lender and Grantor
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Grantor against the other.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Indiana.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement,
and Grantor shall pay the costs and expenses of such enforcement. Costs
and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Grantor also shall pay all court
costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current addresses).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Successor Interests. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Grantor, shall constitute a waiver of any of Lender's rights
or of any of Grantor's obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in
the sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS PLEDGE AND SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED APRIL 29,
1996.
GRANTOR:
IGF Holdings, Inc.
By: /s/ Douglas H. Symons
Douglas H. Symons, Vice President
<PAGE> 1
EXHIBIT 10.10(5)
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of April 29, 1996, made by IGF Holdings, Inc.
("Pledgor"), in favor of Pafco General Insurance Company ("Pafco" or "Pledgee"):
WHEREAS, pursuant to the Stock Purchase Agreement (the "Stock Purchase
Agreement"), dated January 31, 1996, by and among GS Capital Partners II, L.P.
("GSCP"), Goran Capitol Inc. ("Goran"), Symons International Group, Inc. ("SIG")
and GGS Management Holdings, Inc. (the "Company"), Goran and SIG have agreed to
cause Pledgor to issue to Pafco, a wholly owned subsidiary of the Company, the
IGF Holdings Notes;
WHEREAS, Pledgor, an Affiliate of Goran and SIG, owns all the issued and
outstanding shares of capital stock of IGF Insurance Company ("IGF") (such
shares, together with all stock certificates, options or rights of any value or
nature whatsoever that may be issued or granted by IGF to Pledgor while this
Agreement is in effect, being referred to herein as the "Pledged Stock");
WHEREAS, pursuant to the Stock Purchase Agreement, Goran and SIG have
agreed to cause Pledgor to pledge the Pledged Stock to Pledgee to secure any and
all obligations of Pledgor under the IGF Holdings Notes (the "Secured
Obligations"); and
WHEREAS, it is a condition to GSCP's willingness to enter into the Stock
Purchase Agreement that Pledgor shall have executed this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce
GSCP to enter into the Stock Purchase Agreement and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Defined Terms. Unless otherwise defined herein, terms defined in the
Stock Purchase Agreement shall have such defined meanings when used herein.
2. Pledge. Pledgor hereby pledges, assigns, hypothecates, transfers, and
delivers to Union Federal Savings Bank of Indianapolis ("Union"), the collateral
agent of Pafco pursuant to an Intercreditor and Subordination Agreement (the
"Intercreditor Agreement"), dated April 29, 1996, between Pledgor, Union and
Pafco, all the Pledged Stock (together with appropriate undated stock powers
duly executed in blank), and hereby grants to Pledgee a lien on, and security
interest in, the Pledged Stock and in all Proceeds (as defined below) thereof as
collateral security for (i) the prompt and complete payment and performance when
due (whether during any performance period thereof or therefor or at the stated
maturity, by acceleration or otherwise) of all the Secured Obligations.
"Proceeds" means all "proceeds" as defined in Section 9-306(1) of the New York
<PAGE> 2
Uniform Commercial Code (the "Code") and shall, in any event, include, without
limitation, all dividends, distributions or other income from the Pledged Stock,
and any and all collections on the foregoing or distributions with respect to
the foregoing.
3. Stock Dividends, Distributions, etc. If, while this Agreement is in
effect, Pledgor shall become entitled to receive or shall receive any stock
certificate (including, without limitation, any certificate representing a stock
dividend or a distribution in connection with any reclassification, increase or
reduction of capital, or issued in connection with any reorganization), option
or rights, whether as an addition to, in substitution of, or in exchange for,
any shares of any Pledged Stock, or otherwise, Pledgor agrees to accept the same
as Pledgee's agent and to hold the same in trust on behalf of and for the
benefit of Pledgee and to deliver the same forthwith to Pledgee (or, if required
by the Intercreditor Agreement, to Union as collateral agent for Pledgee) in the
exact form received, with the endorsement of Pledgor when necessary, and/or
appropriate undated stock powers duly executed in blank, to be held by Pledgee
(or, if required by the Intercreditor Agreement, to Union as collateral agent
for Pledgee), subject to the terms hereof, as additional collateral security for
the Secured Obligations. Any sums paid upon or in respect of the Pledged Stock
upon the liquidation or dissolution or winding up of IGF shall be paid over
forthwith to Pafco (or, if required by the Intercreditor Agreement, by Union as
collateral agent for Pafco) to be held by Pafco (or, if required by the
Intercreditor Agreement, by Union as collateral agent for Pafco) as additional
collateral security for the Secured Obligations; and in case any distribution of
capital shall be made on or in respect of the Pledged Stock or any property
shall be distributed upon or with respect to the Pledged Stock pursuant to the
recapitalization or reclassification of the capital of IGF, the property so
distributed shall be delivered to Pafco (or, if required by the Intercreditor
Agreement, by Union as collateral agent for Pledgee) as additional collateral
security for the Secured Obligations. All sums of money and property so paid or
distributed in respect of the Pledged Stock which are received by Pledgor shall,
until paid or delivered to Pafco (or, if required by the Intercreditor
Agreement, to Union as collateral agent for Pafco), be held by Pledgor as
Pafco's agent (and in trust on their behalf and for its benefit) as additional
collateral security for the Secured Obligations.
4. Collateral. The Pledged Stock and all other property at any time pledged
to Pledgee hereunder (whether described herein or not) and all income therefrom
and Proceeds thereof, are referred to herein collectively as the "Collateral".
5. Cash Dividends; Voting Rights. Unless a Triggering Event (as defined
below) shall have occurred, Pledgor shall be entitled to receive all cash
dividends paid in respect of the Pledged Stock, to vote the Pledged Stock and to
give consents, waivers and ratification in respect of the Pledged Stock;
provided, however, that no vote shall be cast or consent, waiver or ratification
given or action taken which would impair the Collateral or be inconsistent with
or violate any provision of this Agreement or the Stock Purchase Agreement.
6. Rights of Pledgee. If a Triggering Event shall have occurred, (a) any or
all shares or other securities included in the Collateral held by Pafco (or, if
required by the Intercreditor Agreement, by Union as collateral agent for Pafco)
hereunder may, without notice, be registered in the name of Pafco or its nominee
(or, if required by the Intercreditor Agreement, in the name of Union as
collateral agent for Pafco), and (b) Pafco or its nominee (or, if required by
the Intercreditor Agreement, Union, as collateral agent for Pafco) may
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thereafter, after notice to Pledgor, exercise all voting and corporate rights at
any meeting of any corporation or other entity issuing any of the shares or
other securities included in the Pledged Stock and exercise any and all rights
of conversion, exchange, subscription or any other rights, privileges or options
pertaining to any shares or other securities included in the Pledged Stock as if
it were the sole and absolute owner thereof, including, without limitation, the
right to exchange at its discretion, any and all of the Pledged Stock upon the
merger, consolidation, reorganization, recapitalization or other readjustment of
any corporation or other entity issuing any of such shares or other securities
or upon the exercise by any such issuer or Pafco of any right, privilege or
option pertaining to any shares or other securities included in the Pledged
Stock, and in connection therewith, to deposit and deliver any and all of the
Pledged Stock with any committee, depositary, transfer agent, registrar or other
designated agency upon such
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terms and conditions as it may determine, all without liability, but Pafco shall
have no duty to exercise any of the aforesaid rights, privileges or options and
shall not be responsible to Pledgor for any failure to do so or delay in so
doing.
7. Remedies. If any portion of the Secured Obligations shall at any time
become, or shall be declared, due and payable (or if any stay or legal bar to
such Secured Obligations becoming or being declared due and payable is in
effect, if but for the operation of such stay or legal bar such obligations
would have become, or could have been declared, due and payable by their terms)
and remain unpaid for a period of five business days from the date upon which
such portion of the Secured Obligations shall have become, or shall have been
declared (or would have so become, or could have so been declared), due and
payable (a "Triggering Event"), subject to the terms of the Intercreditor
Agreement, Pafco shall have the sole right to exercise in addition to all other
rights and remedies granted in this Agreement and in any other instrument or
agreement evidencing or relating to the Secured Obligations, all rights and
remedies of a secured party under the Code.
Without limiting the generality of the foregoing, subject to the terms of
the Intercreditor Agreement, Pafco shall have the right to, without demand of
performance or other demand, advertisement or notice of any kind (except the
notice specified below of time and place of public or private sale) to or upon
Pledgor or any other person or entity (all and each of which demands,
advertisements and/or notices are hereby expressly waived), forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or forthwith sell, assign, give option or options to purchase, contract to
sell or otherwise dispose of and deliver said Collateral, or any part thereof,
in one or more parcels at public or private sale or sales, at any exchange,
broker's board or at any of Pafco's offices or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit risk,
with the right to Pafco, upon any such sale or sales, public or private, to
purchase the whole or any part of said Collateral so sold, free of any right or
equity of redemption in Pledgor, which right or equity is hereby expressly
waived or released. Pledgor hereby expressly agrees and acknowledges that,
subject to the requirements of the Intercreditor Agreement, Pafco shall first,
deduct from the net proceeds ("Sale Proceeds") of any such collection, recovery,
receipt, appropriation, realization or sale, all reasonable costs and expenses
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of every kind incurred therein or incidental to the care, safekeeping or
otherwise of any and all of the Collateral or in any way relating to the rights
of Pledgees hereunder, including reasonable attorney's fees and legal expenses;
and second, apply any remaining Sale Proceeds as payment in respect of the full
outstanding principal amount and all accrued interest and other amounts owing
pursuant to the IGF Holdings Notes (Pledgor remaining liable for any Secured
Obligations remaining unpaid after such application); and third, any remaining
Sale Proceeds shall be paid over to Pledgor. Pledgor agrees that Pafco need not
give more than ten days' notice of the time and place of any public sale or of
the time after which a private sale or other intended disposition is to take
place and that such notice is reasonable notification of such matters. No
notification need be given to Pledgor if it has signed after default a statement
renouncing or modifying any right to notification of sale or other intended
disposition. Pledgor shall be liable if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay all amounts owing pursuant
to the Secured Obligations and the fees and expenses of any attorneys employed
by Pafco to collect such amounts. All waivers by Pledgor of rights (including
rights to notice) and all rights and remedies afforded Pafco herein, and all
other provisions of this Agreement, are expressly made subject to any applicable
mandatory provisions of Law limiting, or imposing conditions (including
conditions as to reasonableness) upon, such waivers or the effectiveness thereof
or any such rights and remedies. Any sale or other disposition of the Collateral
shall be in compliance with all provisions of applicable Law (including
applicable securities Laws and applicable provisions of the Code).
8. Representations, Warranties and Covenants. Pledgor represents and
warrants that (a) Pledgor is the legal record and beneficial owner of, and has
good title to, the Pledged Stock, subject to no Encumbrance, except the lien and
security interest created by this Agreement and by the Commercial Pledge and
Security Agreement (the "Commercial Pledge Agreement"), dated as of the date
hereof, between Pledgor and Union; (b) the shares of Pledged Stock listed on
Schedule I hereto constitute all the issued and outstanding shares of the
capital stock of IGF; (c) Pledgor has full power, authority and legal right to
pledge all the Pledged Stock and the other Collateral pursuant to this
Agreement; (d) this Agreement has been duly authorized, executed and delivered
by Pledgor and constitutes a legal, valid and binding obligation of the Pledgor
enforceable in accordance with its terms; (e) all the shares of the Pledged
Stock have been duly and validly issued, are fully paid and non-assessable; and
(f) the pledge, assignment and delivery of the Pledged Stock and the
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<PAGE> 6
other Collateral pursuant to this Agreement creates a valid lien on, and a
security interest in, such shares of the Pledged Stock and the other Collateral,
respectively, and the Proceeds thereof, subject to no prior or pari passu
Encumbrance or to any agreement granting to any third party a security interest
in the property or assets of Pledgor which would include the Pledged Stock or
any item of the other Collateral except for the lien granted to Union pursuant
to the Commercial Pledge Agreement. Pledgor covenants and agrees that it will
defend Pledgee's right and security interest in and to the Pledged Stock and the
other Collateral and the Proceeds thereof against the claims and demands of all
persons whomsoever except for any claim or demand made by Union pursuant to the
Commercial Pledge Agreement; and covenants and agrees that it will have like
title to and right to pledge any other property at any time hereafter pledged to
Pledgees as Collateral hereunder and will likewise defend Pledgee's right
thereto and security interest therein.
9. No Disposition, etc. Without the prior written consent of Pafco, Pledgor
agrees that, except as contemplated by the Intercreditor Agreement or the
Commercial Pledge Agreement, it will not sell, assign, transfer, exchange or
otherwise dispose of, or grant any option with respect to, the Collateral, nor
will it create, incur or permit to exist any Encumbrance with respect to any of
the Collateral, or any interest therein, or any proceeds thereof, except for the
lien and security interest provided for by this Agreement. Without the prior
written consent of Pafco, Pledgor agrees that it will not vote to enable IGF to,
and will not otherwise permit IGF to, issue any stock or other securities of any
nature in addition to or in exchange or substitution for the Pledged Stock.
10. Realization on Collateral. (a) Pledgor recognizes that Pafco may be
unable to effect a public sale of any or all of the Pledged Stock by reason of
certain prohibitions contained in the Securities Act of 1933, as amended (the
"Securities Act") and applicable state securities Laws, but may be compelled to
resort to one or more private sales thereof to a restricted group or purchasers
who will be obliged to agree, among other things, to acquire such securities for
their own account for investment and not with a view to the distribution or
resale thereof. Pledgor acknowledges and agrees that any such private sale may
result in prices and other terms less favorable to the seller than if such sale
were a public sale and, notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
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manner. Pafco shall be under no obligation to delay a sale of any of the Pledged
Stock for the period of time necessary to permit the issuer of such securities
to register such securities for public sale under the Securities Act or under
applicable state securities Laws, even if IGF would agree to do so.
(b) Pledgor further agrees to do or cause to be done all such
other acts and things as may be necessary to make such sale or sales of any
portion or all of the Pledged Stock valid and binding and in compliance with any
and all applicable Laws of any Governmental Authority, domestic or foreign,
having jurisdiction over any such sale or sales, all at Pledgor's expense.
Pledgor further agrees that a breach of any of the covenants contained in this
Agreement will cause irreparable injury to Pledgee that there is no adequate
remedy at Law in respect of such breach and, as a consequence, agrees that each
and every covenant made by it contained in this Agreement shall be specifically
enforceable against it, and Pledgor hereby waives and agrees not to assert any
defenses against an action for specific performance of such covenants. Pledgor
further acknowledges the impossibility of ascertaining the amount of damages
which would be suffered by Pledgee by reason of a breach of any of its covenants
contained herein and, consequently, agrees that, if Pledgee shall sue for
damages for breach, it shall pay, as liquidated damages and not as a penalty, an
amount equal to the value of the Pledged Stock and other Collateral on the date
Pledgee shall demand compliance with the covenants contained in this Agreement.
11. Further Assurances. Pledgee agrees that at any time and from time to
time upon the written request of Pafco, it will execute and deliver such further
documents and do such further acts and things as Pafco may reasonably request in
order to effect the purposes of this Agreement.
12. Limitation on Duties Regarding Collateral. Pafco's sole duty with
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the Code or otherwise, shall be to
deal with it in the same manner as Pafco deals with similar securities and
property for its own account (it being acknowledged that the collateral may be
held by Union, as collateral agent for Pafco pursuant to the terms of the
Intercreditor Agreement). Neither Pafco nor its directors, officers, partners,
employees or agents shall be liable for failure to demand, collect or realize
upon any of the Collateral or for any delay in doing so or shall be under any
obligation to sell or otherwise dispose of any Collateral upon the request of
Pledgor or otherwise.
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13. Powers Coupled with an Interest; Agency. All authorizations,
assignments, designations and agencies contained herein with respect to the
Collateral are irrevocable and powers coupled with an interest authorization.
14. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
15. Paragraph Headings. The paragraph headings used in this Agreement are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
16. No Waiver; Cumulative Remedies. Pledgee shall not by any act (except by
a written instrument executed by Pledgee pursuant to Section 17 hereof) be
deemed to have waived any right or remedy hereunder. No failure to exercise, nor
any delay in exercising, on the part of Pledgee any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by Pledgee of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy which Pledgee would otherwise have
on any future occasion. The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any other
rights or remedies provided by Law.
17. Waivers and Amendments; Successors and Assigns; Governing Law. This
Agreement may be amended, supplemented or otherwise modified by written
instrument executed by Pledgor and Pledgee. This Agreement shall be binding upon
the successors and assigns of Pledgor and shall insure to the benefit of
Pledgees and their respective successors and assigns. THIS PLEDGE AGREEMENT
SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS
OF THE STATE OF INDIANA (REGARDLESS OF THE LAWS THAT MIGHT BE APPLICABLE UNDER
ANY PRINCIPLES OF CONFLICTS OF LAWS).
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18. Irrevocable Authorization and Instruction to IGF. Pledgor hereby
authorizes and instructs IGF to comply with any instruction received by IGF from
Pledgee in writing in accordance with the terms of this Agreement, without any
other or further instructions from Pledgor, and Pledgor agrees that IGF shall be
fully protected in so complying.
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IN WITNESS WHEREOF, the Pledgor has caused this Agreement to be duly
executed and delivered as of the day and year first above written.
IGF HOLDINGS, INC.
By: /s/ Douglas H. Symons
Name: Douglas H. Symons
Title: Vice President
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SCHEDULE I
Description of Pledged Stock
Stock Percentage of
Class of Stock Certificate No. No.of Shares Issued Shares
Issuer
IGF Insurance Preferred 2,494,000 100%
Company Common 29,614
<PAGE> 12
ACKNOWLEDGMENT AND CONSENT
IGF Insurance Company ("IGF") hereby acknowledges receipt of the Pledge
Agreement (the "Agreement"), dated April 29, 1996, made by IGF Holdings, Inc. in
favor of Pafco General Insurance Company and GS Capital Partners II, L.P. and
agrees to be bound thereby and to comply with the terms thereof insofar as such
terms are applicable to it. IGF agrees to notify GSCP promptly in writing of the
occurrence of any of the events described in Section 4 of the Agreement. IGF
further agrees that the terms of Sections 7 and 10 of the Agreement shall apply
to it, mutatis, mutandis, with respect to all actions that may be required of it
under or pursuant to Sections 7 and 10 of the Agreement.
IGF INSURANCE COMPANY
By: /s/ Douglas H. Symons, President
----------------------------------
<PAGE> 1
Exhibit 10.11(2)
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of April 30, 1996 between GGS MANAGEMENT
HOLDINGS, INC., a corporation duly organized and validly existing under the laws
of the State of Delaware (the "Pledgor"); and THE CHASE MANHATTAN BANK (NATIONAL
ASSOCIATION), as administrative agent for the Banks party to the Credit
Agreement referred to below (in such capacity, together with its successors in
such capacity, the "Administrative Agent").
GGS Management, Inc., a Delaware corporation (the "Company"),
certain lenders (the "Banks") and the Administrative Agent are parties to a
Credit Agreement dated as of April 30, 1996 (as modified and supplemented and in
effect from time to time, the "Credit Agreement"), providing, subject to the
terms and conditions thereof, for loans to be made by said Banks to the Company.
To induce said Banks to enter into the Credit Agreement and to
extend credit thereunder, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed
to pledge and grant a security interest in the Collateral (as hereinafter
defined) as security for the Secured Obligations (as hereinafter defined).
Accordingly, the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Credit
Agreement are used herein as defined therein. In addition, as used herein:
"Collateral" shall have the meaning ascribed thereto in
Section 3 hereof.
"Collateral Account" shall have the meaning ascribed thereto
in Section 4.01 hereof.
"Pledged Stock" shall have the meaning ascribed thereto in
Section 3(a) hereof.
"Secured Obligations" shall mean, collectively, (a) the
principal of and interest on the Loans made by the Banks to, and the
Notes held by the Banks of, the Company and all other amounts from time
to time owing to the Banks or the Administrative Agent by the Company
under the Loan Documents, (b) all amounts from time to time owing by
the Company to any Bank under any Interest Rate Protection Agreement
and (c) all obligations of the Pledgor to the Banks and the
Administrative Agent hereunder.
GGS Pledge Agreement
<PAGE> 2
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"Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect from time to time in the State of New York.
Section 2. Representations and Warranties. The Pledgor
represents and warrants to the Banks and the Administrative Agent that:
2.01 Corporate Existence. The Pledgor is a corporation duly
organized and validly existing under the laws of the jurisdiction of its
incorporation.
2.02 Litigation. There are no legal or arbitral proceedings or
any proceedings by or before any governmental or regulatory authority or agency,
now pending or (to the knowledge of the Pledgor) threatened against the Pledgor
that, if adversely determined, is reasonably likely (either individually or in
the aggregate) to have a material adverse effect on the making or performance by
the Pledgor of this Agreement or the validity or enforceability thereof.
2.03 No Breach. None of the execution and delivery of this
Agreement, the consummation of the transactions herein contemplated or
compliance with the terms and provisions hereof will conflict with or result in
a breach of, or require any consent under, the charter or by-laws of the
Pledgor, or any applicable law or regulation, or any order, writ, injunction or
decree of any court or governmental authority or agency, or any agreement or
instrument to which the Pledgor is a party or by which is bound or to which it
is subject, or constitute a default under any such agreement or instrument, or
result in the creation or imposition of any Lien upon any of the revenues or
assets of the Pledgor pursuant to the terms of any such agreement or instrument.
2.04 Corporate Action. The Pledgor has all necessary corporate
power and authority to execute, deliver and perform its obligations under this
Agreement; the execution, delivery and performance by the Pledgor of this
Agreement have been duly authorized by all necessary corporate action on its
part; and this Agreement has been duly and validly executed and delivered by the
Pledgor and constitutes its legal, valid and binding obligation, enforceable in
accordance with its terms, except as such enforceability may be limited by (a)
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
applicability affecting the enforcement of creditors' rights and (b) the
GGS Pledge Agreement
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application of general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
2.05 Approvals. No authorizations, approvals or consents of,
and no filings or registrations with, any governmental or regulatory authority
or agency, or any securities exchange are necessary for the execution, delivery
or performance by the Pledgor of this Agreement or for the validity or
enforceability hereof except for (i) filings and recordings in respect of the
Liens created pursuant to this Agreement, (ii) the approval of the insurance
department or similar insurance regulatory or administrative authority or agency
of the state in which an Insurance Subsidiary is domiciled or licensed to do an
insurance business (and any Subsidiary of such Insurance Subsidiary that is also
an Insurance Subsidiary) as may be required in connection with a foreclosure on
the shares pledged under this Agreement.
2.06 Taxes. From and after the Closing Date, the Pledgor and
its Subsidiaries will be members of an affiliated group of corporations eligible
to file consolidated returns for Federal income tax purposes, of which the
Pledgor will be the "common parent" (within the meaning of Section 1504 of the
Code) of such group. As of the close of business on the Closing Date, the
charges, accruals and reserves on the books of the Pledgor and its Subsidiaries
in respect of taxes and other governmental charges are, in the opinion of the
Pledgor, adequate.
2.07 Pledged Stock.
(a) The Pledgor is the sole beneficial owner of the Collateral
and no Lien exists or will exist upon the Collateral at any time (and no right
or option to acquire the same exists in favor of any other Person), except for
(i) Liens permitted under Section 8.05 of the Credit Agreement and (ii) the
pledge and security interest in favor of the Administrative Agent for the
benefit of the Banks created or provided for herein, which pledge and security
interest, upon delivery of the Pledged Shares to the Administrative Agent and
assuming continuous possession thereof by the Administrative Agent, and upon the
filing of appropriate financing statements in the jurisdictions specified by the
Uniform Commercial Code in the case of Collateral other than the Pledged Shares,
will constitute a first priority perfected pledge and security interest in and
to all of the Collateral.
(b) The Pledged Stock represented by the certificates
identified in Annex 1 hereto is, and all other Pledged Stock in which the
Pledgor shall hereafter grant a security interest pursuant to Section 3 hereof
GGS Pledge Agreement
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will be, duly authorized, validly existing, fully paid and non-assessable and
none of such Pledged Stock is or will be subject to any contractual restriction,
or any restriction under the charter or by-laws of the Company, upon the
transfer of such Pledged Stock (except for any such restriction contained
herein).
(c) The Pledged Stock represented by the certificates
identified in Annex 1 hereto constitutes all of the issued and outstanding
shares of capital stock of any class of the Company beneficially owned by the
Pledgor on the date hereof (whether or not registered in the name of the
Pledgor) and said Annex 1 correctly identifies, as at the date hereof, the
respective class and par value of the shares comprising such Pledged Stock and
the respective number of shares (and registered owners thereof) represented by
each such certificate.
2.08 Investment Company Act. The Pledgor is not an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
2.09 Public Utility Holding Company Act. The Pledgor is not a
"holding company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
Section 3. The Pledge. As collateral security for the prompt
payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the Secured Obligations, the Pledgor hereby pledges and grants to
the Administrative Agent, for the benefit of the Banks as hereinafter provided,
a security interest in all of the Pledgor's right, title and interest in, to and
under the following Property, whether now owned by the Pledgor or hereafter
acquired and whether now existing or hereafter coming into existence (all being
collectively referred to herein as "Collateral"):
(a) the shares of common stock of the Company represented by
the certificates identified in Annex 1 hereto and all other shares of
capital stock of whatever class of the Company, now or hereafter owned
by the Pledgor, in each case together with the certificates evidencing
the same (collectively, the "Pledged Stock");
(b) all shares, securities, moneys or property representing a
dividend on any of the Pledged Stock, or representing a distribution or
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return of capital upon or in respect of the Pledged Stock, or resulting
from a split-up, revision, reclassification or other like change of the
Pledged Stock or otherwise received in exchange therefor, and any
subscription warrants, rights or options issued to the holders of, or
otherwise in respect of, the Pledged Stock;
(c) without affecting the obligations of the Pledgor under any
provision prohibiting such action hereunder or under the Credit
Agreement, in the event of any consolidation or merger in which the
Company is not the surviving corporation, all shares of each class of
the capital stock of the successor corporation (unless such successor
corporation is the Pledgor itself) formed by or resulting from such
consolidation or merger;
(d) each Transaction Document;
(e) the balance from time to time in the Collateral Account;
and
(f) all proceeds of and to any of the Property of the Pledgor
described in the preceding clauses of this Section 3 (including,
without limitation, all causes of action, claims and warranties now or
hereafter held by the Pledgor in respect of any of the items listed
above) and, to the extent related to any property described in said
clauses or such proceeds, products and accessions, all books,
correspondence, credit files, records, invoices and other papers.
Section 4. Cash Proceeds of Collateral.
4.01 Collateral Account. The Administrative Agent may
establish with Chase a cash collateral account (the "Collateral Account") in the
name and under the control of the Administrative Agent into which there shall be
deposited from time to time the cash proceeds of any of the Collateral required
to be delivered to the Administrative Agent pursuant hereto and into which the
Pledgor may from time to time deposit any additional amounts that it wishes to
pledge to the Administrative Agent for the benefit of the Banks as additional
collateral security hereunder. The balance from time to time in the Collateral
Account shall constitute part of the Collateral hereunder and shall not
constitute payment of the Secured Obligations until applied as hereinafter
provided. Except as expressly provided in the next sentence, the Administrative
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Agent shall remit the collected balance standing to the credit of the Collateral
Account to or upon the order of the Pledgor as the Pledgor shall from time to
time instruct. However, at any time following the occurrence and during the
continuance of an Event of Default, the Administrative Agent may (and, if
instructed by the Banks as specified in Section 10.03 of the Credit Agreement,
shall) in its (or their) discretion apply or cause to be applied (subject to
collection) the balance from time to time standing to the credit of the
Collateral Account to the payment of the Secured Obligations in the manner
specified in Section 4.09 hereof. The balance from time to time in the
Collateral Account shall be subject to withdrawal only as provided herein. In
addition to the foregoing, the Pledgor agrees that if the proceeds of any
Collateral hereunder shall be received by it, the Pledgor shall as promptly as
possible deposit such proceeds into the Collateral Account to the extent such
proceeds are required to be delivered to the Administrative Agent pursuant
hereto. Until so deposited, all such proceeds shall be held in trust by the
Pledgor for and as the property of the Administrative Agent and shall not be
commingled with any other funds or property of the Pledgor.
4.02 Investment of Balance in Collateral Account. Amounts on
deposit in the Collateral Account shall be invested from time to time in such
Permitted Investments as the Pledgor (or, after the occurrence and during the
continuance of a Default, the Administrative Agent) shall determine, which
Permitted Investments shall be held in the name and be under the control of the
Administrative Agent, provided that (i) at any time after the occurrence and
during the continuance of an Event of Default, the Administrative Agent may
(and, if instructed by the Banks as specified in Section 10.03 of the Credit
Agreement, shall) in its (or their) discretion at any time and from time to time
elect to liquidate any such Permitted Investments and to apply or cause to be
applied the proceeds thereof to the payment of the Secured Obligations in the
manner specified in Section 6.09 hereof and (ii) if requested by the Pledgor,
such Permitted Investments may be held in the name and under the control of one
or more of the Banks (and in that connection each Bank, pursuant to Section
10.10 of the Credit Agreement has agreed that such Permitted Investments shall
be held by such Bank as a collateral sub-agent for the Administrative Agent
hereunder).
Section 5. Covenants. The Pledgor agrees that, until the
payment and satisfaction in full of the Secured Obligations and the expiration
or termination of the Commitments of the Banks under the Credit Agreement:
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5.01 Litigation. The Pledgor will promptly give to each Bank
(a) notice of all legal or arbitral proceedings, and of all proceedings by or
before any governmental or regulatory authority or agency, affecting the
Pledgor, except proceedings that, if adversely determined, would not (either
individually or in the aggregate) have a material adverse effect on the making
or performance by the Pledgor of this Agreement or the validity or
enforceability thereof, (b) a copy of any written notice given by the Pledgor or
any of its Subsidiaries to the Seller of any claim for damages resulting from
breaches of the representations and warranties of the Sellers in the Superior
Stock Purchase Agreement and (c) a copy of any written notice to arbitrate given
or received by the Pledgor under Section 9.2 of the Superior Stock Purchase
Agreement.
5.02 Corporate Existence, Etc. The Pledgor will: preserve and
maintain its corporate existence and all of its material rights, privileges and
franchises; comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if failure to
comply with such requirements could (either individually or in the aggregate)
materially and adversely affect the making or performance by the Pledgor of this
Agreement or the validity or enforceability thereof; pay and discharge all
taxes, assessments and governmental charges or levies imposed on it or on its
income or profits or on any of its property prior to the date on which penalties
attach thereto, except for any such tax, assessment, charge or levy the payment
of which is being contested in good faith and by proper proceedings and against
which adequate reserves are being maintained; and permit representatives of any
Bank or the Administrative Agent, during normal business hours, to examine, copy
and make extracts from its books and records relating to the Collateral.
Section 6. Further Assurances; Remedies. In furtherance of the
grant of the pledge and security interest pursuant to Section 3 hereof, the
Pledgor hereby agrees with each Bank and the Administrative Agent as follows:
6.01 Delivery and Other Perfection. The Pledgor shall:
(a) if any of the shares, securities, moneys or property
required to be pledged by the Pledgor under clauses (a), (b) and (c) of
Section 3 hereof are received by the Pledgor, forthwith either (x)
transfer and deliver to the Administrative Agent such shares or
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securities so received by the Pledgor (together with the certificates
for any such shares and securities duly endorsed in blank or
accompanied by undated stock powers duly executed in blank), all of
which thereafter shall be held by the Administrative Agent, pursuant to
the terms of this Agreement, as part of the Collateral or (y) take such
other action as the Administrative Agent shall deem necessary or
appropriate to duly record the Lien created hereunder in such shares,
securities, moneys or property in said clauses (a), (b) and (c);
(b) give, execute, deliver, file and/or record any financing
statement, notice, instrument, document, agreement or other papers that
may be necessary or desirable (in the judgment of the Administrative
Agent) to create, preserve, perfect or validate the security interest
granted pursuant hereto or to enable the Administrative Agent to
exercise and enforce its rights hereunder with respect to such pledge
and security interest, including, without limitation, causing any or
all of the Collateral to be transferred of record into the name of the
Administrative Agent or its nominee (and the Administrative Agent
agrees that if any Collateral is transferred into its name or the name
of its nominee, the Administrative Agent will thereafter promptly give
to the Pledgor copies of any notices and communications received by it
with respect to the Collateral);
(c) keep full and accurate books and records relating to the
Collateral, and stamp or otherwise mark such books and records in such
manner as the Administrative Agent may reasonably require in order to
reflect the security interests granted by this Agreement; and
(d) permit representatives of the Administrative Agent, upon
reasonable notice, at any time during normal business hours to inspect
and make abstracts from its books and records pertaining to the
Collateral, and permit representatives of the Administrative Agent to
be present at the Pledgor's place of business to receive copies of all
communications and remittances relating to the Collateral, and forward
copies of any notices or communications received by the Pledgor with
respect to the Collateral, all in such manner as the Administrative
Agent may require.
6.02 Other Financing Statements and Liens. Without the prior
written consent of the Administrative Agent (granted with the authorization of
the Banks as specified in Section 10.09 of the Credit Agreement), the Pledgor
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shall not file or suffer to be on file, or authorize or permit to be filed or to
be on file, in any jurisdiction, any financing statement or like instrument with
respect to the Collateral in which the Administrative Agent is not named as the
sole secured party for the benefit of the Banks.
6.03 Preservation of Rights. The Administrative Agent shall
not be required to take steps necessary to preserve any rights against prior
parties to any of the Collateral.
6.04 Collateral.
(1) The Pledgor will cause the Pledged Stock to constitute at
all times 100% of the total number of shares of each class of capital stock of
the Company then outstanding.
(2) So long as no Event of Default shall have occurred and be
continuing, the Pledgor shall have the right to exercise all voting, consensual
and other powers of ownership pertaining to the Pledged Stock for all purposes
not inconsistent with the terms of this Agreement, the Credit Agreement, the
Notes or any other instrument or agreement referred to herein or therein,
provided that the Pledgor agrees that it will not vote the Collateral in any
manner that is inconsistent with the terms of this Agreement, the Credit
Agreement, the Notes or any such other instrument or agreement; and the
Administrative Agent shall execute and deliver to the Pledgor or cause to be
executed and delivered to the Pledgor all such proxies, powers of attorney,
dividend and other orders, and all such instruments, without recourse, as the
Pledgor may reasonably request for the purpose of enabling the Pledgor to
exercise the rights and powers that it is entitled to exercise pursuant to this
Section 6.04(2).
(3) Unless and until an Event of Default has occurred and is
continuing, the Pledgor shall be entitled to receive, retain and use any
dividends on the Pledged Stock paid in cash out of earned surplus and all
proceeds of all other Collateral.
(4) If any Event of Default shall have occurred, then so long
as such Event of Default shall continue, and whether or not the Administrative
Agent or any Bank exercises any available right to declare any Secured
Obligation due and payable or seeks or pursues any other relief or remedy
available to it under applicable law or under this Agreement, the Credit
Agreement, the Notes or any other agreement relating to such Secured Obligation,
all dividends and other distributions on the Collateral shall be paid directly
to the Administrative Agent and retained by it in the Collateral Account as part
of the Collateral, subject to the terms of this Agreement, and, if the
Administrative Agent shall so request in writing, the Pledgor agrees to execute
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and deliver to the Administrative Agent appropriate additional dividend,
distribution and other orders and documents to that end, provided that if such
Event of Default is cured, any such dividend or distribution theretofore paid to
the Administrative Agent shall, upon request of the Pledgor (except to the
extent theretofore applied to the Secured Obligations), be returned by the
Administrative Agent to the Pledgor.
6.05 Events of Default, Etc. During the period during which
an Event of Default shall have occurred and be continuing, but subject to the
provisions of Section 7.11 hereof:
(a) the Administrative Agent shall have all of the rights and
remedies with respect to the Collateral of a secured party under the
Uniform Commercial Code (whether or not said Code is in effect in the
jurisdiction where the rights and remedies are asserted) and such
additional rights and remedies to which a secured party is entitled
under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, without limitation, the
right, to the maximum extent permitted by law, to exercise all voting,
consensual and other powers of ownership pertaining to the Collateral
as if the Administrative Agent were the sole and absolute owner thereof
(and the Pledgor agrees to take all such action as may be appropriate
to give effect to such right);
(b) the Administrative Agent in its discretion may, in its
name or in the name of the Pledgor or otherwise, demand, sue for,
collect or receive any money or property at any time payable or
receivable on account of or in exchange for any of the Collateral, but
shall be under no obligation to do so; and
(c) the Administrative Agent may, upon ten business days'
prior written notice to the Pledgor of the time and place, with respect
to the Collateral or any part thereof that shall then be or shall
thereafter come into the possession, custody or control of the
Administrative Agent, the Banks or any of their respective agents,
sell, lease, assign or otherwise dispose of all or any part of such
Collateral, at such place or places as the Administrative Agent deems
best, and for cash or for credit or for future delivery (without
thereby assuming any credit risk), at public or private sale, without
demand of performance or notice of intention to effect any such
disposition or of the time or place thereof (except such notice as is
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required above or by applicable statute and cannot be waived), and the
Administrative Agent or any Bank or anyone else may be the purchaser,
lessee, assignee or recipient of any or all of the Collateral so
disposed of at any public sale (or, to the extent permitted by law, at
any private sale) and thereafter hold the same absolutely, free from
any claim or right of whatsoever kind, including any right or equity of
redemption (statutory or otherwise), of the Pledgor, any such demand,
notice and right or equity being hereby expressly waived and released.
The Administrative Agent may, without notice or publication, adjourn
any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for the sale, and
such sale may be made at any time or place to which the sale may be so
adjourned.
The proceeds of each collection, sale or other disposition under this Section
6.05 shall be applied in accordance with Section 6.09 hereof.
The Pledgor recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, and applicable state
securities laws, the Administrative Agent may be compelled, with respect to any
sale of all or any part of the Collateral, to limit purchasers to those who will
agree, among other things, to acquire the Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. The
Pledgor acknowledges that any such private sales may be at prices and on terms
less favorable to the Administrative Agent than those obtainable through a
public sale without such restrictions, and, notwithstanding such circumstances,
agrees that any such private sale shall not be deemed, for that reason alone,
not to have been made in a commercially reasonable manner and that the
Administrative Agent shall have no obligation to engage in public sales and no
obligation to delay the sale of any Collateral for the period of time necessary
to permit the Company or issuer thereof to register it for public sale.
6.06 Deficiency. If the proceeds of sale, collection or other
realization of or upon the Collateral pursuant to Section 4.05 hereof are
insufficient to cover the costs and expenses of such realization and the payment
in full of the Secured Obligations, the Pledgor shall remain liable for any
deficiency.
6.07 Removals, Etc. Without at least 30 days' prior written
notice to the Administrative Agent, the Pledgor shall not (i) maintain any of
its books and records with respect to the Collateral at any office or maintain
GGS Pledge Agreement
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its principal place of business at any place other than at the address indicated
beneath its signature hereto or (ii) change its name, or the name under which it
does business, from the name shown on the signature pages hereto.
6.08 Private Sale. The Administrative Agent and the Banks
shall incur no liability as a result of the sale of the Collateral, or any part
thereof, at any private sale pursuant to Section 6.05 hereof conducted in a
commercially reasonable manner. The Pledgor hereby waives any claims against the
Administrative Agent or any Bank arising by reason of the fact that the price at
which the Collateral may have been sold at such a private sale was less than the
price that might have been obtained at a public sale or was less than the
aggregate amount of the Secured Obligations, even if the Administrative Agent
accepts the first offer received and does not offer the Collateral to more than
one offeree.
6.09 Application of Proceeds. Except as otherwise herein
expressly provided, the proceeds of any collection, sale or other realization of
all or any part of the Collateral pursuant hereto, and any other cash at the
time held by the Administrative Agent under Section 4 hereof or this Section 6,
shall be applied by the Administrative Agent:
First, to the payment of the costs and expenses of such
collection, sale or other realization, including reasonable
out-of-pocket costs and expenses of the Administrative Agent and the
fees and expenses of its agents and counsel, and all expenses incurred
and advances made by the Administrative Agent in connection therewith;
Next, to the payment in full of the Secured Obligations, in
each case equally and ratably in accordance with the respective amounts
thereof then due and owing or as the Banks holding the same may
otherwise agree; and
Finally, to the payment to the Pledgor, or its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining.
As used in this Section 6, "proceeds" of Collateral shall mean
cash, securities and other property realized in respect of, and distributions in
kind of, Collateral, including any thereof received under any reorganization,
GGS Pledge Agreement
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liquidation or adjustment of debt of the Pledgor or any issuer of or obligor on
any of the Collateral.
6.10 Attorney-in-Fact. Without limiting any rights or powers
granted by this Agreement to the Administrative Agent while no Event of Default
has occurred and is continuing, upon the occurrence and during the continuance
of any Event of Default the Administrative Agent is hereby appointed the
attorney-in-fact of the Pledgor for the purpose of carrying out the provisions
of this Section 6 and taking any action and executing any instruments that the
Administrative Agent may deem necessary or advisable to accomplish the purposes
hereof, which appointment as attorney-in-fact is irrevocable and coupled with an
interest. Without limiting the generality of the foregoing, so long as the
Administrative Agent shall be entitled under this Section 6 to make collections
in respect of the Collateral, the Administrative Agent shall have the right and
power to receive, endorse and collect all checks made payable to the order of
the Pledgor representing any dividend, payment or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same.
6.11 Perfection. Prior to or concurrently with the execution
and delivery of this Agreement, the Pledgor shall deliver to the Administrative
Agent all certificates identified in Annex 1 hereto, accompanied by undated
stock powers duly executed in blank.
6.12 Termination. When all Secured Obligations shall have been
paid in full and the Commitments of the Banks under the Credit Agreement shall
have expired or been terminated, this Agreement shall terminate, and the
Administrative Agent shall forthwith cause to be assigned, transferred and
delivered, against receipt but without any recourse, warranty or representation
whatsoever, any remaining Collateral and money received in respect thereof, to
or on the order of the Pledgor.
6.13 Further Assurances. The Pledgor agrees that, from time to
time upon the written request of the Administrative Agent, the Pledgor will
execute and deliver such further documents and do such other acts and things as
the Administrative Agent may reasonably request in order fully to effect the
purposes of this Agreement.
GGS Pledge Agreement
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Section 7. Miscellaneous.
7.01 No Waiver. No failure on the part of the Administrative
Agent or any Bank to exercise, and no course of dealing with respect to, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Administrative
Agent or any Bank of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies herein are cumulative and are not exclusive of any remedies
provided by law.
7.02 Notices. All notices, requests, consents and demands
hereunder shall be in writing and telecopied or delivered to the intended
recipient at the "Address for Notices" specified beneath its name on the
signature pages hereof or, as to either party, at such other address as shall be
designated by such party in a notice to the other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telecopier or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
7.03 Amendments, Etc. The terms of this Agreement may be
waived, altered or amended only by an instrument in writing duly executed by the
Pledgor and the Administrative Agent (with the consent of the Banks as specified
in Section 10.09 of the Credit Agreement). Any such amendment or waiver shall be
binding upon the Administrative Agent and each Bank, each holder of any of the
Secured Obligations and the Pledgor.
7.04 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the respective successors and assigns of the
Pledgor, the Administrative Agent, the Banks and each holder of any of the
Secured Obligations (provided, however, that the Pledgor shall not assign or
transfer its rights hereunder without the prior written consent of the
Administrative Agent).
7.05 Captions. The captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
7.06 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
GGS Pledge Agreement
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same instrument and either of the parties hereto may execute this Agreement by
signing any such counterpart.
7.07 Governing Law, Etc. This Agreement shall be governed by,
and construed in accordance with, the law of the State of New York. The Pledgor
hereby submits to the nonexclusive jurisdiction of the United States District
Court for the Southern District of New York and of the Supreme Court of the
State of New York sitting in New York County (including its Appellate Division),
and of any other appellate court in the State of New York, for the purposes of
all legal proceedings arising out of or relating to this Agreement or the
transactions contemplated hereby. The Pledgor hereby irrevocably waives, to the
fullest extent permitted by applicable law, any objection that it may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum. EACH OF THE PLEDGOR, THE ADMINISTRATIVE AGENT
AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS E AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
7.08 Agents and Attorneys-in-Fact. The Administrative Agent
may employ agents and attorneys-in-fact in connection herewith and shall not be
responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it in good faith.
7.09 Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Administrative
Agent and the Banks in order to carry out the intentions of the parties hereto
as nearly as may be possible and (ii) the invalidity or unenforceability of any
provision hereof in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction.
7.10 The Administrative Agent. As provided in Section 10 of
the Credit Agreement, each Bank has appointed The Chase Manhattan Bank (National
Association) as its agent for purposes of this Agreement. Following the payment
in full of all Secured Obligations outstanding under the Credit Agreement and
the termination or expiration of the Commitments thereunder, the provisions of
said Section 10 shall be deemed to continue in full force and effect for the
GGS Pledge Agreement
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benefit of the Administrative Agent under this Agreement. In that connection,
following such payment in full and expiration and termination of the
Commitments, the term "Majority Banks" (as defined in said Section 1.01) shall
be deemed to refer to Banks holding Secured Obligations representing more than
50% of the aggregate Secured Obligations.
7.11 Certain Regulatory Requirements. The Administrative Agent
hereby acknowledges that, in connection with any exercise by it of the rights
and remedies afforded to it hereunder, it may be necessary to provide notice to
and/or obtain the prior consent or approval of certain governmental authorities.
Notwithstanding anything to the contrary contained herein, the Administrative
Agent will not take any action pursuant to this Agreement which would constitute
or result in any transfer of control over the Company, or any other action, if
such action, in either case, requires notice to and/or the prior consent or
approval of governmental authorities without first providing such notice and/or
obtaining such consent or approval. Upon the exercise by the Administrative
Agent of any power, right or privilege or remedy pursuant to this e Agreement
which requires any consent, approval, recording, qualification or authorization
of any governmental authority, the Pledgor will, and will cause the Company to,
(a) execute and deliver, or cause the execution and delivery of, all
applications, instruments or other documents and papers that the Administrative
Agent may reasonably require to be obtained for such governmental consent,
approval, recording, qualification or authorization, (b) use its best efforts
otherwise to secure such governmental consent, approval, recording,
qualification or authorization and (c) take no action inconsistent therewith.
The Pledgor acknowledges that the Administrative Agent has no adequate remedy at
law for the breach of any obligation of this Section 7.11, and that such
obligations shall be enforceable by specific performance.
GGS Pledge Agreement
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IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day and year first above
written.
GGS MANAGEMENT HOLDINGS, INC.
By /s/ Alan G. Symons
Title:
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Administrative Agent
By /s/ J. David Parker, Jr.
Title: Vice President
GGS Pledge Agreement
<PAGE> 18
ANNEX 1
PLEDGED STOCK
[See Section 2(b) and (c)]
Certificate Registered
Issuer Nos. Owner Number of Shares
GGS Management, C1 GGS Management 1,000 shares of
Inc. Holding, Inc. common stock, par
value $0.01 per share
Annex 1 to GGS Guarantee and Pledge Agreement
<PAGE> 1
EXHIBIT 10.11(3)
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of April 30, 1996 between GGS
MANAGEMENT, INC., a corporation duly organized and validly existing under the
laws of the State of Delaware (the "Company"); and THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION), as administrative agent for the Banks party to the
Credit Agreement referred to below (in such capacity, together with its
successors in such capacity, the "Administrative Agent").
The Company, certain lenders (the "Banks") and the
Administrative Agent are parties to a Credit Agreement dated as of April 30,
1996 (as modified and supplemented and in effect from time to time, the "Credit
Agreement"), providing, subject to the terms and conditions thereof, for loans
to be made by said Banks to the Company.
To induce said Banks to enter into the Credit Agreement and to
extend credit thereunder, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company has agreed
to pledge and grant a security interest in the Collateral (as hereinafter
defined) as security for the Secured Obligations (as so defined). Accordingly,
the parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Credit
Agreement are used herein as defined therein. In addition, as used herein:
"Collateral" shall have the meaning ascribed thereto in
Section 3 hereof.
"Collateral Account" shall have the meaning ascribed thereto
in Section 4.01 hereof.
"Issuers" shall mean, collectively, (a) the respective
corporations identified on Annex 1 hereto under the caption "Issuer"
and (b) to the extent not otherwise identified on Annex 1 hereto, each
other direct Subsidiary of the Company.
"Pledged Stock" shall have the meaning ascribed thereto in
Section 3(a) hereof.
"Secured Obligations" shall mean, collectively, (a) the
principal of and interest on the Loans made by the Banks to, and the
Note(s) held by each Bank of, the Company and all other amounts from
time to time owing to the Banks or the Administrative Agent by the
Company under the Loan Documents, (b) all amounts from time to time
owing by the Company to any Bank under any Interest Rate Protection
Company Pledge Agreement
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Agreement and (c) all obligations of the Company to the Banks and the
Administrative Agent hereunder.
"Uniform Commercial Code" shall mean the Uniform Commercial
Code as in effect from time to time in the State of New York.
Section 2. Representations and Warranties. The Company
represents and warrants to the Banks and the Administrative Agent that:
(a) The Company is the sole beneficial owner of the Collateral
and no Lien exists or will exist upon the Collateral at any time (and
no right or option to acquire the same exists in favor of any other
Person), except for (i) Liens permitted under Section 8.05 of the
Credit Agreement and (ii) the pledge and security interest in favor of
the Administrative Agent for the benefit of the Banks created or
provided for herein, which pledge and security interest, upon delivery
of the Pledged Shares to the Administrative Agent and assuming
continuous possession thereof by the Administrative Agent, and upon the
filing of appropriate financing statements in the jurisdictions
specified by the Uniform Commercial Code in the case of Collateral
other than the Pledged Shares, will constitute a first priority
perfected pledge and security interest in and to all of the Collateral.
(b) The Pledged Stock represented by the certificates
identified in Annex 1 hereto is, and all other Pledged Stock in which
the Company shall hereafter grant a security interest pursuant to
Section 3 hereof will be, duly authorized, validly existing, fully paid
and non-assessable and none of such Pledged Stock is or will be subject
to any contractual restriction, or any restriction under the charter or
by-laws of the respective Issuer of such Pledged Stock, upon the
transfer of such Pledged Stock (except for any such restriction
contained herein or in the Credit Agreement).
(c) The Pledged Stock represented by the certificates
identified in Annex 1 hereto constitutes all of the issued and
outstanding shares of capital stock of any class of the Issuers
beneficially owned by the Company on the date hereof (whether or not
registered in the name of the Company) and said Annex 1 correctly
identifies, as at the date hereof, the respective Issuers of such
Company Pledge Agreement
<PAGE> 3
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Pledged Stock, the respective class and par value of the shares
comprising such Pledged Stock and the respective number of shares (and
registered owners thereof) represented by each such certificate.
Section 3. The Pledge. As collateral security for the prompt
payment in full when due (whether at stated maturity, by acceleration or
otherwise) of the Secured Obligations, the Company hereby pledges and grants to
the Administrative Agent, for the benefit of the Banks as hereinafter provided,
a security interest in all of the Company's right, title and interest in, to and
under the following Property, whether now owned by the Company or hereafter
acquired and whether now existing or hereafter coming into existence (all being
collectively referred to herein as "Collateral"):
(a) the shares of common stock of the Issuers represented by
the certificates identified in Annex 1 hereto and all other shares of
capital stock of whatever class of the Issuers, now or hereafter owned
by the Company, in each case together with the certificates evidencing
the same (collectively, the "Pledged Stock");
(b) all shares, securities, moneys or property representing a
dividend on any of the Pledged Stock, or representing a distribution or
return of capital upon or in respect of the Pledged Stock, or resulting
from a split-up, revision, reclassification or other like change of the
Pledged Stock or otherwise received in exchange therefor, and any
subscription warrants, rights or options issued to the holders of, or
otherwise in respect of, the Pledged Stock;
(c) without affecting the obligations of the Company under any
provision prohibiting such action hereunder or under the Credit
Agreement, in the event of any consolidation or merger in which an
Issuer is not the surviving corporation, all shares of each class of
the capital stock of the successor corporation (unless such successor
corporation is the Company itself) formed by or resulting from such
consolidation or merger;
(d) each Transaction Document;
(e) the balance from time to time in the Collateral Account;
<PAGE> 4
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(f) any and all contracts, agreements and other arrangements
with respect to Net Billing Fees and Net Management Fees ("Accounts");
and
(g) all other tangible and intangible Property of the Company,
including, without limitation, all proceeds, products, accessions,
rents, profits, income, benefits, substitutions and replacements of and
to any of the Property of the Company described in the preceding
clauses of this Section 3 (including, without limitation, all causes of
action, claims and warranties now or hereafter held by the Company in
respect of any of the items listed above and any proceeds of insurance
thereon) and, to the extent related to any Property described in said
clauses or such proceeds, products and accessions, all books,
correspondence, credit files, records, invoices and other papers.
Section 4. Cash Proceeds of Collateral.
4.01 Collateral Account. The Administrative Agent may
establish with Chase a cash collateral account (the "Collateral Account") in the
name and under the control of the Administrative Agent into which there shall be
deposited from time to time the cash proceeds of any of the Collateral required
to be delivered to the Administrative Agent pursuant hereto and into which the
Company may from time to time deposit any additional amounts that it wishes to
pledge to the Administrative Agent for the benefit of the Banks as additional
collateral security hereunder. The balance from time to time in the Collateral
Account shall constitute part of the Collateral hereunder and shall not
constitute payment of the Secured Obligations until applied as hereinafter
provided. Except as expressly provided in the next sentence, the Administrative
Agent shall remit the collected balance standing to the credit of the Collateral
Account to or upon the order of the Company as the Company shall from time to
time instruct. However, at any time following the occurrence and during the
continuance of an Event of Default, the Administrative Agent may (and, if
instructed by the Banks as specified in Section 10.03 of the Credit
Agreement, shall) in its (or their) discretion apply or cause to be applied
(subject to collection) the balance from time to time outstanding to the credit
of the Collateral Account to the payment of the Secured Obligations in the
manner specified in Section 5.09 hereof. The balance from time to time in the
Collateral Account shall be subject to withdrawal only as provided herein. In
addition to the foregoing, the Company agrees that if the proceeds of any
Collateral hereunder shall be received by it, the Company shall as promptly as
Company Pledge Agreement
<PAGE> 5
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possible deposit such proceeds into the Collateral Account to the extent such
proceeds are required to be delivered to the Administrative Agent pursuant
hereto. Until so deposited, all such proceeds shall be held in trust by the
Company for and as the property of the Administrative Agent and shall not be
commingled with any other funds or property of the Company.
4.02 Investment of Balance in Collateral Account. Amounts on
deposit in the Collateral Account shall be invested from time to time in such
Permitted Investments as the Company (or, after the occurrence and during the
continuance of a Default, the Administrative Agent) shall determine, which
Permitted Investments shall be held in the name and be under the control of the
Administrative Agent, provided that (i) at any time after the occurrence and
during the continuance of an Event of Default, the Administrative Agent may
(and, if instructed by the Banks as specified in Section 10.03 of the Credit
Agreement, shall) in its (or their) discretion at any time and from time to time
elect to liquidate any such Permitted Investments and to apply or cause to be
applied the proceeds thereof to the payment of the Secured Obligations in the
manner specified in Section 5.09 hereof and (ii) if requested by the Company,
such Permitted Investments may be held in the name and under the control of one
or more of the Banks (and in that connection each Bank, pursuant to Section
10.10 of the Credit Agreement has agreed that such Permitted Investments shall
be held by such Bank as a collateral sub-agent for the Administrative Agent
hereunder).
Section 5. Further Assurances; Remedies. In furtherance of the
grant of the pledge and security interest pursuant to Section 3 hereof, the
Company hereby agrees with each Bank and the Administrative Agent as follows:
5.01 Delivery and Other Perfection. The Company shall:
(a) if any of the shares, securities, moneys or property
required to be pledged by the Company under clauses (a), (b) and (c) of
Section 3 hereof are received by the Company, forthwith either (x)
transfer and deliver to the Administrative Agent such shares or
securities so received by the Company (together with the certificates
for any such shares and securities duly endorsed in blank or
accompanied by undated stock powers duly executed in blank), all of
which thereafter shall be held by the Administrative Agent, pursuant to
the terms of this Agreement, as part of the Collateral or (y) take such
other action as the Administrative Agent shall deem necessary or
Company Pledge Agreement
<PAGE> 6
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appropriate to duly record the Lien created hereunder in such shares,
securities, moneys or property in said clauses (a), (b) and (c);
(b) give, execute, deliver, file and/or record any financing
statement, notice, instrument, document, agreement or other papers that
may be necessary or desirable (in the judgment of the
Administrative Agent) to create, preserve, perfect or validate the
security interest granted pursuant hereto or to enable the
Administrative Agent to exercise and enforce its rights hereunder with
respect to such pledge and security interest, including, without
limitation, causing any or all of the Collateral to be transferred of
record into the name of the Administrative Agent or its nominee (and
the Administrative Agent agrees that if any Collateral is transferred
into its name or the name of its nominee, the Administrative Agent will
thereafter promptly give to the Company copies of any notices and
communications received by it with respect to the Collateral);
(c) keep full and accurate books and records relating to the
Collateral, and stamp or otherwise mark such books and records in such
manner as the Administrative Agent may reasonably require in order to
reflect the security interests granted by this Agreement; and
(d) permit representatives of the Administrative Agent, upon
reasonable notice, at any time during normal business hours to inspect
and make abstracts from its books and records pertaining to the
Collateral, and permit representatives of the Administrative Agent to
be present at the Company's place of business to receive copies of all
communications and remittances relating to the Collateral, and forward
copies of any notices or communications received by the Company with
respect to the Collateral, all in such manner as the Administrative
Agent may require.
5.02 Other Financing Statements and Liens. Except as otherwise
permitted under Section 8.05 of the Credit Agreement, without the prior written
consent of the Administrative Agent (granted with the authorization of the Banks
as specified in Section 10.09 of the Credit Agreement), the Company shall not
file or suffer to be on file, or authorize or permit to be filed or to be on
file, in any jurisdiction, any financing statement or like instrument with
respect to the Collateral in which the Administrative Agent is not named as the
sole secured party for the benefit of the Banks.
Company Pledge Agreement
<PAGE> 7
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5.03 Preservation of Rights. The Administrative Agent shall
not be required to take steps necessary to preserve any rights against prior
parties to any of the Collateral.
5.04 Collateral.
(1) The Company will cause the Pledged Stock to constitute at
all times 100% of the total number of shares of each class of capital stock of
each Issuer then outstanding.
(2) So long as no Event of Default shall have occurred and be
continuing, the Company shall have the right to exercise all voting, consensual
and other powers of ownership pertaining to the Pledged Stock for all purposes
not inconsistent with the terms of this Agreement, the Credit Agreement, the
Notes or any other instrument or agreement referred to herein or therein,
provided that the Company agrees that it will not vote the Pledged Stock in any
manner that is inconsistent with the terms of this Agreement, the Credit
Agreement, the Notes or any such other instrument or agreement; and the
Administrative Agent shall execute and deliver to the Company or cause to be
executed and delivered to the Company all such proxies, powers of attorney,
dividend and other orders, and all such instruments, without recourse, as the
Company may reasonably request for the purpose of enabling the Company to
exercise the rights and powers that it is entitled to exercise pursuant to this
Section 5.04(2).
(3) Unless and until an Event of Default has occurred and is
continuing, the Company shall be entitled to receive, retain and use any
dividends on the Pledged Stock paid in cash out of earned surplus, the proceeds
of Accounts and, subject to Sections 2.08(b) and 8.04 of the Credit Agreement,
the proceeds of Dispositions of Collateral other than the Pledged Stock.
(4) If any Event of Default shall have occurred, then so long
as such Event of Default shall continue, and whether or not the Administrative
Agent or any Bank exercises any available right to declare any Secured
Obligation due and payable or seeks or pursues any other relief or remedy
available to it under applicable law or under this Agreement, the Credit
Agreement, the Notes or any other agreement relating to such Secured Obligation,
all dividends and other distributions on the Collateral shall be paid directly
to the Administrative Agent and retained by it in the Collateral Account as part
of the Collateral, subject to the terms of this Agreement, and, if the
Administrative Agent shall so request in writing, the Company agrees to execute
and deliver to the Administrative Agent appropriate additional dividend,
distribution and other orders and documents to that end, provided that if such
Company Pledge Agreement
<PAGE> 8
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Event of Default is cured, any such dividend or distribution theretofore paid to
the Administrative Agent shall, upon request of the Company (except to the
extent theretofore applied to the Secured Obligations), be returned by the
Administrative Agent to the Company.
5.05 Events of Default, Etc. During the period during which
an Event of Default shall have occurred and be continuing, but subject to the
provisions of Section 6.11 hereof:
(a) the Administrative Agent shall have all of the rights and
remedies with respect to the Collateral of a secured party under the
Uniform Commercial Code (whether or not said Code is in effect in the
jurisdiction where the rights and remedies are asserted) and such
additional rights and remedies to which a secured party is entitled
under the laws in effect in any jurisdiction where any rights and
remedies hereunder may be asserted, including, without limitation, the
right, to the maximum extent permitted by law, to exercise all voting,
consensual and other powers of ownership pertaining to the Collateral
as if the Administrative Agent were the sole and absolute owner thereof
(and the Company agrees to take all such action as may be appropriate
to give effect to such right);
(b) the Administrative Agent in its discretion may, in its
name or in the name of the Company or otherwise, demand, sue for,
collect or receive any money or property at any time payable or
receivable on account of or in exchange for any of the Collateral, but
shall be under no obligation to do so; and
(c) the Administrative Agent may, upon ten business days'
prior written notice to the Company of the time and place, with respect
to the Collateral or any part thereof that shall then be or shall
thereafter come into the possession, custody or control of the
Administrative Agent, the Banks or any of their respective agents,
sell, lease, assign or otherwise dispose of all or any part of such
Collateral, at such place or places as the Administrative Agent deems
best, and for cash or for credit or for future delivery (without
thereby assuming any credit risk), at public or private sale, without
demand of performance or notice of intention to effect any such
disposition or of the time or place thereof (except such notice as is
required above or by applicable statute and cannot be waived), and the
Administrative Agent or any Bank or anyone else may be the purchaser,
lessee, assignee or recipient of any or all of the Collateral so
disposed of at any public sale (or, to the extent permitted by law, at
Company Pledge Agreement
<PAGE> 9
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any private sale) and thereafter hold the same absolutely, free from
any claim or right of whatsoever kind, including any right or equity
of redemption (statutory or otherwise), of the Company, any such
demand, notice and right or equity being hereby expressly waived and
released. The Administrative Agent may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned
from time to time by announcement at the time and place fixed for the
sale, and such sale may be made at any time or place to which the sale
may be so adjourned.
The proceeds of each collection, sale or other disposition under this Section
5.05 shall be applied in accordance with Section 5.09 hereof.
The Company recognizes that, by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, and applicable state
securities laws, the Administrative Agent may be compelled, with respect to any
sale of all or any part of the Collateral, to limit purchasers to those who will
agree, among other things, to acquire the Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. The
Company acknowledges that any such private sales may be at prices and on terms
less favorable to the Administrative Agent than those obtainable through a
public sale without such restrictions, and, notwithstanding such circumstances,
agrees that any such private sale shall not be deemed, for that reason alone,
not to have been made in a commercially reasonable manner and that the
Administrative Agent shall have no obligation to engage in public sales and no
obligation to delay the sale of any Collateral for the period of time necessary
to permit the respective Issuer or issuer thereof to register it for public
sale.
5.06 Deficiency. If the proceeds of sale, collection or other
realization of or upon the Collateral pursuant to Section 5.05 hereof are
insufficient to cover the costs and expenses of such realization and the payment
in full of the Secured Obligations, the Company shall remain liable for any
deficiency.
5.07 Removals, Etc. Without at least 30 days' prior written
notice to the Administrative Agent, the Company shall not (i) maintain any of
its books and records with respect to the Collateral at any office or maintain
its principal place of business at any place other than at the address indicated
Company Pledge Agreement
<PAGE> 10
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beneath the signature of the Company to the Credit Agreement or (ii) change its
name, or the name under which it does business, from the name shown on the
signature pages hereto.
5.08 Private Sale. The Administrative Agent and the Banks
shall incur no liability as a result of the sale of the Collateral, or any part
thereof, at any private sale pursuant to Section 5.05 hereof conducted in a
commercially reasonable manner. The Company hereby waives any claims against the
Administrative Agent or any Bank arising by reason of the fact that the price at
which the Collateral may have been sold at such a private sale was less than the
price that might have been obtained at a public sale or was less than the
aggregate amount of the Secured Obligations, even if the Administrative Agent
accepts the first offer received and does not offer the Collateral to more than
one offeree.
5.09 Application of Proceeds. Except as otherwise herein
expressly provided, the proceeds of any collection, sale or other realization of
all or any part of the Collateral pursuant hereto, and any other cash at the
time held by the Administrative Agent under Section 4 hereof or this Section 5,
shall be applied by the Administrative Agent:
First, to the payment of the costs and expenses of such
collection, sale or other realization, including reasonable
out-of-pocket costs and expenses of the Administrative Agent and the
fees and expenses of its agents and counsel, and all expenses incurred
and advances made by the Administrative Agent in connection therewith;
Next, to the payment in full of the Secured Obligations, in
each case equally and ratably in accordance with the respective amounts
thereof then due and owing or as the Banks holding the same may
otherwise agree; and
Finally, to the payment to the Company, or its successors or
assigns, or as a court of competent jurisdiction may direct, of any
surplus then remaining.
As used in this Section 5, "proceeds" of Collateral shall mean
cash, securities and other property realized in respect of, and distributions in
kind of, Collateral, including any thereof received under any reorganization,
liquidation or adjustment of debt of the Company or any issuer of or obligor on
any of the Collateral.
Company Pledge Agreement
<PAGE> 11
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5.10 Attorney-in-Fact. Without limiting any rights or powers
granted by this Agreement to the Administrative Agent while no Event of Default
has occurred and is continuing, upon the occurrence and during the continuance
of any Event of Default the Administrative Agent is hereby appointed the
attorney-in-fact of the Company for the purpose of carrying out the provisions
of this Section 5 and taking any action and executing any instruments that the
Administrative Agent may deem necessary or advisable to accomplish the purposes
hereof, which appointment as attorney-in-fact is irrevocable and coupled with an
interest. Without limiting the generality of the foregoing, so long as the
Administrative Agent shall be entitled under this Section 5 to make collections
in respect of the Collateral, the Administrative Agent shall have the right and
power to receive, endorse and collect all checks made payable to the order of
the Company representing any dividend, payment or other distribution in respect
of the Collateral or any part thereof and to give full discharge for the same.
5.11 Perfection. Prior to or concurrently with the execution
and delivery of this Agreement, the Company shall deliver to the Administrative
Agent all certificates identified in Annex 1 hereto, accompanied by undated
stock powers duly executed in blank.
5.12 Termination. When all Secured Obligations shall have been
paid in full and the Commitments of the Banks under the Credit Agreement shall
have expired or been terminated, this Agreement shall terminate, and the
Administrative Agent shall forthwith cause to be assigned, transferred and
delivered, against receipt but without any recourse, warranty or representation
whatsoever, any remaining Collateral and money received in respect thereof, to
or on the order of the Company.
5.13 Further Assurances. The Company agrees that, from time to
time upon the written request of the Administrative Agent, the Company will
execute and deliver such further documents and do such other acts and things as
the Administrative Agent may reasonably request in order fully to effect the
purposes of this Agreement.
Company Pledge Agreement
<PAGE> 12
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Section 6. Miscellaneous.
6.01 No Waiver. No failure on the part of the Administrative
Agent or any Bank to exercise, and no course of dealing with respect to, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Administrative
Agent or any Bank of any right, power or remedy hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
The remedies herein are cumulative and are not exclusive of any remedies
provided by law.
6.02 Notices. All notices, requests, consents and demands
hereunder shall be in writing and telecopied or delivered to the intended
recipient at its "Address for Notices" specified pursuant to Section 11.02 of
the Credit Agreement and shall be deemed to have been given at the times
specified in said Section 11.02.
6.03 Amendments, Etc. The terms of this Agreement may be
waived, altered or amended only by an instrument in writing duly executed by the
Company and the Administrative Agent (with the consent of the Banks as specified
in Section 10.09 of the Credit Agreement). Any such amendment or waiver shall be
binding upon the Administrative Agent and each Bank, each holder of any of the
Secured Obligations and the Company.
6.04 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the respective successors and assigns of the
Company, the Administrative Agent, the Banks and each holder of any of the
Secured Obligations (provided, however, that the Company shall not assign or
transfer its rights hereunder without the prior written consent of the
Administrative Agent).
6.05 Captions. The captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
6.06 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and either of the parties hereto may execute this Agreement by
signing any such counterpart.
6.07 Governing Law, Etc. This Agreement shall be governed by,
and construed in accordance with, the law of the State of New York. The Company
Company Pledge Agreement
<PAGE> 13
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hereby submits to the nonexclusive jurisdiction of the United States District
Court for the Southern District of New York and of the Supreme Court of the
State of New York sitting in New York County (including its Appellate Division),
and of any other appellate court in the State of New York, for the purposes of
all legal proceedings arising out of or relating to this Pledge Agreement or the
transactions contemplated hereby. The Company hereby irrevocably waives, to the
fullest extent permitted by applicable law, any objection that it may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum. EACH OF THE COMPANY, THE ADMINISTRATIVE AGENT
AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
6.08 Agents and Attorneys-in-Fact. The Administrative Agent
may employ agents and attorneys-in-fact in connection herewith and shall not be
responsible for the negligence or misconduct of any such agents or
attorneys-in-fact selected by it in good faith.
6.09 Severability. If any provision hereof is invalid and
unenforceable in any jurisdiction, then, to the fullest extent permitted by law,
(i) the other provisions hereof shall remain in full force and effect in such
jurisdiction and shall be liberally construed in favor of the Administrative
Agent and the Banks in order to carry out the intentions of the parties hereto
as nearly as may be possible and (ii) the invalidity or unenforceability of any
provision hereof in any jurisdiction shall not affect the validity or
enforceability of such provision in any other jurisdiction.
6.10 The Administrative Agent. As provided in Section 10 of
the Credit Agreement, each Bank has appointed The Chase Manhattan Bank (National
Association) as its agent for purposes of this Agreement. Following the payment
in full of all Secured Obligations outstanding under the Credit Agreement and
the termination or expiration of the Commitments thereunder, the provisions of
said Section 10 shall be deemed to continue in full force and effect for the
benefit of the Administrative Agent under this Agreement. In that connection,
following such payment in full and expiration and termination of the
Company Pledge Agreement
<PAGE> 14
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Commitments, the term "Majority Banks" (as defined in said Section 1.01) shall
be deemed to refer to Banks holding Secured Obligations representing more than
50% of the aggregate Secured Obligations.
6.11 Certain Regulatory Requirements. The Administrative Agent
hereby acknowledges that, in connection with any exercise by it of the rights
and remedies afforded to it hereunder, it may be necessary to provide notice to
and/or obtain the prior consent or approval of certain governmental authorities.
Notwithstanding anything to the contrary contained herein, the Administrative
Agent will not take any action pursuant to this Agreement which would constitute
or result in any transfer of control over any Issuer, or any other action, if
such action, in either case, requires notice to and/or the prior consent or
approval of governmental authorities without first providing such notice and/or
obtaining such consent or approval. Upon the exercise by the Administrative
Agent of any power, right or privilege or remedy pursuant to this Agreement
which requires any consent, approval, recording, qualification or authorization
of any governmental authority, the Company will, and will cause each Issuer to,
(a) execute and deliver, or cause the execution and delivery of, all
applications, instruments or other documents and papers that the Administrative
Agent may reasonably require to be obtained for such governmental consent,
approval, recording, qualification or authorization, (b) use its best efforts
otherwise to secure such governmental consent, approval, recording,
qualification or authorization and (c) take no action inconsistent therewith.
The Company acknowledges that the Administrative Agent has no adequate remedy at
law for the breach of any obligation of this Section 6.11, and that such
obligations shall be enforceable by specific performance.
Company Pledge Agreement
<PAGE> 15
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IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed and delivered as of the day and year first above
written.
GGS MANAGEMENT, INC.
By /s/ Alan G. Symons
Title:
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION),
as Administrative Agent
By /s/ J. David Parker, Jr.
Title: Vice President
Company Pledge Agreement
<PAGE> 16
ANNEX 1
PLEDGED STOCK
[See Section 2(b) and (c)]
Certificate Registered
Issuer Nos. Owner Number of Shares
Pafco General 2 GGS Management, 10,000 shares of common
Insurance Company Inc. stock, par value $125.
Superior Insurance 3 and 4 GGS Management, 30,000 shares of
Company Inc. common stock,
par value $100.
Annex 1 to Company Pledge Agreement
<PAGE> 1
EXHIBIT 10.17(1)
EMPLOYMENT AGREEMENT
WHEREAS, IGF Insurance Company, an Indiana corporation, (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 continue to employ Dennis G. Daggett
("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
President and Chief Operating Officer, effective as of February 1, 1996 and
continuing for a period of thirty-six (36) months through January 31, 1999,
unless such employment is terminated pursuant to Article III 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 and such termination of employment shall be
treated as a termination without cause under 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, and furthermore, the Company agrees that should termination pursuant to
this Section apply, that the Executive, pursuant to the terms contained in
Section 3.1 herein, shall receive his base salary for a further twelve (12)
months, plus life and health benefits, from the date of such termination.
1.2 Terms of Employment. During the Term, You agree to be a full-time
employee of the Company serving in the position of President and Chief Operating
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 President and Chief Operating Officer of the Company, 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 Goran
Capital, Inc. ("Goran") and/or the Company and the Board of Directors of the
Company, which duties shall be consistent with the position of President of the
Company, which shall grant Executive authority, responsibility, title and
standing comparable to that of the president and chief operating officer of a
-1-
<PAGE> 2
stock insurance company and which will not require Executive to relocate his
principal place of residence from the metropolitan Des Moines, Iowa 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.
1.3 Director. The Board of Directors shall at their first meeting
following the effective date of this Agreement appoint Executive as a Director
of the Company to serve until his successor is duly qualified, elected and
serving. The Company shall nominate Executive for election to the Board of
Directors at the first annual meeting of shareholders of the Company which
follows the effective date of this Agreement. If the Executive is not so
appointed and so elected as a Director of the Company or if at any time during
the term of this Agreement the Executive is not a Director serving as a member
of the Board of Directors of the Company, then Company shall be in material
breach of this Agreement and Executive may treat such breach as a termination
without cause. Executive agrees to resign as a Director of the Company upon the
termination or expiration of this Agreement.
2. Compensation, Benefits and Prerequisites
2.1 Salary. During the term of this Agreement, the Company shall pay
Executive a salary at the minimum annual rate of One Hundred Eighty Thousand
Dollars ($180,000). The salary shall be payable in twenty-six (26) equal
installments. Company may increase this annual rate at its discretion but no
reduction of Executive's then current rate of pay shall be made without his
prior written consent.
2.2 Bonus. The Executive shall be eligible to participate in a bonus
program as defined in Exhibit C (the "Bonus Arrangement") which is attached and
incorporated herein by reference. All awards made to other Company employees
pursuant to the Bonus Arrangement shall be at the sole discretion of the
Compensation Committee of the Company's Board of Directors, which shall be
comprised of four (4) members, two (2) of which shall be Company employees and
two (2) of which shall be designated by the Company's shareholders. Should there
be a stalemate then an outside member of the Board of Directors of Goran shall
be asked to cast the final vote which final vote shall be determinative. In
exercising its discretion, the Compensation Committee may make any award to any
Company employee it shall deem appropriate; provided, however, that the
Compensation Committee shall not grant any bonus award or authorize any payment
of monies pursuant to this Section 2.2 that is in excess of one hundred fifty
percent (150%) of the base salary received by any Company employee (during such
individual's tenure as a Company employee) for any calendar year for which a
bonus award is granted pursuant to this Section 2.2.
The Compensation Committee shall only have discretion to award monies
to the extent of the seven percent (7%) of the Company's statutory accounting
basis pre-tax profits in excess of the Bonus Threshold as determined by the
Bonus Arrangement in Exhibit C.
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2.3 Stock Option Plan. Should the Company enter into an Initial Public
Offering, then the provisions of this Section 2.3 shall become operative;
otherwise, stock options shall be granted solely at the discretion of the
Company's Board of Directors. During the term of this Agreement, Executive shall
receive stock options under a Plan which shall give Executive the opportunity to
acquire up to (a) 1.25% of the total stock of the Company and relinquish all of
his Goran options; or (b) .75% of the total stock of the Company and retain all
of the Goran options granted; or (c) a sliding scale between (a) and (b).
Such options, granted pursuant to this Section 2.3 and the Stock Option
Plan, shall vest ratably over a five (5) year period from the date of granting
at twenty percent (20%) per year. All such awards of stock options shall be made
by the Compensation Committee of the Company's Board of Directors, with
Executive not taking part in the deliberations or vote of the Compensation
Committee concerning options to be granted to Executive.
Even though such stock options shall vest ratably over a five (5) year
period, no stock options granted pursuant to the provisions of this Section 2.3
and the Stock Option Plan shall be exercisable until after five (5) years from
the date of grant of such option.
The exercise price of any stock option granted pursuant to this Section
2.3 and the Stock Option Plan shall increase by ten percent (10%) on each
anniversary of the date of grant of such option.
The Company, or one of its affiliates ("Lender") will make available to
Executive a loan facility (the "Stock Purchase Loan") whereby Executive may
borrow up to Five Hundred Thousand Dollars ($500,000) at an interest rate of six
percent (6%) per annum of the outstanding principle balance, calculated yearly.
Any funds obtained by Executive pursuant to the Stock Purchase Loan shall only
be used by Executive to purchase Company stock. Definitive documentation of the
Stock Purchase Loan will provide for quarterly interest payments and no
principle payments until the end of the five (5) year terms (the "Repayment
Date") of the Stock Purchase Loan. At Executive's election, amounts otherwise
payable as yearly interest payments may be added to the outstanding principle
amount of the Stock Purchase Loan. The Stock Purchase Loan shall be secured by a
perfected first security interest in all stock purchased with the proceeds of
the Stock Purchase Loan ("Stock Purchase Loan Security"). In the event Executive
shall elect to defer Stock Purchase Loan interest payments until the Repayment
Date, in addition to the Stock Purchase Loan Security, Executive will grant
Lender a perfected first security interest in all stock options granted to
Executive pursuant to this Section 2.3 and the Stock Option Plan.
2.4 Goran Options. Goran shall make available to the Executive options
for a total of Twenty Thousand (20,000) shares of Goran based on the market
terms on the date that this Agreement is signed. Furthermore, Goran shall make
available, upon completion of the next Public Offering of Goran/SIG common
stock, options for a total amount of Twenty Thousand (20,000) shares of Goran
at the market price of the next Public Offering.
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The Goran options so granted shall vest with Executive in accordance
with the Stock Option Plan at the end of three (3) years from the date of
granting of the options.
2.5 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 . A listing of such
current benefit plans is attached hereto as Exhibit A. But in no event shall the
cost to participate in the benefit plans be different than the obligations of
other Presidents and Executive Vice Presidents of affiliates of the Goran Group
of Companies.
2.6 Additional Prerequisites. During the term of this Agreement, Company
shall provide Executive with:
(a) Not less than four (4) weeks paid vacation during each
calendar year.
(b) A monthly motor vehicle allowance of Seven Hundred Fifty
Dollars ($750). Further, Executive shall be reimbursed for his
actual gasoline expenses in the utilization of the motor
vehicle in furtherance of his duties under this Agreement or
the business of the Company. Executive also shall be
reimbursed for the costs of insuring himself and the Company
for liability, damage, injury or loss arising out of or in
connection with the use of such motor vehicle in the course of
Executive's employment with the Company.
(c) Monthly dues incurred by Executive at the country club of his
choice located within reasonable geographic limits of the
corporate offices of the Company, not to exceed Five Thousand
Dollars ($5,000) per year.
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. Executive 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.
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) year's
salary continuation from the Date of Termination, payable in twenty-six (26)
bi-weekly installments with regular withholdings as if Executive was
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still an employee of the Company. 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 B.
3.2 Cause. For purposes of this Article 3, "cause" shall mean only the
following: (i) the committing of any act by Executive which would be considered
a criminal offense (other than minor traffic violations) under the laws of
either Indiana, Iowa or the United States of America; (ii) the failure by
Executive to perform his material duties under this Agreement (excluding
nonperformance resulting from Executive's disability) or disobedience to
directives from those persons or bodies outlined in Section 1.2 which have the
authority to determine and direct Executive's work and activities where such
failure is not cured by Executive within fifteen (15) days of his receipt of
written notification from Company specifying Executive's failure or breach and
the steps the Executive must take to cure that failure or breach; however,
during the fifteen (15) days the Company has the option to put the Executive on
leave of absence with pay; or (iii) disability as provided in Section 3.3.
3.3 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.
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,
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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 4.14.1(aa) shall permit
the Company to terminate Your employment for cause.
(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.
(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
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confidential information (as outlined in the Iowa 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.
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:
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Chief Executive Officer
With a Copy to:
Goran Capital, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
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If to Executive, to:
Dennis G. Daggett
2882 106th Street
Des Moines, Iowa 50322
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.
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 Iowa, 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.
5.10 Arbitration.
(a) Except for those provisions contained in Sections 4.1 and 4.2
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, at Executive's election, Kansas City,
Missouri; Chicago, Illinois or 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
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such individuals cannot agree of the selection of the
arbitrator, who shall be selected by the American Arbitration
Association.
(b) The parties agree to use their best efforts to
cause (i) the two applicable individuals set forth in the
preceding Paragraph 5.10(a) or, if applicable, the American
Arbitration Association, to appoint the arbitrator within
thirty (30) days of the date that a party notifies the other
party that a dispute or controversy exists that necessitates
the appointment of an arbitrator, and (ii) any arbitration
hearing to be held within thirty (30) 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 meeting at such time.
5.11 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.
IGF INSURANCE COMPANY DENNIS G. DAGGETT
("Company") ("Executive")
By: /s/ Alan G. Symons /s/ Dennis G. Daggett
4.9.96
Title: Director April 15-96
Attachments: Exhibit A: IGF Insurance Company's Current Benefit Plans
Exhibit B: Severance Release
Exhibit C: Bonus Arrangement
Exhibit D: Stock Option Plan
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EXHIBIT 10.17(2)
EMPLOYMENT AGREEMENT
WHEREAS, IGF Insurance Company, an Indiana corporation, (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 continue to employ Thomas F. Gowdy
("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
Executive Vice President, effective as of February 1, 1996 and continuing for a
period of thirty-six (36) months through January 31, 1999, unless such
employment is terminated pursuant to Article III 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 and such termination of employment shall be
treated as a termination without cause under 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, and furthermore, the Company agrees that should termination pursuant to
this Section apply, that the Executive, pursuant to the terms contained in
Section 3.1 herein, shall receive his base salary for a further twelve (12)
months, plus life and health benefits, from the date of such termination.
1.2 Terms of Employment. During the Term, 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. Executive shall perform such
duties and responsibilities as may be determined from time to time by the
Chairman and/or Chief Executive Officer of Goran Capital, Inc. ("Goran") and/or
the Company and the Board of Directors of the Company, which duties shall be
consistent with the position of Executive Vice President of the Company, which
shall grant Executive authority, responsibility, title and standing comparable
to that of the executive vice president of a stock insurance company and which
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will not require Executive to relocate his principal place of residence from the
metropolitan Des Moines, Iowa 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.
1.3 Director. The Board of Directors shall at their first meeting
following the effective date of this Agreement appoint Executive as a Director
of the Company to serve until his successor is duly qualified, elected and
serving. The Company shall nominate Executive for election to the Board of
Directors at the first annual meeting of shareholders of the Company which
follows the effective date of this Agreement. If the Executive is not so
appointed and so elected as a Director of the Company or if at any time during
the term of this Agreement the Executive is not a Director serving as a member
of the Board of Directors of the Company, then Company shall be in material
breach of this Agreement and Executive may treat such breach as a termination
without cause. Executive agrees to resign as a Director of the Company upon the
termination or expiration of this Agreement.
2. Compensation, Benefits and Prerequisites
2.1 Salary. During the term of this Agreement, the Company shall pay
Executive a salary at the minimum annual rate of One Hundred Forty Thousand
Dollars ($140,000). The salary shall be payable in twenty-six (26) equal
installments. Company may increase this annual rate at its discretion but no
reduction of Executive's then current rate of pay shall be made without his
prior written consent.
2.2 Bonus. The Executive shall be eligible to participate in a bonus
program as defined in Exhibit C (the "Bonus Arrangement") which is attached and
incorporated herein by reference. All awards made to other Company employees
pursuant to the Bonus Arrangement shall be at the sole discretion of the
Compensation Committee of the Company's Board of Directors, which shall be
comprised of four (4) members, two (2) of which shall be Company employees and
two (2) of which shall be designated by the Company's shareholders. Should there
be a stalemate then an outside member of the Board of Directors of Goran shall
be asked to cast the final vote which final vote shall be determinative. In
exercising its discretion, the Compensation Committee may make any award to any
Company employee it shall deem appropriate; provided, however, that the
Compensation Committee shall not grant any bonus award or authorize any payment
of monies pursuant to this Section 2.2 that is in excess of one hundred fifty
percent (150%) of the base salary received by any Company employee (during such
individual's tenure as a Company employee) for any calendar year for which a
bonus award is granted pursuant to this Section 2.2.
The Compensation Committee shall only have discretion to award monies
to the extent of the seven percent (7%) of the Company's statutory accounting
basis pre-tax profits in excess of the Bonus Threshold as determined by the
Bonus Arrangement in Exhibit C.
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2.3 Stock Option Plan. Should the Company enter into an Initial Public
Offering, then the provisions of this Section 2.3 shall become operative;
otherwise, stock options shall be granted solely at the discretion of the
Company's Board of Directors. During the term of this Agreement, Executive shall
receive stock options under a Plan which shall give Executive the opportunity to
acquire up to (a) 1.25% of the total stock of the Company and relinquish all of
his Goran options; or (b) .75% of the total stock of the Company and retain all
of the Goran options granted; or (c) a sliding scale between (a) and (b).
Such options, granted pursuant to this Section 2.3 and the Stock Option
Plan, shall vest ratably over a five (5) year period from the date of granting
at twenty percent (20%) per year. All such awards of stock options shall be made
by the Compensation Committee of the Company's Board of Directors, with
Executive not taking part in the deliberations or vote of the Compensation
Committee concerning options to be granted to Executive.
Even though such stock options shall vest ratably over a five (5) year
period, no stock options granted pursuant to the provisions of this Section 2.3
and the Stock Option Plan shall be exercisable until after five (5) years from
the date of grant of such option.
The exercise price of any stock option granted pursuant to this Section
2.3 and the Stock Option Plan shall increase by ten percent (10%) on each
anniversary of the date of grant of such option.
The Company, or one of its affiliates ("Lender") will make available to
Executive a loan facility (the "Stock Purchase Loan") whereby Executive may
borrow up to Five Hundred Thousand Dollars ($500,000) at an interest rate of six
percent (6%) per annum of the outstanding principle balance, calculated yearly.
Any funds obtained by Executive pursuant to the Stock Purchase Loan shall only
be used by Executive to purchase Company stock. Definitive documentation of the
Stock Purchase Loan will provide for quarterly interest payments and no
principle payments until the end of the five (5) year terms (the "Repayment
Date") of the Stock Purchase Loan. At Executive's election, amounts otherwise
payable as yearly interest payments may be added to the outstanding principle
amount of the Stock Purchase Loan. The Stock Purchase Loan shall be secured by a
perfected first security interest in all stock purchased with the proceeds of
the Stock Purchase Loan ("Stock Purchase Loan Security"). In the event Executive
shall elect to defer Stock Purchase Loan interest payments until the Repayment
Date, in addition to the Stock Purchase Loan Security, Executive will grant
Lender a perfected first security interest in all stock options granted to
Executive pursuant to this Section 2.3 and the Stock Option Plan.
2.4 Goran Options. Goran shall make available to the Executive options
for a total of Twenty Thousand (20,000) shares of Goran based on the market
terms on the date that this Agreement is signed. Furthermore, Goran/SIG shall
make available, upon completion of the next Public Offering of Goran/SIG common
stock, options for a total amount of Twenty Thousand (20,000) shares of Goran
at the market price of the next Public Offering.
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The Goran options so granted shall vest with Executive in accordance
with the Stock Option Plan at the end of three (3) years from the date of
granting of the options.
2.5 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 . A listing of such
current benefit plans is attached hereto as Exhibit A. But in no event shall the
cost to participate in the benefit plans be different than the obligations of
other Presidents and Executive Vice Presidents of affiliates of the Goran Group
of Companies.
2.6 Additional Prerequisites. During the term of this Agreement,
Company shall provide Executive with:
(a) Not less than four (4) weeks paid vacation during each
calendar year.
(b) A monthly motor vehicle allowance of Seven Hundred Fifty
Dollars ($750). Further, Executive shall be reimbursed for his
actual gasoline expenses in the utilization of the motor vehicle
in furtherance of his duties under this Agreement or the business
of the Company. Executive also shall be reimbursed for the costs
of insuring himself and the Company for liability, damage, injury
or loss arising out of or in connection with the use of such
motor vehicle in the course of Executive's employment with the
Company.
(c) Monthly dues incurred by Executive at the country club of his
choice located within reasonable geographic limits of the
corporate offices of the Company, not to exceed Five Thousand
Dollars ($5,000) per year.
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. Executive 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.
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) year's
salary continuation from the Date of Termination, payable in twenty-six (26)
bi-weekly installments with regular withholdings as if Executive was
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still an employee of the Company. 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 B.
3.2 Cause. For purposes of this Article 3, "cause" shall mean only the
following: (i) the committing of any act by Executive which would be considered
a criminal offense (other than minor traffic violations) under the laws of
either Indiana, Iowa or the United States of America; (ii) the failure by
Executive to perform his material duties under this Agreement (excluding
nonperformance resulting from Executive's disability) or disobedience to
directives from those persons or bodies outlined in Section 1.2 which have the
authority to determine and direct Executive's work and activities where such
failure is not cured by Executive within fifteen (15) days of his receipt of
written notification from Company specifying Executive's failure or breach and
the steps the Executive must take to cure that failure or breach; however,
during the fifteen (15) days the Company has the option to put the Executive on
leave of absence with pay; or (iii) disability as provided in Section 3.3.
3.3 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.
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
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<PAGE> 6
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 4.14.1(aa) shall permit
the Company to terminate Your employment for cause.
(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.
(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.
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<PAGE> 7
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 Iowa 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.
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:
IGF Insurance Company
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: Chief Executive Officer
With a Copy to:
Goran Capital, Inc.
4720 Kingsway Drive
Indianapolis, Indiana 46205
Attention: President and Chief Executive Officer
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<PAGE> 8
If to Executive, to:
Dennis G. Daggett
2882 106th Street
Des Moines, Iowa 50322
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.
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 Iowa, 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.
5.10 Arbitration.
(a) Except for those provisions contained in Sections 4.1 and 4.2
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, at Executive's election, Kansas City,
Missouri; Chicago, Illinois or Indianapolis, Indiana, before
-8-
<PAGE> 9
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 individuals cannot agree of the selection of the
arbitrator, who shall be selected by the American
Arbitration Association.
(b) The parties agree to use their best efforts to cause (i)
the two applicable individuals set forth in the preceding
Paragraph 5.10(a) or, if applicable, the American
Arbitration Association, to appoint the arbitrator within
thirty (30) days of the date that a party notifies the other
party that a dispute or controversy exists that necessitates
the appointment of an arbitrator, and (ii) any arbitration
hearing to be held within thirty (30) 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 meeting at such time.
5.11 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.
IGF INSURANCE COMPANY THOMAS F. GOWDY
("Company") ("Executive")
By:/s/ Alan G. Symons /s/ Thomas F. Gowdy
Title: Director April 15 96 4/9/96
Attachments: Exhibit A: IGF Insurance Company's Current Benefit Plans
Exhibit B: Severance Release
Exhibit C: Bonus Arrangement
Exhibit D: Stock Option Plan
<PAGE> 1
EXHIBIT 10.21
GGS MANAGEMENT HOLDINGS, INC.
1996 STOCK OPTION PLAN
(As Adopted April 30, 1996)
<PAGE> 2
GGS MANAGEMENT HOLDINGS, INC.
1996 STOCK OPTION PLAN
1. Purpose.
The purpose of the Plan is to strengthen GGS Management
Holdings, Inc., a Delaware corporation (the "Company"), by providing an
incentive to the officers and employees of the Company and its subsidiaries to
devote their abilities and industry to the success of the Company's and its
subsidiaries' business enterprise. It is intended that this purpose be achieved
by providing an incentive, through the grant of Options (as hereinafter
defined), to officers and employees of the Company and its subsidiaries, to work
towards the long-term goals of the Company.
2. Definitions.
For purposes of the Plan:
2.1."Agreement" means the written agreement between the Company
and an Optionee evidencing the grant of an Option and setting forth the terms
and conditions thereof.
2.2. "Board" means the Board of Directors of the Company.
2.3. "Change in Capitalization" means any increase or
reduction in the number of Shares, or any change (including, but not limited to,
a change in value) in the Shares or exchange of Shares for a different number or
kind of shares or other securities of the Company, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, change in corporate
structure or otherwise.
2.4."Code" means the Internal Revenue Code of 1986, as amended.
2.5. "Company" means Newco Holding Company.
2.6. "Company Sale" means a Company Sale (as defined in the
Stockholder Agreement, dated the date hereof, among the Company, GS Capital
Partners II, L.P., Goran Capital Inc. and Symons International Group, Inc. (the
"Stockholder Agreement")) pursuant to Section 4 of the Stockholder Agreement.
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<PAGE> 3
2.7 "Effective Date" means the Closing Date (as defined in
Stock Purchase Agreement), the date on which the Plan is first going into
effect.
2.8. "Eligible Individual" means any officer or employee of
the Company or a Subsidiary, or any consultant or advisor who is receiving cash
compensation from the Company or a Subsidiary, designated by the Board as
eligible to receive Options subject to the conditions set forth herein.
2.9. "Fair Market Value" on any date means the average of the
high and low sales prices of the Shares on such date on the principal national
securities exchange on which such Shares are listed or admitted to trading, or
if such Shares are not so listed or admitted to trading, the arithmetic mean of
the per Share closing bid price and per Share closing asked price on such date
as quoted on the National Association of Securities Dealers Automated Quotation
System or such other market in which such prices are regularly quoted, or, if
there have been no published bid or asked quotations with respect to Shares on
such date, the Fair Market Value shall be the value established by the Board in
good faith.
2.10. "Initial Public Offering" means an underwritten public
offering of Shares which (i) is effected pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, (ii) involves
Shares and other securities convertible into, or exchangeable or exercisable for
Shares, on a fully-diluted basis, representing at least 20% of all of the then
issued and outstanding Shares, and (iii) generates net proceeds to the sellers
in such underwritten public offering of at least $25,000,000.
2.11. "Option" means the right and option to acquire Shares
granted pursuant to the Plan.
2.12. "Optionee" means a person to whom an Option has been
granted under the Plan.
2.13. "Plan" means this Newco Holding Company 1996 Stock
Option Plan.
2.14. "Pooling Transaction" means an acquisition of or by the
Company or a Subsidiary in a transaction which is intended to be treated as a
"pooling of interests" under generally accepted accounting principles.
2.15. "Shares" means the common stock, par value $.01 per
share, of the Company.
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<PAGE> 4
2.16. "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.
2.17. "Vested Option" means an option to the extent it has
become vested and exercisable pursuant to Section 5.4(a) hereof, notwithstanding
Section 5.4(b) hereof.
3. Administration.
3.1 The Plan shall be administered by the Board. The Board
shall have the right to appoint a committee thereof to administer the Plan. No
member of the Board shall be liable to any Eligible Individual, Optionee or
other person having any interest in the Plan for any action, failure to act,
determination or interpretation made in good faith with respect to the Plan or
any transaction hereunder.
3.2 Subject to the express terms and conditions set forth
herein, the Board shall have the exclusive power (at any time and from time to
time) to:
(a) determine the number of Options to be granted under the
Plan and those Eligible Individuals to whom an Option shall be granted and to
prescribe the terms and conditions (which need not be identical) of each such
Option, including the number of Shares subject to each Option, and to make any
amendment or modification to any Agreement consistent with the terms of the
Plan;
(b) to construe and interpret the Plan and the Agreements
granted hereunder and to establish, amend and revoke rules and regulations for
the administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable so that the Plan complies with applicable law, and otherwise to make
the Plan fully effective. All decisions and determinations by the Board in the
exercise of this power shall be final, binding and conclusive upon the Company,
its Subsidiaries, the Optionees and all other persons having any interest
therein;
(c) to determine the duration and purposes for leaves of
absence which may be granted to an Optionee on an individual basis without
constituting a termination of employment for purposes of the Plan;
(d) to exercise its discretion with respect to the powers
and rights granted to it as set forth in the Plan; and
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<PAGE> 5
(e) generally, to exercise such powers and to perform such
acts as are deemed necessary or advisable to promote the best interests of the
Company with respect to the Plan.
4. Shares Subject to the Plan.
4.1 The maximum number of Shares that may be made the subject
of Options granted under the Plan is 111,111 (representing 10% of the Shares
issued and outstanding on the Effective Date on a fully diluted basis assuming
exercise of all Options granted under the Plan). Upon a Change in
Capitalization, the maximum number of Shares shall be adjusted in number and
kind pursuant to Section 7. The Company shall reserve for the purposes of the
Plan, out of its authorized but unissued Shares or out of Shares held in the
Company's treasury, or partly out of each, such number of Shares as shall be
determined by the Board.
4.2 Upon the granting of an Option, the number of Shares
available under Section 4.1 for the granting of further Options shall be reduced
by the number of Shares in respect of which the Option is denominated.
4.3 Whenever any outstanding Option or portion thereof
expires, is canceled or is otherwise terminated for any reason without having
been exercised or payment having been made in respect of the entire Option, the
Shares allocable to the expired, canceled or otherwise terminated portion of the
Option may again be the subject of Options granted hereunder.
5. Option Grants.
5.1 Grants. (a) On the Effective Date, the Company shall grant
an Option to each Eligible Individual listed on Schedule A hereto to acquire all
or any part of that number of Shares as is set forth next to his or her name
thereon.
(b) At any time after the Effective Date, the Committee may,
in its sole discretion, determine the Eligible Individuals to whom an Option
shall be granted and prescribe the terms and conditions of each such Option
consistent with the Plan.
(c) The terms and conditions of each Option issued hereunder
shall be set forth in an Agreement.
5.2 Purchase Price.(a) Options Granted On the Effective Date.
The price per Share at which an Optionee shall be entitled to purchase Shares
4
<PAGE> 6
upon the exercise of an Option, or portion thereof, that is granted on the
Effective Date, shall be as follows: (i) as to 50% of the Shares to be
purchased, the exercise price shall be equal to $44.17 per Share, and (ii) as to
the other 50% of the Shares to be purchased, the exercise price per Share shall
be as follows during each of the following periods:
Period Exercise Price
From the Effective Date through the date $44.17
immediately preceding the first anniver-
sary of the Effective Date
From the first anniversary of the Effec- 1.1 x $44.17
tive Date through the date immediately
preceding the second anniversary
From the second anniversary of the (1.1)2 x $44.17
Effective Date through the date immedi-
ately preceding the third anniversary
From the third anniversary of the Effec- (1.1)3 x $44.17
tive Date through the date immediately
preceding the fourth anniversary
From the fourth anniversary of the Ef- (1.1)4 x $44.17
fective Date through the date immediate-
ly preceding the fifth anniversary
From the fifth anniversary of the Effec- (1.1)5 x $44.17
tive Date through the date immediately
preceding the sixth anniversary
From the sixth anniversary of the Effective (1.1)6 x $44.17
Date through the date immediately
preceding the seventh anniversary
From the seventh anniversary of the (1.1)7 x $44.17
Effective Date through the date immedi-
ately preceding the eighth anniversary
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<PAGE> 7
From the eighth anniversary of the Ef-
fective Date through the date immediate- (1.1)8 x $44.17
ly preceding the ninth anniversary
From the ninth anniversary of the Effec- (1.1)9 x $44.17
tive Date through the date immediately
preceding the tenth anniversary
(b) Options Granted After the Effective Date. The price per
Share at which an Optionee shall be entitled to purchase Shares upon the
exercise of an Option, or portion thereof, that is granted after the Effective
Date, shall be determined by the Board in its sole discretion; provided,
however, that the Board shall provide that (i) 50% of the Shares to be purchased
shall have an exercise price per Share of a stated amount (the "Strike Price"),
and (ii) 50% of the Shares to be purchased shall have an exercise price per
Share during each of the following periods as follows:
Period Exercise Price
From the date of grant (the "Grant Strike Price
Date") through the date day immediately
preceding the first anniversary of the
Grant Date
From the first anniversary of the Grant 1.1 x the Strike Price
Date through the date immediately pre-
ceding the second anniversary
(1.1)2 x the Strike Price
From the second anniversary of the
Grant Date through the date immediately
preceding the third anniversary
From the third anniversary of the Grant (1.1)3 x the Strike Price
Date through the date immediately preceding
the fourth anniversary
From the fourth anniversary of the Grant (1.1)4 x the Strike Price
Date through the date immediately preceding
the fifth anniversary
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<PAGE> 8
From the fifth anniversary of the Grant (1.1)5 x the Strike Price
Date through the date immediately preceding
the sixth anniversary
From the sixth anniversary of the Grant (1.1)6 x the Strike Price
Date through the date immediately
preceding the fifth anniversary
From the seventh anniversary of the (1.1)7 x the Strike Price
Grant Date through the date immediately
preceding the sixth anniversary
From the eighth anniversary of the Grant (1.1)8 x the Strike Price
Date through the date immediately preceding
the ninth anniversary
From the ninth anniversary of the Grant (1.1)9 x the Strike Price
Date through the date immediately preceding
the tenth anniversary
5.3 Duration of Option. Options granted hereunder shall
not be exercisable after the expiration of ten (10) years from the date of
grant.
5.4 Vesting. Other than pursuant to the terms of any
employment agreement entered into by the Company, subject to Sections 8 and 9
hereof, with respect to each Option granted pursuant to the Plan, such Option
shall become vested and, subject to Section 5.4(b), immediately exerciseable,
with respect to one-fifth of the shares subject to such Option, on each of the
first, second, third, fourth and fifth anniversaries of the date of the grant of
such Option, and such Option shall be exercisable, subject to Section 5.4(b), in
whole or in part, at any time after and to the extent it has, become vested, but
not later than the expiration of ten (10) years from the date of grant.
(b) Notwithstanding anything in this Plan to the contrary, no
Option shall be exercisable prior to the earlier of (x) an Initial Public
Offering and (y) a Company Sale.
7
<PAGE> 9
5.5 Transferability. No Option granted hereunder shall be
transferable by the Optionee to whom granted other than by will or the laws of
descent and distribution, and any attempted transfer of an Option by the
Optionee shall be null and void and of no force and effect. An Option may be
exercised during the lifetime of such Optionee only by the Optionee or his or
her guardian or legal representative. The terms of such Option shall be final,
binding and conclusive upon the beneficiaries, executors, administrators, heirs
and successors of the Optionee.
5.6 Method of Exercise. The exercise of an Option shall be
made only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's principal executive office, specifying the number
of Shares to be purchased and accompanied by payment therefor and otherwise in
accordance with the Agreement pursuant to which the Option was granted. The
purchase price for any Shares purchased pursuant to the exercise of an Option
shall be paid in full upon such exercise in cash. Notwithstanding the foregoing,
the Committee may establish cashless exercise procedures which provide for the
exercise of an Option and sale of the underlying Shares by a designated broker
and delivery of the Shares by the Company to such broker. No fractional Shares
(or cash in lieu thereof) shall be issued upon exercise of an Option and the
number of Shares that may be purchased upon exercise shall be rounded to the
nearest number of whole Shares. After exercise of an Option, Optionee shall
execute and become a party to the Stockholder Agreement, effective as of the
date of such execution.
5.7 Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (i)
the Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered the Shares to the Optionee, (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company, and (iv) the Optionee shall have executed the Stockholder
Agreement. Thereupon, the Optionee shall have full voting, dividend and other
ownership rights with respect to such Shares, subject to such terms and
conditions as may be set forth in the applicable Agreement.
5.8 Forfeiture. Except as otherwise determined by the Board,
an Optionee shall forfeit all of his or her rights (a) with respect to any
Options granted to him or her under the Plan that are not Vested Options, upon
the termination of his or her employment with the Company for any reason
whatsoever and (b) with respect to any Options granted to him or her under the
Plan (whether or not Vested Options), upon the termination of his or her
8
<PAGE> 10
employment with the Company for cause. The Board shall have absolute and
complete discretion to determine when an Optionee's employment with the
Company has been terminated.
6. Transferability of Shares. Subject to Section 13, Shares
received upon the exercise of an Option shall not be transferable by an
Optionee (or his or her beneficiary) except as permitted by and pursuant to the
terms of the Stockholder Agreement.
7. Adjustment Upon Changes in Capitalization.
(a) In the event of a Change in Capitalization, the Board shall
conclusively determine the appropriate adjustments, if any, to the (i) maximum
number and class of Shares with respect to which Options may be granted under
the Plan and (ii) the number and class of Shares which are subject to
outstanding Options granted under the Plan, and the purchase price therefor, if
applicable.
(b) If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions and restrictions
which were applicable to the Shares subject to the Option prior to such Change
in Capitalization.
8. Effect of Certain Transactions. In the event of (i) the liquidation
or dissolution of the Company or (ii) a merger or consolidation of the Company
in which the Company is not the surviving corporation (a "Transaction"), all
Options shall terminate; provided, however, that each Optionee shall be
entitled, upon the occurrence of a Transaction, to receive in respect of each
Share subject to any Vested Options such consideration as is provided for in the
agreements relating to the Transaction.
9. Pooling Transactions. Notwithstanding anything contained in the Plan
or any Agreement to the contrary, in the event of a Pooling Transaction the
Board may take such actions which are specifically recommended by an independent
accounting firm retained by the Company to the extent reasonably necessary in
order to assure that the Pooling Transaction will qualify as such, including but
not limited to (i) deferring the vesting, exercise, payment, settlement or
lapsing of restrictions with respect to any Option, (ii) providing that the
payment or settlement in respect of any Option be made in the form of cash,
Shares or securities of a successor or acquiror of the Company, or a combination
of the foregoing and (iii) providing for the extension of the term of any Option
to the extent necessary to accommodate the foregoing.
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<PAGE> 11
10. Termination and Amendment of the Plan. The Plan shall terminate on
the tenth anniversary of the Effective Date and no Options may be granted
thereafter. The Board may sooner terminate the Plan and the Board may at any
time and from time to time amend, modify or suspend the Plan; provided, however,
that no such amendment, modification, suspension or termination shall impair or
adversely alter any Options theretofore granted under the Plan, except with the
consent of the Optionee, nor shall any amendment, modification, suspension or
termination deprive any Optionee of any Shares which he or she may have acquired
through or as a result of the Plan.
11. Non-Exclusivity of the Plan. The adoption of the Plan by the Board
shall not be construed as amending, modifying or rescinding any previously
approved incentive arrangement or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem desirable,
including, without limitation, the granting of stock options otherwise than
under the Plan, and such arrangements may be either applicable generally or only
in specific cases.
12. Limitation of Liability.
As illustrative of the limitations of liability of the
Company, but not intended to be exhaustive thereof, nothing in the Plan shall be
construed to:
(i) give any person any right to be granted an Option
other than at the sole discretion of the Board;
(ii) give any person any rights whatsoever with respect
to Shares except as specifically provided in the Plan;
(iii) limit in any way the right of the Company to
terminate the employment of any person at any time; or
(iv) be evidence of any agreement or understanding, expressed
or implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.
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<PAGE> 12
13. Regulations and Other Approvals; Governing Law.
13.1. Except as to matters of federal law, this Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of New York without giving effect to
conflicts of law principles thereof.
13.2. The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Board.
13.3. The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Options the tax
benefits under the applicable provisions of the Code and regulations promulgated
thereunder.
13.4. Each Option is subject to the requirement that, if at
any time the Board determines, in its discretion, that the listing, registration
or qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Option or the issuance of
Shares, no Options shall be granted or Shares issued, in whole or in part,
unless listing, registration, qualification, consent or approval has been
effected or obtained free of any conditions as acceptable to the Board.
13.5. Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event that the disposition of Shares acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act of 1933, as amended, and is not otherwise exempt from
such registration, such Shares shall be restricted against transfer to the
extent required by the Securities Act of 1933, as amended, and Rule 144 or other
regulations thereunder. The Board may require any individual receiving Shares
pursuant to an Option granted under the Plan, as a condition precedent to
receipt of such Shares, to represent and warrant to the Company in writing that
the Shares acquired by such individual are acquired without a view to any
distribution thereof and will not be sold or transferred other than pursuant to
an effective registration thereof under said Act or pursuant to an exemption
applicable under the Securities Act of 1933, as amended, or the rules and
regulations promulgated thereunder. The certificates evidencing any of such
Shares shall be appropriately amended to reflect their status as restricted
securities as aforesaid.
11
<PAGE> 13
14. Miscellaneous.
14.1 Multiple Agreements. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some other
time. The Board may also grant more than one Option to a given Eligible
Individual during the term of the Plan, either in addition to, or in
substitution for, one or more Options previously granted to that Eligible
Individual.
14.2 Withholding of Taxes. At such times as an Optionee
recognizes taxable income in connection with the receipt of Shares hereunder (a
"Taxable Event"), the Optionee shall pay to the Company an amount equal to the
federal, state and local income taxes and other amounts as may be required by
law to be withheld by the Company in connection with the Taxable Event (the
"Withholding Taxes") prior to the issuance of such Shares. In satisfaction of
the obligation to pay Withholding Taxes to the Company, the Optionee may make a
written election (the "Tax Election"), which may be accepted or rejected in the
discretion of the Board, to have withheld a portion of the Shares then issuable
to him or her having an aggregate Fair Market Value, on the date preceding the
date of such issuance, equal to the Withholding Taxes.
12
<PAGE> 14
SCHEDULE A
Optionee Number of Shares
Alan G. Symons
Douglas G. Symons
13
<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 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."
COOPERS & LYBRAND L.L.P.
Indianapolis, Indiana
September 23, 1996
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