AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 31, 1997
REGISTRATION NO. 333-14103
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PREFERRED EMPLOYERS HOLDINGS, INC.
(Name of small business issuer in its charter)
------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 6411 65-0698779
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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10800 Biscayne Blvd., Penthouse
Miami, FL 33161
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
------
Mel Harris, Chairman and Chief Executive Officer
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
(305) 893-4040
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
------
Copies to:
Donald J. Bezahler, Esq. Stephen J. Gulotta, Jr., Esq.
Baer Marks & Upham LLP Squadron, Ellenoff, Plesent &
805 Third Avenue Sheinfeld, LLP
New York, New York 10022 551 Fifth Avenue
Tel: (212) 702-5700 New York, New York 10176
Fax: (212) 702-5941 Tel: (212) 661-6500
Fax: (212) 697-6686
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
------
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. |_|
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [X]
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CALCULATION OF REGISTRATION FEE
<TABLE>
=======================================================================================================
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Each Class of Securities Amount to be Offering Price Aggregate Offering Amount of
to be Registered Registered Per Share(1) Price(1) Registration Fee
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock, par value
$.01(2) ........................ 1,725,000 $8.00 $13,800,000 $4,312.50
- -------------------------------------------------------------------------------------------------------
Representative's Warrants ....... 150,000 $.001 $150 $ .05
- -------------------------------------------------------------------------------------------------------
Shares of Common Stock, par value
$.01(3)(4) .................... 150,000 $11.20 $ 1,680,000 $ 509.09
- -------------------------------------------------------------------------------------------------------
Total ........................... -- -- $15,480,150 $4,821.65(5)
=======================================================================================================
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Act.
(2) Includes 225,000 shares of Common Stock which may be issued upon exercise
of the Underwriter's over-allotment option. See "UNDERWRITING."
(3) Shares of Common Stock issuable upon exercise of the Warrants to be sold to
the Representative of the several underwriters at an exercise price of 140%
of the initial public offering price.
(4) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of
anti-dilution adjustment in accordance with the terms of the Warrants to be
sold to the Representative of the several underwriters.
(5) $4,762.55 of this amount was previously paid.
------
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NO. CAPTION IN FORM SB-2 LOCATION IN PROSPECTUS
------------ ------------------------------------------------ -------------------------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Front Cover Page.
Outside Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages.
Prospectus.
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors.
of Earnings To Fixed Charges.
4. Use of Proceeds. Use of Proceeds.
5. Determination of Offering Price. Underwriting.
6. Dilution. Dilution.
7. Selling Security Holders. *
8. Plan of Distribution. Underwriting.
9. Description of Securities to be Registered. Description of Securities.
10. Interest of Named Experts and Counsel. Legal Matters; Experts.
11. Information with Respect to the Registrant. Prospectus Summary; Summary and Pro Forma
Consolidated Financial Information; Management's
Discussion and Analysis of Financial Condition
and Results of Operations; Business; Management;
Principal Stockholders; Certain Transactions;
Consolidated Financial Statements.
12. Disclosure of Commission Position on Management -- Indemnification.
Indemnification for Securities Act
Liabilities.
</TABLE>
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*NOT APPLICABLE
<PAGE>
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
ffective. 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 DATED JANUARY 31, 1997
PROSPECTUS
PREFERRED EMPLOYERS HOLDINGS, INC.
1,500,000 SHARES OF COMMON STOCK
Preferred Employers Holdings, Inc. (together with Preferred Employers
Group, Inc., which will become its wholly-owned subsidiary as a result of the
Exchange (as defined in "Recapitalization"), and P.E.G. Reinsurance Company,
Ltd., its wholly-owned subsidiary, the "Company") is hereby offering 1,500,000
shares (the "Shares") of common stock, par value $.01 per share (the "Common
Stock").
Prior to this offering (the "Offering"), no public market existed for the
Common Stock. The Common Stock has been approved for listing subject to official
notice of issuance on the Nasdaq SmallCap Market ("Nasdaq") under the symbol
"PEGI" and on the Boston Stock Exchange (the "BSE") under the symbol "PEG". The
initial public offering price will be determined by negotiations between the
Company and Commonwealth Associates, as representative (the "Representative") of
the several underwriters in this Offering (the "Underwriters"). It is currently
anticipated that the initial public offering price per Share will be between
$7.00 and $8.00. See "Underwriting" for a discussion of the factors considered
in determining the public offering price of the Shares.
THESE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 9
AND "DILUTION" COMMENCING ON PAGE 17
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 COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================
Underwriting
Discount and Proceeds to
Price to Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ..... $ $ $
- --------------------------------------------------------------------------------
Total(3) ..... $ $ $
================================================================================
</TABLE>
(1) Does not include additional compensation to be received by the
Representative consisting of (i) a non-accountable expense allowance equal
to 2% of the gross proceeds of this Offering or $_________ ($_________ if
the Underwriters' over-allotment option, is exercised in full), of which
$20,000 has been paid to date, (ii) warrants to purchase up to 150,000
Shares (the "Representative's Warrants"), exercisable during the four years
commencing one year after the date of this Prospectus, at an exercise price
equal to 140% of the initial public offering price per Share, and (iii) a
one-year financial advisory agreement pursuant to which the Representative
will receive an aggregate of 2% of the gross proceeds of this Offering
payable at closing. In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "UNDERWRITING."
(2) Before deducting expenses of this Offering payable by the Company, estimated
to be $_______, including the Representative's non- accountable expense
allowance ($_______ if the Underwriters' over-allotment option is exercised
in full).
(3) The Company has granted to the Underwriters a 45-day option to purchase
up to an additional 225,000 Shares to cover over-allotments, if any. If
the over-allotment option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to the
Company will be $_________, $__________ and $________, respectively. See
"UNDERWRITING."
------
The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify this Offering
and to reject any order in whole or in part. It is expected that delivery of the
certificates representing the securities offered hereby will be made against
payment therefor at the offices of Commonwealth Associates at 733 Third Avenue,
New York, New York, on or about February , 1997.
------
COMMONWEALTH ASSOCIATES
The date of this Prospectus is February , 1997
<PAGE>
[PICTURE]*
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 SMALLCAP MARKET, ON THE BOSTON STOCK
EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus constitute "forward-looking
statements" within the meaning of the Securities Act of 1933, as amended. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors include,
among others, those discussed under the caption "Risk Factors."
<PAGE>
FOR CALIFORNIA RESIDENTS ONLY
THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA HAS IMPOSED INVESTOR
SUITABILITY STANDARDS OF (i) A MINIMUM LIQUID NET WORTH (NET WORTH EXCLUDES
PRINCIPAL RESIDENCE, HOME FURNISHINGS AND AUTOMOBILES) OF $60,000, PLUS GROSS
ANNUAL INCOME OF AT LEAST $60,000 OR (ii) A MINIMUM LIQUID NET WORTH OF
$225,000.
3
<PAGE>
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Except as otherwise indicated, all information in this Prospectus (i)
assumes the Underwriter's over-allotment option is not exercised, and (ii) gives
effect to the consummation, immediately prior to the consummation of this
Offering, of the exchange by the stockholders of the Company of their shares of
common stock in Preferred Employers Group, Inc. ("PEGI"), the corporation that
now conducts certain of the Company's business, for shares of the Common Stock.
See "Recapitalization." Except as otherwise specified or when the context
otherwise requires, references to the Company in this Prospectus include
Preferred Employers Holdings, Inc., PEGI, which will become its wholly-owned
subsidiary as a result of the Exchange (as such term is defined in
"Recapitalization") and through which the Company conducts certain of its
business, and the Reinsurance Subsidiary (as defined below).
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. This Prospectus contains forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those
discussed in "Risk Factors."
THE COMPANY
The Company is primarily engaged in providing workers' compensation and
business insurance products and risk management services designed for American
franchise businesses, particularly fast food and family style restaurants and
convenience stores. The Company's risk management services are designed to
assist clients in lowering claims costs. The Company believes that through its
innovative approach to cost containment and the expertise of its management
team, it has succeeded in helping its clients achieve claims costs which are
among the lowest in the industry to which it provides service. The average cost
per claim to the Company's clients for the years 1991 to 1995 was $1,584 (this
figure includes medical, indemnity and loss adjustment expenses). In comparison,
although no data is available for the years 1994 and 1995, the latest data
available from the National Council on Compensation Insurance, Inc. on
restaurant workers' compensation claims reflects an average cost per claim of
$2,515 (this figure only includes medical and indemnity expenses) for the years
1991 to 1993.
The Company believes that annual premiums paid for workers' compensation
insurance by the franchise industry exceed $2.5 billion, with annual premiums
paid by the fast food and family style restaurant and convenience store segment
alone representing approximately $1 billion of this amount. Although the Company
believes that such franchise businesses are potentially among the safest
insurance risks, they generally pay the same workers' compensation rates as
non-franchise businesses which may not have formal risk or safety awareness
programs. Consequently, such businesses rarely realize any price advantages from
their favorable safety attributes and generally suffer premium "redundancy" or
an "overcharge" in their workers' compensation insurance rates. The Company
offers products and services designed to enable its clients to realize
substantial savings in their workers' compensation costs while reducing the time
required to manage this element of their business. Specifically, the Company
provides clients such savings by offering competitive rates and dividends and
risk management services, including cost containment and claims management
programs, which assist clients in managing their workers' compensation costs. As
a result of these measures, the Company has enabled its clients to achieve an
average reduction of approximately 11% over the four year period 1990 through
1994 in their premium experience modification factors (which are a significant
component in determining a client's premium).
Since its inception, the Company has been tracking and recording loss data
related to franchise businesses and has accumulated and developed what it
believes to be the nation's largest database of fast food franchise restaurant
policy loss results. Such information is crucial to writing effective and
competitive policies and attaining overall profitability. The Company has
developed other proprietary information and
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
claim analyses systems and custom designed loss reports which explain the claims
procedure and motivate client management to promote safety and control claims
expense. The Company's goal is to exploit its policy loss database to become the
leading "risk insurance manager" for fast food and family style franchise
restaurants and convenience stores throughout North America and to expand into
other franchise businesses. The Company believes that, as one of the only
national providers specializing in workers' compensation insurance for franchise
businesses in the United States, it is uniquely positioned to accomplish this
goal.
Historically, the Company has acted as a general agent ("GA") representing
various major international and domestic insurance carriers. In this capacity,
the Company produces both workers' compensation and other forms of property and
liability insurance (such other forms of insurance being hereinafter referred to
as "Package") for franchise businesses through its own sales staff as well as
through the use of outside broker/agents. As a GA, the Company assumes none of
the risks associated with the insurance business it produces. To date, the
Company's principal source of revenue has been from commissions based on
insurance premiums collected on the insurance policies it sells. Upon
consummation of this Offering, the Company will continue writing business as a
GA, but will significantly expand its focus to include operating as a reinsurer
with the expectation of increasing its overall profitability.
The Company currently writes a Guaranteed Cost Workers' Compensation Safety
Group Dividend Program (the "Safety Group Program" or "Program") on behalf of
The American International Group of companies ("AIG"), a U.S. holding company
for global providers of insurance. As the insurance carrier, AIG assumes 100% of
the risks associated with the Program and receives, as compensation for such
assumption, all of the premiums less the commissions paid to the Company from
the Program. Through a subsidiary of the Company formed under the laws of
Bermuda (the "Reinsurance Subsidiary"), the Company will enter into a
reinsurance agreement (the "Reinsurance Agreement") with The Insurance Company
of the State of Pennsylvania an affiliate of AIG and other affiliated companies
of AIG (the "AIG Affiliates"), pursuant to which the Reinsurance Subsidiary will
act as the reinsurer with respect to certain workers' compensation and
employer's liability insurance policies in force as of the date of the
Reinsurance Agreement with policy inception dates as of January 1, 1996 through
the date of the Reinsurance Agreement (the "Book of Business"), or attaching
during the term thereof, which are written by the Company on behalf of the AIG
Affiliates. Upon entering into the Reinsurance Agreement, the AIG Affiliates
will pay the Reinsurance Subsidiary the related net written premium less certain
Program expenses and commissions and the losses paid associated with the Book of
Business (the "Ceded Premium"). It is anticipated that a substantial portion of
the Ceded Premium will be used as security for the payment of losses for the
benefit of AIG. See "Business -- Reinsurance -- Reinsurance Agreement."
Pursuant to the Reinsurance Agreement, the Reinsurance Subsidiary will retain
the Ceded Premium together with the risks and potential for profitability
associated therewith. See "Business -- Strategy." The Company intends to use a
significant portion of the proceeds of this Offering to fund the operations of
the Reinsurance Subsidiary. See "Use of Proceeds."
Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement will limit the liability of the
Reinsurance Subsidiary for losses and certain defined expenses to the first
$300,000 per occurrence. In addition, the Reinsurance Agreement limits the
aggregate liability of the Reinsurance Subsidiary for all coverage to an amount
not to exceed 70% of the gross written premium for each individual underwriting
year. The AIG Affiliates will retain all liabilities in excess of this amount.
The AIG Affiliates will be paid 5% of the gross written premiums under the
Program with which to purchase excess and aggregate reinsurance.
In September 1996, an AIG Affiliate made available to the Company a new
workers' compensation program (the "Small Business Workers' Compensation
Program" or "SBP") designed to provide coverage to certain smaller businesses
located in 23 states which pay annual premiums of between $5,000 and $50,000 and
which are represented by over 500 separate workers' compensation class codes.
The underwriting process under the SBP has been simplified enabling the Company
to respond promptly with com-
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
petitively priced quotes. The Company believes that many broker/agents,
regardless of size, have accounts that would be eligible to participate in the
SBP and therefore could be a potential broker/agent to promote this program. If
successful, the SBP could substantially increase the Company's revenues. The SBP
will not be subject to the Reinsurance Agreement.
Preferred Employers Holdings, Inc. was organized in Delaware on September
20, 1996. Preferred Employers Group, Inc., which will become a wholly-owned
subsidiary of Preferred Employers Holdings, Inc. as a result of the Exchange,
was organized in Florida on November 17, 1988. The Company's executive
offices are located at 10800 Biscayne Blvd., Miami, Florida 33161, and its
telephone number is (305) 893-4040.
THE OFFERING
Common Stock offered by the
Company: .................... 1,500,000
Common Stock to be outstanding
after the Offering: ......... 4,500,000 (1)
Use of Proceeds:............... To capitalize the reinsurance operations of
the Reinsurance Subsidiary and for working
capital and general corporate purposes. See
"Use of Proceeds."
Nasdaq Symbol(2):.................................. PEGI
Boston Stock Exchange
Symbol(2):................... PEG
- ------
(1) Does not include (i) 300,000 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Company's
1996 Employee Stock Option Plan (the "Option Plan"), including 175,000
options which will be granted prior to the consummation of the Offering,
and (ii) 150,000 shares of Common Stock reserved for issuance upon exercise
of the Representative's Warrants.
(2) There is currently no market for the Common Stock and there can be no
assurances that a liquid or active market will develop or be sustained for
the Common Stock after this Offering. The Common Stock has been approved for
listing, subject to official notice of issuance, on Nasdaq and on the BSE.
However, there can be no assurance that such listings will be maintained.
See "Risk Factors -- Absence of Public Market."
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6
<PAGE>
SUMMARY AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine months ended Year ended
Nine Months Ended September 30, Years Ended December 31, September 30, December 31,
------------------------------- ------------------------------- ----------------- --------------
1996 1995 1995 1994 1996(4) 1995(4)
---------- ------------ ------------ --------------- ----------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Total revenue ...... $1,909,272 $1,652,339 $2,269,920 $ 2,783,072 $13,307,000(1) $18,534,000(1)
---------- ---------- ---------- ------------ ----------- -----------
Claims and claim
settlement expenses. $ -- $ -- $ -- $ -- $ 6,269,000(5) $ 8,305,000(5)
---------- ---------- ---------- ------------ ----------- -----------
Amortization of
deferred policy
acquisition costs . $ -- $ -- $ -- $ -- $ 4,217,000(6) $ 6,018,000(6)
---------- ---------- ---------- ------------ ----------- -----------
Total operating
expenses .......... $2,170,450 $1,648,161 $2,287,438 $ 1,509,398 $ 6,387,000 $ 8,305,000
---------- ---------- ---------- ------------ ----------- -----------
Operating income
(loss) ............ ($ 261,178) $ 4,178 ($ 17,518) $ 1,273,674 $ 651,000 $ 1,284,000
Nonoperating income
(loss) ............ $ 190,000 $ -- ($ 69,269) $ 5,857,749(7) $ 190,000 ($ 69,000)
Income (loss) before
income taxes ...... ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Income taxes (2) ... $ -- $ -- $ -- $ -- $ -- $ --
Net income (loss) . ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Net income (loss) per
share ............. ($ .02) $ -- ($ 0.03) $2.38 $ .28 $ .40
As Adjusted Statement
of Operations
Data(3):
Historical income
(loss) before income
taxes
(benefit) ......... ($ 71,178) $ 4,178 ($ 86,787) $ 7,131,423 $ 841,000 $ 1,215,000
Pro forma provision for
income taxes
(benefit) ......... ($ 26,550) $ 1,558 ($ 32,372) $ 2,660,021 $ 314,000 $ 453,000
Pro forma net income
(loss) ............ ($ 44,628) $ 2,620 ($ 54,415) $ 4,471,402 $ 527,000 $ 762,000
Pro forma net income
(loss) per share .. ($ 0.01) $ -- ($ 0.02) $ 1.49 $ .18 $ .25
Weighted average
shares outstanding. 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
Combined Ratio(5)(6). -- -- -- -- 92% 92%
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1996
---------------------------- ------------------------------
Balance Sheet Data: 1995 1994 Actual As Adjusted(8)
------------ ------------ ------------ --------------
(unaudited)
<S> <C> <C> <C> <C>
Total assets .......... $3,765,150 $4,985,650 $6,067,499 $15,671,764
Total liabilities ..... $3,474,747 $3,502,903 $5,848,274 $ 5,848,274
Net stockholders' equity $ 290,403 $1,482,747 $ 219,225 $ 9,823,490
</TABLE>
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(1) Net income does not include expected income from investment of available
cash. Based upon the average flow of funds for the periods presented and
assuming a rate of return of 5%, investment income for the year ended
December 31, 1995 and the nine months ended September 30, 1996 would have
been $163,000 and $364,000, respectively, and net income would have been
$864,000 and $755,000, respectively. Actual results from investment may have
been greater than or less than this amount.
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7
<PAGE>
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(2) For all periods presented, the Company was treated as an S Corporation
for federal and state income tax purposes. As a result, income taxes have
not been provided for herein. The Company's status as an S Corporation
will be terminated upon consummation of this Offering. See "Dividend
Policy."
(3) Represents adjustments for U.S. federal and state income taxes as if the
Company had been taxed as a C Corporation rather than an S Corporation
for all periods presented. The pro forma financial information includes
income earned by the Reinsurance Subsidiary, on which the Company will be
subject to tax in the United States. See "Risk Factors -- United States
Federal Income Tax Risks -- Controlled Foreign Corporation Rules."
(4) The pro forma financial information contained in this Prospectus assumes
that the Reinsurance Subsidiary was operational effective January 1, 1995.
In this regard the pro forma financial information assumes that the average
annualized workers' compensation premiums in force for the periods presented
were reinsured by the Reinsurance Subsidiary and, as a reinsurance entity,
the Reinsurance Subsidiary recorded and invested premiums received, paid
claims and established reserves on losses incurred, and conducted business
consistent with such business typically conducted by a reinsurer. See
"Discussion and Analysis of Pro Forma Consolidated Financial Information."
(5) Claims and claim settlement expenses incurred of $8,945,475 and $6,268,956
for the year ended December 31, 1995 and the nine month period ended
September 30, 1996, respectively, are based on an assumed 55% loss ratio
(premiums earned x 55%). The actual average loss ratio experienced by the
insurance carrier in prior years, based on underwriting analyses prepared by
the Company, was 51.5% which ratio compares favorably with the loss ratios
experienced by other similarly situated companies in the industry. The
Company has engaged an outside independent firm of consulting actuaries
which annually reviews the Company's underwriting analysis for
reasonableness.
(6) Amortization of deferred policy acquisition costs of $6,018,000 and
$4,217,000 for the year ended December 31, 1995 and the nine month period
ended September 30, 1996, respectively, represents amortization of
contractually agreed upon Program expenses equal to 37% of premiums earned
and include the following:
a) Ceding commission payable to the insurance carrier 28.83%
b) Specific and excess reinsurance premiums payable 5.00%
c) Acquisition expenses incurred by the Reinsurance Subsidiary 3.17%
-----
Total Program expenses 37.00%
=====
See "Prospectus Summary," "Risk Factors -- Reinsurance Liability,"
"Discussion and Analysis of Pro Forma Consolidated Financial
Information," and "Business -- Strategy -- Reinsurance."
(7) The Company received $5,858,000 in 1994, net of expenses, with respect to
litigation regarding a breach of contract. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(8) Adjusted to give effect to the sale of the 1,500,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $7.50 per Share and the application of the net proceeds
therefrom. See "Use of Proceeds."
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8
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information contained in this Prospectus, in
evaluating an investment in the shares offered hereby.
Reinsurance Liability
The Company currently writes the Safety Group Program on behalf of AIG. As
the insurance carrier, AIG assumes 100% of the risks associated with the Program
and receives, as compensation for such assumption, all of the premiums less the
commissions paid to the Company from the Program. Upon consummation of the
Offering and pursuant to the Reinsurance Agreement, the Reinsurance Subsidiary
will act as the reinsurer with respect to certain workers' compensation and
employer's liability insurance policies in force as of the date of the
Reinsurance Agreement with policy inception dates as of January 1, 1996 and
later (the "Book of Business"), or attaching during the term thereof, which are
written by the Company on behalf of the AIG Affiliates and, as a result, will
assume all of the risks associated with being a reinsurer. Upon entering into
the Reinsurance Agreement, the AIG Affiliates will pay the Reinsurance
Subsidiary the related net written premium less certain Program expenses and
commissions and the losses paid associated with the Book of Business (the "Ceded
Premium"). It is anticipated that a substantial portion of the Ceded Premium
will be used as security for the benefit of AIG (See "Business -- Reinsurance
Agreement").
Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement will limit the liability of the
Reinsurance Subsidiary for losses and certain defined expenses to the first
$300,000 per occurrence. In addition, the Reinsurance Agreement limits the
aggregate liability of the Reinsurance Subsidiary for all coverage to an amount
not to exceed 70% of the gross written premium for each individual underwriting
year. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General" and "Business -- Reinsurance."
New Lines of Business
Late in 1995, the Company began writing other forms of property and
casualty insurance in addition to workers' compensation insurance on behalf of
the insurance carriers it represents. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General" and "Business --
Reinsurance." The success of the Company's strategy of entering into these new
lines of business, as well as the Small Business Workers' Compensation Program
and the business of reinsurance through the Reinsurance Subsidiary, will depend
on various factors, including the unpredictable nature of the insurance industry
generally, the ability of the Company to manage its anticipated growth, the
availability of adequate capital and general economic and business conditions.
Not all of the foregoing factors are in the Company's control. There can be no
assurances that the Company will successfully implement its strategy or that its
strategy will result in profitability.
Recent Operating Losses
For the years ended December 31, 1995 and December 31, 1994, the Company
generated total revenues of approximately $2,270,000 and $2,783,000,
respectively, and incurred a net operating loss of approximately $18,000 in 1995
and net operating income of approximately $1,274,000 in 1994. For the nine month
period ended September 30, 1996, the Company generated total revenues of
approximately $1,909,000 and sustained a net operating loss of approximately
$261,000. For at least the current fiscal year, the Company may incur a net
operating loss as a result of, among other things, its expansion strategy. There
can be no assurance that the Company's operations will achieve profitability at
any time in the future or, if achieved, sustain such profitability. See
"Managements' Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategy."
9
<PAGE>
Regulation
As a general agent ("GA"), the Company is subject to regulation in the
various states in which it sells insurance. These regulations vary from state to
state, and may include such matters as licensing requirements, bonding
requirements, requirements regarding the Company's agreements with the insurance
carriers for which it acts as a GA, and certain other requirements. Penalties
may be imposed for violations of such regulations. Any change in such regulation
may have a material adverse effect on the Company's business and operations.
Workers' compensation coverage is a creation of state law, subject to
change by the state legislature, and influenced by the political processes in
each state. Several states have mandated that employers receive coverage only
from funds operated by the state. As a result, the Company's financial
performance could be materially adversely affected by mandatory assessments from
such funds over which the Company has no control. Certain smaller states, such
as Hawaii and Maine, have promulgated regulations that place onerous assessments
on commercial insurers to subsidize state assigned risk programs. These
assessments generally preclude commercial insurers from offering their workers'
compensation programs in such states because of excessive costs and necessitate
insureds to either participate in state assigned risk programs or to
self-insure. The Company would be precluded from offering workers' compensation
insurance in such states and such restrictions could have a material adverse
effect on the Company's business. In addition, there can be no assurance that
other states will not also pass similar regulations which could have a material
adverse effect on the business of the Company.
The Reinsurance Subsidiary will be a registered Bermuda insurance company
and will be subject to regulation and supervision in Bermuda. The applicable
Bermudian statutes and regulations generally are designed to protect insureds
and ceding insurance companies rather than stockholders. Among other things,
such statutes and regulations require the Reinsurance Subsidiary to maintain
minimum levels of capital and surplus, impose restrictions on the amount and
type of investments it may hold, prescribe solvency standards that it must meet,
limit transfers of ownership of its capital shares, and provide for the
performance of certain periodic examinations of the Reinsurance Subsidiary and
its financial condition. These statutes and regulations may, in effect, restrict
the ability of the Reinsurance Subsidiary to write new business or distribute
funds to the Company. Moreover, if Bermuda were to alter its capital reserve
requirements to require additional reserves for the Reinsurance Subsidiary, the
Reinsurance Subsidiary may require additional infusions of capital from the
Company.
The Reinsurance Subsidiary is neither registered nor licensed as an
insurance company in any jurisdiction in the United States. The Reinsurance
Subsidiary will conduct its business through offices in Bermuda and will not
maintain an office, and its personnel will not solicit, advertise, settle claims
or conduct other insurance activities, in the United States. Accordingly, the
Reinsurance Subsidiary does not believe it will be subject to the insurance laws
of any jurisdiction in the United States, except as provided below with respect
to its status as a foreign insurer. There can be no assurance, however, that
inquiries or challenges to the Reinsurance Subsidiary's insurance activities
will not be raised in the future or that the Reinsurance Subsidiary's location,
regulatory status or restrictions on its activities resulting therefrom will not
materially adversely affect its ability to conduct its business in the future.
See "Business -- Regulation." Although it conducts its operations from Bermuda,
the Reinsurance Subsidiary is not authorized to underwrite local risks in
Bermuda.
All of the Reinsurance Subsidiary's premiums are expected to come from
ceding insurers in the United States. The insurance laws of each state in the
United States generally impose specific requirements on insurers which seek to
place reinsurance with a foreign insurer such as the Reinsurance Subsidiary, as
a condition to the insurer being permitted to recognize the reinsurance contract
as an admitted asset or as a deduction from liabilities on its statutory
financal statements. Such requirements, which vary from state to state, may
include requiring the foreign insurer to submit to jurisdiction in the United
States, to obtain approval by the state insurance regulator, to meet certain
capital requirements, or to comply with other conditions. Accordingly, failure
of the Reinsurance Subsidiary to comply with the requirements imposed by a
particular state may reduce the interest of insurers in that state in ceding
reinsurance to the Reinsurance Subsidiary. The Company is not required to meet
any capital requirements in connection with the Reinsurance Agreement.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny in many jurisdictions, including the United States
and various states within the United States. Many states have
10
<PAGE>
recently created employee class codes that distinguish fast food restaurants
from other types of restaurants. As of the date hereof, the Company believes
that workers' compensation insurance rates with respect to such class codes have
not been similarly distinguished. However, there can be no assurance that
certain states will not, in the future, distinguish workers' compensation
insurance rates based upon such class codes, which could have a material adverse
effect on the Company's business. It is not possible to predict the future
impact of changing law or regulation on the operations of the Company. Such
changes could, however, have a material adverse effect on the Company. See
"Business -- Regulation."
Dependence on Independent Insurance Broker/Agents; Product and Service
The Company's programs are predicated upon the successful marketing of its
products and services through independent insurance broker/agents. Although the
programs have been structured to increase revenues for the independent
broker/agents, there can be no assurance that independent broker/agents will
utilize the Company's products or services. These broker/agents are not
obligated to promote the Company's products and services and may sell
competitors' insurance products. Therefore, the Company's growth depends in part
on the marketing efforts of broker/agents and on the Company's ability to
continue to offer workers' compensation products and services that meet the
requirements of these broker/agents and their customers. Failure of these
independent insurance broker/agents to market the Company's products and
services successfully could have a material adverse effect on the Company's
financial condition and results of operations.
The Company custom designs its workers' compensation insurance programs
with nationally recognized carriers rated A or better by A.M. Best and assists
these carriers in establishing competitive rates for American franchise
businesses. The Company believes by offering superior products and services to
this segment of the business community, which tends to be among the safest
insurance risks, it can offer its clients substantial savings in their workers'
compensation programs and reduce the time devoted to managing such programs.
There can be no assurances that these programs will continue or that the rates
offered for these products will remain competitive.
Dependence on Limited Number of Clients
The Company's business largely depends upon its relationships with owners
of multiple franchises in the United States such as Burger King, McDonald's,
Wendy's and Pizza Hut. Although for the year ended December 31, 1995, the
Company provided services and products to approximately 750 separate accounts,
none of which accounted for more than 3% of annual revenues, approximately 32%
of the Company's income was derived from owners of Burger King franchises. In as
much as the Company's clients tend to own between three and 140 franchises, the
non-renewal of even a limited number of programs or policies by brand name
franchisees could have a material adverse effect on the business of the Company.
Similarly, endorsements from franchisors to franchisees dictating the manner in
which franchisees obtain workers' compensation could have a material adverse
effect on the business of the Company.
Dependence on Limited Number of Carriers
The Company currently writes all of its workers' compensation and Package
insurance through AIG and General Accident Insurance Company of America
("GAIC"). The Company has been a GA with AIG since 1993. The Company has been a
GA with GAIC since 1995, offering Package insurance for family style and fast
food restaurants, the commissions from which accounted for 15% of the Company's
net revenues in 1995. GAIC has recently advised the Company that it will no
longer accept Package insurance risks for fast food restaurants, but will
continue to do so for family style restaurants. The Company is currently
pursuing other carriers through which it can write such business. The Company
believes that there are many national insurance carriers through which it may
write business and that termination of the Company's relationship with its
current insurance carriers would not have a material adverse effect on the
business of the Company.
Investment Income Necessary to Preserve Capital
The Company's income will depend, in part, on the income derived from the
investment of premiums by the Reinsurance Subsidiary. The Company believes that
the risks inherent in the business of the Reinsurance Subsidiary should not be
augmented by a speculative investment policy and, therefore, its investment
strategy will be partially defined by the need to preserve its capital. Because
of the unpredictable nature of losses that
11
<PAGE>
may arise under insurance policies, the Reinsurance Subsidiary's liquidity needs
may be substantial. The Company's investment policy will be established by the
Company's Investment Committee, and will be subject to, among other factors, the
Company's liquidity requirements. The Company intends that its investments will
consist primarily of cash or fixed-income securities (none of which will have a
rating of less than AA), the market value of which is subject to fluctuation
depending on changes in prevailing interest rates. Additionally, the Company
reserves the right to invest a limited percentage of its portfolio, to be
determined by the Investment Committee, in common stock of companies listed on
national securities exchanges. The stock of such companies may fluctuate as a
result of specific events affecting such companies as well as general market
conditions. Increases in interest rates or fluctuations in the market price of
such companies' stocks may result in losses, both realized and unrealized, on
the Company's investments. See "Business -- Investments."
Competition
The workers' compensation industry is highly competitive. The Company
competes with other GA's, numerous large insurance companies, managed health
care companies, state sponsored insurance pools, risk management consultants and
non-Company affiliated broker/agents, many of which have significantly larger
operations and greater financial, marketing, human and other resources than the
Company. Competitive factors include product lines, premium rates, personalized
service and effective cost containment measures. Additionally, the Company does
not offer the full line of insurance products which is offered by some of its
competitors. Such competitors may have material advantages over the Company as a
result of additional types of insurance and services they offer. There can be no
assurance that the Company will be able to maintain its competitive position or
that any increased competition will not have a material adverse effect on the
Company's financial condition and results of operations. See "Business --
Competition."
After a period of absence from the market, traditional national insurance
companies have recently re-entered the workers' compensation insurance market
thereby increasing competition in the Company's major market segment. Although
the Company believes that, as one of the only national providers specializing in
workers' compensation insurance for franchise businesses in the United States,
it is uniquely positioned in the industry, no assurance can be given that other
companies will not develop similar national programs or that the Company will be
able to compete effectively in the future.
Reliance Upon Key Personnel
The Company's success depends to a substantial extent upon the continuing
efforts and abilities of Mel Harris, the Company's Chairman and Chief Executive
Officer, Howard Odzer, the Company's President, and upon the efforts and
abilities of certain other key management personnel. The Company has entered
into employment agreements with Messrs. Harris and Odzer. The loss of the
services of Mr. Harris, Mr. Odzer or other key management personnel, for any
reason could have a material adverse effect on the Company's ability to conduct
its operations. The Company maintains key man insurance on the lives of Mr.
Harris and Mr. Odzer in the amount of $4,000,000 and $3,000,000, respectively.
See "Management."
United States Federal Income Tax Risks
Taxation of Reinsurance Subsidiary
As a Bermuda domiciled corporation, the Reinsurance Subsidiary will not
file United States tax returns. The Company anticipates that the Reinsurance
Subsidiary will operate in such a manner that it will not directly be subject to
U.S. tax (other than U.S. excise tax on reinsurance premiums where the risks
covered thereby are reinsured with another foreign insurer which is neither a
resident of Bermuda nor a resident of a third country with a United States tax
treaty which entitles the foreign insurer to exemption from excise tax, and
withholding tax on certain investment income from U.S. sources) because it will
not engage in business or have a permanent establishment in the United States.
However, because definitive identification of activities which constitute being
engaged in a trade or business in the United States is not provided by the
Internal Revenue Code of 1986, as amended (the "Code"), or regulations or court
decisions, there can be no assurance that the Internal Revenue Service (the
"IRS") will not contend in the future that the Reinsurance Subsidiary is engaged
in a trade or business in the United States. If the Reinsurance Subsidiary were
engaged in business in the United States (and, if it were to qualify for
benefits under the income tax treaty between the United States and Bermuda, such
busi-
12
<PAGE>
ness were attributable to a "permanent establishment" in the United States), the
Reinsurance Subsidiary would be subject to U.S. tax at regular corporate rates
on its income that is effectively connected with its U.S. business plus an
additional 30% "branch profits" tax on such income remaining after the regular
tax, in which case the Company's earnings and stockholders' equity could be
materially adversely affected.
Controlled Foreign Corporation Rules
The Reinsurance Subsidiary will constitute a "controlled foreign
corporation" ("CFC") for United States federal income tax purposes. As a result
the Company must include in its gross income for United States federal income
tax purposes its pro rata share of the CFC's "subpart F income," even if such
subpart F income is not distributed. The Company anticipates that substantially
all of the Reinsurance Subsidiary's income will be subpart F income. If the
Company does not receive distributions of the subpart F income from the
Reinsurance Subsidiary, the Company will be required to utilize other funds to
satisfy the United States federal income taxes due on the subpart F income and
as a result the Company's earnings and shareholder's equity could be materially
adversely affected.
Control by Existing Stockholders
Following completion of this Offering, Mel Harris, members of his family,
and Howard Odzer and members of his family, who together currently beneficially
own 100% of the Company's Common Stock, will own approximately 66.67% of the
Company's outstanding Common Stock. Accordingly, these stockholders will have
the ability to control the outcome of stockholder votes, which will include the
ability to elect all of the Company's directors, control the adoption or
amendment of provisions in the Company's Certificate of Incorporation and
Bylaws, and approve certain mergers and other significant corporate
transactions. See "Principal Stockholders" and "Description of Securities."
Broad Discretion as to Use of Proceeds
Approximately 64% of the net proceeds of this Offering has been allocated
to working capital and general corporate purposes and will be used for such
purposes as management may determine. Accordingly, management will have broad
discretion with respect to the expenditure of that portion of the net proceeds
of this Offering. In addition, the Company's estimate of its allocation of the
use of proceeds of this Offering is subject to a reapportionment of proceeds
among the categories set forth herein or to new categories. The amount and
timing of expenditures will vary depending upon a number of factors, including
changing competitive conditions and general economic conditions. See "Use of
Proceeds."
Possible Nasdaq and BSE Delisting; Low Priced Stocks
The trading of the Common Stock Securities on Nasdaq and the BSE will be
conditioned upon the Company meeting certain asset, capital and surplus,
earnings and stock price tests set forth by Nasdaq and the BSE. For example, to
maintain eligibility for trading on Nasdaq, the Company will be required to
maintain total assets in excess of $2,000,000, capital and surplus in excess of
$1,000,000 and (subject to certain exceptions) a bid price of $1.00 per share.
Nasdaq has proposed new listing requirements, which, if adopted may impose more
stringent maintenance criteria. To maintain eligibility for trading on the BSE,
the Company will be required, among other things, to maintain total net tangible
assets in excess of $1,000,000. Upon completion of this Offering and the receipt
of the proceeds therefrom, the Company believes that it will meet the respective
asset, capital and surplus earnings tests set forth by Nasdaq and the BSE. If
the Company fails any of the tests, the Common Stock may be delisted from
trading on Nasdaq and the BSE. The effects of delisting include the limited
release of the market prices of the Common Stock and limited news coverage of
the Company. Delisting may restrict investors' interest in the Common Stock and
materially adversely affect the trading market and prices for such securities
and the Company's ability to issue additional securities or to secure additional
financing. In addition to the risk of volatile stock prices and possible
delisting, low price stocks are subject to the additional risks of federal and
state regulatory requirements and the potential loss of effective trading
markets. In particular, if the Common Stock were delisted from trading on such
exchanges and the trading price of the Common Stock was less than $5 per share,
the Common Stock could be subject to Rule 15g-9 under the Exchange Act, which,
among other things, requires that broker/dealers satisfy special sales practice
requirements, including making individualized written suitability determinations
and receiving purchasers' written consent, prior to any transac-
13
<PAGE>
tion. If the Common Stock could also be deemed to be penny stock under the
Securities Enforcement and Penny Stock Reform Act of 1990, this would require
additional disclosure in connection with any trading of the Common Stock,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. Such requirements could severely limit the liquidity
of the Common Stock and the ability of purchasers in this Offering to sell their
securities in the secondary market.
Common Stock Prices May Be Highly Volatile
The market prices of equity securities of many companies have experienced
extreme price volatility in recent years for reasons not necessarily related to
the individual performance of specific companies. Accordingly, the market price
of the Common Stock following this Offering may be highly volatile. Factors such
as announcements by the Company or its competitors concerning products,
governmental regulatory actions, other events affecting insurance companies
generally as well as general market conditions may have a significant impact on
the market price of the Common Stock and could cause it to fluctuate
substantially.
Absence of Public Market; Negotiated Offering Price
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that any trading market therefor will
develop or, if any such market develops, that it will be sustained. Accordingly,
purchasers of the Common Stock may experience difficulty selling or otherwise
disposing of such Common Stock. The public offering price of the Common Stock
has been established by negotiation between the Company and the Representative
and does not bear any relationship to the Company's book value, assets, past
operating results, financial condition or other established criteria of value.
Immediate Dilution to New Investors of 70.89%
The assumed initial public offering price per share of Common Stock exceeds
the book value per share of the Common Stock. Investors in this Offering will
therefore incur immediate and substantial dilution of $5.32 or 70.89% per share
from the initial public offering price. See "Dilution."
Shares Eligible for Future Sale
Upon completion of the Offering, the Company will have 4,500,000 shares of
Common Stock outstanding (4,725,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,500,000 shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
the Company within the meaning of Rule 144 under the Securities Act ("Rule
144"). The remaining 3,000,000 shares of Common Stock are "restricted
securities," as that term is defined under Rule 144, and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including the exemption provided by Rule 144. The
sale of a substantial number of shares of Common Stock or the availability of
Common Stock for sale could adversely affect the market price of the Common
Stock prevailing from time to time. The Company's existing stockholders have
agreed that they will not, without the consent of the Representative, sell or
otherwise dispose of any equity securities of the Company for a period of one
year following the closing date of this Offering. See "Principal Stockholders,"
"Shares Eligible for Future Sale" and "Underwriting."
Possible Issuances of Preferred Stock; Anti-Takeover Provisions
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 1,000,000 shares of preferred stock, par value $.01 per
share. The preferred stock may be issued in one or more series, the terms of
which may be determined by the Board of Directors at the time of issuance
without further action by stockholders, and may include voting rights (including
the right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion and redemption rights and sinking fund
provisions. No preferred stock is currently outstanding and the Company
currently has no intention of issuing any preferred stock. However, the issuance
of any such preferred stock could materially adversely affect the rights of
holders of Common Stock and, therefore, could reduce the value of the Common
Stock. In addition, specific rights granted to future holders of preferred stock
could be used to restrict the Company's ability to merge with, or sell its
assets to, a third party, thereby preserving control of the Company by present
stockholders. The ability of the
14
<PAGE>
Board of Directors to issue preferred stock could have the effect of
delaying, deferring or preventing a change in control of the Company. Certain
provisions of Delaware law may also discourage third party attempts to
acquire control of the Company. See "Description of Securities."
Representative's Warrants
The Company will sell to the Representative and/or its designees, for
nominal consideration, the Representative's Warrants to purchase an aggregate of
up to 150,000 shares of Common Stock. The Representative's Warrants are
exercisable for a four-year period commencing one year from the date of this
Prospectus, at an exercise price per share equal to 140% of the initial public
offering price of the Common Stock. For the life of the Representative's
Warrants, the holders are given, at nominal cost, the opportunity to profit from
a rise in the market price of the Common Stock without assuming the risk of
ownership, with a resulting dilution in the interest of other security holders.
As long as the Representative's Warrants remain unexercised, the terms under
which the Company could obtain additional capital may be adversely affected.
Moreover, the holders of the Representative's Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital through a new offering of its securities on terms more
favorable than those provided by the Representative's Warrants. Additionally, if
the holders of the Representative's Warrants were to effect a distribution of
the Representative's Warrants or the underlying securities, the Representative,
prior to and during such distribution, may be unable to make a market in the
Company's securities and may be required to comply with other limitations on
trading set forth in Rules 10b-2, 10b-6 and 10b-7 promulgated under the Exchange
Act, (and, upon its effectiveness, Regulation M which has been promulgated by
the Securities and Exchange Commission to replace such rules.) Such rules
restrict the solicitation of purchasers of a security when a person is
interested in the distribution of such security and also limit market making
activities by an interested person until the completion of the distribution. If
the Representative were required to cease making a market, the market and market
price for such securities may be adversely affected and holders of such
securities may be unable to sell such securities. See "Underwriting."
Lack of Dividends
The payment of cash dividends, if any, will be within the discretion of the
Board of Directors and will depend upon the Company's earnings, if any, capital
requirements and financial condition and other relevant factors. The Board of
Directors does not intend to declare any cash or other dividends in the
foreseeable future, but rather intends to retain future earnings, if any, to
provide for the operation and expansion of the Company's business. See "Dividend
Policy" and "Description of Securities."
LIMITATION OF LIABILITY
The Company has included in its Certificate of Incorporation provisions to
indemnify its directors and officers to the extent permitted by Delaware law. In
addition, as permitted by Delaware law, the Company's Certificate of
Incorporation limits the liability of directors to the Company or to its
stockholders for monetary damages for breach of a director's fiduciary duty
except in certain instances. As a result, stockholders may have limited rights
to recover against directors for breach of fiduciary duty.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Shares offered hereby
(after deducting underwriting discounts and commissions and other expenses of
the Offering), are estimated to be approximately $9,600,000 ($11,100,000 if the
over-allotment option is exercised in full). The Company expects to use the net
proceeds in approximately the manner set forth in the following table:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Net Proceeds
---------------------- --------------- ---------------
<S> <C> <C>
Capitalize Reinsurance Subsidiary ............................. $3,500,000 36.46%
Working Capital and General Corporate Purposes ................ 4,100,000 42.70%
Expansion of Marketing and Distribution Systems ............... 1,000,000 10.42%
Upgrading Expansion of Data Processing Facilities and Other
Corporate Systems ............................................ 1,000,000 10.42%
--------------- ---------------
Total ......................................................... $9,600,000 100.00%
=============== ===============
</TABLE>
The Company intends to capitalize the Reinsurance Subsidiary initially at
$3,500,000. Such capitalization is based on the current capital requirements for
Class 3 insurers in Bermuda.
The balance of the net proceeds will be used for working capital and other
general corporate purposes, for the expansion of the Company's marketing and
distribution systems and for the upgrading and expansion of its data processing
capabilities and facilities and other corporate systems. Although as of the date
of this Prospectus no specific acquisition is being contemplated by the Company,
such general corporate purposes could include future acquisitions.
If the Underwriters exercise the over-allotment option in full, the Company
will realize additional net proceeds of approximately $1,500,000, which will be
added to the Company's working capital.
The foregoing uses of proceeds represent the Company's best estimates of
the allocation of the estimated net proceeds of this Offering and there could be
significant variations in the anticipated or actual use of the proceeds due to
changes in business or economic circumstances. Accordingly, the Company reserves
the right to reallocate the foregoing uses of proceeds depending upon any such
change of circumstances.
Pending utilization of the net proceeds of the Offering, the Company may
make temporary investments in, among other things, bank certificates of deposit,
interest-bearing investments, prime commercial paper, United States government
obligations, or money-market funds.
RECAPITALIZATION
Immediately prior to this Offering, the Company and the stockholders of
PEGI at such date (the "Exchanging Stockholders") will effect a recapitalization
whereby the Company will exchange 17,647.06 shares of Common Stock for each
share of common stock of PEGI held by the Exchanging Stockholders (the
"Exchange"). As a result of the Exchange, PEGI will become a wholly-owned
subsidiary of the Company.
DIVIDEND POLICY
Prior to this Offering, the Company was treated as an S Corporation for
federal income tax purposes. Pursuant to an Amended and Restated Shareholders
Agreement made as of May 15, 1995 (the "Shareholders Agreement") by and between
the Company, Mel Harris and Howard Odzer, the Company was required, as an S
Corporation, to make annual pro rata distributions of cash to stockholders of
not less than 45% of the prior year's net income of the Company. Immediately
prior to the consummation of this Offering, the Company's status as an S
Corporation shall terminate. The payment of future cash dividends, if any, will
be within the discretion of the Board of Directors and will depend upon the
Company's earnings, if any, capital requirements and financial condition and
other relevant factors. The Board does not intend to declare any cash or other
dividends in the foreseeable future, but rather intends to retain future
earnings, if any, to provide for the operation and expansion of the Company's
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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<PAGE>
DILUTION
At September 30, 1996, the net tangible book value (total tangible assets
less total liabilities) of the Company was $219,225, or $.07 per share. Without
giving effect to any other changes in the pro forma net tangible book value of
the Company after September 30, 1996, other than to give effect to the sale of
the 1,500,000 shares of Common Stock offered hereby at an estimated price per
share of $7.50 (less underwriting discounts and estimated expenses of the
Offering and the application of the estimated net proceeds therefrom), the pro
forma net tangible book value of the Company at September 30, 1996 would have
been $9,823,490, or $2.18 per share, representing an immediate increase in net
tangible book value of $2.11 per share to existing stockholders and an immediate
dilution of $5.32 per share (70.89%) to the purchasers of Common Stock in this
Offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price .......................... $7.50
Pro forma net tangible book value before this Offering ......... $ .07
Increase attributable to new investors ......................... $2.11
Pro forma as adjusted net tangible book value after this
Offering ...................................................... $2.18
Dilution to new investors ...................................... $5.32
</TABLE>
The following table summarizes, as of September 30, 1996, the total
consideration paid and the average price per share of Common Stock paid by
existing stockholders and by purchasers of Common Stock in this Offering (before
deduction of underwriting discounts and commissions and estimated offering
expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
--------------------------- -----------------------------
Amount Percentage Amount Percentage Per Share
----------- ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders 3,000,000 66.667% $ 30,000 .27% $ .01
New Investors 1,500,000 33.333% $11,250,000 99.73% $7.50
----------- ------------ ------------- ------------
Total 4,500,000 100.0 % $11,280,000 100.0 %
=========== ============ ============= ============
</TABLE>
The foregoing table does not include (i) 300,000 shares of Common Stock
reserved for issuance upon exercise of stock options which may be granted under
the Option Plan, including 175,000 options which will be granted prior to the
consummation of the Offering, and (ii) 150,000 shares reserved for issuance
pursuant to the Representative's Warrants. To the extent that any of these
options or warrants are exercised, there may be further dilution to new
investors. See "Capitalization," "Management -- Stock Option Plan" and
"Underwriting."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996, and as adjusted to reflect the issuance and sale of the
shares of Common Stock offered hereby at an assumed initial offering price of
$7.50 per share and the application of the estimated net proceeds therefrom.
This table should be read in conjunction with the consolidated financial
statements and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1996
----------------------------
(unaudited)
Actual As Adjusted
----------- -------------
<S> <C> <C>
Total debt .................................... $ 349,563 $ 349,563
----------- -------------
Stockholders' equity
Common Stock, $.01 par value; 10,000,000
shares authorized; 3,529,412 shares
issued; 5,029,412, as adjusted (1) ....... 35,294 50,294
Additional paid-in capital .................. -- 9,589,265
Retained earnings ........................... 689,488 689,488
----------- -------------
Total stockholders' equity .................... 724,782 10,329,047
Treasury stock at cost; 529,412 shares ........ (505,557) (505,557)
----------- -------------
Net stockholders' equity ...................... 219,225 9,823,490
----------- -------------
Total capitalization .......................... $ 568,788 $10,173,053
=========== =============
</TABLE>
- ------
(1) Does not include (i) 300,000 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Option Plan,
including 175,000 options which will be granted prior to the consummation of the
Offering, and (ii) 150,000 shares reserved for issuance pursuant to the
Representative's Warrants.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and the related Notes contained elsewhere in this
Prospectus.
GENERAL
The Company is primarily engaged in the property and casualty insurance
business as a general agent ("GA") for The Insurance Company of the State of
Pennsylvania, an affiliate of AIG, and other AIG affiliates and for GAIC and
certain of its affiliates. Pursuant to its agreements with these carriers, the
Company is authorized to solicit and bind insurance contracts on behalf of the
insurers, collect and account for premiums on business it writes, and request
cancellation or nonrenewal of any policy placed by the Company. The Company
receives, as compensation pursuant to the terms of these agreements, gross
commissions on its business at rates which range from 5% to 20%. The Company has
written workers' compensation insurance since its inception and in late 1995
began writing other forms of property and casualty insurance (such other forms
of insurance being hereinafter referred to as "Package") for family style and
fast food restaurants as a GA for GAIC. GAIC has recently advised the Company
that it will no longer accept Package insurance risks for fast food restaurants,
but will continue to do so for family style restaurants. The Company is
currently pursuing other carriers through which it can write such business. The
Company believes that there are many national insurance carriers through which
it may write business and that termination of the Company's relationship with
its current insurance carriers would not have a material adverse effect on the
business of the Company. See "Risk Factors -- Dependence on Limited Number of
Carriers."
The Company collects workers' compensation premiums from insureds and
remits the same to the insurance carrier net of its commission. Commission
income on workers' compensation business is recognized as income when premiums
are collected. Package insurance premiums are principally collected by the
insurance carrier. The Package insurance carrier remits commissions on Package
premiums it collects to the Company monthly. Commission income on Package
business is recognized as income when premiums are due. In 1995, the Company
wrote approximately $3,800,000 of Package insurance premiums, commissions from
which accounted for approximately 15% of its net revenues.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995:
TOTAL REVENUES
Total revenues for the nine months ended September 30, 1996 were $1,909,000
compared to $1,652,000 for the nine months ended September 30, 1995,
representing a net increase of $257,000, or 15.6%. The following table provides
a comparison of revenue for the nine month periods ended September 30, 1996 and
1995 by category:
<TABLE>
<CAPTION>
1996 1995 Net Change
---------- ---------- ----------
<S> <C> <C> <C>
Net commission income:
Workers' compensation ....... $1,275,000 $1,396,000 ($121,000)
Package ..................... $ 524,000 $ 107,000 $417,000
Other, net .................. $ 31,000 $ 82,000 ($ 51,000)
---------- ---------- --------
Total net commission income . $1,830,000 $1,585,000 $245,000
Interest income ............. $ 79,000 $ 67,000 $ 12,000
---------- ---------- --------
Total revenues .............. $1,909,000 $1,652,000 $257,000
========== ========== ========
</TABLE>
Workers' compensation:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Premiums collected .......... $12,487,000 $13,753,000 ($1,266,000)
=========== =========== ==========
Ratio of net commission
income/premiums collected . 10.2% 10.2%
=========== ===========
</TABLE>
19
<PAGE>
Workers' compensation commission income declined $121,000, or 8.7%, as a
result of the reduction in premiums collected of $1,266,000. The reduction in
premiums collected was the result of the breach of a broker contract and the
non-renewal by a broker of a significant portion of business related to a single
restaurant group. The breached contract was unilaterally cancelled by a broker
after two years of a three year term. The Company filed a lawsuit against the
broker for breach of contract during 1995 and received $190,000 in 1996 in
settlement of such lawsuit. In addition, a broker elected to place the premiums
of a single restaurant group in a rent- a-captive (an entity conceptually
similar to a self-insurance fund) rather than renew such business with the
Company. As of the date hereof, no broker accounts for more than 5.8% of the
Company's annual revenues.
Package commission income increased $417,000, or 389.7%, as a result of the
entry into the Package business (as discussed above) and the execution of a new
GA contract with GAIC for this line of business.
TOTAL EXPENSES:
Total expenses for the nine months ended September 30, 1996 were $2,170,000
compared to $1,648,000 for the comparative period ended September 30, 1995,
representing an increase of $522,000, or 31.7%. The following table provides a
comparison of total expenses for the nine month periods ended September 30, 1996
and 1995 by category:
<TABLE>
<CAPTION>
1996 1995 Net Change
---------- ---------- ----------
<S> <C> <C> <C>
Personnel expenses ...... $1,491,000 $1,049,000 $442,000
Professional fees ....... $ 80,000 $ 104,000 ($ 24,000)
Occupancy expense ....... $ 165,000 $ 104,000 $ 61,000
Interest expense ........ $ 33,000 $ 36,000 ($ 3,000)
Other operating expenses . $ 401,000 $ 355,000 $ 46,000
---------- ---------- --------
Total expenses ..... $2,170,000 $1,648,000 $522,000
========== ========== ========
</TABLE>
Personnel expenses increased $442,000 as a result of the hiring of new
employees with aggregate annual compensation of $627,000 (including salespersons
with an aggregate annual draw of $175,000) consistent with the entry into new
lines of business, and adding the Chairman and Chief Executive Officer to the
Company's payroll at an annual salary of $250,000.
Professional fees decreased $24,000, principally as a result of a reduction
in legal fees.
Occupancy expense increased $61,000 as a result of the Company's relocation
to larger quarters to accommodate the Company's expansion.
Interest expense decreased $3,000 as a result of a decrease in the
principal balance of a loan from a stockholder.
Other operating expenses increased $46,000, primarily related to employment
fees and employee relocation expenses associated with the increase in staffing
discussed above.
NONOPERATING INCOME:
Nonoperating income increased $190,000 as a result of the settlement of a
lawsuit related to the cancellation of a broker contract discussed above.
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
TOTAL REVENUES:
Total revenues for the year ended December 31, 1995 were $2,270,000 as
compared to $2,783,000 for the prior year, representing a decrease of $513,000,
or 18.4%. The following table provides a comparison of revenue for the years
ended December 31, 1995 and 1994 by category:
<TABLE>
<CAPTION>
1995 1994 Net Change
----------- ----------- ------------
<S> <C> <C> <C>
Net commission income:
Workers' compensation ......................... $ 1,758,000 $ 2,661,000 ($ 903,000)
Package ....................................... $ 343,000 $ -- $ 343,000
Other, net .................................... $ 81,000 $ -- $ 81,000
----------- ----------- ------------
Total net commission income ................... $ 2,182,000 $ 2,661,000 ($ 479,000)
=========== =========== ============
Interest income ................................. $ 88,000 $ 122,000 ($ 34,000)
----------- ----------- ------------
Total revenues .................................. $ 2,270,000 $ 2,783,000 ($ 513,000)
=========== =========== ============
Workers' compensation:
Premiums collected ............................ $17,112,000 $32,458,000 ($15,346,000)
=========== =========== ============
Ratio of net commission income/premiums collected 10.3% 8.2%
=========== ===========
</TABLE>
20
<PAGE>
Workers' compensation commission income declined $903,000, or 44.2%, as a
result of the reduction in premiums collected of $15,346,000. The reduction in
premiums collected was the result of the breach of a broker contract and the
non-renewal by a broker of a significant portion of business related to a single
restaurant group. The breached contract was unilaterally cancelled by a broker
after two years of a three year term. The Company filed a lawsuit against the
broker for breach of contract during 1995 and received $190,000 in 1996 in
settlement of such lawsuit. In addition, a broker elected to place the premiums
of a single restaurant group in a rent-a-captive (an entity conceptually similar
to a self-insurance fund) rather than renew such business with the Company. The
ratio of net commission income to premiums collected increased from 8.2% in 1994
to 10.3% in 1995 as a result of a 2.0% increase in the Company's gross
commission rate.
Package commission income increased $343,000 as a result of the entry into
this new line of business and the execution of a new GA contract with GAIC for
this line of business. The Company has been a GA with GAIC since 1995, offering
Package insurance for family style and fast food restaurants, the commission
from which accounted for 15% of the Company's net revenues in 1995. GAIC has
recently advised the Company that it will no longer accept Package insurance
risks for fast food restaurants, but will continue to do so for family style
restaurants. The Company is currently pursuing other carriers through which it
can write such business. The Company believes that there are many national
insurance carriers through which it may write business and that termination of
the Company's relationship with its current insurance carriers would not have a
material adverse effect on the business of the Company.
Other commission income increased $81,000 representing revenue from the
provision of marketing and management services to insureds participating in self
insurance funds.
TOTAL EXPENSES:
Total expenses for the year ended December 31, 1995 were $2,287,000
compared to $1,509,000 for the year ended December 31, 1994, representing an
increase of $778,000, or 51.6%. The following table provides a comparison of
total expenses for the years ended December 31, 1995 and 1994 by category:
<TABLE>
<CAPTION>
1995 1994 Net Change
---------- ---------- ----------
<S> <C> <C> <C>
Personnel expenses ...... $1,471,000 $ 933,000 $538,000
Professional fees ....... $ 93,000 $ 111,000 ($ 18,000)
Occupancy expense ....... $ 145,000 $ 89,000 $ 56,000
Interest expense ........ $ 36,000 $ 8,000 $ 28,000
Other operating expenses $ 542,000 $ 368,000 $174,000
---------- ---------- --------
Total expenses ..... $2,287,000 $1,509,000 $778,000
========== ========== ========
</TABLE>
Personnel expenses increased $538,000 as a result of the hiring of 14 new
employees with aggregate annual compensation of $519,000 (including two
salespersons with an aggregate annual draw of $95,000) consistent with the
Company's expansion into new lines of business.
Professional fees decreased $18,000, principally as a result of reduced
legal fees.
Occupancy expense increased $56,000 as a result of the cost of the
Company's relocation to larger quarters of $35,000 and increase in telephone
expenses of $21,000 to accommodate the Company's expansion. Interest expense
increased $28,000 due to an increase in stockholder loans.
Other operating expenses increased $174,000, primarily related to the
Company's increase in staff described above and increased depreciation expense
of $76,000 resulting from the Company's purchase of additional property and
equipment associated with its increase in staff and quarters.
NONOPERATING INCOME:
Nonoperating income decreased $5,927,000. The Company received $5,858,000
in 1994, net of expenses associated with the litigation, in settlement of a
lawsuit for breach of contract. The Company incurred legal fees of $69,000 in
1995 related to a separate lawsuit which it settled and with respect to which it
received $190,000 in 1996, as discussed previously.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal source of cash has been from the
collection of workers' compensation insurance premiums from its insureds. During
the past two years, commission income has been supplemented by proceeds received
in settlement of various litigation described above.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Net cash and cash equivalents were $565,000 at September 30, 1996 (net of
premiums payable of $4,455,000). Net cash provided by operating activities
increased to $2,495,000 in 1996 from ($1,221,000) in 1995, an increase of
$3,716,000. This increase resulted primarily from an increase in the proceeds
from litigation of $190,000 and an increase in net premiums collected of
$3,959,000, offset in part by an increase in expenses paid of $318,000 from 1995
to 1996. The increase in litigation proceeds is a result of the settlement of a
lawsuit in 1996 in which the Company received $190,000. The increase in net
premiums collected is the result of an increase in the Company's workers'
compensation book of business together with additional net premiums generated
from the Company's writing of Package insurance.
Cash flows used in investing activities, which relate solely to the
investment and purchase of property and equipment, decreased by $341,000 to
$95,000 in the nine months ended September 30, 1996 compared to $436,000 in the
nine months ended September 30, 1995. The decrease is the result of purchases
made in 1995 associated with the relocation of the Company's offices and is
consistent with the expansion of the Company's business during 1995 discussed
above.
Net cash used in financing activities decreased to ($200,000) in the nine
months ended September 30, 1996 from ($625,000) in the nine months ended
September 30,1995, a decrease of $425,000. This decrease resulted primarily from
a reduction in stockholders distributions of $600,000 and an increase in
payments of $175,000 in connection with a stock repurchase. See "Certain
Transactions."
The Company believes that existing cash balances, proceeds from this
offering and cash flows from activities will be sufficient to meet its financing
needs for at least the next twelve months, including expected capital
expenditures and working capital to fund operations.
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Net cash and cash equivalents were $466,000 at December 31, 1995 compared
to $1,375,000, at December 31, 1994 (net of premiums payable of $2,354,000 and
$3,415,000 in 1995 and 1994, respectively). Net cash provided by operating
activities decreased to ($878,000) in 1995 from $6,726,000 in 1994, a decrease
of $7,604,000. This decrease resulted primarily from a decrease in the proceeds
from litigation of $5,927,000 and a decrease in net premiums collected of
$1,201,000. The decrease in litigation proceeds was a result of the settlement
of a lawsuit in 1994 in which the Company received $5,858,000, net of expenses,
for breach of contract. The Company paid legal fees totalling $69,000 in 1995
related to a separate lawsuit in which the Company, as plaintiff, sought damages
for the unilateral termination of a broker agreement. The termination of this
broker agreement was also responsible for the decrease in net premiums
collected.
Cash flows used in investing activities which relate solely to the
investment and purchase of property and equipment, increased by $315,000 to
$467,000 in 1995 compared to $152,000 in 1994. This increase is consistent with
the expansion of the Company's business as discussed above.
Net cash used in financing activities increased to ($625,000) in 1995 from
($5,596,000) in 1994, an increase of $4,971,000. This increase resulted
primarily from reductions in stockholders' distributions and principal payments
on a stockholder loan of $4,294,000 and $677,000, respectively.
22
<PAGE>
DISCUSSION AND ANALYSIS OF
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following discussion and analysis of the pro forma financial condition
and analysis of operations should be read in conjunction with the Financial
Statements and the related Notes contained elsewhere in this Prospectus.
GENERAL
The pro forma financial information contained in this Prospectus assumes
that the Company's proposed Reinsurance Subsidiary was operational effective
January 1, 1995. In this regard the pro forma financial information assumes that
the average annualized workers' compensation premiums in force for the periods
presented were reinsured by the Reinsurance Subsidiary and, as a reinsurance
entity, the Reinsurance Subsidiary recorded and invested premiums received, paid
claims and established reserves on losses incurred, and conducted business
consistent with such business typically conducted by a reinsurer. The financial
information identified as "Actual" represents the actual results of operations
for the Company. The financial information identified as "Total" represents the
total results of the combined entities as if the Reinsurance Subsidiary were
operational for all periods presented.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
Total revenue, claims and claim settlement expenses, amortization of
deferred policy acquisition costs and total operating expenses for the nine
months ended September 30, 1996 would have been $13,308,000, $6,269,000,
$4,217,000 and $6,387,000, respectively, and consist of the following:
<TABLE>
<CAPTION>
Actual Pro forma Total
---------- ----------- -----------
<S> <C> <C> <C>
Net commission income .................................. $1,830,000 $ -- $ 1,830,000
Premiums earned ........................................ $ -- $11,398,000 $11,398,000
Interest income ........................................ $ 79,000 $ -- $ 79,000
Net investment income .................................. $ -- $ -- (1) $ --
---------- ----------- -----------
Total revenue ........................................ $1,909,000 $11,398,000 $13,307,000
---------- ----------- -----------
Claims and claim settlement expenses ................... $ -- $ 6,269,000 $ 6,269,000
---------- ----------- -----------
Amortization of deferred policy acquisition costs ...... $ -- $ 4,217,000 $ 4,217,000
Personnel expenses (1) ................................. $1,491,000 $ -- $ 1,491,000
Professional expenses .................................. $ 80,000 $ -- $ 80,000
Occupancy expenses ..................................... $ 165,000 $ -- $ 165,000
Interest expense ....................................... $ 33,000 $ -- $ 33,000
Other operating expenses ............................... $ 401,000 $ -- $ 401,000
---------- ----------- -----------
Total operating expenses ............................. $2,170,000 $ 4,217,000 $ 6,387,000
---------- ----------- -----------
Operating income (loss) before net investment income (2) ($ 261,000) $ 912,000 $ 651,000
Non-operating income ................................... $ 190,000 $ -- $ 190,000
---------- ----------- -----------
Income (loss) before net investment income and income
taxes (2) ............................................ ($ 71,000) $ 912,000 $ 841,000
Income taxes (benefit) ................................. ($ 26,000) $ 340,000 $ 314,000
---------- ----------- -----------
Net income (loss) before net investment income (2) ..... ($ 45,000) $ 572,000 $ 527,000
========== =========== ===========
</TABLE>
- ------
(1) Personnel expenses do not include salary for Mr. Harris, which at the
current level would have been $112,500 for the period presented.
(2) Net income does not include income from investment of available cash. Based
upon the average flow of funds for the period presented and assuming a rate
of return of 5%, for the nine months ended September 30, 1996 investment
income would have been $364,000 and net income would have been $755,000.
Actual results from investment may have been greater than or less than this
amount.
23
<PAGE>
Premiums earned of $11,398,000 represent the Company's average annualized
workers' compensation premiums in force adjusted to reflect nine months pro rata
earnings. Such amount represents premiums which relate to business previously
written on behalf of AIG and which would have been covered under the Reinsurance
Agreement had it been in effect for the entire period presented.
Claims and claim settlement expenses incurred of $6,269,000 are based on an
assumed 55% loss ratio (premiums earned x 55%). Under the Reinsurance Agreement
the Company's maximum liability for losses is limited to an amount not to exceed
70% of premiums written with respect to each year. The actual average loss ratio
experienced by the insurance carrier in prior years, based on underwriting
analyses prepared by the Company, was 51.5% which ratio compares favorably with
the loss ratios experienced by other similarly situated companies in the
industry. In this regard, the Company has engaged an outside independent firm of
consulting actuaries which annually reviews the Company's underwriting analysis
for reasonableness.
Acquisition expenses are deferred and amortized over the period in which
the related premiums are earned. Amortization of deferred policy acquisition
costs of $4,217,000 represents the amortization of contractually agreed upon
Program expenses equal to 37% of the premiums earned, all of which are fixed for
the term of the contract, and includes the following:
<TABLE>
<CAPTION>
<S> <C>
a) Ceding commission payable to the insurance carrier ... 28.83%
b) Specific and excess reinsurance premiums payable ..... 5.00%
c) Acquisition expenses incurred by the Reinsurance
Subsidiary ............................................ 3.17%
--------
Total Program expenses .................................. 37.00%
========
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
Total revenue, claims and claim settlement expenses, amortization of
deferred policy acquisition costs and total operating expenses for the year
ended December 31, 1995 would have been $18,534,000, $8,945,000, $6,018,000 and
$8,305,000, respectively, and consist of the following:
<TABLE>
<CAPTION>
Actual Pro forma Total
---------- ----------- -----------
$
<S> <C> <C> <C>
Net commission income ..................... $2,182,000 $ -- $ 2,182,000
Premiums earned ........................... $ -- $16,264,000 $16,264,000
Interest income ........................... $ 88,000 $ -- $ 88,000
Net investment income ..................... $ -- $ -- (1) $ --
---------- ----------- -----------
Total revenue ........................... $2,270,000 $16,264,000 $18,534,000
---------- ----------- -----------
Claims and claim settlement expenses ...... $ -- $ 8,945,000 $ 8,945,000
---------- ----------- -----------
Amortization of deferred policy acquisition
costs .................................... $ -- $ 6,018,000 $ 6,018,000
Personnel expenses (1) .................... $1,471,000 $ -- $ 1,471,000
Professional expenses ..................... $ 93,000 $ -- $ 93,000
Occupancy expenses ........................ $ 145,000 $ -- $ 145,000
Interest expense .......................... $ 36,000 $ -- $ 36,000
Other operating expenses .................. $ 542,000 $ -- $ 542,000
---------- ----------- -----------
Total operating expenses ................ $2,287,000 $ 6,018,000 $ 8,305,000
---------- ----------- -----------
Operating income (loss) before net
investment income (2) .................... ($ 17,000) $ 1,301,000 $ 1,284,000
Nonoperating expenses ..................... ($ 69,000) $ -- ($ 69,000)
---------- ----------- -----------
Income (loss) before net investment income
and income taxes (2) ..................... ($ 86,000) $ 1,301,000 $ 1,215,000
Income taxes (benefit) .................... ($ 32,000) $ 485,000 $ 453,000
---------- ----------- -----------
Net income (loss) before net investment
income (2) ............................... ($ 54,000) $ 816,000 $ 762,000
========== =========== ===========
</TABLE>
24
<PAGE>
(1) Personnel expenses do not include salary for Mr. Harris, which at the
current level would have been $150,000 for the period presented. However,
during such period, Mr. Harris received S Corporation distributions of
$270,000. Subsequent to the Offering, Mr. Harris will no longer receive any
such distributions.
(2) Net income does not include income from investment of available cash. Based
upon the average flow of funds for the period presented and assuming a rate
of return of 5%, for the year ended December 31, 1995 investment income
would have been $163,000 and net income would have been $864,000. Actual
results from investment may have been greater than or less than this
amount.
Premiums earned of $16,264,000, represent the Company's average annualized
workers' compensation premiums in force adjusted to reflect twelve months pro
rata earnings. Such amount represents premiums which relate to business
previously written on behalf of AIG and which would have been covered under the
Reinsurance Agreement had it been in effect for the entire period presented.
Claims and claim settlement expenses incurred of $8,945,000 for the twelve
months ended December 31, 1996 are based on an assumed 55% loss ratio (premiums
earned x 55%). The actual average loss ratio experienced by the insurance
carrier in prior years, based on underwriting analyses prepared by the Company,
was 51.5% which ratio compares favorably with the loss ratios experienced by
other similarly situated companies in the industry. In this regard, the Company
has engaged an outside independent firm of consulting actuaries which annually
reviews the Company's underwriting analysis for reasonableness.
Acquisition expenses are deferred and amortized over the period in which
the related premiums are earned. Amortization of deferred policy acquisition
costs of $6,018,000 represents the amortization of contractually agreed upon
Program expenses, equal to 37% of the premiums earned, all of which are fixed
for the term of the contract, and includes the following:
<TABLE>
<CAPTION>
<S> <C>
a) Ceding commission payable to the insurance carrier ..... 28.83%
b) Specific and excess reinsurance premiums payable ....... 5.00%
c) Acquisition expenses incurred by the Reinsurance
Subsidiary ............................................. 3.17%
--------
Total Program expenses .................................... 37.00%
========
</TABLE>
25
<PAGE>
BUSINESS
GENERAL
The Company is primarily engaged in providing workers' compensation and
business insurance products and risk management services designed for American
franchise businesses, particularly fast food and family style restaurants and
convenience stores. The Company believes that annual premiums paid for workers'
compensation insurance by the franchise industry exceed $2.5 billion, with
annual premiums paid by the fast food and family style restaurant and
convenience store segment alone representing approximately $1 billion of this
amount. Although the Company believes that such franchise businesses are
potentially among the safest insurance risks, they generally pay the same
workers' compensation rates as non-franchise businesses which may not have
formal risk or safety awareness programs. Consequently, such businesses rarely
realize any price advantages from their favorable safety attributes and
generally suffer premium "redundancy" or an "overcharge" in their workers'
compensation insurance rates. The Company offers products and services designed
to enable its clients to realize substantial savings in their workers'
compensation costs while reducing the time required to manage this element of
their business. The Company believes that through its innovative approach to
cost containment and the expertise of its management team, it has succeeded in
helping its clients achieve claims costs which are among the lowest in the
industry to which it provides service. The average cost per claim to the
Company's clients for the years 1991 to 1995 was $1,584 (this figure includes
medical, indemnity and loss adjustment expenses). In comparison, although no
data is available for the years 1994 and 1995, the latest data available from
the National Council on Compensation Insurance, Inc. on restaurant workers'
compensation claims reflects an average cost per claim of $2,515 (this figure
only includes medical and indemnity expenses) for the years 1991 to 1993.
Historically, the Company has acted as a general agent ("GA") representing
various major international and domestic insurance carriers. In this capacity,
the Company produces both workers' compensation and other forms of property and
liability insurance (such other forms of insurance being hereinafter referred to
as "Package") for franchise businesses through its own sales staff as well as
through the use of outside broker/agents. The Company currently offers Package
insurance for family style and fast food restaurants in its capacity as a GA for
GAIC. GAIC has recently advised the Company that it will no longer accept
Package insurance risks for fast food restaurants, but will continue to do so
for family style restaurants. The Company is currently pursuing other carriers
to write such business. See "Risk Factors -- Dependence on Limited Number of
Carriers." As a GA, the Company assumes none of the risks associated with the
insurance business it produces. To date, the Company's principal source of
revenue has been from commissions based on insurance premiums collected on the
insurance policies it sells. Upon consummation of this Offering, the Company
will continue writing business as a GA, but will significantly expand its focus
to include operating as a reinsurer with the expectation of increasing its
overall profitability.
The Company currently writes the Safety Group Program on behalf of AIG. As
the insurance carrier, AIG assumes 100% of the risks associated with the Program
and receives, as compensation for such assumption, all of the premiums less the
commissions paid to the Company from the Program. Through the Reinsurance
Subsidiary, the Company will enter into the Reinsurance Agreement with the AIG
Affiliates, pursuant to which the Reinsurance Subsidiary will act as the
reinsurer with respect to certain workers' compensation and employer's liability
insurance policies in force as of the date of the Reinsurance Agreement with
policy inception dates as of January 1, 1996 through the date of the Reinsurance
Agreement (the "Book of Business"), or attaching during the term thereof, which
are written by the Company on behalf of the AIG Affiliates. Upon entering into
the Reinsurance Agreement, the AIG Affiliates will pay the Reinsurance
Subsidiary the related net written premium less certain Program expenses and
commissions associated with the Book of Business (the "Ceded Premium"). It is
anticipated that a substantial portion of the Ceded Premium will be used as
security for the payment of losses for the benefit of AIG. See "Risk Factors --
Reinsurance" and "Business -- Reinsurance -- Reinsurance Agreement."
Although the Reinsurance Subsidiary will assume the risks associated with
being a reinsurer, the Reinsurance Agreement will limit the liability of the
Reinsurance Subsidiary for losses and certain defined expenses to the first
$300,000 per occurrence. In addition, the Reinsurance Agreement limits the
aggregate liability of the Reinsurance Subsidiary for all coverage to an amount
not to exceed 70% of the gross written premium for each individual underwriting
year. The AIG Affiliates will retain all liabilities in excess of this amount.
The AIG Affiliates will be paid 5% of the gross written premiums under the
Program with which to purchase excess and
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aggregate reinsurance. The Company has never received notice of a claim in
excess of $300,000 in the seven and one-half years that the Company and AIG have
written the Program; however, there can be no assurance that future claims, with
respect to the Program or under the Reinsurance Agreement, will not exceed this
threshold. See "Business -- Strategy." The Company intends to use a portion of
the proceeds of this Offering to fund the operations of the Reinsurance
Subsidiary. See "Use of Proceeds."
In September 1996, an AIG Affiliate made available to the Company a new
workers' compensation program (the "Small Business Workers' Compensation
Program" or "SBP") designed to provide coverage to certain smaller businesses
located in 23 states which pay annual premiums of between $5,000 and $50,000 and
which are represented by over 500 separate workers' compensation class codes.
The underwriting process under the SBP has been simplified enabling the Company
to respond promptly with competitively priced quotes. The Company believes that
many broker/agents, regardless of size, have accounts that would be eligible to
participate in the SBP and therefore could be a potential broker/agent to
promote this program. If successful, the SBP could substantially increase the
Company's revenues. The SBP will not be subject to the Reinsurance Agreement.
INDUSTRY OVERVIEW
All fifty States and the District of Columbia have promulgated statutes,
rules and regulations that require employers to provide wage replacement and
medical benefits to work accident victims regardless of fault. As a result of
these mandates, virtually all employers must either (i) purchase workers'
compensation insurance from a private insurance carrier, (ii) obtain coverage
from a state managed fund, or (iii) be self-insured if permitted by the state in
which business is conducted.
Workers' compensation is a major risk management issue of the '90's. In a
poll of risk managers published in the July 1996 issue of Risk Management
Magazine, workers' compensation insurance was the second most frequent concern.
Nationwide, employers workers' compensation costs increased significantly over
the last decade. Workers' compensation costs increased an average of 9.6% per
annum between 1984 and 1990. From 1990 through 1995, costs have increased by
about 2.9% per year. Certain additional intangible losses also directly relate
to increased workers' compensation costs such as higher incidents of employee
turnover, the cost of retraining new employees and litigation expenses. Many
employers are looking for techniques to better control their mounting costs.
The Company believes that franchises often are the safest segment of a
particular industry. Most franchises are standardized operations based upon
successful models with demonstrated profitability. These businesses typically
have standard operating procedures and standard plant and equipment with
standardized safety programs. The design and construction of most franchises
take into account safety engineering of the workplace. For example, in a fast
food restaurant, chairs and tables are set a certain distance apart to allow for
adequate walking space, and the cooking equipment used must conform to certain
safety standards. The franchisor and the franchisee have a shared interest to
maintain safe, clean and uniform environments for their customers and employees.
Consequently, the Company believes that, in general, workers' compensation cost
of claims of franchise businesses are significantly lower than non-franchise
operations.
Franchises are often subject to the same workers' compensation rating
system that the insurance industry uses for any comparable business. As a
result, fast food franchise restaurants pay the same rates as bars and taverns
which may be open all night, as fine dining restaurants where staff often carry
heavy trays, or as "mom and pop" restaurants without safety engineered
facilities or a formal safety program. Although these businesses are charged the
same workers' compensation rates, their claims experience is significantly
higher. Consequently, most franchise companies generally suffer premium
"redundancy" or an "overcharge" in their insurance premiums in many industries.
In effect, franchise businesses subsidize the higher workers' compensation
claims costs of non-franchise operations.
Workers' Compensation premium rates are generally based upon a formula
which considers the following:
o whether the loss experience qualifies the risk for any available
schedule rating plan discounts;
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o the class codes of each employee and such employee's compensation;
o the class code of the employer and the carrier's rate in such class
code;
o the employer's experience modification factor, as determined by each
state's rating organization; and
o whether the employer's total premium qualifies for a state approved
premium volume discount.
With the implementation of the Company's loss control techniques, many of the
Company's customers have experienced a reduction in workers' compensation
premiums as a result of experience modification factor reductions which provide
for scheduling rating credit.
Many states have recently created employee class codes that distinguish
fast food restaurants from other types of restaurants. For example, class code
9079 entitled "Restaurant-NOC" has historically included family style, fine
dining and fast food restaurants as well as bars and taverns. In 1995, the
National Council on Compensation and Insurance (NCCI) recommended to their
members that they divide the class code into three separate codes: (i) 9082
encompassing Restaurant Employees; (ii) 9083 encompassing Fast Food Restaurant
Employees; and (iii) 9084 encompassing Bar, Tavern and similar employees.
Approximately 34 states adopted the new class code designations during 1996.
However, as of the date hereof, the Company believes that workers' compensation
insurance rates with respect to such class codes have not been similarly
distinguished. See "Risk Factors -- Regulation." By 1998, it is anticipated that
the actuaries who determine loss costs in this industry will be able to
separately develop a loss cost in each category. During the initial three year
period, it is expected that the rates for all three codes will remain equal.
Thereafter, the Company believes that the franchise industry will continue to
yield a more favorable loss result than the non-franchise industry within the
Fast Food Restaurant code. As a result, the Company believes that, relative to
its competition, changes in employee class codes will not have a material
adverse effect on its business.
THE COMPANY'S SOLUTION
The Company has developed insurance programs designed specifically to
reduce the impact of redundancy on American franchise businesses while also
emphasizing loss containment. By taking advantage of this business segment's
good safety records and providing risk management services, including loss
control and claims management, the Company provides its clients the opportunity
to effectively lower their cost of claims. The Company has developed proprietary
information and claim analyses systems and custom designed loss reports which
explain the claims procedure and motivate client management to promote safety
and control claims expense. Additionally, the Company, through early
intervention, seeks to limit the number of disputes with injured employees. The
Company believes in the prompt settlement of meritorious claims, but it will
aggressively defend against non-meritorious claims. The Company attempts to
resolve cases prior to litigation and, if litigation ensues, aggressively seeks
to settle reasonable claims.
Through a third-party administrator (a "TPA"), the Company provides its
clients with access to national 800 telephone numbers to ensure that their
claims can be reported quickly, 24 hours-a-day, seven days-a-week. The TPA has
made available a trained medical staff to initiate a four party contact among
the claimant, the employer, the adjuster and the treating physician. This
process helps ensure prompt and competent medical care for the employee and
management of the claim which achieves a lower cost. The Company monitors high
loss claims on a weekly basis and interacts with the professional, medical, and
adjusting staff to close out claims cost effectively.
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In addition to these cost containing activities, the Company's client
services staff maintains constant communication with clients. Its loss control
department conducts safety seminars and provides periodic newsletters to clients
on how to control the frequency and severity of claims. The Company believes it
has succeeded in persuading clients that safety is not just an issue of good
management but can have a significant impact on the financial success of their
businesses. Since workers' compensation cost has become one of the most
expensive components of non-productive overhead, the Company seeks to
demonstrate to its clients that, by reducing the cost of their claims, they are
improving their overall profitability.
STRATEGY
GENERAL
The Company's goal is to strengthen its position as one of the leading
providers of its products and services to fast food and family style franchise
restaurants and convenience stores throughout North America and to expand into
other franchise businesses. It believes this goal can be accomplished by
devising and implementing programs on a state-by-state basis to:
o accumulate the latest approved rate information;
o obtain approved carrier rate filings;
o maintain up to date information on legislative changes affecting the
industry;
o ascertain current factors affecting pricing in the voluntary market;
o interact with insurance carriers to encourage competitive pricing,
while respecting the carriers need for profitability and to remain
viable in the marketplace;
o target quality risks;
o present insured clients with effective methods of monitoring, reducing
and containing claims costs;
o monitor claims handling procedures of claims administrators and
interact with them to produce cost effective results;
o market programs designed to reward preferred risks with incentives to
purchase and renew insurance coverage; and
o become a "one-stop" provider of commercial insurance to its selected
franchise industries.
The carriers providing workers' compensation insurance have generally
entered and withdrawn from regional or local markets with some frequency. Often,
the reason for movement is attributed to (i) a change of corporate policy, (ii)
the general conditions in the insurance industry at that time, and (iii) the
carrier's experience with loss ratios. Even where cost containment programs
exist, often they are not adequately managed and are not particularly effective.
The Company is committed to its insured clients as well as its carriers. To
achieve its goals, the Company's staff has been trained to offer a level of
service not otherwise present in a generally complacent industry. By combining
the talents of specialists drawn from diverse backgrounds, the Company has
created a unique environment where sales, marketing, and risk management experts
produce quality products and results. The Company's clients have been able to
achieve an average reduction of approximately 11% over the four year period 1990
through 1994 in their premium experience modification factors (which are a
significant component in determining a client's premium).
REINSURANCE
GENERAL
Historically, the Company has acted as a GA and, as such, assumes none of
the risks associated with the insurance business it produces. To date, the
Company's principal source of revenue has been from commissions based on
premiums collected on the business it produces. Upon consummation of this
Offering, the Company will continue writing business as a GA, but will expand
its focus to include operating as a reinsurer.
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The Company currently writes the Safety Group Program on behalf of AIG. As
the insurance carrier, AIG assumes 100% of the risks associated with the Program
and receives, as compensation for such assumption, all of the premiums less the
commissions paid to the Company from the Program.
REINSURANCE AGREEMENT
Upon consummation of this Offering, the Reinsurance Subsidiary will enter
into the Reinsurance Agreement which provides that the Reinsurance Subsidiary
will reimburse the ceding insurer for the first $300,000 of losses paid to
claimants and certain specified loss expenses incurred in connection with such
payments pursuant to various coverages assumed under worker's compensation and
employer's liability insurance policies issued on behalf of the AIG Affiliates
by the Company as part of the Book of Business. The Reinsurance Agreement is
terminable by either party upon the occurrence of certain events. The
Reinsurance Subsidiary's aggregate liability for such amounts for all coverages
under the Reinsurance Agreement shall be limited to an amount not to exceed 70%
of the gross written premium for each individual underwriting year. The AIG
Affiliates shall retain all liabilities in excess of this amount. The AIG
Affiliates will be paid 5% of the gross written premiums under the Program with
which to purchase excess and aggregate reinsurance.
The purchase of excess and aggregate reinsurance by the AIG Affiliates and
the stated aggregate limit of liability in the Reinsurance Agreement will cap
the Reinsurance Subsidiary's liability for loss and loss expenses and will
permit the Reinsurance Subsidiary to quantify its aggregate maximum loss
exposure. By contrast, maximum liability under pro-rata or quota share
reinsurance contracts can be more difficult to quantify precisely.
Quantification of loss exposure will be fundamental to the Reinsurance
Subsidiary's ability to manage its losses.
The AIG Affiliates will pay the Reinsurance Subsidiary 100% of the Ceded
Premium derived from business written by the Company on behalf of the AIG
Affiliates. The AIG Affiliates shall retain a commission allowance of 28.83%
based on the net premiums. Pursuant to the Reinsurance Agreement, the
Reinsurance Subsidiary will retain the Ceded Premium together with the risks and
potential for profitability associated therewith. Accordingly, the Company
believes that the Reinsurance Subsidiary's operations will provide the
opportunity to retain the underwriting profitability that is presently being
retained by AIG, while creating a relatively limited risk exposure under the
Reinsurance Agreement. See, however, "Risk Factors -- Reinsurance."
The Reinsurance Subsidiary will provide the AIG Affiliates, as security for
the payment of losses any combination of cash, United States government
securities and/or an irrevocable letter of credit in an aggregate amount equal
to 70% of the gross Ceded Premium less the amount of losses paid for the
expiring underwriting year as of December 30, 1996 and each December 30
thereafter.
PRODUCTS AND SERVICES
The Company custom designs its insurance programs to be offered only
through nationally recognized carriers with the highest industry ratings. It
works with these carriers to establish competitive rates, while being mindful of
a carrier's need to maintain profitability and remain viable in the marketplace.
Additionally, the Company offers products and services designed to enable its
clients to realize substantial savings in their workers' compensation costs
while reducing the time required to manage this element of their business.
Specifically, the Company provides clients such savings by offering competitive
rates and dividends and cost containment programs which assist its clients in
managing their workers' compensation costs. As a result of these measures, the
Company has enabled its clients to achieve an average reduction of approximately
11% over the four year period 1990 through 1994 in their premium experience
modification factors (which are a significant component in determining a
client's premium). For larger clients, "loss sensitive" programs (also known as
"retro" programs) can be established.
The Company has created a new, innovative, comprehensive and aggressive
approach to safety/loss control. The Company blends old and new prevention
techniques to develop safety programs specific to each industry it serves. While
the primary thrust of the Company's programs is safety for employees and
customers, emphasis is also placed on motivating client management to implement
safety programs as a means of improving profitability. The Company conducts
workshops to demonstrate the benefits of using the Company's loss control safety
programs at no additional cost to its clients. Proprietary, custom designed loss
management information is communicated by mail and phone to the Company's
clients at no additional cost.
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The Company believes its safety programs help reduce workers' compensation
claims costs. The basic elements of its safety programs, as recommended to its
clients, are:
o a written safety policy;
o specific written safety rules;
o regularly scheduled safety meetings;
o new employee hiring practices;
o training of all new and transferred employees;
o supervisor responsibility and accountability;
o a regular self-inspection program administered by identified
supervisors;
o defensive driving courses;
o first aid and CPR programs;
o an incentive program that rewards safety awareness;
o a team safety committee program;
o a timely accident reporting and investigation program;
o a monitored record keeping system for all accidents;
o a policy to implement corrective action for unsafe conditions and
acts; and
o a monthly review by top management of the program and its
implementation.
Many states have allowed a reduction in workers' compensation insurance premiums
when an employer implements an approved safety program. The Company's safety
programs meet the requirements of most states that do so. Such workers'
compensation safety program discounts are authorized on a state by state basis
and, therefore, guidelines are state specific. The Company deals only with those
state programs applicable to the voluntary market, not the assigned risk market.
Certain states make safety program discounts available to all insureds, while
others make them available only to those insureds with high experience
modification factors or based on the size of the premium. Some states require
state certification of the safety program on a risk by risk basis. The employer,
not the provider of the safety program, qualifies for the program. The Company
evaluates the requirements in the states where such discounts are available and
provides employers with manuals, record keeping tools and recommendations which
assist the employer in obtaining certification.
CUSTOMERS, SALES AND MARKETING
The Company markets its products primarily to the franchise industry
through broker/agents. Its customers typically are sophisticated owners of
multiple unit franchises who understand the importance of cost containment and
safety features. While the Company focuses its efforts on large, national
franchisees operating multiple outlets, it also serves smaller, regional
franchise operators. For the year ended December 31, 1995, the Company provided
services and products to approximately 750 separate insureds, none of which
accounted for more than 3% of annual revenues. As of the date hereof, no
broker/agent accounted for more than 5.8% of annual revenues.
Consumers of insurance products have traditionally focused on price rather
than cost containment. They have come to expect little or no customer service.
The Company capitalizes on these insurance industry deficiencies by tailoring
its products for each niche market, providing exceptional customer service and,
most importantly, providing loss control and cost containment services.
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The Company conducts regional safety seminars showing how to contain costs
and reduce losses. Although not a sales effort, it is one of the ways the
Company generates new business while continuing to educate its existing clients.
Each franchisee is provided with its own personalized client service
representative who is knowledgeable and available throughout the work day. An
800 "hot line" is also available to reach the manager of client services should
any issue need immediate resolution. The Company believes that, over a
continuing period of time, these client support services will distinguish it
from its competition.
The Company has created a central database to keep it abreast of market
trends, current premium rates, rate filings, renewal dates and information on
its competition.
The Company's sales and marketing programs are varied. The Company engages
in multiple direct mail programs each year and carefully monitors the responses
to determine the effectiveness of each of these programs. The Company also
utilizes its database of franchisees to contact and generate potential clients
through an extensive telemarketing effort. Identified prospective clients are
then quoted prices by a Company representative. Periodic telephone calls and
quarterly newsletters nurture and cultivate the Company's name recognition and
update its database. The Company has also designed marketing programs tailored
for the specific needs of the high revenue broker/agents (those whose client
bases that produce workers' compensation annual premiums ranging between $2
million and $15 million) as well as smaller broker/agents who operate in small
towns, and their respective clients. The Company's programs relieve the
broker/agent of administrative and claims tasks in that the Company bills and
collects premiums directly from the insured, remits the commission earned to the
broker/agent, deals directly with the insured in connection with any problems
experienced by the insured and serves as a clearinghouse, together with the TPA,
with respect to the reporting, processing, reviewing and evaluating of claims.
As a result of the foregoing, the broker/agent can earn more revenue by focusing
its efforts on selling Company products. Other benefits provided to these
broker/agents include (i) increasing the geographical area in which the
broker/agent generates business, (ii) a lower likelihood of the broker/agent
losing larger multiple store and multiple state franchisees because the
broker/agents will have many more states in which they are able to write
business, (iii) being able, through the Company, to also offer the Company's
other property and casualty products to their clients, and (iv) providing to the
broker/agent's clients the benefit of the Company's loss control and cost
containment programs to reduce the clients losses, thus enabling the client
potentially to receive a dividend through low losses.
POLICY RENEWALS
Client policy renewals are critical to the Company's prosperity. The
Company believes it can achieve its goal of maintaining favorable renewal rates
by (i) providing its clients superior service, (ii) ensuring that all insurance
policy, endorsement and audit documents are distributed to each client on a
timely basis, and (iii) ensuring that all documents distributed to clients are
complete and accurate. The Company communicates with each client at least four
times per year in order to maintain close relationships and to learn of any real
or perceived problems and concerns on a timely basis. The Company responds
quickly to all written and telephone communications initiated by the client. The
Company believes that its superior service is a major factor in its client
retention rate.
The Company's underwriting department reviews prospect applications to
identify risks that appear undesirable from a historical viewpoint and to
recognize those prospects dedicated to significant improvement in their loss
history which thereby makes them a valuable addition to the Company's customer
base and to a carrier's portfolio. The Company's underwriting department
re-evaluates each client for renewal purposes. This evaluation determines
whether the particular client is eligible to receive a decrease or other form of
modification to its renewal premium. If the client has responded to loss control
recommendations and its loss history reflects improvement, a reduction in its
renewal premium rate may be implemented. The department will also identify
clients whose experience has deteriorated and who have not responded to loss
control guidance and recommendations. If the deterioration is significant enough
and the client has not demonstrated a sincere commitment to improvement in loss
experience, the underwriting department may make a recommendation not to renew
the policy.
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DATA MANAGEMENT
The Company has dedicated significant resources and capital in developing
its current management information systems which constitute an integral part of
the Company's business operations. The Company utilizes such systems to process
insurance applications, control the issuance of policies and endorsements, audit
medical fees, pay broker/agent commissions, manage claims, provide reports to
its clients, provide accounting statements and financial reports, and analyze
claims data, all of which give the Company the ability to write more effective
and competitive policies and result in a higher rate of policy renewals. In
order to ensure proper coordination, the Company's data processing policies
encompass the following features:
o maintaining the highest degree of compatibility within the Company in
the design, implementation and operation of management information
systems;
o conducting periodic meetings with department managers to review
current system developments and enhancements;
o maintaining procedures to insure that proper management approval and
review are obtained prior to the initiation of any systems
development, software or hardware procurement;
o ensuring effective utilization of software and hardware;
o maintaining guidelines for systems documentation, project control,
security and system operations; and
o maintaining inventory records of hardware and software.
COMPETITION
The workers' compensation industry is highly competitive. The Company
competes with other GA's, numerous large insurance companies, managed health
care companies, state sponsored insurance pools, risk management consultants and
non-Company affiliated broker/agents, many of which have significantly larger
operations and greater financial, marketing, human, and other resources than the
Company. Such competitors may have material advantages over the Company as a
result of additional forms of insurance and services they offer in addition to
workers' compensation products and services. Competitive factors include product
lines, premium rates, personalized service and effective cost containment
measures.
Although the Company believes that, as one of the only national providers
specializing in workers' compensation insurance for franchise businesses in the
United States, it is uniquely positioned in the industry, no assurance can be
given that other companies will not develop similar national programs. See "Risk
Factors Competition."
REGULATION
GENERAL
As a GA, the Company is subject to regulation in the various states in
which it sells insurance. These regulations vary from state to state, and may
include such matters as licensing requirements, bonding requirements,
requirements regarding the Company's agreements with the insurance carriers for
which it acts as a GA, and certain other requirements. Penalties may be imposed
for violations of such regulations. Changes in such regulation, if any, may have
a material adverse effect on the Company's business and operations.
Under the workers' compensation system, employer insurance or self-funded
coverage is governed by individual laws in each of the fifty states and by
certain federal laws. Changes in individual state regulation of workers'
compensation or managed health care may create a greater or lesser demand for
some or all of the Company's services, or require the Company to develop new or
modified services in order to meet the needs of the marketplace and compete
effectively in that marketplace.
REINSURANCE SUBSIDIARY
It is anticipated that the Reinsurance Subsidiary will be registered as a
Class 3 insurer in Bermuda and, accordingly, will be subject to the provisions
of the Bermuda Insurance Act 1978, as amended, and the regulations promulgated
thereunder (collectively, the "Insurance Act"). The Insurance Act provides that
no person shall
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carry on insurance business in or from within Bermuda unless registered as an
insurer under the Insurance Act by the Minister of Finance (the "Minister"). The
Minister, in determining whether to grant registration, has broad discretion to
act as he thinks fit in the public interest. The Minister is required by the
Insurance Act to ascertain whether the applicant is a fit and proper body to be
engaged in the insurance business and, in particular, whether it has, or has
available to it, adequate knowledge and expertise. In connection with
registration, the Minister may impose conditions relating to the writing of
certain types of insurance business.
The Insurance Act imposes on Bermuda insurance companies such as the
Reinsurance Subsidiary solvency and liquidity standards and auditing and
reporting requirements and grants to the Minister powers to supervise,
investigate and intervene in the affairs of insurance companies. Significant
aspects of the Bermuda insurance regulatory framework are set forth below.
o The Reinsurance Subsidiary will be required to maintain a principal
office in Bermuda and appoint and maintain a principal representative
in Bermuda. The Insurance Act places a duty on the principal
representative to report to the Minister the occurrence of certain
events, including, but not limited to, the failure by the insurer for
which he or she acts to comply with a condition imposed by the
Minister relating to a solvency margin or a liquidity or other ratio
with respect to any other such condition not so relating. Without a
reason acceptable to the Minister, the Reinsurance Subsidiary may not
terminate the appointment of its principal representative, and the
principal representative may not cease to act as such, unless 30 day's
advance notice in writing to the Minister is given of the intention to
do so.
o The Reinsurance Subsidiary will be required to appoint an independent
auditor to conduct the annual audit of the statutory-basis financial
statements.
o The Reinsurance Subsidiary will be required to maintain share capital
(the aggregate par value of issued shares) of at least $120,000.
o The Reinsurance Subsidiary must maintain statutory capital and surplus
exceeding the greater of the following three criteria:
o $1,000,000
o 20% of the net premiums where the net premiums in the current
financial year do not exceed $6,000,000, or, where the net
premiums exceed $6,000,000, $1,200,000 plus 15% of the net
premiums which exceed $6,000,000. The net premium is the gross
premium after deduction for any premium ceded for reinsurance.
o 15% of reserves for losses and loss expenses.
o The Reinsurance Subsidiary will be required to maintain liquid assets
(referred to in the Insurance Act as "relevant assets") at a level
equal to or greater than 75% of its net relevant (insurance)
liabilities. For this purpose, liquid assets include cash and time
deposits, quoted (publicly traded) investments, unquoted bonds and
debentures, mortgage loans backed by first liens on real estate,
accrued investment income, accounts and premiums receivable,
reinsurance balances receivable and funds held by ceding companies.
o The Reinsurance Subsidiary will be required to obtain the approval of
the Minister before reducing by 15% or more its total statutory
capital (comprised of share capital, contributed surplus and any other
fixed capital) as set out in the previous years financial statements.
o The Reinsurance Subsidiary may declare and pay dividends or make
distributions out of contributed surplus or other assets legally
available for distribution provided that after the payment of any such
dividend or distribution the Reinsurance Subsidiary will continue to
maintain the required statutory capital and surplus and liquid assets
as summarized above.
o The Reinsurance Subsidiary will be required to have a copy of its
Statutory Financial Statements available at its principal office for
production to the Registrar of Companies ("Registrar") and to file
these Statutory Financial Statements and a Statutory Financial Return
within four months after the end of the financial year (or such longer
period, not exceeding seven months, as the Registrar, on application,
may allow).
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o The Reinsurance Subsidiary will be required to include in its annual
Statutory Financial Return the opinion of a loss reserve specialist in
respect of its loss and loss expense reserves.
o The Minister may appoint an inspector with extensive powers to
investigate the affairs of an insurer or reinsurer if the Minister
believes that an investigation is required in the interest of the
insurer's or reinsurer's policyholders or persons who may become
policyholders. To verify or supplement information otherwise provided
to him, the Minister may direct an insurer or reinsurer to produce
documents or information relating to matters connected with the
insurer's or reinsurer's business.
Under current Bermuda law, there is no Bermuda income, corporation or
profits tax, withholding tax, capital gains tax, capital transfer tax, estate
duty or inheritance tax payable by stockholders of the Company other than
stockholders ordinarily resident in Bermuda for exchange purposes. The Company
is not subject to stamp or other similar duty on the issue, transfer or
redemption of its shares of Common Stock.
It is expected that the Company will obtain an assurance from the Minister
under the Exempted Undertakings Tax Protection Act 1966 that, in the event of
there being enacted in Bermuda any legislation imposing tax computed on profits
or income or computed on any capital assets, gain or appreciation or any tax in
the nature of estate duty or inheritance tax, such tax shall not, until March
28, 2016, be applicable to the Company or to its operations, or to the shares,
debentures or other obligations of the Company except in so far as such tax
applies to persons ordinarily resident in Bermuda and holding such shares,
debentures or other obligations of the Company or any real property or leasehold
interests in Bermuda owned by the Company. As an exempted company, the Company
is liable to pay a registration fee in Bermuda based upon its authorized capital
and the premium on its issued shares of Common Stock at a rate not exceeding
$25,000 per annum.
PREMIUM RATE RESTRICTIONS
State regulations governing the workers' compensation system impose
restrictions and limitations on the Reinsurance Subsidiary's business
operations. State laws regulate what workers' compensation benefits must be paid
to injured workers. Additionally, most states must approve the workers'
compensation premium rates that may be charged. As a consequence, the
Reinsurance Subsidiary's ability to pay insured workers' compensation claims out
of the premium revenue generated from the Reinsurance Subsidiary's assumption of
such insurance is dependent on the level of benefits and premium rates approved
by the various states. In this regard it is significant that the state
regulatory agency that regulates workers' compensation benefits is often not the
same agency that regulates workers' compensation insurance premium rates.
POSSIBLE FUTURE REGULATIONS
Several state legislatures and the federal government have considered and
are considering a number of cost containment and health care reform proposals.
The Company believes it may benefit from some proposals that favor the growth of
managed care. However, no assurance can be given that the state or federal
government will not adopt future health care reforms that would have a material
adverse effect on the Company.
INVESTMENT INCOME
The Company's income will depend, in part, on the income derived from the
investment of premiums by the Reinsurance Subsidiary. The Company believes that
the risks inherent in the business of the Reinsurance Subsidiary should not be
augmented by a speculative investment policy and therefore its investment
strategy will be partially defined by the need to safeguard its capital. Because
of the unpredictable nature of losses that may arise under insurance policies,
the Reinsurance Subsidiary's liquidity needs may be substantial. The Company's
investment policy will be established by the Company's Investment Committee, and
will be subject to, among other factors, the Company's liquidity requirements.
The Company intends that its investments will consist primarily of cash or
fixed-income securities (none of which will have a rating of less than AA), the
market value of which is subject to fluctuation depending on changes in
prevailing interest rates. Additionally, the Company reserves the right to
invest a limited percentage of its portfolio, to be determined by the Investment
Committee, in common stock of companies listed on national securities exchanges.
The stock of such companies may fluc-
35
<PAGE>
tuate as a result of specific events affecting such companies as well as
general market conditions. Increases in interest rates or fluctuations in the
market price of such companies' stocks may result in losses, both realized
and unrealized, on the Company's investments. See "Risk Factors -- Investment
Income Necessary to Preserve Capital."
EMPLOYEES
The Company currently has approximately 35 full-time employees, of whom
five are officers, four are managers, three are sales personnel and the balance
are accounting, clerical, loss control and underwriting staff. None of the
Company's employees is subject to collective bargaining agreements. The Company
believes that its relationships with its employees are good.
FACILITIES
The Company leases approximately 12,600 square feet of office space in
Miami, Florida for use as its corporate headquarters. The lease agreement has an
initial seven year term, which expires in 2002, with two five- year renewal
options. The Company believes that its present facilities are well maintained,
in good condition and are suitable for its needs for the foreseeable future.
LEGAL PROCEEDINGS
The Company is a party to various claims and lawsuits arising in the
ordinary course of business. At present, management does not anticipate that the
resolution of any of these claims and lawsuits will have a material adverse
affect on the financial condition or operations of the Company.
36
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names, ages and positions of the executive officers and Directors of
the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
------------------- ----- ---------------------------------------------
<S> <C> <C>
Mel Harris 56 Chairman, Chief Executive Officer and Director
Howard Odzer 61 President and Director
William R. Dresback 49 Chief Financial Officer and Secretary
Tod C. Powers 45 Senior Vice President
John Rearer 38 Vice President
Nancy Ryan 40 Vice President and Assistant Secretary
Tony Nowakowski 39 Vice President
Stuart J. Gordon 66 Director
Jack D. Burstein 51 Director
Maxwell M. Rabb 86 Director
</TABLE>
Mel Harris has been a director of the Company since its inception in 1988
and has been Chairman and Chief Executive Officer of the Company since April
1993. Mr. Harris served as Vice Chairman of Jardine Insurance Brokers New York,
Inc. from February 1992 until January 1994. From 1988 until February 1992, Mr.
Harris served as Vice Chairman of Alexander & Alexander of New York, Inc. (a
wholly-owned subsidiary of A&A Services, Inc.), a global insurance brokerage
organization. In addition, Mr. Harris serves as President of International
Insurance Group, Inc., an insurance brokerage company located in Miami and New
York and has been a director of Koo Koo Roo, Inc., a casual dining chain, since
September 1996. Mr. Harris has agreed to devote such time as is necessary and in
any event, no less than 80% of his business time, to the affairs of the Company.
Howard Odzer has been President and a director of the Company since its
inception in 1988. Between 1976 and 1988, Mr. Odzer carried on business
principally as a private investor. Mr. Odzer co-founded MarkeTiming, a company
that became an affiliate of Jesup and Lamont, members of the NYSE, and which was
a provider of research to major financial institutions throughout the United
States and pioneered the use of computer analysis for investment and program
trading. He served as President of MarkeTiming from its inception until 1976.
Prior to founding MarkeTiming, Mr. Odzer worked as a stock market analyst with
Moore and Schley, members of the NYSE, where he became a Vice President of
Institutional Research. Mr. Odzer participates in the National Restaurant
Association Risk and Safety Managers Group, and is a member of the Advisory
Council of GAB Robins, one of the largest claims administrators in the country.
Mr. Odzer is a graduate of Princeton University.
William R. Dresback has been Chief Financial Officer and Secretary of the
Company since May 1993. From 1986 to 1992, he served as Chief Financial Officer
of Cobb Partners Financial, Inc. (previously a wholly-owned subsidiary of The
Walt Disney Company), a national financial services company primarily involved
in the mortgage banking, construction and real estate development businesses.
From 1981 to 1986, Mr. Dresback served as Senior Vice President and Chief
Financial Officer of International Financial Services, Inc. (a subsidiary of The
Torchmark Corporation), an international financial services company primarily
involved in the financial planning, life insurance and securities brokerage
businesses. From 1969 to 1981, he was employed by KPMG Peat Marwick where he was
responsible for managing the firm's South Florida Insurance Practice.
Tod C. Powers has been Senior Vice President of the Company since January
1997. Mr. Powers has eighteen years of experience in property/casualty
insurance. From 1986 to 1997, Mr. Powers served in various positions with Kaye
Insurance Associates, Inc. ("Kaye"), the nation's fifteenth largest insurance
broker. For the past two years, Mr. Powers served as its Chief Operating Officer
with overall responsibility for marketing, claims and account servicing. From
1986 to 1995, Mr. Powers served as its Assistant Vice President, handling the
agency's tougher workers compensation risks, then as Vice President of a team of
account executives handling most of Kaye's national accounts, and, just prior to
becoming Chief Operating Officer, Mr. Powers served as Group Vice President
responsible for management of Kaye's Connecticut office. From 1979 to 1986, Mr.
Powers served in various capacities with Liberty Mutual Insurance, the nation's
largest workers compensation carrier.
37
<PAGE>
John Rearer has been a Vice President of the Company since February 1994.
Mr. Rearer has over ten years of commercial insurance experience. From 1989 to
1994, Mr. Rearer was Executive Vice President of the Food Service Division of
The Garlington Group, a large retail insurance agency specializing in fast food
franchisee insurance programs. From 1986 to 1989, Mr. Rearer concentrated on the
development and marketing of workers' compensation and property and liability
insurance and overall agency management for Coastal Plains Insurance. From 1984
to 1986, Mr. Rearer was employed by Arthur Young & Company as a Certified Public
Accountant in their Tax Department.
Nancy Ryan has been a Vice President and Assistant Secretary of the Company
since July 1992. Ms. Ryan has over 12 years commercial insurance experience. Ms.
Ryan served as a Vice President of Jardine Insurance Brokers New York, Inc. from
February 1992 until January 1994. From 1988 until February 1992, she served as a
Vice President of Alexander & Alexander of New York, Inc. (a wholly-owned
subsidiary of A&A Services, Inc.), a global insurance brokerage organization. In
addition, since 1984, Ms. Ryan has served as Vice President of International
Insurance Group, Inc. Ms. Ryan devotes approximately 50% of her business time to
the affairs of the Company.
Tony Nowakowski will serve as a Vice President of the Company in charge of
loss control and cost containment commencing February 3, 1997. Mr. Nowakowski
has served for more than the past five years with Kaye Insurance Associates,
Inc., most recently as Vice President in charge of technical services.
Stuart J. Gordon has been a director of the Company since 1995. Mr. Gordon
has been a partner at the law firm of Metzger, Hollis, Gordon & Alprin since
1989. Mr. Gordon has served as Chief Counsel of Special Enforcement with the
Securities and Exchange Commission, Special Assistant to the Comptroller of the
Currency, Deputy Chairman and Treasurer of the United States Senate campaign of
Daniel Patrick Moynihan, the first Administrative Assistant and Chief of Staff
to Senator Moynihan in Washington, D.C., and Deputy Finance Chairman of the
Presidential campaign of Senator John Glenn. Mr. Gordon was appointed by the
Governor of the State of Maryland to the Foster Care Review Board and served as
a member of the Board of Governors of Daytop Village. Mr. Gordon is also a
member of the Board of Advisors of the Independent College Fund of New York.
Jack D. Burstein has been a director of the Company since January, 1997.
Mr. Burstein has been the Chairman and President of each of Strategica Group,
Inc., a merchant bank ("Strategica Group"), and Strategica Capital Corp., an
affiliate of Strategica Group and a merchant bank ("Strategica Capital"), since
1992. From 1984 to present, Mr. Burstein has served as Chief Executive Officer
and President of American Capital Corp., a savings and loan holding corporation,
and as Chief Executive Officer of TransCapital Financial Corporation, a savings
and loan holding corporation. Prior to such time, Mr. Burstein was a senior
partner in the accounting firms of Schecter Beame Burstein Price & Co. and
Seidman & Seidman, respectively.
Maxwell M. Rabb has been a director of the Company since January, 1997. Mr.
Rabb has been of Counsel to the law firm of Kramer, Levin, Naftalis, Nessen,
Kamin & Frankel since 1991 and was a partner in the law firm of Stroock &
Stroock & Lavan from 1958 to 1981 and from 1989 to 1991. Mr. Rabb served as the
United States Ambassador to Italy from 1981 to 1989. In addition, Mr. Rabb
serves as a director of the Sterling National Bank, MIC Industries, Inc.,
Liberty Cable Company, Inc., Black Hole Technologies, Inc., Data Software and
Systems, Inc., and CompuTower.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors currently receive
no cash compensation for serving on the Board of Directors. Officers are elected
by and serve at the discretion of the Board of Directors. Effective upon the
consummation of this Offering, the Board of Directors intends to establish an
Audit Committee, an Investment Committee, an Executive Committee and a
Compensation Committee.
The Audit Committee will review and evaluate the results and scope of the
audit and other services provided by the Company's independent accountants, as
well as the Company's accounting principles and system of internal accounting
controls. The members of the Audit Committee will be Messrs. Burstein, Gordon
and Rabb.
The Investment Committee will establish the Company's investment policy and
will have complete discretion in investing the Company's portfolio, including
the investment of premiums assumed by the Reinsurance Subsidiary. The members of
the Investment Committee will be Messrs. Harris, Burstein and Gordon.
38
<PAGE>
The Executive Committee will exercise all power and authority of the Board
of Directors in the management and affairs of the Company between meetings of
the Board of Directors, to the extent permitted by law. The members of the
Executive Committee will be Messrs. Harris, Burstein and Gordon.
The Compensation Committee will make recommendations to the Board of
Directors concerning the compensation, including incentive arrangements, of the
Company's officers, key employees and others and will administer the Option Plan
and will determine the officers, key employees and others to be granted options
under the Option Plan and the Additional Option Agreement and the number of
shares subject to such options. The members of the Compensation Committee will
be Messrs. Harris, Burstein and Gordon.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid for all services rendered to the Company during the years ended 1995, 1994
and 1993 by the Chief Executive Officer and each of the Company's other
executive officers (collectively, the "Named Officers") who received
compensation in excess of $100,000 during any such year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and
Principal Position (1) Year Annual Competition Long-Term Compensation
--------------------------- ------ ---------------------------------- --------------------------------------------------------
Awards Payouts
--------------------------------------------------------
Other Restricted Securities LTIP All Other
Annual Stock Underlying Pay-outs Compen-
Salary Bonus Compen- Award(s) Options/SARs sation
($) ($) sation ($) ($) (3) (#) ($) ($) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mel Harris 1995 0 0 0 0 0 0 $ 270,000
-----------------------------------------------------------------------------------------------------
Chairman and Chief
Executive Officer 1994 0 0 0 0 0 0 $1,977,468
-----------------------------------------------------------------------------------------------------
1993 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Howard Odzer 1995 $100,000 0 0 0 0 0 $ 270,000
-----------------------------------------------------------------------------------------------------
President 1994 $100,000 0 0 0 0 0 $1,977,468
-----------------------------------------------------------------------------------------------------
1993 $100,641 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
William R. Dresback 1995 $100,000 0 $8,400 0 0 0 0
-----------------------------------------------------------------------------------------------------
Chief Financial Officer and
Secretary 1994 $100,000 0 $8,400 0 0 0 0
-----------------------------------------------------------------------------------------------------
1993 $ 66,231 0 $5,600 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
John Rearer 1995 $106,250 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------
Vice President 1994 $ 87,692 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------
1993 0 0 0 0 0 0 0
-----------------------------------------------------------------------------------------------------
</TABLE>
- ------
(1) Mel Harris serves as Chairman and Chief Executive Officer of the Company
pursuant to an employment agreement. Howard Odzer serves as President of
the Company pursuant to an employment agreement. See "Employment
Arrangements."
(2) Dividends paid pursuant to the Shareholders Agreement. See "Dividend
Policy."
(3) Automobile allowance.
EMPLOYMENT ARRANGEMENTS
The Company has entered into a one-year employment agreement with Mr.
Harris, dated January 30, 1997, pursuant to which Mr. Harris serves as Chairman
and Chief Executive Officer. The agreement will automatically renew for
successive one-year periods, unless either party gives not less than 90-days
notice to the other party of its desire to terminate the Agreement at the end of
such period. Mr. Harris will receive an annual salary of $150,000 and is also
entitled to receive perquisites similar to perquisites made available to other
senior executives of the Company. Mr. Harris has agreed to devote such time as
is necessary and in any event, no less than 80% of his business time, to the
affairs of the Company. Mr. Harris has agreed that at all times while he is
employed by the Company in any capacity, and for a period of three years after
the date of the termination of his employment with the Company, irrespective of
the manner of such termination, Mr. Harris will not (i) be
39
<PAGE>
employed or retained by, seek employment with, or serve as a employee, agent,
officer, director or partner of, or as a consultant to, or directly or
indirectly acquire or own in any manner an interest in (whether as owner,
operator, stockholder, director, financial backer, creditor, consultant,
partner, agent or otherwise), any person, firm, partnership, corporation,
association, sole proprietorship or other entity which engages in competition
with the Company in any and all states in which the Company and/or any of its
subsidiaries conduct their respective businesses, (ii) solicit any current or
previously solicited potential customer of the Company, or (iii) solicit or
induce any person to leave the employ of the Company to engage in activities
competitive with any business of the Company provided, however, that Mr. Harris
is permitted to own no more than 5% of the outstanding common stock of any
company, the stock of which is traded on a national securities exchange or on an
over-the- counter market and provided, further, that Harris may serve as an
employee of or a consultant to a diversified business organization which derives
no more than 5% of its consolidated gross revenues from a line of business
competing with that of the Company. Under no circumstances, however, may Mr.
Harris's services to such organization consist of any activities in competition
with the business of the Company.
The Company has entered into an employment agreement with Mr. Odzer, dated
January 30, 1997, pursuant to which Mr. Odzer serves as President and as a
Director until May 15, 1998, with automatic renewals for successive one-year
periods, unless either party gives not less than 90-days notice to the other
party of its desire to terminate the Agreement at the end of such period (the
"Term"). Mr. Odzer is to remain a director for so long as he is an employee and
stockholder of the Company, unless an investment banker or other acquiror of
securities requires his removal in writing. Upon the consummation of the
Offering and during the remainder of the Term, Mr. Odzer will receive an annual
salary of $200,000. Mr. Odzer is also entitled to receive perquisites similar to
perquisites made available to other senior executives of the Company. In the
event that Mr. Odzer's employment is terminated by the Company other than for
"Cause" (as such term is defined in the agreement), he shall be entitled to
receive all payments and benefits to which he was entitled under the agreement.
For a period of one year after the Term, Mr. Odzer has agreed not to, directly
or indirectly, compete with or be engaged in the same business as the Company,
or be employed by, or act as consultant or lender to, or be a director, officer,
employee, owner or partner of, any business organization which, directly or
indirectly, competes with or is engaged in the same business in which the
Company is engaged at the end of the Term; provided, however, that Mr. Odzer is
permitted to own no more than 5% of the outstanding common stock of any company,
the stock of which is traded on a national securities exchange or on an
over-the-counter market and provided, further, that Odzer may serve as an
employee of or a consultant to a diversified business organization which derives
no more than 5% of its consolidated gross revenues from a line of business
competing with that of the Company. Under no circumstances, however, may Mr.
Odzer's services to such organization consist of any activities in competition
with the business of the Company.
In January 1997, the Company hired Tod Powers as a Senior Vice President of
Marketing at an annual salary of $150,000 plus commissions (with a minimum
guarantee of an additional $25,000 annually). Mr. Powers receives reimbursement
for certain expenses (including medical, moving and automobile expenses) as well
as options to purchase 40,000 shares of Common Stock. In the event of
termination, he becomes entitled to between six months and one year of severance
pay depending on the circumstances of his termination.
STOCK OPTION PLAN
In September 1996, the Board of Directors adopted and the stockholders of
the Company approved the Option Plan. The Option Plan provides for the grant to
qualified employees (including officers and directors) of the Company of options
to purchase shares of Common Stock. A total of 300,000 shares of Common Stock
will be reserved by the Company for issuance upon exercise of stock options
granted or which may be granted under the Option Plan. The Company anticipates
that it will grant options under the Option Plan prior to this Offering.
The Option Plan is administered by the Compensation Committee whose members
are not entitled to receive options under the Plan (excluding options granted
exclusively for directors' fees). The Compensation Committee has complete
discretion to select the optionee and to establish the terms and conditions of
each option, subject to the provisions of the Plan. Options granted under the
Plan may or may not be "incentive stock options" as defined in Section 422 of
the Code ("Incentive Options") depending upon the terms established by
40
<PAGE>
the Compensation Committee at the time of grant, but the exercise price of
options granted may not be less than 100% of the fair market value of the Common
Stock as of the date of grant (110% of the fair market value if the grant is an
Incentive Option to an employee who owns more than 10% of the outstanding voting
power of the Company). Options may not be exercised more than 10 years after the
grant (five years if the grant is an Incentive Option to any employee who owns
more than 10% of the outstanding voting power of the Company). Options granted
under the Plan are not transferable and may be exercised only by the respective
grantees during their lifetimes or by their heirs, executors or administrators
in the event of death. Under the Option Plan, shares subject to canceled or
terminated options are reserved for subsequently granted options. The number of
options outstanding and the exercise price thereof are subject to adjustment in
the case of certain transactions such as mergers, recapitalizations, stock
splits or stock dividends.
Pursuant to a Share Escrow Agreement to be entered into prior to the
consummation of this Offering by and between Howard Odzer, Baer Marks & Upham
LLP, as Escrow Agent, and the Company (the "Additional Option Agreement"), Mr.
Odzer has agreed to place 300,000 shares of Common Stock beneficially owned by
him in escrow for issuance upon exercise of stock options which will be granted
by him, for no consideration, to certain executives, officers and directors
designated by the Compensation Committee, in its sole discretion (the
"Additional Options"). The exercise price of the Additional Options will be no
less than the initial public offering price of the Common Stock as set forth on
the cover of this Prospectus. Mr. Odzer will receive all proceeds from any
exercise of the Additional Options. In addition, any exercise of Additional
Options must occur, if at all, within five years from the date of this
Prospectus. After such date the balance of the shares of Common Stock held in
escrow pursuant to the Option Agreement, if any, shall revert to Mr. Odzer. See
"Certain Transactions."
Prior to the consummation of the Offering, the Company intends to grant
options to purchase an aggregate of 350,000 shares of Common Stock under the
Option Plan and the Additional Option Agreement to certain executive officers
and directors of the Company. See "Management -- Principal Stockholders."
INDEMNIFICATION
Section 145 of the General Corporation Law of the State of Delaware permits
indemnification by a corporation of its officers and directors. Consistent
therewith the Company's Certificate of Incorporation requires that the Company
indemnify all persons whom it may indemnify pursuant thereto to the fullest
extent permitted by Section 145.
In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to certain unlawful dividend payments or stock redemptions or purchases,
or (iv) any transaction from which the director derived an improper benefit. The
effect of these provisions is to eliminate the right of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against any director for breach of fiduciary duty as
a director (including breaches resulting from negligent or grossly negligent
behavior) except for situations described in clauses (i)-(iv) of the preceding
sentence. These provisions will not affect the availability of injunctive relief
for breach of fiduciary duty or alter the liability of directors under federal
securities laws.
The Underwriting Agreement between the Company and each of the Underwriters
(the "Underwriting Agreement") provides for a reciprocal indemnification among
the Company and the Underwriters against certain civil liabilities in connection
with the Registration Statement of which this Prospectus is a part, including
liabilities under the Securities Act. See "Underwriting."
Pursuant to the Shareholders Agreement, the Company has agreed to indemnify
each of Mr. Odzer and Mr. Harris for all fines, liabilities, settlements, costs
and expenses, including attorneys' fees, asserted against him or incurred by him
in his capacity as officer, director, trustee, partner, agent or employee.
Although the Shareholders Agreement terminates by its own terms upon the
consummation of the Offering, such indemnification provisions, among others, are
to be incorporated in a new agreement to be entered into with the Company within
30 days of such termination.
41
<PAGE>
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act. Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the Commission,
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus and as
adjusted to reflect the sale of 1,500,000 shares of Common Stock offered hereby,
certain information with respect to the beneficial ownership of Common Stock by
(i) each person known by the Company to be the owner of more than 5% of the
outstanding Common Stock, (ii) each director, (iii) each Named Officer, and (iv)
all directors and executive officers as a group:
<TABLE>
<CAPTION>
Percentage of Outstanding
Shares Owned (3)
-------------------------------------
Amount and Nature
Name and Address of Beneficial
Before Offering After Offering
of Beneficial Owner (1) Ownership (2) (4) (5)
------------------------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C>
Mel Harris(6) 3,000,000 100 % 66.67 %
Howard Odzer(7) 1,111,765 37.06% 24.706%
William R. Dresback -- -- --
John Rearer -- -- --
Stuart Gordon -- -- --
Jack D. Burstein -- -- --
Maxwell M. Rabb -- -- --
All directors and executive officers 3,000,000 100 % 66.67 %
as a group (9 persons)
</TABLE>
- ------
(1) The address of each beneficial owner is Preferred Employers Holdings, Inc.,
10800 Biscayne Boulevard, Penthouse, Miami, Florida 33161.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock beneficially owned by them. In accordance with Rule 13d-3
under the Exchange Act, a person is deemed to be the beneficial owner of
securities that can be acquired by such person within 60 days from the date
hereof upon the exercise of warrants or options. Each beneficial owner's
percentage ownership is determined by assuming that options or warrants
that are held by such person (but not those held by any other person) and
which are exercisable within 60 days from the date hereof have been
exercised. See "Certain Transactions."
(3) Does not include options to purchase an aggregate of 350,000 shares of
Common Stock under the Option Plan and the Additional Option Agreement to
certain executive officers and directors of the Company (including options
to purchase 50,000 shares to Mr. Dresback, 40,000 to Mr. Rearer, 20,000 to
Ms. Ryan, 40,000 to Mr. Powers, and 25,000 shares to each of Messrs. Rabb,
Burstein and Gordon) to be granted prior to the consummation of the
Offering. See "Management -- Stock Option Plan."
(4) Based on 3,000,000 shares outstanding.
(5) Based on 4,500,000 shares outstanding, including the 1,500,000 shares of
Common Stock offered hereby.
(6) Includes (i) 88,235 shares held of record by Francine Harris, wife of Mr.
Harris, (ii) 88,235 shares held of record by Francine Harris, wife of Mr.
Harris, as custodian for Jamie Jo Harris, daughter of Mr. and Mrs. Harris,
(iii) 44,118 shares held of record by Ginger Harris, daughter of Mrs.
Harris, (iv) 44,118 shares held of record by Nicole Tanenbaum Kramer,
daughter of Mrs. Harris, (v) 25,000 shares held of record by Alan Harris,
brother of Mr. Harris, (vi) 25,000 shares held of record by Nancy Ryan,
(vii) 1,111,765 shares held of record by Howard Odzer, and (viii) 123,529
shares held of record by Ronald Rothstein, step-brother of Mr. Odzer, over
all of which Mr. Harris has voting control and of which Mr. Harris may be
deemed to be the beneficial owner. All shares deemed to be beneficially
owned by each of Mr. Harris and Mr. Odzer are subject to a right of first
refusal by the other whereby each shall have the right to purchase the
other's shares on the same terms as any bona fide offer therefor. See
"Certain Transactions."
(7) Mr. Harris has voting control over the 1,111,765 shares held of record by
Mr. Odzer and, therefore, such shares have been included in the 3,000,000
shares beneficially owned by Mr. Harris. See footnote 6 above. Includes
300,000 shares placed in escrow pursuant to the terms of the Share Escrow
Agreement. See "Management -- Stock Option Plan."
43
<PAGE>
CERTAIN TRANSACTIONS
Immediately prior to the consummation of this Offering, the Company and the
Exchanging Stockholders will effect a recapitalization whereby the Company will
exchange 17,647.06 shares of Common Stock for each share of common stock of PEGI
held by the Exchanging Stockholders (the "Exchange"). As a result of the
Exchange, PEGI will become a wholly-owned subsidiary of the Company.
Pursuant to the Share Escrow Agreement, Mr. Odzer has agreed to place
300,000 shares of Common Stock beneficially owned by him in escrow for issuance
upon exercise of stock options which will be granted by him to certain
executives and officers designated by the Compensation Committee, in its sole
discretion (the "Additional Options"). The exercise price of the Additional
Options will be no less than the initial public offering price of the Common
Stock as set forth on the cover of this Prospectus. Mr. Odzer will receive all
proceeds from any exercise of the Additional Options. The Company has agreed to
pay to Mr. Odzer an amount equal to the additional income tax to which Mr. Odzer
will be subject over and above the rate that would have been applicable if the
gain recognized by Mr. Odzer from the exercise of such options had been taxable
as a "capital gain" rather than "ordinary income." In addition, any exercise of
Additional Options must occur, if at all, within five years from the date of
this Prospectus. After such date the balance of the shares of Common Stock held
in escrow pursuant to the Option Agreement, if any, shall revert to Mr. Odzer.
The Company has agreed to indemnify Mr. Odzer and hold him harmless, against all
claims and liabilities to which Mr. Odzer may become subject under any federal
or securities laws insofar as such claims arise out of or are based upon this
Share Escrow Agreement. See "Management -- Stock Option Plan."
Messrs. Harris and Odzer entered into the Shareholders Agreement with the
Company which provides for certain agreements regarding restrictions on the
transferability of shares and other issues relating to corporate governance.
Pursuant to the Shareholders Agreement Mr. Harris has voting control over the
shares held by Mr. Odzer. See "Principal Stockholders." Upon the consummation of
the offering, the Shareholders Agreement shall terminate by its own terms. The
Company has agreed to enter into a new agreement with Mr. Harris and Mr. Odzer
within 30 days after such termination which shall incorporate certain provisions
of the Shareholders Agreement, including the right of first refusal of Mr.
Harris and Mr. Odzer with respect to the disposition of shares of stock by the
other, certain tag-along rights and registration rights of Mr. Odzer, the right
to seek arbitration to settle disputes arising out of the Shareholders Agreement
and the indemnification provisions with respect to Mr. Harris and Mr. Odzer. The
Company has been advised that in the opinion of the Securities and Exchange
Commission, arbitration of claims arising under the provisions of the federal
securities laws is contrary to public policy and inappropriate and, therefore,
the provisions with respect to arbitration of federal securities laws issues
under the Shareholders Agreement may be unenforceable. See "Management --
Indemnification."
The Company entered into a Stock Repurchase Agreement, dated as of May 15,
1995 (the "Repurchase Agreement"), with Mr. Odzer and Mr. Rothstein, a
step-brother of Mr. Odzer, pursuant to which the Company agreed to repurchase
from them an aggregate of 30 shares (529,412 shares, as adjusted) of common
stock of the Company. The purchase price for such shares was $600,000 (including
interest) to be paid to Mr. Odzer and Mr. Rothstein in 24 installments of
$25,000 each. The closing of the Repurchase Agreement was subject to the
Company's completion of a $600,000 distribution to the existing stockholders of
the Company, pro rata based on the number of shares of common stock of the
Company outstanding, and paid to the stockholders of record on the date of the
Repurchase Agreement, without giving effect to the repurchase. The $600,000
distribution was made by the Company on May 26, 1995. The Company agreed,
pursuant to a subsequent agreement made with Mr. Harris and Mr. Odzer, to repay
the balance of the purchase price at December 31, 1995 in 23 monthly
installments of $25,000 (including interest) commencing in February 1996. As of
September 30, 1996, the total amount of payments made by the Company was
$225,000 and the balance of the purchase price outstanding was $375,000.
The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its financial advisory and planning services provided in
connection with this Offering. Mr. Harris is a director and investor in
Strategica Capital, an affiliate of Strategica Group. Mr. Burstein, a director
of the Company, is the Chairman and President of Strategica Group and Strategica
Capital. See "Management -- Directors and Executive Officers."
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The Company has provided office space, equipment and other administrative
services to International Insurance Group, Inc. ("IIG"), an insurance brokerage
company wholly-owned by Mr. Harris. Under this arrangement, the Company
currently receives approximately $2,400 per month for rendering such services.
The contractual arrangement between the Company and IIG commenced in January
1996, and the aggregate amount billed by the Company for the nine months ended
September 30, 1996 was $19,450. Prior to January, 1996, the Company provided
these services without reimbursement. IIG has agreed that it will not solicit
any employee, any customer or any entity which was a customer of the Company
within the past two years with respect to any business then being written by the
Company. IIG has agreed to pay the Company any commission received by IIG with
respect to any business written by the Company.
Except as set forth above, the Company does not presently intend to enter
into any other business transactions with affiliated parties. In the event,
however, that any such business transaction is entered into all future
transactions between the Company and its officers, directors and 5% shareholders
will be on terms no less favorable than could be obtained from unaffiliated
third parties and will be approved by a majority of the independent
disinterested directors of the Company.
For information concerning employment agreements with, and compensation of,
the Company's executive officers and directors, see "Management -- Executive
Compensation; Employment Arrangements; and Stock Option Plan."
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, of which 3,000,000 shares are currently outstanding and
held of record by six record holders. Holders of shares of Common Stock are
entitled to one vote for each share held of record on all matters to be voted on
by stockholders. There are no preemptive, subscription, conversion or redemption
rights pertaining to the shares of Common Stock. Holders of shares of Common
Stock are entitled to receive dividends when, as and if declared by the Board of
Directors from funds legally available therefor and to share ratably in the
assets of the Company available upon liquidation, dissolution or winding up. The
holders of shares of Common Stock do not have cumulative voting rights for the
election of directors and, accordingly, the holders of more than 50% of the
shares of Common Stock are able to elect all directors. See "Risk Factors --
Control by Existing Stockholders." All of the outstanding shares of Common Stock
are, and the Common Stock offered hereby, upon issuance and when paid for, will
be, duly authorized, validly issued, fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue up to 1,500,000 shares of preferred
stock, par value $.01 per share. The preferred stock may be issued in one or
more series, the terms of which may be determined by the Board of Directors at
the time of issuance without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. The issuance of any such preferred stock could
materially adversely affect the rights of holders of Common Stock and,
therefore, could reduce the value of the Common Stock. The ability of the Board
of Directors to issue preferred stock could have the effect of delaying,
deferring or preventing a change in control of the Company. See "Risk Factors --
Possible Issuances of Preferred Stock; Anti-Takeover Provisions."
LIMITATIONS UPON TRANSACTIONS WITH "INTERESTED STOCKHOLDERS"
Section 203 of the Delaware General Corporation Law prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date, the business combination is
approved by the board of directors and by the affirmative vote of at least 66
2/3 % of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An "interested
stockholder" is a person who, together with affiliates and associates, owns (or
within three years, did own) 15% or more of the
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<PAGE>
corporation's voting stock. The restrictions of Section 203 do not apply, among
other things, if a corporation, by action of its stockholders, adopts an
amendment to its certificate of incorporation or by-laws expressly electing not
to be governed by Section 203, provided that, in addition to any other vote
required by law, such amendment to the certificate of incorporation or by-laws
must be approved by the affirmative vote of a majority of the shares entitled to
vote. Moreover, an amendment so adopted is not effective until twelve months
after its adoption and does not apply to any business combination between the
corporation and any person who became an interested stockholder of such
corporation on or prior to such adoption. The Company's Certificate of
Incorporation and By-laws do not currently contain any provisions electing not
to be governed by Section 203 of the Delaware General Corporation Law. The
provisions of Section 203 of the Delaware General Corporation Law may have a
depressive effect on the market price of the Common Stock because they could
impede any merger, consolidation, takeover or other business combination
involving the Company or discourage a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is the American Stock
Transfer and Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 4,500,000 shares of
Common Stock outstanding (4,725,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,500,000 Shares sold in this Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by an "affiliate" of the Company
within the meaning of Rule 144 under the Securities Act ("Rule 144"). The
remaining 3,000,000 shares of Common Stock are "restricted securities," as that
term is defined under Rule 144, and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption provided by Rule 144. 40,000 of such shares
will be eligible for sale under Rule 144 commencing 90 days after the
consummation of the Offering. However, each officer, director and stockholder of
the Company has agreed to refrain from making any public sale or distribution of
any of his or her Common Stock, or warrants or options to purchase Common Stock,
or securities of the Company convertible into such Common Stock (pursuant to
Rule 144 or otherwise), owned by him or her on the closing date of this Offering
for a period of 12 months from such date without the prior written consent of
the Representative. Such persons may make private transfers, provided that the
transferees agree to be bound by the same restrictions. An appropriate legend
will be marked on the face of certificates representing all such securities.
In general, under Rule 144, as currently in effect, a person, including an
"affiliate" of the Company as defined under the Securities Act (or persons whose
shares are aggregated) who for at least two years has beneficially owned
restricted securities acquired directly or indirectly from the Company or an
affiliate of the Company in a private transaction, is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1% of the total number of outstanding shares of the same class or the average
weekly trading volume during the four calendar weeks preceding the day notice is
given to the Securities and Exchange Commission with respect to such sale. A
person (or persons whose shares are aggregated) who is not an affiliate and has
not been an affiliate of the Company at any time during the three months
immediately preceding the sale and who has beneficially owned shares of Common
Stock for at least three years is entitled to sell such shares pursuant to
subparagraph (k) of Rule 144 without regard to the volume limitations described
above.
Prior to this Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that a regular trading market will
develop after this Offering, or that if developed it will be sustained. In
addition, no prediction can be made as to the effect, if any, that market sales
of Common Stock or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of shares of Common Stock may be sold in the public market
may adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities.
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<PAGE>
Rule 701 under the Securities Act provides that, beginning 90 days after
the date of this Prospectus, shares of Common Stock acquired on the exercise of
outstanding options may be resold by persons other than affiliates subject only
to the manner of sale provisions of Rule 144, and by affiliates subject to all
provisions of Rule 144 except its two-year minimum holding period. The Company
intends to file a registration statement under the Securities Act (on Form S-8
or any successor form) to register the shares of Common Stock issued and
reserved for issuance under the Option Plan. Registration would permit the
resale of such shares by non-affiliates in the public market without restriction
under the Securities Act, subject to the lock-up arrangements discussed above.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material federal income tax
consequences expected to apply to a holder with respect to the purchase,
ownership and disposition of Shares. This discussion is based on the provisions
of the Code, final, temporary and proposed United States Treasury regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof, all as in effect as of the date of this Prospectus. The consequences to
any particular holder may differ from those described below by reason of that
holder's particular circumstances. This summary does not address the
considerations that may be applicable to particular classes of holders,
including financial institutions, broker-dealers, tax-exempt organizations,
banks, insurance companies and persons who are not citizens or residents of the
United States, or who, as to the United States, are foreign corporations,
foreign partnerships or foreign estates or trusts. In addition, this summary is
limited to persons that will hold Shares as "capital assets" within the meaning
of Section 1221 of the Code.
The following discussion does not constitute, and should not be considered
as, legal or tax advice to prospective holders. Each potential holder should
consult with its own tax adviser before determining whether to purchase Shares,
including the effects of applicable state, local, foreign or other tax laws and
possible changes in the tax laws.
DIVIDENDS
Dividends paid on the Shares will be taxable as ordinary income to the
extent paid out of the Company's current or accumulated earnings and profits (as
defined for United States federal income tax purposes). Dividends received by
corporations out of such earnings and profits will generally qualify for the 70
percent dividends-received deduction, so long as the holder has held its Shares
for a sufficient time (generally more than 45 days) and certain other conditions
are met. The 70 percent dividends-received deduction may be reduced for holders
who borrow funds directly attributable to the purchase of its Shares. Where the
dividends-received deduction is available, a portion of the amount deducted may
have to be included by a corporation in computing its possible liability for
alternative minimum tax. The amount of any distribution in excess of the
Company's current and accumulated earnings and profits will first be applied to
reduce the holder's tax basis in the Shares, and any amount in excess of tax
basis will be treated as gain from the sale or exchange of the Shares.
DISPOSITIONS OF SHARES
Subject to the discussion below relating to the potential application of
Code Section 1248, a U.S. stockholder will, upon the sale or exchange of any
Shares, recognize a gain or loss for federal income tax purposes equal to the
difference between the amount realized upon such sale or exchange and the
stockholder's basis in the Shares. If the stockholder's holding period for such
Shares is more than one year, such gain will be taxed as long-term capital gain.
Code Section 1248 provides that if a U.S. person disposes of stock in a
foreign corporation and such person owned directly, indirectly or constructively
10% or more of the voting shares of the corporation at any time during the
five-year period ending on the date of disposition when the corporation was a
"controlled foreign corporation" ("CFC"), any gain from the sale or exchange of
the shares may be treated as ordinary income to the extent of the CFC's earnings
and profits during the period that the stockholder held the shares (with certain
adjustments). Holders who acquire Shares in this Offering will own stock in a
U.S. corporation. However, the Reinsurance Subsidiary will qualify as a CFC and
will be a wholly-owned subsidiary of the Company. Code Section 1248(e) provides
that if a United States person, who owns 10% or more of the stock of a U.S.
corporation, sells or exchanges stock of such U.S. corporation and such U.S.
corporation was formed or availed of prin-
47
<PAGE>
cipally for the holding, directly or indirectly, of stock of one or more foreign
corporations, then all or part of the United States person's gain from the sale
of the stock of the U.S. corporation could be subject to Section 1248. The
determination of whether such U.S. corporation was formed principally for such
purpose is a facts and circumstances analysis. The Company believes that because
of the Company's dispersion of the ownership of Shares being offered in this
Offering, no stockholder who acquires Shares in this Offering will own 10% or
more of the voting shares of the Company and therefore Section 1248(e) should
not apply to such stockholders. Even if such a stockholder owns, directly or
through attribution, 10% or more of the voting shares of the Company, Code
Section 1248(e) should not apply to such stockholder since, in the Company's
view, it was not formed nor will be availed of principally for the holding,
directly or indirectly, of stock of the Reinsurance Subsidiary. However, U.S.
persons who might, directly or through attribution, acquire 10% or more of the
voting Shares of the Company should consider the possible application of Code
Section 1248(e). In all events, a corporate stockholder is not currently subject
to Code Section 1248(e) since the federal income tax rate at which capital gain
and ordinary income are taxed is the same.
BACKUP WITHHOLDING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31 percent on dividends. Generally, backup withholding applies only when the
taxpayer fails to furnish or certify a proper Taxpayer Identification Number or
when the taxpayer is notified by the IRS that the taxpayer has failed to report
payments of interest and dividends properly. Holders should consult their tax
advisers regarding their qualification for exemption for backup withholding and
the procedure for obtaining any applicable exemption.
UNDERWRITING
The Underwriters named below, for which Commonwealth Associates is acting
as representative (the "Representative"), have agreed, severally and not
jointly, subject to the terms and conditions contained in the Underwriting
Agreement, to purchase from the Company, and the Company has agreed to sell to
the several Underwriters, an aggregate of 1,500,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase is
set forth opposite its name below. The Underwriters have advised the Company
that they do not intend to confirm sales of Common Stock to any account over
which they exercise any discretionary authority.
<TABLE>
<CAPTION>
Number of Shares
Underwriters to be Purchased
----------- ----------------
<S> <C>
Commonwealth Associates ...
</TABLE>
The Underwriters are committed on a firm commitment basis to purchase and
pay for all of the Common Stock offered hereby (other than shares offered
pursuant to the over-allotment option) if any shares are purchased. The shares
are being offered by the Underwriters, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriters have advised the Company that the Underwriters propose to
offer the Shares to the public at the public offering price set forth on the
cover page of this Prospectus. The Underwriters may allow to certain dealers who
are members of the National Association of Securities Dealers, Inc. (the "NASD")
concessions, not in excess of $ per share, of which not in excess of $ per share
may be reallowed to other dealers who are members of the NASD. After the
commencement of the offering, the public offering price, the concessions and
re-allowance may be changed by the Underwriters.
The Company has granted to the Representative, exercisable for 45 days from
the date of this Prospectus, an option to purchase up to an additional 225,000
shares of Common Stock at the public offering price set forth on the cover page
of the Prospectus, less the underwriting discounts and commissions. The
Representative may exercise this option in whole or, from time to time, in part,
solely for the purpose of covering over-allotments, if any, made in connection
with the sale of the shares of Common Stock offered hereby.
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<PAGE>
The Company has agreed to pay the Representative, individually and not as
the representative of the Underwriters, a nonaccountable expense allowance of 2%
of the gross proceeds of the Common Stock offered hereby (including any Common
Stock purchased pursuant to the Underwriters' over-allotment option) of which
$20,000 has been paid to date.
The Company has agreed to sell to the Representative and/or its designees
warrants (the "Representative's Warrants") to purchase up to 150,000 shares of
Common Stock at an exercise price per share equal to 140% of the initial public
offering price (the "Strike Price"). Both the number of shares issuable upon
exercise of the Representative's Warrant and the exercise price per share
thereunder are subject to adjustment under certain circumstances. The
Representative's Warrants may not be sold, transferred, assigned or hypothecated
for a period of one year from the effective date of this Prospectus, except to
the officers, directors, or partners of the Representative, and are exercisable
during the four-year period commencing one year from the date of this Prospectus
(the "Warrant Exercise Term").
The Representative's Warrants will contain antidilution provisions
providing for appropriate adjustments of the Strike Price and number of shares
which may be purchased upon exercise upon the occurrence of certain events. The
antidilution provisions of the Representative's Warrants generally are triggered
by the issuance of Common Stock (or securities exchangeable for or convertible
into Common Stock) by the Company at a price below the Current Market Price (as
such term is defined in the Representative's Warrant) (subject to certain
exceptions) for a period of five years from the date of this Prospectus, as well
as by stock splits, stock dividends and other similar dilutive events in which
the Company increases its outstanding stock without receiving additional
consideration.
The Company has agreed that it will, on any two occasions during the
Warrant Exercise Term, register the Representative's Warrants and the underlying
securities, at the request of holders of at least 51% of the Representative's
Warrants, at the expense of the Company on one occasion and at the expense of
the selling holders on the other occasion. The Company has also agreed, during
the four-year period commencing one year from the date of this Prospectus, to
register on a "piggy-back" basis, on an unlimited number of occasions, the
Representative's Warrants and the underlying securities whenever the Company
files a registration statement.
For the life of the Representative's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Representative's Warrants might be expected to exercise them at a time
when the Company would, in all likelihood, be able to obtain any needed capital
by a new offering of its securities on terms more favorable than those provided
by the Representative's Warrants. See "Risk Factors -- Representative's
Warrants."
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Representative, to allow the
Representative to have an observer at all meetings of the Board of Directors.
The Underwriting Agreement provides for a reciprocal indemnification among
the Company and the Underwriters against certain civil liabilities in connection
with the Registration Statement of which this Prospectus is a part, including
liabilities under the Securities Act.
The Company has agreed to pay the Representative, upon the consummation of
this Offering, a fee equal to 2% of the gross proceeds of this Offering as
compensation for its advisory services in connection with this Offering. The
Company has also agreed to pay the representative a fee with respect to all
funds invested in, or certain other transactions with, the Company by any party
introduced to the Company by the Representative during the two year period
ending August 11, 1998.
Each of the officers, directors or stockholders owning any of the Common
Stock or warrants, or options to purchase Common Stock, or securities
convertible into such Common Stock, has agreed to refrain from making any public
sale or distribution of his Common Stock, or such warrants, options, or
convertible securities (pursuant to Rule 144 or otherwise), owned by him or her
on the closing date of this Offering for a period of 12 months from such date
without the prior written consent of the Representative. Such persons may make
private transfers, provided that the transferees agree to be bound by the same
restrictions.
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<PAGE>
The Company has agreed to pay to Strategica Group a fee of $50,000 as
compensation for its financial advisory and planning services provided in
connection with this Offering. Mr. Harris is a director and investor in
Strategica Capital, an affiliate of Strategica Group. Mr. Burstein, who will be
elected a director of the Company prior to this Offering, is the Chairman and
President of Strategica Group and Strategica Capital. See "Management --
Directors and Executive Officers."
The foregoing discussion of the material terms and provisions of the
Underwriting Agreement and related documents is qualified in its entirety by
reference to the detailed provisions of such documents, the forms of which have
been filed as exhibits to the Registration Statement on Form SB-2 of which this
Prospectus forms a part.
Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price has been
determined by arms-length negotiations between the Company and the
Representative and does not necessarily bear any relationship to the Company's
book value, assets, past operating results or other established criteria of
value. Among the factors considered in determining the offering price were the
Company's current financial condition and prospects, recent financial results,
financing required by the Company, management, market prices of similar
securities of comparable publicly traded companies, certain financial and
operating information of companies engaged in activities similar to those of the
Company, the general condition of the securities markets and other relevant
factors.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Baer Marks & Upham LLP, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Squadron, Ellenoff,
Plesent & Sheinfeld, LLP, New York, New York.
EXPERTS
The consolidated financial statements of the Company for the years ended
December 31, 1995, 1994 and 1993 included in the Registration Statement of which
this Prospectus is a part, have been included in reliance upon the report of
KPMG Peat Marwick LLP, independent certified public accountants, and 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 SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits filed
therewith, certain items of which are omitted from this Prospectus as permitted
by the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to herein are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement, including the exhibits
thereto, may be inspected without charge at the principal office of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or at the Regional
Offices of the Commission, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Registration Statement has been
filed electronically with the Commission. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, at
http://www.sec.gov.
Following this Offering, the Company will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith, will file reports, proxy and information statements and
other information with the Commission. The Company intends to furnish to its
stockholders annual reports containing audited financial statements and such
other periodic reports as the Company may determine to be appropriate or as may
be required by law.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report ................................ F-2
Consolidated Balance Sheets ................................. F-3
Consolidated Statements of Operations ....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) ... F-5
Consolidated Statements of Cash Flows ....................... F-6
Notes to Consolidated Financial Statements .................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Preferred Employers Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Preferred
Employers Holdings, Inc. and subsidiary as of December 31, 1995, 1994 and 1993,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for each of the years in the three-year 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 the 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Preferred Employers
Holdings, Inc. and subsidiary at December 31, 1995, 1994 and 1993, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
May 3, 1996, except as to note 2
and note 9, which are as
of November 11, 1996
F-2
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED), DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
December 31,
September 30, ----------------------------------------
1996 1995 1994 1993
---------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
Assets
------
Cash and cash equivalents ................... $5,019,551 2,819,829 4,789,703 3,811,825
Commissions and premiums receivable ......... 381,160 345,614 1,118 10,509
Security deposits ........................... 22,736 23,586 35,899 3,589
Property and equipment, net ................. 530,904 518,613 158,930 38,136
Other assets ................................ 113,148 57,508 -- --
---------- --------- --------- ---------
$6,067,499 3,765,150 4,985,650 3,864,059
========== ========= ========= =========
Liabilities and Stockholders' Equity (Deficit)
- -----------------------------------------------
Liabilities:
Premiums payable .......................... 4,455,309 2,353,914 3,415,005 3,551,252
Accounts payable .......................... 187,792 5,475 24,874 300,027
Stockholder loan .......................... 349,563 516,494 -- 701,734
Commissions payable ....................... 648,039 296,588 48,715 --
Other liabilities ......................... 207,571 302,276 14,309 65,348
---------- --------- --------- ---------
Total liabilities ....................... 5,848,274 3,474,747 3,502,903 4,618,361
---------- --------- --------- ---------
Stockholders' equity (deficit):
Common stock, $.01 par value.
Authorized 10,000,000 shares; issued
3,529,412 shares in 1995, 1994 and 1993 35,294 35,294 35,294 35,294
Retained earnings (accumulated deficit) ... 689,488 760,666 1,447,453 (789,596)
---------- --------- --------- ---------
Total stockholders' equity (deficit) .... 724,782 795,960 1,482,747 (754,302)
Treasury stock, at cost -- 529,412 shares ... (505,557) (505,557) -- --
---------- --------- --------- ---------
Net stockholders' equity (deficit) ... 219,225 290,403 1,482,747 (754,302)
Commitments and contingencies
---------- --------- --------- ---------
$6,067,499 3,765,150 4,985,650 3,864,059
========== ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
---------------------------- --------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Commission income, net .......................... $ 1,829,667 1,585,181 2,181,868 2,661,424 1,892,875
Interest income ................................. 79,605 67,158 88,052 121,648 61,644
----------- ----------- ----------- ----------- -----------
Total revenue ................................. 1,909,272 1,652,339 2,269,920 2,783,072 1,954,519
----------- ----------- ----------- ----------- -----------
Expenses:
Personnel expense ............................ 1,490,947 1,049,420 1,471,409 933,033 585,632
Occupancy expense ............................ 164,750 104,206 145,421 89,337 75,574
Professional fees ............................ 80,160 103,781 92,758 110,620 56,943
Interest expense ............................. 33,069 35,937 35,937 8,357 63,968
Other operating expenses ..................... 401,524 354,817 541,913 368,051 291,513
----------- ----------- ----------- ----------- -----------
Total expenses .............................. 2,170,450 1,648,161 2,287,438 1,509,398 1,073,630
----------- ----------- ----------- ----------- -----------
Operating (loss) income ..................... (261,178) 4,178 (17,518) 1,273,674 880,889
Nonoperating income (loss) ...................... 190,000 -- (69,269) 5,857,749 (830,151)
----------- ----------- ----------- ----------- -----------
Net (loss) income ............................. $ (71,178) 4,178 (86,787) 7,131,423 50,738
=========== =========== =========== =========== ===========
Unaudited pro forma information (note 1k):
Historical (loss) income before income
taxes ...................................... $ (71,178) 4,178 (86,787) 7,131,423 50,738
Pro forma income tax (benefit) provision ..... (26,550) 1,558 (32,372) 2,660,021 18,925
Pro forma net (loss) income .................. (44,628) 2,620 (54,415) 4,471,402 31,813
Pro forma (loss) income per share ............ (.01) .00 (.02) 1.49 .01
Weighted average shares outstanding .......... 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Common Retained Total
stock Common earnings Treasury Treasury stockholders'
shares stock Paid-in (accumulated stock stock equity
issued amount capital deficit) shares amount (deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 . 200 $ 2 $ 198 $ (805,240) -- $ -- $ (805,040)
Net income ................ -- -- -- 50,738 -- -- 50,738
Stock exchange ............ 3,529,212 35,292 (198) (35,094) -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1993 . 3,529,412 35,294 -- (789,596) -- -- (754,302)
Net income ................ -- -- -- 7,131,423 -- -- 7,131,423
Distribution to
stockholders ............ -- -- -- (4,894,374) -- -- (4,894,374)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1994 . 3,529,412 35,294 -- 1,447,453 -- -- 1,482,747
Net loss .................. -- -- -- (86,787) -- -- (86,787)
Distribution to
stockholders ............ -- -- -- (600,000) -- -- (600,000)
Purchase of treasury stock -- -- -- -- 529,412 (505,557) (505,557)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 . 3,529,412 35,294 -- 760,666 529,412 (505,557) 290,403
Net loss (unaudited) ...... -- -- -- (71,178) -- -- (71,178)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1996
(unaudited) ............... 3,529,412 $ 35,294 $ -- $ 689,488 529,412 $ (505,557) $ 219,225
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Premiums collected ......................... $ 16,800,971 14,080,501 18,371,077 32,458,172 22,794,923
Nonoperating (loss) income ................. 190,000 -- (69,269) 5,857,749 (830,151)
Interest received .......................... 79,605 67,158 88,052 121,648 61,644
Premiums paid .............................. (12,807,698) (14,047,023) (17,042,483) (29,928,502) (17,886,573)
Expenses paid .............................. (1,721,462) (1,402,915) (2,144,646) (1,784,551) (614,163)
Other, net ................................. (46,521) 81,027 (81,067) 1,301 (70,306)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ................ 2,494,895 (1,221,252) (878,336) 6,725,817 3,455,374
------------ ------------ ------------ ------------ ------------
Cash flows used in investing activities-
purchases of property and
equipment .................................. (95,173) (436,090) (466,538) (151,831) (36,304)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Repayment of stockholder loan .............. (200,000) (25,000) (25,000) (701,734) (235,000)
Stockholders' distributions ................ -- (600,000) (600,000) (4,894,374) --
------------ ------------ ------------ ------------ ------------
Net cash used in financing
activities .......................... (200,000) (625,000) (625,000) (5,596,108) (235,000)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents ........................... 2,199,722 (2,282,342) (1,969,874) 977,878 3,184,070
Cash and cash equivalents, beginning of
period ..................................... 2,819,829 4,789,703 4,789,703 3,811,825 627,755
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents, end of
period ..................................... $ 5,019,551 2,507,361 2,819,829 4,789,703 3,811,825
============ ============ ============ ============ ============
</TABLE>
F-6
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, December 31,
----------------------------- ----------------------------------------------
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Reconciliation of net (loss) income to
net cash provided by (used in)
operating activities:
Net (loss) income .......................... $ (71,178) 4,178 (86,787) 7,131,423 50,738
Adjustments to reconcile net (loss)
income to net cash provided by
(used in) operating activities:
Depreciation and amortization ......... 82,882 37,994 106,855 31,037 19,855
Amortization of discount on
stockholder loan .................... 33,069 35,937 35,937 -- --
Changes in assets and
liabilities:
(Increase) decrease in
commissions and premiums
receivable .......................... (35,546) (42,233) (344,496) 9,391 (10,509)
Decrease (increase) in security
deposits ............................ 850 11,513 12,313 (32,310) (405)
Increase in other assets .............. (55,640) (29,941) (57,508) -- --
Increase (decrease) in premiums
payable ............................. 2,101,395 (1,319,787) (1,065,584) (131,754) 2,983,346
Increase (decrease) in accounts
payable ............................. 182,317 (24,874) (19,399) (275,153) 300,027
Increase (decrease) in
commissions payable ................. 351,451 (23,121) 296,588 -- 63,968
(Decrease) increase in other
liabilities ......................... (94,705) 129,082 243,745 (6,817) 48,354
------------ ------------ ------------ ------------ ------------
Total adjustments .................... 2,566,073 (1,225,430) (791,549) (405,606) 3,404,636
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ................ $ 2,494,895 (1,221,252) (878,336) 6,725,817 3,455,374
============ ============ ============ ============ ============
Supplemental disclosure of noncash
activities:
Stock exchange ............................... $ -- -- -- -- (35,094)
============ ============ ============ ============ ============
Issuance of note payable to stockholder
in exchange for treasury stock ............. $ -- -- 505,557 -- --
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996 (unaudited) and December 31, 1995, 1994 and 1993
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
(a) Organization
Preferred Employers Holdings, Inc. (the "Company") is the successor
company to Preferred Employers Group, Inc. ("PEGI"). Immediately prior to
the Company's initial public offering, the Company and the stockholders
of PEGI at such date (the "Exchanging Stockholders") will effect a
recapitalization whereby the Company will exchange 17,647.06 shares of
Common Stock for each share of common stock of PEGI held by the
Exchanging Stockholders (the "Exchange"). As a result of the Exchange,
PEGI will become a wholly-owned subsidiary of the Company. Except as
otherwise specified or when the context otherwise requires, references to
the Company herein, include Preferred Employers Holdings, Inc. and PEGI,
through which the Company conducts certain of its business.
The Company was appointed as a general agent ("GA") by The American
International Group of companies ("AIG"), a major international insurance
carrier, on January 1, 1993. In this regard, the Company is authorized to
write workers' compensation as well as other forms of "property and
casualty" business (such other forms of insurance being hereinafter
referred to as "Package") on behalf of AIG. In addition, the Company was
appointed as a GA by General Accident Insurance Company of America
("GAIC") on September 1, 1994, with the authority to write all forms of
commercial property and casualty business for family style and fast food
restaurants. GAIC has recently advised the Company that it will no longer
write Package insurance for fast food restaurants and the Company is
currently pursuing other carriers through which it can write such
business.
The Company writes business by direct solicitation and through brokers
and subproducers, and in turn is compensated via a commission based on a
percentage of the premiums it writes.
(b) Basis of Consolidated Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles in the United States. All
intercompany balances and transactions have been eliminated in
consolidation.
(c) Cash and Cash Equivalents
The Company considers cash in banks and money market accounts as cash and
cash equivalents.
(d) Property and Equipment, Net
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is computed using an accelerated method of depreciation over
the estimated useful lives of the related assets, which range from five
to seven years. Leasehold improvements are carried at cost less
accumulated amortization provided on the straight-line basis over the
shorter of the lease term or the estimated useful lives of the
improvements.
(e) Premiums Payable
Premiums which are collected from insureds are reported as assets of the
Company and as corresponding liabilities to the insurance carriers.
Premiums received from insureds but not yet remitted to the carriers are
held as invested cash in a fiduciary capacity.
(f) Revenue Recognition
Commissions are recognized when premiums are received. Any subsequent
commission adjustments, including policy cancellations, are recognized
upon notification from the insurance carrier or broker.
F-8
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) Income Taxes
Prior to the formation of the Company, PEGI had elected to be taxed as an
S Corporation under the provisions of the Internal Revenue Code. PEGI's
stockholders included in their tax returns the Company's income or loss.
Accordingly, no provision for income taxes is provided in the
consolidated financial statements.
(h) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these consolidated financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
(i) Reclassification
Certain amounts in the 1994 and 1993 consolidated financial statements
have been reclassified to conform with the presentation of the 1995
consolidated financial statements.
(j) Accounting for Stock-Based Compensation
Statement of Financing Accounting Standard ("SFAS") Number 123,
"Accounting for Stock-Based Compensation" was recently issued and is
effective for the Company beginning January 1, 1996. SFAS Number 123
requires expanded disclosures of equity-based compensation arrangements
with employees and does not require, but encourages compensation cost to
be measured based on fair value of the equity instrument when awarded.
The Company, as allowed, intends to measure equity-based compensation
using the method of accounting prescribed by Accounting Principles Board
Opinion Number 25 that recognized compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will be
required to disclose certain additional information related to its
stock-based compensation; however, management believes the impact to the
financial statements, as a whole, will not be material.
(k) Pro Forma Net (Loss) Income
Proforma net (loss) income represents the results of operations for the
nine months ended September 30, 1996 and 1995 (unaudited) and for the
years ended December 31, 1995, 1994 and 1993, adjusted to reflect a
(benefit) provision for income tax on historical (loss) income before
income taxes which gives effect to the change in the Company's income tax
status to a C corporation.
(2) CONSOLIDATED FINANCIAL STATEMENT RESTATEMENT
The 1993, 1994 and 1995 consolidated financial statements have been
restated to give retroactive effect to the stock exchange on December 31,
1993 and the 17,647.06 for 1 stock exchange to be effected immediately
prior to the Company's initial public offering. (See note 9 for more
details).
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following at September 30,
1996 (unaudited) and December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
December 31,
September 30, -----------------------------------
1996 1995 1994 1993
--------- --------- -------- --------
Unaudited
<S> <C> <C> <C> <C>
Computer equipment .............. $ 272,592 $ 221,529 164,108 53,472
Office equipment ................ 108,675 105,055 50,408 23,845
Furniture and fixtures .......... 257,097 231,301 19,732 18,100
Leasehold improvements .......... 170,595 155,901 13,000 --
--------- --------- -------- --------
808,959 713,786 247,248 95,417
Less accumulated depreciation and
amortization ................... (278,055) (195,173) (88,318) (57,281)
--------- --------- -------- --------
$ 530,904 $ 518,613 $158,930 $ 38,136
========= ========= ======== ========
</TABLE>
F-9
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) STOCKHOLDER LOAN
Stockholder loan at December 31, 1993, consists of an 11.5 percent demand
note which includes accrued interest of $280,734. On March 4, 1994, the Company
paid off the balance of the note's principal and accrued interest.
In May 1995, the Company entered into a stock repurchase agreement (the
"Agreement") with Mr. Odzer and Mr. Rothstein whereby the Company agreed to
repurchase from them an aggregate of 30 shares (529,412 shares as adjusted) of
common stock (the "Shares") of the Company. The purchase price for the Shares
was $600,000 (including interest) to be paid to Mr. Odzer and Mr. Rothstein in
24 installments of $25,000. The closing of this Agreement was subject to the
Company's completion of a $600,000 distribution to the stockholders of the
Company, pro rata based on the number of shares of common stock of the Company
outstanding and paid to the stockholders of record on the Agreement date,
without giving effect to the repurchase. The $600,000 distribution was made by
the Company on May 26, 1995.
At September 30, 1996 (unaudited) and December 31, 1995, the outstanding
balance of above referenced stockholder loan consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------- -------
(Unaudited)
<S> <C> <C>
Principal ................ $375,000 575,000
Unamortized discount (10%) (25,437) (58,506)
-------- -------
$349,563 516,494
======== =======
</TABLE>
Per a subsequent agreement made with the stockholders, the outstanding loan
balance at December 31, 1995 will be repaid in 23 monthly installments of
$25,000 (including interest) commencing in February 1996.
(5) NONOPERATING EXPENSE
During the year ended December 31, 1993, nonoperating expense includes
legal expenses incurred related to litigation to which the Company, as
plaintiff, was involved. In January 1994, the U.S. District Court in Baltimore,
Maryland awarded the Company $9.9 million in damages it sustained as a result of
the first of three separate lawsuits for breach of contract by Alexander &
Alexander Services, Inc. ("A&A"), a global organization of advisers providing
risk management, insurance brokerage and human resource management consulting
services.
On February 28, 1994, the Company entered into a settlement agreement with
A&A, whereby A&A agreed to pay the Company $9.9 million and the Company agreed
to dismiss the remaining untried lawsuits. On March 3, 1994, the Company
received $5,857,749, net of expenses associated with the litigation, of which
$4,894,374 was distributed to stockholders of the Company.
During 1995, the Company incurred expenses amounting to $69,269 for legal
fees associated with the settlement of a lawsuit. (See Note 9 for more details).
F-10
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) LEASES
In August 1994, the Company entered into an office lease agreement which
became effective on April 1, 1995. The lease agreement provides for an initial
seven-year term with two five-year renewal options. The following is a schedule
of the approximate future minimum lease payments as of December 31, 1995.
<TABLE>
<CAPTION>
Year ending
December 31, Total
----------- ----------
<S> <C>
1996 $ 141,000
1997 183,000
1998 191,000
1999 199,000
2000 211,000
Thereafter 268,000
----------
$1,193,000
==========
</TABLE>
Rent expense for the years ended December 31, 1995, 1994 and 1993 was $80,078,
$38,570 and $34,365, respectively.
(7) MAJOR SUPPLIERS AND INDUSTRY CONCENTRATION
Substantially all of the Company's customers are fast-food and family style
restaurant franchises and convenience stores. In addition, substantially all
insurance policies written by the Company are underwritten by two insurance
carriers.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
At December 31, 1995, the carrying amounts of the following instruments
approximate fair value because of the short maturity of these instruments: cash
and cash equivalents, premiums receivable, premiums payable, accounts payable,
commissions payable and other liabilities.
The fair value of the stockholder loan is based on quoted market prices at
the reporting date for similar instruments. The carrying value and fair value of
the stockholder loan at December 31, 1995 were $516,494 and $516,494,
respectively.
(9) SUBSEQUENT EVENT
In 1996, the Company settled a lawsuit with a major international brokerage
firm that had unilaterally canceled an insurance brokerage agreement. The
Company received $190,000 in settlement of the lawsuit.
The Company is in process of offering 1,500,000 shares of common stock in
an initial public offering at a price of between $7 and $8 per share. The final
offering price will be set immediately prior to the signing of an underwriting
agreement with the underwriters.
F-11
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or any Underwriter. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the securities offered by this Prospectus, or an
offer to sell or a solicitation of an offer to buy any security by any person in
any jurisdiction in which such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, imply that the information in this Prospectus is correct as of
any time subsequent to its date.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ........................................................ 4
The Offering .............................................................. 6
Summary and Pro Forma Consolidated
Financial Information ................................................... 7
Risk Factors .............................................................. 9
Use of Proceeds ........................................................... 16
Recapitalization .......................................................... 16
Dividend Policy ........................................................... 16
Dilution .................................................................. 17
Capitalization ............................................................ 18
Management's Discussion and Analysis
of Financial Condition and Results of
Operations .............................................................. 19
Discussion and Analysis of Pro Forma
Consolidated Financial Information ...................................... 23
Business .................................................................. 26
Management ................................................................ 37
Principal Stockholders .................................................... 43
Certain Transactions ...................................................... 44
Description of Securities ................................................. 45
Shares Eligible for Future Sale ........................................... 46
Certain Federal Income Tax Considerations ................................. 47
Underwriting .............................................................. 48
Legal Matters ............................................................. 50
Experts ................................................................... 50
Available Information ..................................................... 50
Index to Consolidated Financial Statements ................................ F-1
</TABLE>
Until ______, 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the securities offered hereby, 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.
================================================================================
================================================================================
1,500,000 SHARES OF
COMMON STOCK
PREFERRED EMPLOYERS
HOLDINGS, INC.
----------
PROSPECTUS
----------
Commonwealth Associates
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Except to the extent hereinafter set forth, there is no statute, charter
provision, by-law, contract or other arrangement under which any controlling
person, director, or officer of the Company is insured or indemnified in any
manner against liability which he may incur in his capacity as such.
Section 145 of the General Corporation Law of the State of Delaware permits
indemnification by a corporation of its officers and directors. Consistent
therewith the Company's Certificate of Incorporation requires that the Company
indemnify all persons whom it may indemnify pursuant thereto to the fullest
extent permitted by Section 145.
In addition, the Company's Certificate of Incorporation provides that
directors of the Company shall not be liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) an act
related to certain unlawful dividend payments or stock redemptions or purchases,
or (iv) any transaction from which the director derived an improper benefit. The
effect of these provisions is to eliminate the right of the Company and its
stockholders (through stockholders' derivative suits on behalf of the Company)
to recover monetary damages against any director for breach of fiduciary duty as
director (including breaches resulting from negligent or grossly negligent
behavior) except for situations described in clauses (i)-(iv) of the preceding
sentence. These provisions will not affect the availability of injunctive relief
for breach of fiduciary duty or alter the liability of directors under federal
securities laws.
The Underwriting Agreement between the Company and each of the Underwriters
(the "Underwriting Agreement") provides for a reciprocal indemnification among
the Company and the Underwriters against certain civil liabilities in connection
with this Registration Statement, including liabilities under the Securities
Act. See "Underwriting."
Pursuant to an Amended and Restated Shareholders Agreement made as of May
15, 1995 (the "Shareholders Agreement") by and between the Company, Mel Harris
and Howard Odzer, the Company has agreed to indemnify each of Mr. Odzer and Mr.
Harris for all fines, liabilities, settlements, costs and expenses, including
attorneys' fees, asserted against him or incurred by him in his capacity as
officer, director, trustee, partner, agent or employee. Although the
Shareholders Agreement terminates by its own terms upon the consummation of the
Offering, such indemnification provisions, among others, are to be incorporated
in a new agreement to be entered into with the Company within 30 days of such
termination.
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the issuance and
distribution of the securities being registered (other than underwriting
discounts) are estimated as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee .................................... $ 4,763
National Association of Securities Dealers, Inc. Fee .... 2,230
Nasdaq Fee and the Boston Stock Exchange Fee ............ 13,750
Transfer Agent's Fee .................................... 3,500
Printing and Engraving Expenses ......................... 100,000
Legal Fees and Expenses ................................. 150,000
Underwriters' non-accountable expense allowance ......... 225,000*
State Securities Qualification Fees and Expenses ........ 45,000
Accounting and Auditing Fees and Expenses ............... 50,000
Miscellaneous ........................................... 4,036
--------
Total ................................................. $598,279
========
</TABLE>
- ----------
*$258,750 if the over-allotment option is exercised in full.
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
Immediately prior to the consumation of the Company's initial public
offering, the Company and the stockholders of Preferred Employers Group, Inc.
("PEGI") at such date (the "Exchanging Stockholders") will effect a
recapitalization whereby the Company will exchange 17,647.06 shares of Common
Stock for each share of common stock of PEGI held by the Exchanging Stockholders
(the "Exchange").
No underwriter has been or will be involved in the Exchange, and the
Company believes that the securities to be issued therein will not involve a
public offering and will be issued in reliance upon an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
since there are a limited number of purchasers of Common Stock in the Exchange
(nine), and such purchasers are either accredited investors (as such term is
defined under the Act), or the Company reasonably believes that, immediately
prior to such Exchange, such purchasers (either alone or with such purchasers'
representatives) have such knowledge and experience in financial and business
matters such that such purchasers are capable of evaluating the merits and risks
associated with the acquisition of Common Stock.
ITEM 27. EXHIBITS
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
4.1 Form of Representative Warrants.
4.2 Specimen Common Stock Certificate.
5.1 Opinion of Baer Marks & Upham LLP.
*10.1 The Company's 1996 Employee Stock Option Plan.
*10.2 Form of Share Escrow Agreement among the Company, Baer Marks &
Upham LLP and Howard Odzer together with the Letter Agreement
Regarding Additional Terms.
10.3 Employment Agreement, dated May 15, 1995, between the Company and
Howard Odzer.
*10.4 Form of Employment Agreement between the Company and Mel Harris.
*10.5 Letter regarding Agreement among the Reinsurance Subsidiary, The
Insurance Company of the State of Pennsylvania and other AIG
Affiliates and Form of Reinsurance Agreement.
10.6 Office Space Lease Agreement, dated August 1, 1994 between the
Company and K/B Opportunity Fund I, LP and PEGI.
10.7 Form of Advisory Services Letter Agreement between the Company
and the Representative.
10.8 Stock Repurchase Agreement, dated as of May 15, 1995, among the
Company, Howard Odzer and Ronald Rothstein.
*10.9 Cost Sharing Agreement, between the Company and International
Insurance Group, Inc.
II-2
<PAGE>
10.10 Form of Share Exchange Agreement among the Company and certain
stockholders of PEGI listed therein.
10.11 Amended and Restated Shareholders Agreement, dated as of May 15,
1995 among the Company, Howard Odzer and Mel Harris.
*10.12 Form of Employment Agreement between the Company and Howard
Odzer.
*10.13 Agency Agreement dated September 1, 1994 among the Company, GAIC
and certain affiliates of GAIC.
*10.14 General Agency Agreement dated January 1, 1993 among the Company,
The Insurance Company of the State of Pennsylvania and certain
affiliates of AIG.
*21.1 Subsidiaries of the Company.
23.1 The consent of Baer Marks & Upham LLP (included in Exhibit 5.1).
*23.2 The consent of KPMG Peat Marwick LLP, certified public
accountants.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
- ----------
* Filed herewith.
ITEM 28. UNDERTAKINGS
The Company hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement;
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer 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 small business issuer of
expenses incurred or paid by a Director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer 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.
(6) For determining any liability under the Securities Act, to treat 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 small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Act as part of this registration statement as of the time the
Commission declared it effective.
(7) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized 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 the 31st day of
January, 1997.
PREFERRED EMPLOYERS HOLDINGS, INC.
By: /s/ Mel Harris
--------------------------------
Mel Harris
Chairman and Chief Executive
Officer
In accordance with 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 stated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Mel Harris Chairman of the Board and Chief Executive
- ------------------------- Officer (Principal Executive Officer) January 31, 1997
Mel Harris
/s/ William R. Dresback Chief Financial Officer
- ------------------------- (Principal Accounting Officer) January 31, 1997
William R. Dresback
/s/ Howard Odzer President; Director January 31, 1997
- -------------------------
Howard Odzer
/s/ Stuart J. Gordon Director January 31, 1997
- -------------------------
Stuart J. Gordon
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
EXHIBITS
10.1 The Company's 1996 Employee Stock Option Plan.
10.2 Form of Share Escrow Agreement among the Company, Baer Marks &
Upham LLP and Howard Odzer together with the Letter Agreement
Regarding Additional Terms.
10.4 Form of Employment Agreement between the Company and Mel Harris.
10.5 Letter regarding Agreement among the Reinsurance Subsidiary, The
Insurance Company of the State of Pennsylvania and other AIG
Affiliates and Form of Reinsurance Agreement.
10.9 Cost Sharing Agreement between the Company and International
Insurance Group, Inc.
10.12 Form of Employment Agreement between the Company and Howard
Odzer.
10.13 Agency Agreement dated September 1, 1994 among the Company, GAIC
and certain affiliates of GAIC.
10.14 General Agency Agreement dated January 1, 1993 among the Company,
The Insurance Company of the State of Pennsylvania and certain
affiliates of AIG.
21.1 Subsidiaries of the Company.
23.2 The consent of KPMG Peat Marwick LLP, certified public
accountants.
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
1996 STOCK OPTION PLAN
1. Purpose
The purpose of this plan (the "Plan") is to secure for
PREFERRED EMPLOYERS HOLDINGS, INC. (the "Company") and its stockholders the
benefits arising from capital stock ownership by employees, officers and
directors (who are also either employees or officers) of the Company and its
subsidiary corporations who are expected to contribute to the Company's future
growth and success. Those provisions of the Plan which make express reference to
Section 422 of the Internal Revenue Code of 1986, as amended or replaced from
time to time (the "Code"), shall apply only to Incentive Stock Options (as that
term is defined in the Plan).
2. Type of Options and Administration
(a) Types of Options. Options granted pursuant to the Plan
shall be authorized by action of the Board of Directors (the "Board") of the
Company (or a committee designated by the Board) and may be either incentive
stock options ("Incentive Stock Options") meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code.
(b) Administration. The Plan will be administered by the Board
or by a committee consisting of two or more directors each of whom shall be a
"non-employee director" within the meaning of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor rule ("Rule 16b-3") and an "outside director" within the meaning of
Treasury Regulation Section 1.162-27(e)(3) promulgated under Section 162(m) of
the Code (the "Committee") appointed by the Board of the Company, in each case
whose construction and interpretation of the terms and provisions of the Plan
shall be final and conclusive. If the Board determines to create a Committee to
administer the Plan, the delegation of powers to the Committee shall be
consistent with applicable laws or regulations (including, without limitation,
applicable state law and Rule 16b-3). The Board or Committee may in its sole
discretion grant options to purchase shares of the Company's Common Stock, $0.01
par value per share ("Common Stock"), and issue shares upon exercise of such
options as provided in the Plan. The Board or Committee shall have authority,
subject to the express provisions of the Plan, to construe the respective option
agreements and the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the respective
option agreements, which need not be identical; and to make all other
determinations in the judgment of the Board or Committee necessary or desirable
for the administration of the Plan. The Board or Committee may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any option agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
<PAGE>
expediency. No director or person acting pursuant to authority delegated by the
Board shall be liable for any action or determination under the Plan made in
good faith.
3. Eligibility
Options may be granted to persons who are, at the time of
grant, employees, officers or directors (who are also either employees or
officers) of the Company or any subsidiaries of the Company as defined in
Sections 424(e) and 424(f) of the Code, provided, that Incentive Stock Options
may only be granted to individuals who are employees of the Company (within the
meaning of Section 3401(c) of the Code). A person who has been granted an option
may, if he or she is otherwise eligible, be granted additional options if the
Board or Committee shall so determine.
4. Stock Subject to Plan
The stock subject to options granted under the Plan shall be
shares of authorized but unissued or reacquired Common Stock. Subject to
adjustment as provided in Section 15 below, the maximum number of shares of
Common Stock of the Company which may be issued and sold under the Plan is
300,000. If an option granted under the Plan shall expire, terminate or is
cancelled for any reason without having been exercised in full, the unpurchased
shares subject to such option shall again be available for subsequent option
grants under the Plan.
5. Forms of Option Agreements
As a condition to the grant of an option under the Plan, each
recipient of an option shall execute an option agreement in such form not
inconsistent with the Plan as may be approved by the Board. Such option
agreements may differ among recipients.
6. Purchase Price
(a) General. The purchase price per share of stock issuable
upon the exercise of an option shall be determined by the Board or the Committee
at the time of grant of such option, provided, however, that in the case of an
Incentive Stock Option, the exercise price shall not be less than 100% of the
Fair Market Value (as hereinafter defined) of such stock at the time of grant of
such option, or less than 110% of such Fair Market Value in the case of options
described in Section 11(b). "Fair Market Value" of a share of Common Stock of
the Company as of a specified date for the purposes of the Plan shall mean the
closing price of a share of the Common Stock on the principal securities
exchange (including The Nasdaq SmallCap Market or The Nasdaq National Market) on
which such shares are traded on the day immediately preceding the date as of
which Fair Market Value is being determined, or on the next preceding
2
<PAGE>
date on which such shares are traded if no shares were traded on such
immediately preceding day, or if the shares are not traded on a securities
exchange, Fair Market Value shall be deemed to be the average of the high bid
and low asked prices of the shares in the over-the-counter market on the day
immediately preceding the date as of which Fair Market Value is being determined
or on the next preceding date on which such high bid and low asked prices were
recorded. If the shares are not publicly traded, Fair Market Value of a share of
Common Stock (including, in the case of any repurchase of shares, any
distributions with respect thereto which would be repurchased with the shares)
shall be determined in good faith by the Board. In no case shall Fair Market
Value be determined with regard to restrictions other than restrictions which,
by their terms, will never lapse.
(b) Payment of Purchase Price. Options granted under the Plan
may provide for the payment of the exercise price by delivery of cash or a check
to the order of the Company in an amount equal to the exercise price of such
options, or by any other means which the Board determines are consistent with
the purpose of the Plan and with applicable laws and regulations (including,
without limitation, the provisions of Rule 16b-3 and Regulation T promulgated by
the Federal Reserve Board).
7. Exercise Option Period
Subject to earlier termination as provided in the Plan, each
option and all rights thereunder shall expire on such date as determined by the
Board or the Committee and set forth in the applicable option agreement,
provided, that such date shall not be later than ten (10) years after the date
on which the option is granted.
8. Exercise of Options
Each option granted under the Plan shall be exercisable either
in full or in installments at such time or times and during such period as shall
be set forth in the option agreement evidencing such option, subject to the
provisions of the Plan. Subject to the requirements in the immediately preceding
sentence, if an option is not at the time of grant immediately exercisable, the
Board may (i) in the agreement evidencing such option, provide for the
acceleration of the exercise date or dates of the subject option upon the
occurrence of specified events, and/or (ii) at any time prior to the complete
termination of an option, accelerate the exercise date or dates of such option.
9. Nontransferability of Options
3
<PAGE>
No option granted under this Plan shall be assignable or
otherwise transferable by the optionee, except by will or by the laws of descent
and distribution. An option may be exercised during the lifetime of the optionee
only by the optionee. In the event an optionee dies during his employment by the
Company or any of its subsidiaries, or during the three (3) month period
following the date of termination of such employment, his option shall
thereafter be exercisable within a period of one (1) year after the date of
death (or within such lesser period specified in the applicable option
agreement), by his executors or administrators to the full extent to which such
option was exercisable by the optionee at the time of his death during the
periods set forth in Section 10 or 11(d).
10. Effect of Termination of Employment or Other Relationship
Except as provided in Section 11(d) with respect to Incentive
Stock Options and except as otherwise determined by the Board or Committee at
the date of grant of an option, and subject to the provisions of the Plan, an
optionee may exercise an option at any time within three (3) months following
the termination of the optionee's employment or other relationship with the
Company or within one (1) year if such termination was due to the death or
disability of the optionee but in no event later than the expiration date of the
option. If the termination of the optionee's employment is for cause or is
otherwise attributable to a breach by the optionee of an employment or
confidentiality or non-disclosure agreement, the option shall expire immediately
upon such termination. The Board shall have the power to determine what
constitutes a termination for cause or a breach of an employment or
confidentiality or non-disclosure agreement, whether an optionee has been
terminated for cause or has breached such an agreement, and the date upon which
such termination for cause or breach occurs. Any such determinations shall be
final and conclusive and binding upon the optionee.
11. Incentive Stock Options
Options granted under the Plan which are intended to be
Incentive Stock Options shall be subject to the following additional terms and
conditions:
(a) Express Designation. All Incentive Stock Options granted
under the Plan shall, at the time of grant, be specifically designated as such
in the option agreement covering such Incentive Stock Options.
(b) 10% Shareholder. If any employee to whom an Incentive
Stock Option is to be granted under the Plan is, at the time of the grant of
such option, the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company (after taking into account
the attribution of stock ownership rules of Section 424(d) of the Code), then
the following special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
4
<PAGE>
(i) the purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than 110% of
the Fair Market Value of one share of Common Stock at the time of
grant; and
(ii) the option exercise period shall not exceed five (5)
years from the date of grant.
(c) Dollar Limitation. For so long as the Code shall so
provide, options granted to any employee under the Plan (and any other incentive
stock option plans of the Company) which are intended to constitute Incentive
Stock Options shall not constitute Incentive Stock Options to the extent that
such options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate Fair Market Value, as
of the respective date or dates of grant, of more than $100,000.
(d) Termination of Employment, Death or Disability. No
Incentive Stock Option may be exercised unless, at the time of such exercise,
the optionee is, and has been continuously since the date of grant of his or her
option, employed by the Company, except that:
(i) an Incentive Stock Option may be exercised within
the period of three (3) months after the date the optionee ceases to be
an employee of the Company (or within such lesser period as may be
specified in the applicable option agreement), provided, that the
agreement with respect to such option may designate a longer exercise
period and that the exercise after such three (3) month period shall be
treated as the exercise of a non-statutory option under the Plan,
(ii) if the optionee dies while in the employ of the
Company, or within three (3) months after the optionee ceases to be
such an employee, the Incentive Stock Option may be exercised by the
person to whom it is transferred by will or the laws of descent and
distribution within the period of one (1) year after the date of death
(or within such lesser period as may be specified in the applicable
option agreement), and
(iii) if the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor provisions thereto)
while in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one (1) year after the date the optionee
ceases to be such an employee because of such disability (or within
such lesser period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions
5
<PAGE>
(a) Additional Option Provisions. The Board or the Committee
may, in its sole discretion, include additional provisions in option agreements
covering options granted under the Plan, including without limitation,
restrictions on transfer, repurchase rights, rights of first refusal,
commitments to pay cash bonuses or to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board or the Committee, provided, that
such additional provisions shall not be inconsistent with any other term or
condition of the Plan and such additional provisions shall not cause any
Incentive Stock Option granted under the Plan to fail to qualify as an Incentive
Stock Option within the meaning of Section 422 of the Code.
(b) Acceleration, Extension, Etc. The Board or the Committee
may, in its sole discretion (i) accelerate the date or dates on which all or any
particular option or options granted under the Plan may be exercised, or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised, provided, however that no such extension shall
be permitted if it would cause the Plan to fail to comply with Section 422 of
the Code or with Rule 16b-3 (if applicable to such option).
13. General Restrictions
(a) Investment Representations. The Company may require any
person to whom an option is granted, as a condition of exercising such option or
award, to give written assurances in substance and form satisfactory to the
Company to the effect that such person is acquiring the Common Stock subject to
the option or award for his or her own account for investment and not with any
present intention of selling or otherwise distributing the same, and to such
other effects as the Company deems necessary or appropriate in order to comply
with federal and applicable state securities laws, or with covenants or
representations made by the Company in connection with any public offering of
its Common Stock, including any "lock-up" or other restriction on
transferability.
(b) Compliance With Securities Law. Each option shall be
subject to the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option or award upon any securities exchange or automated quotation
system or under any state or federal law, or the consent or approval of any
governmental or regulatory body, or that the disclosure of non-public
information or the satisfaction of any other condition, is necessary as a
condition of, or in connection with the issuance or purchase of shares
thereunder, such option or award may not be exercised, in whole or in part,
unless such listing, registration, qualification, consent or approval or
satisfaction of such condition shall have been effected or obtained on
conditions acceptable to the Board or the Committee. Nothing herein shall be
deemed to require the Company to apply for or to obtain such listing,
registration or qualification, or to satisfy such condition.
6
<PAGE>
14. Rights as a Stockholder
The holder of an option shall have no rights as a stockholder
with respect to any shares covered by the option (including, without limitation,
any right to vote or to receive dividends or non-cash distributions with respect
to such shares) until the effective date of exercise of such option and then
only to the extent of the shares of Common Stock so purchased. No adjustment
shall be made for dividends or other rights for which the record date is prior
to the date of exercise.
15. Adjustment Provisions for Recapitalizations,
Reorganizations and Related Transactions
(a) Recapitalizations and Related Transactions. If, through or
as a result of any recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar transaction (i) the outstanding
shares of Common Stock are increased, decreased or exchanged for a different
number or kind of shares or other securities of the Company, or (ii) additional
shares or new or different shares or other non-cash assets are distributed with
respect to such shares of Common Stock or other securities, an appropriate and
proportionate adjustment shall be made in (x) the maximum number and kind of
shares reserved for issuance under or otherwise referred to in the Plan, (y) the
number and kind of shares or other securities subject to any then-outstanding
options under the Plan, and (z) the price for each share subject to any
then-outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment (A) would cause the Plan to fall to comply with Section 422 of the
Code or with Rule 16b-3 (if applicable to such option), or (B) would be
considered as the adoption of a new plan requiring stockholder approval.
(b) Reorganization, Merger and Related Transactions. All
outstanding options under the Plan shall become fully exercisable for a period
of sixty (60) days following the occurrence of any Trigger Event (as defined
below), whether or not such options are then exercisable under the provisions of
the applicable agreements relating thereto. For purposes of the Plan, a "Trigger
Event" is any one of the following events:
(i) the date on which shares of Common Stock are first
purchased pursuant to a tender offer or exchange offer (other than such
an offer by the Company, any subsidiary of the Company, any employee
benefit plan of the Company or of any subsidiary of the Company or any
entity holding shares or other securities of the Company for or
pursuant to the terms of such plan), whether or not such offer is
approved or opposed by the Company and regardless of the number of
shares purchased pursuant to such offer;
(ii) the date the Company acquires knowledge that any
person or group deemed a person under Section 13(d)-3 of the Exchange
Act (other than the Company,
7
<PAGE>
any subsidiary of the Company, any employee benefit plan of the Company
or of any subsidiary of the Company or any entity holding shares of
Common Stock or other securities of the Company for or pursuant to the
terms of any such plan or any individual or entity or group or
affiliate thereof which acquired its beneficial ownership interest
prior to the date the Plan was adopted by the Board), in a transaction
or series of transactions, has become the beneficial owner, directly or
indirectly (with beneficial ownership determined as provided in Rule
13d-3, or any successor rule, under the Exchange Act), of securities of
the Company entitling the person or group to 30% or more of all votes
(without consideration of the rights of any class or stock to elect
directors by a separate class vote) to which all stockholders of the
Company would be entitled in the election of the Board were an election
held on such date;
(iii) the date, during any period of two (2) consecutive
years, when individuals who at the beginning of such period constitute
the Board cease for any reason to constitute at least a majority
thereof, unless the election, or the nomination for election by the
stockholders of the Company, of each new director was approved by a
vote of at least a majority of the directors then still in office who
were directors at the beginning of such period; and
(iv) the date of approval by the stockholders of the
Company of an agreement (a "reorganization agreement") providing for:
(A) The merger or consolidation of the Company with
another corporation (x) where the stockholders of the Company,
immediately prior to the merger or consolidation, do not
beneficially own, immediately after the merger or
consolidation, shares of the corporation issuing cash or
securities in the merger or consolidation entitling such
stockholders to 80% or more of all votes (without
consideration of the rights of any class of stock to elect
directors by a separate class vote) to which all stockholders
of such corporation would be entitled in the election of
directors, or (y) where the members of the Board of the
Company, immediately prior to the merger or consolidation, do
not, immediately after the merger or consolidation, constitute
a majority of the Board of Directors of the corporation
issuing cash or securities in the merger or consolidation, or
(B) The sale or other disposition of all or
substantially all the assets of the Company.
(c) Board Authority to Make Adjustments. Any adjustments under
this Section 15 will be made by the Board or the Committee, whose determination
as to what adjustments, if any, will be made and the extent thereof will be
final, binding and conclusive. No fractional shares will be issued under the
Plan on account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc
8
<PAGE>
(a) General. In the event of any sale, merger, transfer or
acquisition of the Company or substantially all of the assets of the Company in
which the Company is not the surviving corporation, provided that after the
merger, transfer or acquisition the Company shall have requested the acquiring
or succeeding corporation (or an affiliate thereof) that equivalent options
shall be substituted and such successor corporation shall have refused or failed
to assume all options outstanding under the Plan or issue substantially
equivalent options, then any or all outstanding options under the Plan shall
accelerate and become exercisable in full immediately prior to such event. The
Board or Committee will notify holders of options under the Plan that any such
options shall be fully exercisable for a period of fifteen (15) days from the
date of such notice, and the options will terminate upon expiration of such
notice.
(b) Substitute Options. The Company may grant options under
the Plan in substitution for options held by employees of another corporation
who become employees of the Company, or a subsidiary of the Company, as the
result of a merger or consolidation of the employing corporation with the
Company or a subsidiary of the Company, or as a result of the acquisition by the
Company, or one of its subsidiaries, of property or stock of the employing
corporation. The Company may direct that substitute options be granted on such
terms and conditions as the Board considers appropriate in the circumstances.
17. No Special Employment Rights
Nothing contained in the Plan or in any option shall confer
upon any optionee any right with respect to the continuation of his or her
employment by the Company or interfere in any way with the right of the Company
at any time to terminate such employment or to increase or decrease the
compensation of the optionee.
18. Other Employee Benefits
Except as to plans which by their terms include such amounts
as compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board.
19. Amendment, Modification or Termination of the Plan
(a) The Board may at any time modify, amend or terminate the
Plan provided, however, that if at any time the approval of the stockholders of
the Company is required under Section 422 of the Code or any successor provision
with respect to Incentive Stock
9
<PAGE>
Options, or under Rule 16b-3, the Board may not effect such modification or
amendment without such approval.
(b) The modification, amendment or termination of the Plan
shall not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board or the Committee may amend or modify outstanding option
agreements in a manner not inconsistent with the Plan. The Board shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code, and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
20. Withholding
(a) The Company shall have the right to deduct from payments
of any kind otherwise due to the optionee any federal, state or local taxes of
any kind required by law to be withheld with respect to any shares issued upon
exercise of options under the Plan. Subject to the prior approval of the
Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option, or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a Fair Market Value equal to such withholding obligation as
of the date that the amount of tax to be withheld is to be determined. An
optionee who has made an election pursuant to this Section 20(a) may only
satisfy his or her withholding obligation with shares of Common Stock which are
not subject to any repurchase, forfeiture, unfulfilled vesting or other similar
requirements.
(b) The acceptance of shares of Common Stock upon exercise of
an Incentive Stock Option shall constitute an agreement by the optionee (i) to
notify the Company if any or all of such shares are disposed of by the optionee
within two (2) years from the date the option was granted or within one (1) year
from the date the shares were issued to the optionee pursuant to the exercise of
the option, and (ii) if required by law, to remit to the Company, at the time of
and in the case of any such disposition, an amount sufficient to satisfy the
Company's federal, state and local withholding tax obligations with respect to
such disposition, whether or not, as to both (i) and (ii), the optionee is in
the employ of the Company at the time of such disposition.
10
<PAGE>
21. Cancellation and New Grant of Options, Etc.
The Board or the Committee shall have the authority to effect,
at any time and from time to time, with the consent of the affected optionees
(i) the cancellation of any or all outstanding options under the Plan and the
grant in substitution therefor of new options under the Plan covering the same
or different numbers of shares of Common Stock and having an option exercise
price per share which may be lower or higher than the exercise price per share
of the cancelled options, or (ii) the amendment of the terms of any and all
outstanding options under the Plan to provide an option exercise price per share
which is higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan
(a) Effective Date. The Plan shall become effective when
adopted by the Board, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the date of the Board's adoption of the Plan, no
options previously granted under the Plan shall be deemed to be Incentive Stock
Options and no Incentive Stock Options shall be granted thereafter. Amendments
to the Plan not requiring stockholder approval shall become effective when
adopted by the Board and amendments requiring stockholder approval (as provided
in Section 19) shall become effective when adopted by the Board, but no
Incentive Stock Option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve (12) months of the Board's adoption of such amendment, any Incentive
Stock Options granted on or after the date of such amendment shall terminate to
the extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular optionee. Subject to this limitation, options
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) Termination. Unless sooner terminated by the Board, the
Plan shall terminate upon the close of business on the day next preceding the
tenth anniversary of the date of its adoption by the Board. After termination of
the Plan, no further options may be granted under the Plan; provided however,
that such termination will not affect any options granted prior to termination
of the Plan.
23. Provision for Foreign Participants
The Board may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize
11
<PAGE>
differences in laws, rules, regulations or customs of such foreign jurisdictions
with respect to tax, securities, currency, employee benefit or other matters.
24. Governing Law
The provisions of this Plan shall be governed and construed in
accordance with the laws of the State of Delaware without regard to the
principles of conflicts of laws.
12
<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
FORM OF STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement"), dated as of January
___, 1997, between PREFERRED EMPLOYERS HOLDINGS, INC., a Delaware corporation
(the "Company"), having an address at 10800 Biscayne Boulevard, Penthouse,
Miami, Florida 33161 and [ ], having an address at
___________________________________ (the "Grantee").
In accordance with the Preferred Employers Holdings, Inc. 1996
Stock Option Plan (the "Plan"), the Company hereby grants to the Grantee an
incentive stock option (the "Option") to purchase all or any part of an
aggregate of [ ] shares of the Company's common shares,
$.01 par value per share (the "Shares").
To evidence the Option and to set forth its terms, the Company
and the Grantee agree as follows:
1. Confirmation of Grant. The Company hereby evidences and
confirms its grant of the Option to the Grantee on the date of this Agreement.
2. Number of Shares. This Option shall be for an aggregate of
[ ] Shares.
3. Exercise Price. The exercise price shall be [$ ]
per share for a total of [$ ].
4. Medium and Time of Payment. The exercise price of the
Option shall be paid in cash or by check payable to the order of the Company at
the time of exercise. In addition, the Company shall accept full or partial
payment in Shares having a fair market value on the date of exercise equal to
the portion of the exercise price being so paid.
Payment in full shall be required before the issuance of any
Shares pursuant to this Option. In addition, before or concurrently with
delivery to the Grantee of a Certificate representing such Shares, the Grantee
shall pay any amount necessary to satisfy applicable federal, state, or local
tax requirements.
5. Term and Exercise of the Option. The Option shall expire
five years from the date of this Agreement and may be exercised at the times and
for the number of Shares as follows:
<PAGE>
(a) on or after the date hereof, up to ___% (ignoring
fractional shares) of the total number of Shares subject to
this Option;
(b) on or after the date which is one year after the
date hereof, up to ___% (ignoring fractional Shares) of the
total number of Shares subject to this Option;
(c) on or after the date which is two years after the
date hereof, up to ___% (ignoring fractional Shares) of the
total number of Shares subject to this Option; and
(d) on or after the date which is three years after
the date of the grant, the remaining Shares subject to this
Option.
This Option may be exercised only by written notice to the
Company indicating the number of Shares which are being purchased. Such notice
must be signed by the Grantee and be accompanied by full payment of the exercise
price.
6. Nontransferability. The Option may be transferred only by
will or the laws of descent and distribution, and the Option may be exercised
during the Grantee's lifetime only by the Grantee or by the Grantee's legal
representative.
7. Rights in the Event of the Grantee's Disability. If the
Grantee's employment with the Company or any parent or subsidiary corporation
(within the meaning of Section 424(e) and (f) of the Internal Revenue Code of
1986, as amended (the "Code"), ("Affiliates")) is terminated on account of
permanent and total disability (as defined in Code Section 22(e)(3)), the
Grantee or the Grantee's legal representative (or the Grantee's estate if the
Grantee dies after termination of employment) may exercise the Option, to the
extent exercisable on the date of the Grantee's termination of employment, at
any time within one year after termination of employment but in no event after
the expiration of the term of the Option. The Grantee's "estate" means the
Grantee's legal representative or any person who acquires the right to exercise
the Option by reason of the Grantee's death.
8. Rights in the Event of the Grantee's Death. If the Grantee
dies while an employee of the Company or any Affiliate (or within three months
after the Grantee ceases to be such an employee) but while he still has the
right to exercise this Option, his estate may exercise the Option, to the extent
exercisable at the date of the Grantee's death, any time within one year after
the Grantee's death, but in no event after the expiration of the term of the
Option.
9. Rights in the Event of Termination of Employment. If
Grantee's employment with the Company or any Affiliate is terminated
involuntarily for "Cause" the Grantee's Option shall expire as of the date of
termination of employment. "Cause" under this Agreement shall mean (i) material
misconduct by the Grantee, (ii) any act by the Grantee that is materially
adverse to the Company or any Affiliate, or (iii) breach by the Grantee of any
employment or confidentiality or nondisclosure agreement with the Company or any
Affiliate. "Cause" also shall have the meaning given to that term, or any
similar term, under any
-2-
<PAGE>
employment agreement with the Company or any Affiliate. If the Grantee's
employment is terminated for any reason other than death, disability, or as
described in the preceding sentences of this Section, the Grantee (or the
Grantee's estate, if the Grantee dies after the termination) may exercise the
Option, to the extent exercisable before the termination, within three months
after the termination, but in no event after the expiration of the term of the
Option.
10. Adjustment in the Shares. If the Shares, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares or other securities of the Company or of another corporation (whether
by reason of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares, or otherwise) or if the number of Shares
shall be increased through the payment of a share dividend, the Grantee shall
receive upon exercise of the Option the number and kind of shares or other
securities into which each outstanding Share shall be so changed, or for which
each such Share shall be exchanged, or to which each such Share shall be
entitled, as the case may be. The exercise price and other terms of the Option
shall be appropriately amended to reflect the foregoing events. If there shall
be any other change in the number or kind of the outstanding Shares, or of any
shares or other securities into which the Shares shall have been changed, or for
which the Shares shall have been exchanged, then, if the Board of Directors
shall, in its sole discretion, determine that such change equitably requires an
adjustment in the Option, such adjustment shall be made in accordance with that
determination. Notice of any adjustment shall be given by the Company to the
Grantee.
11. Effect of Termination or Amendment of Plan. No suspension,
termination, modification, or amendment of the Plan may, without the express
written consent of the Grantee, adversely affect the rights of the Grantee under
this Option.
12. No Limitation on Rights of the Company. The grant of this
Option shall not in any way affect the right or power of the Company to make
adjustments, reclassifications, or changes in its capital or business structure
or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part
of its business or assets.
13. Rights as a Shareholder. The Grantee shall have the rights
of a shareholder with respect to the Shares covered by the Option only upon
becoming the holder of record of those Shares.
14. Compliance with Applicable Law. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificates for Shares pursuant to the exercise of the Option,
unless and until the Company is advised by its counsel that the issuance and
delivery of such certificates is in compliance with all applicable laws,
regulations of governmental authority, and the requirements of any exchange upon
which Shares are traded. The Company shall in no event be obligated to register
any securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any such law, regulation or
requirement. The Board of Directors may require, as a condition of the issuance
and delivery of such certificates and in order to ensure compliance with such
laws, regulations, and requirements, that the Grantee make such covenants,
agreements, and representations as the Board of Directors, in its sole
discretion, considers necessary or desirable.
-3-
<PAGE>
15. No Obligation to Exercise Option. The granting of the
Option shall impose no obligation upon the Grantee to exercise the Option.
16. Agreement Not a Contract of Employment. This Agreement is
not a contract of employment, and the terms of employment of the Grantee or the
relationship of the Grantee with the Company or any Affiliate shall not be
affected in any way by this Agreement except as specifically provided herein.
The execution of this Agreement shall not be construed as conferring any legal
rights upon the Grantee for a continuation of employment or relationship with
the Company or any Affiliate, nor shall it interfere with the right of the
Company or any subsidiary thereof to discharge the Grantee and to treat him
without regard to the effect which that treatment might have upon him as a
Grantee.
17. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally or
sent by certified, registered, or express mail, postage prepaid. Any such notice
shall be deemed given when so delivered personally or, if mailed, four days
after the date of deposit in the United States mails, to each party at its
address set forth above or to such other address as may be designated in a
notice given in accordance with this Section.
18. Governing Law. Except to the extent preempted by Federal
law, this Agreement shall be construed and enforced in accordance with, and
governed by, Delaware law.
19. Receipt of Plan. Grantee acknowledges receipt of a copy of
the Plan, and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all the terms and provisions
of this Option and of the Plan. Grantee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board of Directors
of the Company or the Committee, as defined in the Plan, upon any questions
rising under the Plan.
IN WITNESS WHEREOF, the Company and the Grantee have duly
executed this Agreement as of the date first written above.
PREFERRED EMPLOYERS
HOLDINGS, INC.
__________________________ By:___________________________
Witness Its:
__________________________ ______________________________
Witness [GRANTEE]
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<PAGE>
PREFERRED EMPLOYERS HOLDINGS, INC.
FORM OF STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT (the "Agreement"), dated as of [ ]
1996, between PREFERRED EMPLOYERS HOLDINGS, INC., a Delaware corporation (the
"Company"), having an address at 10800 Biscayne Boulevard, Penthouse, Miami,
Florida 33161 and [ ], having an address
at ___________________________________ (the "Grantee").
In accordance with the Preferred Employers Holdings, Inc. 1996
Stock Option Plan (the "Plan"), the Company hereby grants to the Grantee a
nonqualified stock option (the "Option") to purchase all or any part of an
aggregate of [ ] shares of the Company's common shares, $.01 par value per share
(the "Shares"). This Option is a nonqualified Stock Option which is not intended
to be an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code").
To evidence the Option and to set forth its terms, the Company
and the Grantee agree as follows:
1. Confirmation of Grant. The Company hereby evidences and
confirms its grant of the Option to the Grantee on the date of this Agreement.
2. Number of Shares. This Option shall be for an aggregate of
[ ] Shares.
3. Exercise Price. The exercise price shall be [$ ]
per share for a total of [$ ].
4. Medium and Time of Payment. The exercise price of the
Option shall be paid in cash or by check payable to the order of the Company at
the time of exercise. In addition, the Company shall accept full or partial
payment in Shares having a fair market value on the date of exercise equal to
the portion of the exercise price being so paid.
Payment in full shall be required before the issuance of any
Shares pursuant to this Option. In addition, before or concurrently with
delivery to the Grantee of a Certificate representing such Shares, the Grantee
shall pay any amount necessary to satisfy applicable federal, state, or local
tax requirements.
5. Term and Exercise of the Option. The Option shall expire
five years from the date of this Agreement and may be exercised at the times and
for the number of Shares as follows:
<PAGE>
(a) on or after the date which is one year after the
date hereof, up to __% (ignoring fractional Shares) of the
total number of Shares subject to this Option;
(b) on or after the date which is two years after the
date hereof, up to __% (ignoring fractional Shares) of the
total number of Shares subject to this Option;
(c) on or after the date which is three years after
the date hereof, up to __% (ignoring fractional Shares) of the
total number of Shares subject to this Option;
(d) on or after the date which is four years after
the date hereof, up to __% (ignoring fractional Shares) of the
total number of Shares subject to the this Option; and
(e) on or after the date which is five years form the
date of the grant, the remaining Shares subject to this
Option.
This Option may be exercised only by written notice to the
Company indicating the number of Shares which are being purchased. Such notice
must be signed by the Grantee and be accompanied by full payment of the exercise
price.
6. Nontransferability. The Option may be transferred only by
will or the laws of descent and distribution, and the Option may be exercised
during the Grantee's lifetime only by the Grantee or by the Grantee's legal
representative.
7. Rights in the Event of the Grantee's Disability. If the
Grantee's employment with the Company or any parent or subsidiary corporation
(within the meaning of Section 424(e) and (f) of the Internal Revenue Code of
1986, as amended (the "Code"), ("Affiliates")) is terminated on account of
permanent and total disability (as defined in Code Section 22(e)(3)), the
Grantee or the Grantee's legal representative (or the Grantee's estate if the
Grantee dies after termination of employment) may exercise the Option, to the
extent exercisable on the date of the Grantee's termination of employment, at
any time within one year after termination of employment but in no event after
the expiration of the term of the Option. The Grantee's "estate" means the
Grantee's legal representative or any person who acquires the right to exercise
the Option by reason of the Grantee's death.
8. Rights in the Event of the Grantee's Death. If the Grantee
dies while an employee of the Company or any Affiliate but while he still has
the right to exercise this Option, his estate may exercise the Option, to the
extent exercisable at the date of the Grantee's death, any time within one year
after the Grantee's death, but in no event after the expiration of the term of
the Option.
9. Rights in the Event of Termination of Employment. If
Grantee's employment with the Company or any Affiliate is terminated
involuntarily for "Cause" the Grantee's Option shall expire as of the date of
termination of employment. "Cause" under this
-2-
<PAGE>
Agreement shall mean (i) material misconduct by the Grantee, (ii) any act by the
Grantee that is materially adverse to the Company or any Affiliate, or (iii)
breach by the Grantee of any employment or confidentiality or non-disclosure
agreement with the Company or any Affiliate. "Cause" also shall have the meaning
given to that term, or any similar term, under any employment agreement with the
Company or any Affiliate. If the Grantee's employment is terminated for any
reason other than death, disability, or as described in the preceding sentences
of this Section, the Grantee (or the Grantee's estate, if the Grantee dies after
the termination) may exercise the Option, to the extent exercisable before the
termination, within three months after the termination, but in no event after
the expiration of the term of the Option.
10. Adjustment in the Shares. If the Shares, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares or other securities of the Company or of another corporation (whether
by reason of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares, or otherwise) or if the number of Shares
shall be increased through the payment of a share dividend, the Grantee shall
receive upon exercise of the Option the number and kind of shares or other
securities into which each outstanding Share shall be so changed, or for which
each such Share shall be exchanged, or to which each such Share shall be
entitled, as the case may be. The exercise price and other terms of the Option
shall be appropriately amended to reflect the foregoing events. If there shall
be any other change in the number or kind of the outstanding Shares, or of any
shares or other securities into which the Shares shall have been changed, or for
which the Shares shall have been exchanged, then, if the Board of Directors
shall, in its sole discretion, determine that such change equitably requires an
adjustment in the Option, such adjustment shall be made in accordance with that
determination. Notice of any adjustment shall be given by the Company to the
Grantee.
11. Effect of Termination or Amendment of Plan. No suspension,
termination, modification, or amendment of the Plan may, without the express
written consent of the Grantee, adversely affect the rights of the Grantee under
this Option.
12. No Limitation on Rights of the Company. The grant of this
Option shall not in any way affect the right or power of the Company to make
adjustments, reclassifications, or changes in its capital or business structure
or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part
of its business or assets.
13. Rights as a Shareholder. The Grantee shall have the rights
of a shareholder with respect to the Shares covered by the Option only upon
becoming the holder of record of those Shares.
14. Compliance with Applicable Law. Notwithstanding anything
herein to the contrary, the Company shall not be obligated to cause to be issued
or delivered any certificates for Shares pursuant to the exercise of the Option,
unless and until the Company is advised by its counsel that the issuance and
delivery of such certificates is in compliance with all applicable laws,
regulations of governmental authority, and the requirements of any exchange upon
which Shares are traded. The Company shall in no event be obligated to register
any securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any
-3-
<PAGE>
such law, regulation or requirement. The Board of Directors may require, as a
condition of the issuance and delivery of such certificates and in order to
ensure compliance with such laws, regulations, and requirements, that the
Grantee make such covenants, agreements, and representations as the Board of
Directors, in its sole discretion, considers necessary or desirable.
15. No Obligation to Exercise Option. The granting of the
Option shall impose no obligation upon the Grantee to exercise the Option.
16. Agreement Not a Contract of Employment. This Agreement is
not a contract of employment, and the terms of employment of the Grantee or the
relationship of the Grantee with the Company or any Affiliate shall not be
affected in any way by this Agreement except as specifically provided herein.
The execution of this Agreement shall not be construed as conferring any legal
rights upon the Grantee for a continuation of employment or relationship with
the Company or any Affiliate, nor shall it interfere with the right of the
Company or any subsidiary thereof to discharge the Grantee and to treat him
without regard to the effect which that treatment might have upon him as a
Grantee.
17. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally or
sent by certified, registered, or express mail, postage prepaid. Any such notice
shall be deemed given when so delivered personally or, if mailed, four days
after the date of deposit in the United States mails, to each party at its
address set forth above or to such other address as may be designated in a
notice given in accordance with this Section.
18. Governing Law. Except to the extent preempted by Federal
law, this Agreement shall be construed and enforced in accordance with, and
governed by, Delaware law.
19. Receipt of Plan. Grantee acknowledges receipt of a copy of
the Plan, and represents that he is familiar with the terms and provisions
thereof, and hereby accepts this Option subject to all the terms and provisions
of this Option and of the Plan. Grantee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board of Directors
of the Company or the Committee, as defined in the Plan, upon any questions
rising under the Plan.
IN WITNESS WHEREOF, the Company and the Grantee have duly
executed this Agreement as of the date first written above.
PREFERRED EMPLOYERS
HOLDINGS, INC.
__________________________ By:___________________________
Witness Its:
__________________________ ______________________________
Witness [GRANTEE]
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<PAGE>
FORM OF SHARE ESCROW AGREEMENT
This SHARE ESCROW AGREEMENT, dated as of _______________________, 1997
(the "Agreement"), is entered into by and among PREFERRED EMPLOYERS HOLDINGS,
INC., a Delaware corporation (the "Company"), HOWARD ODZER ("Odzer") and Baer
Marks & Upham LLP, a New York limited liability partnership, as Escrow Agent
(the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, Odzer is the beneficial owner of _________ shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock"); and
WHEREAS, Odzer agrees to place 300,000 shares of Common Stock (the
"Shares") in escrow with the Escrow Agent for issuance upon the exercise of
certain stock options which will be granted by him pursuant to the terms and
subject to the conditions hereof (the "Stock Options") to certain executives and
officers of the Company as designated by the Compensation Committee (the
"Committee") of the Board of Directors of the Company.
NOW, THEREFORE, in consideration of the foregoing and of the covenants
and agreements contained herein, the parties hereto, intending legally to be
bound, agree as follows:
1. Escrow of Shares. (a) Concurrently with the execution and delivery
hereof, Odzer shall deliver to the Escrow Agent certificates representing the
Shares, duly endorsed for transfer (the "Certificates"), to be held for so long
as any Stock Options remain outstanding and such Certificates shall be retained
in escrow pursuant to the terms and subject to the conditions hereof.
(b) The Escrow Agent agrees to hold the Shares in accordance with the
terms and conditions of this Agreement and for the uses and purposes stated
herein.
(c) Odzer and the Company shall deliver to the Escrow Agent the Form of
Stock Option Agreement, attached hereto as Annex A (the "Form Option
Agreement"), to be retained in escrow in accordance with the terms and
conditions of this Agreement and for the uses and purposes stated herein.
(d) It is understood and agreed that the Escrow Agent's sole duties
hereunder are as indicated herein and that the Escrow Agent in the performance
of its duties hereunder shall incur no liability except for willful malfeasance
and shall not be liable or responsible for anything done or omitted to be done
in good faith as herein provided. The Company agrees to indemnify and save the
Escrow Agent harmless from any claims, liabilities, judgments, attorneys' fees
and
<PAGE>
other expenses of every kind and nature, which may be incurred by the Escrow
Agent by reason of its acceptance of, and its performance under, this Agreement,
except such as may arise because of the Escrow Agent's willful misconduct in
performing the specified duties as Escrow Agent. The parties hereby agree that
in no event shall any claim be made with respect to any conflict of interest in
connection with Baer Marks & Upham LLP's acting in its capacity of Escrow Agent
and counsel to the Company. All reasonable expenses of the Escrow Agent incurred
in connection with the exercise of its duties hereunder shall be borne by the
Company.
(e) The Escrow Agent may resign at any time upon giving the parties
hereto thirty (30) days' prior written notice; in such event, the successor
Escrow Agent shall be such person, firm or corporation as shall be selected by
the Company and approved by Odzer in his reasonable discretion. It is understood
and agreed that such resignation shall not be effective until a successor agrees
to act hereunder.
(f) Upon the receipt of a notice and a certified or bank cashier's
check for an amount equal to the full purchase price for the Shares from an
optionee of the exercise of any Stock Option pursuant to Section 3(b) of such
optionee's respective Option Agreement (as defined hereinafter), the Company
shall promptly give written notice thereof to the Escrow Agent and the Escrow
Agent shall, within 10 business days of its receipt of such notice, release and
deliver to the Company Certificates representing such number of Shares as shall
be set forth in such notice against payment by the Company to Odzer for the
Shares.
2. Terms of Stock Options. (a) Odzer hereby agrees that he shall grant
Stock Options to purchase all of the Shares upon the direction of, and to those
executives and officers of the Company designated by, the Committee in
accordance with the terms and subject to the conditions of this Agreement.
(b) In no event shall the exercise price of any Stock Option granted
pursuant to this Agreement be less than $________ (the initial public offering
price of the Common Stock on a per share basis).
(c) The exercise of the Stock Options must occur, if at all, prior to
________, 2001 (the "Expiration Date"). Odzer shall receive all proceeds
received from the exercise of any Stock Options.
(d) Upon the Expiration Date, the balance of the Shares held in escrow
pursuant to the terms of this Agreement, shall revert back and be delivered by
the Escrow Agent to Odzer and such Shares shall no longer be subject to the
provisions hereof.
(e) The terms and conditions of the Stock Options shall be more fully
set forth in each of the respective option agreements which shall be executed
and delivered by Odzer and each optionee in substantially the form of the Form
Option Agreement (the "Option Agreements").
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<PAGE>
3. Administration. (a) Odzer hereby appoints each of the Committee and
the Board of Directors as his attorney-in-fact with the power to designate the
executives and officers of the Company to whom Stock Options shall be granted by
Odzer.
(b) The administration of this Agreement and the Stock Options to be
granted pursuant to the terms hereof, shall be the sole responsibility of the
Committee, whose construction and interpretation of the terms and provisions
hereof and thereof shall be final and conclusive; provided, however, that the
Committee shall not be entitled to make a unilateral construction or
interpretation of any term or provision of this Agreement which adversely
affects the rights and obligations to which Odzer is entitled or subject
pursuant to the terms hereof without the consent of Odzer which consent shall
not be unreasonably withheld. The Committee shall in its sole discretion
designate the executives and officers to whom the Stock Options shall be granted
by Odzer and shall oversee the issuance of the Shares upon exercise of such
Stock Options as provided herein. The Committee shall have authority, subject to
the express provisions hereof, to construe this Agreement and the respective
Option Agreements, to be executed and delivered pursuant to the terms hereof to
prescribe, amend and rescind rules and regulations relating to this Agreement
and the issuance of the Shares upon exercise of such Stock Options as provided
herein; to determine the terms and provisions of the respective Option
Agreements to be executed and delivered pursuant to the terms hereof, which need
not be identical but which in all cases shall be consistent with the terms of
this Agreement and the Form Option Agreement; and to make all other
determinations in the judgment of the Committee necessary or desirable for the
administration of the provisions hereof; provided, however, that the Committee
shall not be entitled to make a unilateral construction or interpretation of any
term or provision of this Agreement which adversely affects the rights and
obligations to which Odzer is entitled or subject pursuant to the terms hereof
without the consent of Odzer which consent shall not be unreasonably withheld.
The Committee may correct any defect or supply any omission or reconcile any
inconsistency contained herein and in the respective Option Agreements to be
executed and delivered pursuant to the terms hereof, in the manner and to the
extent it shall deem expedient to carry out the purposes and intent of this
Agreement and it shall be the sole and final judge of such expediency; provided,
however, the Committee shall not be entitled to make any correction, change or
determination which adversely affects the rights and obligations to which Odzer
is entitled or subject, without the consent of Howard Odzer, which consent shall
be not unreasonably withheld. No director or person acting pursuant to authority
delegated by the Board of Directors or the Committee shall be liable for any
action or determination under this Agreement made in good faith and consistent
with the express terms of this Agreement.
4. Further Assurances. Odzer shall do, execute, acknowledge and deliver
all and every such further acts, deeds, conveyances, certificates, notices,
transfers and assurances as the Escrow Agent or the Company may reasonably
require in order to effect the purposes and intention of, or facilitate the
performance of the terms and conditions contained in, this Agreement, or to
enable the Company or any grantee of a Stock Option to comply with any
applicable federal or state law, provided, however, that any such further action
which Odzer
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<PAGE>
may be requested to undertake will be without cost or expense to Odzer and shall
not adversely affect the rights and obligations to which Odzer is entitled or
subject.
5. Notices. All notices, claims, certificates, requests, demands and
other communications hereunder shall be in writing and shall be deemed to have
been duly given or made as of the date delivered, mailed or transmitted, and
shall be effective upon receipt, if delivered personally, mailed by registered
or certified mail (postage prepaid, return receipt requested) to the parties at
the following addresses or sent by electronic transmission to the telecopier
number specified below:
(a) If to Odzer, to:
Howard Odzer
c/o Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Steel Hector & Davis LLP
200 South Biscayne Blvd.
Miami, FL 33131
Attn: Thomas R. McGuigan, P.A.
Telephone: (305) 577-2850
Telecopy: (305) 577-7001
(b) If to the Company, to:
Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Attn: Mel Harris
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
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<PAGE>
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
(c) If to Escrow Agent, to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
or to such other address as the person to whom the notice is to be given may
have previously furnished to the other in writing in the manner set forth above.
6. Benefit and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns. Except as otherwise provided herein, this Agreement shall not be
assignable by the Escrow Agent without the prior written consent of the other
parties and shall not be assignable by either the Company or Odzer without the
consent of the other.
7. Entire Agreement; Amendment. This Agreement contains all the terms
agreed upon by the parties, and supersede any prior agreements, with respect to
the subject matter hereof. This Agreement may be amended only by a written
instrument signed by the parties against which enforcement of any waiver,
change, modification, extension or discharge is sought.
8. Attorneys' Fees. If any action, suit or proceeding is brought by any
of the parties hereto arising out of or relating to this Agreement or its
breach, the successful or prevailing party in any such action, suit or
proceeding, shall be entitled to the full amount of its reasonable expenses,
including all court costs and attorneys' fees paid or incurred in connection
therewith, in addition to such other relief as such party shall be entitled to.
9. Interpretation. The articles and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.
-5-
<PAGE>
10. Governing Law. This Agreement and the legal relations of the
parties hereto shall be governed by and construed in accordance with the laws of
the State of New York, without giving effect to any conflict or choice of law.
11. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the day
of , 1997.
PREFERRED EMPLOYERS HOLDINGS, INC.
By:
----------------------------------
Name:
Title:
--------------------------------------
HOWARD ODZER
BAER MARKS & UPHAM LLP, as Escrow Agent
---------------------------------------
-7-
<PAGE>
ANNEX A
Optionee:_____________________
Address:______________________
PREFERRED EMPLOYERS HOLDINGS, INC.
FORM OF STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT, dated as of ___________, 19__
(the "Agreement"), by and among PREFERRED EMPLOYERS HOLDINGS, INC., a Delaware
corporation (the "Company"), ________________ ("Optionee") and HOWARD ODZER
("Grantor"), is entered into pursuant to the Share Escrow Agreement, dated as of
November ___, 1996, by and among the Company, Grantor and Baer Marks & Upham
LLP, a New York limited liability partnership, as Escrow Agent (the "Escrow
Agreement").
PURSUANT TO THE ESCROW AGREEMENT, it is agreed as follows:
1. Grant of Option. Grantor hereby grants to the Optionee on
the date hereof the right and option (the "Option") to purchase an aggregate of
______ shares of Common Stock, $.01 par value per share, of the Company (the
"Shares"), which are currently held in escrow by the Company on behalf of
Grantor pursuant to the terms of the Escrow Agreement.
2. Payment; Term. (a) The exercise price of the Option is
$______ per Share which shall be paid in cash or by certified or bank cashier's
check payable to the order of the Grantor at the time of exercise. Payment in
full shall be required before the issuance of any Shares pursuant to this
Option. In addition, before or concurrently with delivery to the Optionee of a
Certificate representing such Shares, the Optionee shall pay to the Company any
amount necessary to satisfy applicable federal, state, or local tax
requirements.
(b) The Option granted herein shall expire on ________ __,
2001. [the fifth anniversary of the date of the prospectus filed with the
Securities and Exchange Commission on behalf of the Company in connection with
the Company's initial public offering].
3. Exercise of Option. (a) Subject to Section 2(b) above, the
Optionee may exercise, on a cumulative basis, the Option granted hereby in
accordance with the following:
(i) on or after the date hereof, up to ___% (ignoring
fractional Shares) of the total number of Shares subject to
this Option;
<PAGE>
(ii) on or after the date which is one year after the date
hereof, up to ___% (ignoring fractional Shares) of the total
number of Shares subject to this Option;
(iii) on or after the date which is two years after the date
of the grant, up to ___% (ignoring fractional Shares) of the
total number of Shares subject to this Option; and
(iv) on or after the date which is three years after the date
of the grant, the remaining Shares subject to this Option.
(b) The Optionee may exercise the Option (to the extent it is
then exercisable) by delivering to the Company a written notice duly signed by
the Optionee stating the number of Shares that the Optionee has elected to
purchase and accompanied by payment (by certified check or bank cashier's check)
of an amount equal to the full purchase price for the Shares to be purchased.
Within twenty days after receipt by the Company of such notice and payment, the
Company shall (subject to Section 12 of this Agreement) issue from escrow the
Shares in the name of the Optionee or assignee and deliver the certificate
therefor to the Optionee. No Shares shall be issued until full payment therefor
has been made.
4. Non-Transferability of Option; Restrictions on Exercise.
(a) The Option may be transferred only by will or the laws of descent and
distribution, and the Option may be exercised during the Optionee's lifetime
only by the Optionee or by the Optionee's legal representative.
(b) If at any time during which the Option can be exercised,
exercise of the Option will constitute a sale of any of the Shares by the
Grantor which is subject to the short-swing trading provisions of Section 16(b)
of the Securities Exchange Act of 1934, as amended, the Optionee agrees not to
exercise, in whole or in part, the Option until such time as the Grantor will
not be required to make any payment pursuant to Section 16(b) or the rules
promulgated thereunder by the Securities and Exchange Commission. To this end,
the Optionee agrees that the Grantor may, at his sole election, delay the
closing of any requested exercise under Section 3 to avoid the risk of such
short-swing trading liability, based upon any transaction, or planned
transactions, by the Grantor.
5. Tax Status. It is not intended that this option qualify as
an incentive stock option within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended. In addition, the Optionee hereby agrees that
no representation has been made to him by the Company or the Grantor with
respect to the tax consequences of (i) the Option granted hereby, (ii) any
transfer of the Option granted hereby, (iii) the exercise of the Option granted
hereby or (iv) any transfer of the Shares.
6. Rights in the Event of the Optionee's Disability. If the
Optionee's employment with the Company or any parent or subsidiary corporation
(within the meaning of
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<PAGE>
Section 424(e) and (f) of the Internal Revenue Code of 1986, as amended (the
"Code"), ("Affiliates")) is terminated on account of permanent and total
disability (as defined in Code Section 22(e)(3)), the Optionee or the Optionee's
legal representative (or the Optionee's estate if the Optionee dies after
termination of employment) may exercise the Option, to the extent exercisable on
the date of the Optionee's termination of employment, at any time within one
year after termination of employment but in no event after the expiration of the
term of the Option as provided in Sections 2(b). The Optionee's "estate" means
the Optionee's legal representative or any person who acquires the right to
exercise the Option by reason of the Optionee's death.
7. Rights in the Event of the Optionee's Death. If the
Optionee dies while an employee of the Company or any Affiliate (or within three
months after the Optionee ceases to be such an employee) but while he still has
the right to exercise this Option, his estate may exercise the Option, to the
extent exercisable at the date of the Optionee's death, any time within one year
after the Optionee's death, but in no event after the expiration of the term of
the Option as provided in Section 2(b).
8. Rights in the Event of Termination of Employment. If
Optionee's employment with the Company or any Affiliate is terminated
involuntarily for "Cause" the Optionee's Option shall expire as of the date of
termination of employment. "Cause" under this Agreement shall mean (i) material
misconduct by the Optionee, (ii) any act by the Optionee that is materially
adverse to the Company or any Affiliate, or (iii) breach by the Optionee of any
employment or confidentiality or nondisclosure agreement with the Company or any
Affiliate. "Cause" also shall have the meaning given to that term, or any
similar term, under any employment agreement with the Company or any Affiliate.
If the Optionee's employment is terminated for any reason other than death,
disability, or as described in the preceding sentences of this Section, the
Optionee (or the Optionee's estate, if the Optionee dies after the termination)
may exercise the Option, to the extent exercisable before the termination,
within three months after the termination, but in no event after the expiration
of the term of the Option as provided in Section 2(b).
9. Adjustment in the Shares. If the Shares, as presently
constituted, shall be changed into or exchanged for a different number or kind
of shares or other securities of the Company or of another corporation (whether
by reason of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares, or otherwise) or if the number of Shares
shall be increased through the payment of a share dividend, the Optionee shall
receive upon exercise of the Option the number and kind of shares or other
securities into which each outstanding Share shall be so changed, or for which
each such Share shall be exchanged, or to which each such Share shall be
entitled, as the case may be. The exercise price and other terms of the Option
shall be appropriately amended to reflect the foregoing events. If there shall
be any other change in the number or kind of the outstanding Shares, or of any
shares or other securities into which the Shares shall have been changed, or for
which the Shares shall have been exchanged, then, if the Board of Directors (or
the Compensation Committee thereof (the "Compensation Committee")) shall, in its
sole discretion, determine that such change equitably requires an adjustment in
the Option, such adjustment shall be made in
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<PAGE>
accordance with that determination; provided, however, that, without the consent
of Odzer, which consent will not be unreasonably withheld, no adjustment,
modification or other change made pursuant to this Section 9 shall be
inconsistent with the intent of the Escrow Agreement or have an adverse effect
on Odzer. Notice of any adjustment shall be given by the Company to the
Optionee.
10. No Limitation on Rights of the Company. The grant of this
Option shall not in any way affect the right or power of the Company to make
adjustments, reclassifications, or changes in its capital or business structure
or to merge, consolidate, dissolve, liquidate, sell, or transfer all or any part
of its business or assets.
11. Rights as a Shareholder. The Optionee shall have the
rights of a shareholder with respect to the Shares covered by the Option only
upon becoming the holder of record of those Shares. Until the Optionee becomes
the holder of record of his respective Shares, Odzer shall retain all rights as
a shareholder with respect to such Shares, including, but not limited to, the
right to receive any dividends and other distributions with respect to the
Shares, and to vote such Shares for all purposes and all permissible methods,
and nothing herein shall be deemed or construed to limit such rights.
12. Compliance with Applicable Law. Notwithstanding anything
herein to the contrary, neither the Company nor the Grantor shall be obligated
to cause to be issued or delivered from escrow any certificates for Shares
pursuant to the exercise of the Option, unless and until the Company is advised
by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority, and
the requirements of any exchange upon which Shares are traded. Neither the
Company nor the Grantor shall in any event be obligated to register any
securities pursuant to the Securities Act of 1933 (as now in effect or as
hereafter amended) or to take any other action in order to cause the issuance
and delivery of such certificates to comply with any such law, regulation or
requirement. The Board of Directors (or the Compensation Committee) may require,
as a condition of the issuance and delivery of such certificates and in order to
ensure compliance with such laws, regulations, and requirements, that the
Optionee make such covenants, agreements, and representations as the Board of
Directors (or the Compensation Committee, as the case may be), in its sole
discretion, considers necessary or desirable.
13. No Obligation to Exercise Option. The granting of the
Option shall impose no obligation upon the Optionee to exercise the Option.
14. Agreement Not a Contract of Employment. This Agreement is
not a contract of employment, and the terms of employment of the Optionee or the
relationship of the Optionee with the Company or any Affiliate shall not be
affected in any way by this Agreement except as specifically provided herein.
The execution of this Agreement shall not be construed as conferring any legal
rights upon the Optionee for a continuation of employment or relationship with
the Company, the Grantor or any Affiliate, nor shall it interfere with the right
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<PAGE>
of the Company or any subsidiary thereof to discharge the Optionee and to treat
him without regard to the effect which that treatment might have upon him as a
Optionee.
15. Withholding. Whenever Shares are to be delivered upon
exercise of this Agreement, the Company shall be entitled to require as a
condition of delivery that the Optionee remit to the Company an amount
sufficient to satisfy the Company's federal, state and local withholding tax
obligations with respect to the exercise of the Option granted hereby.
16. Notices. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given or made as of the date delivered, mailed or
transmitted, and shall be effective upon receipt, if delivered personally,
mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses or sent by electronic
transmission to the telecopier number specified below:
(a) If to Grantor, to:
Howard Odzer
c/o Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Steel Hector & Davis LLP
200 South Biscayne Blvd.
Miami, FL 33131
Attn: Thomas R. McGuigan P.A.
Telephone: (305) 577-2850
Telecopy: (305) 577-7001
(b) If to the Company, to:
Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
with copies to:
Baer Marks & Upham LLP
805 Third Avenue
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<PAGE>
New York, NY 10022
Attn: Donald J. Bezahler, Esq.
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
(c) If to Optionee, to address set forth above.
17. Governing Law. Except to the extent preempted by Federal
law, this Agreement shall be construed and enforced in accordance with, and
governed by, Delaware law.
18. Receipt of Escrow Agreement. Optionee acknowledges receipt
of a copy of the Escrow Agreement, and represents that he is familiar with the
terms and provisions thereof, and hereby accepts this Option subject to all the
terms and provisions of this Option and of the Escrow Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board of Directors of the Company or the Compensation
Committee, upon any questions rising under the Escrow Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
PREFERRED EMPLOYERS
HOLDINGS, INC.
__________________________ By:___________________________
Witness Its:
- -------------------------- -----------------------------
Witness HOWARD ODZER, Grantor
- -------------------------- -----------------------------
Witness , Optionee
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<PAGE>
Letter Agreement of Additional Terms Regarding Escrow Agreement
This Letter Agreement of Additional Terms Regarding Escrow
Agreement, dated as of January __, 1997 (the "Agreement") is entered into by and
between Preferred Employers Holdings, Inc., a Delaware corporation (the
"Company") and Howard Odzer ("Odzer").
Recitals
1. The parties to this Agreement, and Baer Marks & Upham LLP,
a New York limited liability partnership, are parties to an Escrow Agreement of
even date herewith pursuant to which Odzer agrees to place in escrow 300,000
shares of the Company's common stock (the "Shares") for issuance upon the
exercise of certain stock options which will be granted by Odzer pursuant to the
terms and subject to the conditions of the Escrow Agreement and the "Form Option
Agreement" (as defined in the Escrow Agreement) (the "Stock Options") to certain
executives and officers of the Company.
2. The parties to this Agreement desire to incorporate certain
additional terms and conditions which will govern the relationship between the
parties regarding the implementation and operation of the Escrow Agreement, the
Form Option Agreement, and the exercise of any options thereunder.
Agreement
1. Tax Indemnification.
(A) Upon the exercise of any option to purchase Shares subject
to the Escrow Agreement, the Company agrees to pay to Odzer an amount equal to
the additional federal, state and local taxes to which Odzer will be subject if
the income recognized by Odzer upon the exercise of an option to purchase any
Shares subject to the Escrow Agreement (or any additional shares which become
subject to the Escrow Agreement pursuant to the provisions of Section 9 of the
Form Option Agreement) is taxable to Odzer at a rate higher than the rate that
would have been applicable if the gain had been characterized as and taxable as
a "capital gain" and not as "ordinary income". The amount of the payment which
Odzer will be entitled to receive from the Company and which the Company will be
obligated to pay Odzer pursuant to this Section 1.(A) upon each exercise of an
option to purchase Shares will be equal to the product of the (i) amount of
income recognized or to be recognized by Odzer upon each exercise of an option
to purchase Shares (ii) multiplied by the difference between the maximum
statutory rate of tax to which Odzer is or would be subject on ordinary income
and the maximum statutory rate of tax to which Odzer is or would be subject on
capital gains for the year in which the option is exercised (determined
separately for each federal, state and local income tax to which Odzer is or may
become subject). In addition, to the extent that a payment or right to payment
under this Section 1 is included or subject to inclusion in Odzer's income for
income tax purposes, the amount of the payment shall be "grossed" up for the
payment of the income tax payable in respect of the payment and in respect of
the gross up so that the benefit to Odzer of all payments to which he is
entitled under this Section 1 shall be on an "after tax" basis. The amount of
the payment to
<PAGE>
which Odzer will be entitled for the indemnification and "gross up" to
compensate Odzer for the differential between the capital gains and ordinary
income tax rates will be calculated as follows:
I = OP times ((1 -CG/1-OIG) - 1)
where,
"I" means the total indemnification payment to which Odzer is
entitled upon the exercise of any option to purchase Shares
subject to the Escrow Agreement,
"OP" means the amount paid to Odzer upon the exercise of any
option to purchase Shares subject to the Escrow Agreement,
"CG" means the maximum statutory rate of tax to which Odzer is
or would be subject on capital gains (determined separately
for each federal, state and local income tax to which Odzer is
or may become subject), and
"OIG" means the maximum statutory rate of tax to which Odzer
is or would be subject on ordinary income (determined
separately for each federal, state and local income tax to
which Odzer is or may become subject).
(B) Odzer shall consult with his tax advisors as to the
characterization of income to be recognized by Odzer upon an exercise of an
option to purchase the Shares pursuant to the Escrow Agreement and the Form
Option Agreement, and the tax advisor's characterization of the income shall be
notified by Odzer to the Company and be binding upon both the Company and Odzer
for purposes of the of this Agreement. Odzer agrees to report the
characterization reported to the company consistently on all federal, state and
local income tax returns which he files.
(C) The Company shall pay to Odzer in cash the amount of each
payment to which he is entitled pursuant to this Section 1 on the later of the
(i) last day of each calender quarter within which any option is exercised, and
(ii) within 5 business days after such date.
2. Securities Laws Disclosure and Compliance.
(A) The Company agrees that it will be responsible for and
will comply with all laws, rules and regulations pertaining to the sale and
transfer of the Shares and all other responsibilities of the Company with
respect to the options to be granted under the Escrow Agreement and the Form
Option Agreement, and the Shares, including but not limited to all laws, rules
and regulations pertaining to the federal and state securities laws to which the
grant of option and the sale or transfer of the Shares is or will at the time of
exercise of the option be subject, and the Company agrees to comply with and
make all disclosures, filings and registrations required under all state and
federal securities laws to which the options and the Shares are subject.
<PAGE>
(B) The Company will, to the extent permitted by law,
indemnify and hold harmless Odzer, against all losses, claims, demands, damages
or liabilities, to which Odzer may become subject under any federal or state
securities laws or otherwise, and with respect to all claims asserted against
Odzer by any "Optionee", (as defined in the Form Option Agreement) insofar as
the losses, claims, demands, damages or liabilities (or actions or proceedings
in respect thereof) arise out of or are based upon any filing, statement or
disclosure made by the Company or failed to be made by the Company or arise out
of or are based upon the Escrow Agreement, the Form Option Agreement or the
actual option agreement (which must be substantially in the same form as the
Form Option Agreement) executed by any Optionee, other than losses, claims,
demands, damages or liabilities which are attributable to Odzer's failure to
deliver the Shares to the Escrow Agent pursuant to the Eacrow Agreement or to
transfer the Shares to an Optionee in accordance with the terms of the Form
Option Agreement; and the Company will reimburse Odzer for all legal or other
expenses reasonably incurred by him in connection with investigating or
defending any such loss, claim, demand, damage, liability, action or proceeding
for which the Company is liable to reimburse or hold Odzer harmless. This
indemnity shall remain in full force and shall survive the transfer of Shares
upon the exercise of an Option.
3. Notices. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given or made as of the date delivered, mailed or
transmitted, and shall be effective upon receipt, if delivered personally,
mailed by registered or certified mail (postage prepaid, return receipt
requested) to the parties at the following addresses or sent by electronic
transmission to the Telecopier number specified below:
(A) If to Odzer, to:
Howard Odzer
c/o Preferred Employers Holdings, Inc.
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Telephone: (305) 893-4040
Telecopy: (305)
With copies to:
Steel Hector & Davis, LLF
200 South Biscayne Blvd.
Miami, FL 33131
Attn: Thomas R. McGuigan, P.A.
Telephone: (305) 577-2850
Telecopy: (305) 577-7001
(B) If to the Company, to;
Preferred Employers Holdings, Inc.
<PAGE>
10800 Biscayne Blvd., Penthouse
Miami, FL 33161
Attn: Mel Harris
Telephone: (305) 893-4040
Telecopy: (305)
With copies to:
Baer Marks & Upham LLP
805 Third Avenue
New York, New York 10022
Attn: Donald J. Bezahler, Esq.
Telephone: (212) 702-5700
Telecopy: (212) 702-5941
or to such other address as the person to whom the notice is to be given may
have previously furnished to the other in writing in the manner set forth above.
4. Benefit and Assignment. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Except as otherwise provided herein or pursuant to an
assignment permitted in the Escrow Agreement, this Agreement shall not be
assignable by either the Company or Odzer without the consent of the other.
5. Entire Agreement; Amendment. This Agreement contains all
the terms agreed upon by the parties, and supersede any prior agreements, with
respect to the subject matter hereof. This Agreement may be amended only by a
written instrument signed by the parties against which enforcement of any
waiver, change, modification, extension or discharge is sought. The parties
acknowledge and agree that this Agreement modifies the Escrow Agreement.
6. Attorneys' Fees. If any action, suit or proceeding is
brought by any of the parties hereto arising out of or relating to this
Agreement or its breach, the successful or prevailing party in any such action,
suit or proceeding, shall be entitled to the full amount of its reasonable
expenses, including all court costs and attorneys' fees paid or incurred in
connection therewith, in addition to such other relief as to which such party
shall be entitled.
7. Interpretation. The articles and section headings contained
in this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement.
8. Governing Law. This Agreement and the legal relations of
the parties hereto shall be governed by and construed in accordance with the
laws of the State of New York, without giving effect to any conflict or choice
of law.
<PAGE>
9. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all off which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their duly authorized offices as of the date first
above written.
PREFERRED EMPLOYERS HOLDINGS, INC.
By:
------------------------------------
Name:
Title:
--------------------------------------
HOWARD ODZER
<PAGE>
[PREFERRED LOGO]
,1997
Mr. Mel Harris
10800 Biscayne Boulevard
Penthouse
Miami, FL 33161
Dear Mel:
This letter sets forth the terms of your employment as Chairman of the Board of
Directors and Chief Executive Officer of Preferred Employers Holdings, Inc. (the
"Company"), commencing as of the date hereof and continuing for a period of one
year thereafter (the "Term"):
1. Your salary shall be $150,000 per year throughout the Term. In addition, you
will receive reimbursement for all business expenses related to the Company
and medical insurance and will be entitled to receive perquisites similar to
perquisites made available to other senior executives of the Company.
2. Your employment will automatically renew for successive one-year periods,
unless either party gives notice to the other party of its desire to
terminate such employment at least 90 days before the commencement of any
renewal period.
3. You hereby agree to devote such time as is necessary and, in any event, no
less than 80% of your total busienss time, to the affairs of the Company.
4. You hereby agree that at all times while you are employed by the Company, in
any capacity, and for a period of three (3) years after the date of the
termination of your employment with the Company, irrespective of the manner
of such termination, you will not (i) be employed or retained by, seek
employment with, or serve as an employee, agent, officer, director of,
partner of, or as consultant to, or directly or indirectly acquire or own in
any manner an interest in (whether as owner, operator, stockholder, director,
financial backer, creditor, consultant, partner, agent or otherwise), any
person, firm, partnership, corporation, association, sole proprietorship or
other entity (an "Entity") which engages in competition with the Company in
any and all states in which the Company and/or any of its subsidiaries
conduct their respective businesses, (ii) solicit any current or previously
solicited potential customer of the Company, or (iii) solicit or induce any
person to leave the employ of the Company to engage in activities competitive
with any business of the Company; provided, however, that nothing in this
Agreement shall prohibit you from (a) owning less than 5% of any class of
securities listed on a national securities exchange or traded publicly in an
over-the-counter market of any Entity which competes with the business of the
Company, or (b) serving as an employee of or a consultant to a diversified
Entity which derives no more than 5% of its consolidated gross revenues from
a line of business competing with that of the Company. Under no
circumstances, however, may your services to such Entity consist of any
activities in competition with the business of the Company.
We look forward to continuing our long and pleasant relationship. Please sign
and return the original of this letter, retaining the copy for your files.
Sincerely,
Howard Odzer
President
Agreed and Acknowledged:
________________________
Mel Harris
<PAGE>
[LOGO] PREFERRED
EMPLOYERS GROUP
October 21, 1996
Ms. Julie A. Loven, President
The New Hampshire Program Division of
New Hampshire Insurance Company
70 Pine Street
New York, NY 10270
Dear Julie:
Reference is hereby made to the Reinsurance Agreement (the "Reinsurance
Agreement"), which is to be entered into by and among National Union Fire
Insurance Company of Pittsburgh, PA.; The Insurance Company of the State of
Pennsylvania; AIU Insurance Company and New Hampshire Insurance Company
(collectively, the "AIG Companies") and the proposed reinsurance subsidiary of
Preferred Employers Holdings, Inc. (the "Company") to be formed under the laws
of Bermuda (the "Reinsurer").
As you are aware, in connection with the Company's proposed initial public
offering of common stock, it is necessary that the Company finalize the form and
content of the Reinsurance Agreement which is attached hereto as Annex A.
Please execute this letter where indicated below and initial each of the pages
of the Reinsurance Agreement acknowledging your acquiescence and agreement that
each of the AIG Companies is prepared to and will enter into the Reinsurance
Agreement substantially in the form attached hereto as Annex A upon the
formation and incorporation of the Reinsurer.
Very truly yours,
/s/ Mel Harris
----------------------------
MEL HARRIS, Chairman and CEO
ACKNOWLEDGED AND AGREED TO:
/s/ Julie Loven
- -----------------------------------
Name:
Title: President - Program Division
Preferred Employers Group, Inc. 10800 Biscayne Boulevard, 10th Floor,
Miami, Florida 33161-7487
Tel: (305) 893-4040 National: (800) 433-5755 Fax: (305) 893-8659
<PAGE>
REINSURANCE AGREEMENT
(herinafter "this Agreement")
between
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,
AIU INSURANCE COMPANY (a New York corporation), and
NEW HAMPSHIRE INSURANCE COMPANY
(hereinafter collectively called the "Company")
and
a Bermuda corporation
(hereinafter called the "Reinsurer")
In consideration of the mutual covenants hereinafter contained and upon the
terms and conditions hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS:
"Allocated Loss Expenses" shall mean all costs and expenses allocable to a
specific claim that are incurred by the Company in the investigation, appraisal,
adjustment, settlement, litigation, defense or appeal of a specific claim,
including but not limited to court costs and costs of supersedeas and appeal
bonds, and including (a) pre-judgment interest, unless included as part of the
reward or judgment: (b) post-judgment interest; and (c) attorneys' fees and
other legal expenses and costs, including such costs and expenses incurred in
connection with coverage questions with respect to the Policies. Allocated Loss
Adjustment Expense shall not include salaries and expenses of the Company's
employees, or office and other overhead expenses of the Company.
"Business" shall mean Workers Compensation and Employers Liability coverage
provided to companies or entities under the "Fast Food, Burger King, McDonalds,
Pizza Hut and Convenience Store" insurance programs currently underwritten on
behalf of the Company by Preferred Employers Group, Inc. ("PEGI'"), and any
additional such programs as may be agreed by the Company and the Reinsurer.
"Dollars" or $ shall mean United States dollars.
"Gross Premiums Written" shall mean Direct Written Premiums, Additional Premiums
for Policies and audit premiums covered hereunder less return premiums and
cancellations. Direct Premiums written on installment premium payment policies
shall be deemed to be the installment due in the period for which the account is
rendered, in accordance with the Reports and Remittances article contained in
this Agreement.
"IBNR" (Incurred But Not Reported) shall mean liability for future payment on
Losses which have already occurred but have not yet been reported to the Company
and shall also include expected future development of Outstanding Loss Reserves,
[using loss development factors as determined appropriate by [the
Reinsurer's][an] [the] independent actuarial consulting firm [Tillinghast and
Company]].
"Incurred Losses" shall mean Losses Paid and Loss Expenses Paid plus current
period Outstanding Loss Reserves.
-1-
<PAGE>
"Line(s) of Coverage" shall mean each separate coverage contained in the
policy(ies) reinsured hereunder.
"Loss" or "Losses" Shall mean payments to claimants under Policies reinsured
hereunder.
"Losses Paid" shall mean Losses Paid by or on behalf of the Company less
Recoveries for Salvage and Subrogation.
"Loss Expenses Paid" shall mean Allocated Loss Expenses paid by or on behalf of
the Company.
"Obligations" shall mean:
(a) Losses and Allocated Loss Expenses paid by the Company but not recovered
from the Reinsurer;
(b) Outstanding Loss Reserves;
(c) Reserves for Losses Incurred But Not Reported;
(d) Reserves for Allocated Loss Expenses; and
(e) Reserves for Unearned Premium.
"Outstanding Loss Reserves" shall mean losses reported to the Company which have
been reserved but unpaid at any specified date.
"Policies" shall mean any and all binders, certificates, policies and contracts
of insurance, accepted or held covered provisionally or otherwise.
"Ultimate Net Loss" shall mean the actual loss sustained by the Company, such
loss to include Allocated Loss Expenses (except office expense and salaries of
officials and employees not classified as loss adjusters), but salvages and all
other recoveries,including recoveries under all reinsurance (except reinsurance
of the Company excess of the limits of the Reinsurer's liability hereunder),
shall be deducted from such Loss to arrive at the amount of liability, if any,
attached hereunder.
All salvages, recoveries, or payments recovered or received subsequent to loss
settlement hereunder, shall be applied as if recovered or received prior to the
aforesaid settlement, and all necessary adjustments shall be made by the parties
hereto. Nothing in this clause shall be construed to mean that Losses are not
recoverable hereunder; until the Company's Ultimate Net Loss has been
ascertained.
"Unearned Premiums Reserve" shall mean the reserve for the amount of premium
allocated to the unexpired portion of a policy in force as of any specified
date.
ARTICLE 11
TERM:
This Agreement is effective at 12:01 A.M. Eastern Standard Time, the 1st day of
January 1996, with respect to Line(s) of Coverage written on and after said date
for the Company by Preferred Employers Group Inc. ("PEGI") for Business as
defined hereunder.
The Company shall not issue a policy for a period in excess of twelve (12)
months plus odd time not exceeding eighteen (18) months in all or so deemed.
-2-
<PAGE>
ARTICLE III
TERRITORY:
The territorial scope of This Agreement shall be coextensive with the
territorial scope of the Company's Policies reinsured hereunder.
ARTICLE IV
BUSINESS REINSURED:
This Agreement shall cover, for the Business reinsured hereunder:
Workers Compensation and Employers Liability
Coverage A. Workers Compensation-Statutory
Coverage B. Employers Liability
Coverage C. Other States Insurance
written on behalf of the Company by PEGI.
ARTICLE V
RE-INSURING CLAUSE:
The Company hereby obligates itself to cede to the Reinsurer and the Reinsurer
hereby obligates itself to accept as reinsurance:
For Coverage A. The first $300,000 (three hundred thousand) Ultimate Net Loss as
herein provided and specified under any and all policies issued or entered into,
by or on behalf of the Company by PEGI, under the Business reinsured hereunder.
For Coverage B. The first $300,000 (three hundred thousand) Ultimate Net Loss as
herein provided and specified under any and all policies issued or entered into,
by or on behalf of the Company by PEGI, for The Business reinsured hereunder.
For Coverage C. The first $300,000 (three hundred thousand) Ultimate Net Loss as
herein provided and specified under any and all policies issued or entered into,
by or on behalf of the Company by PEGI, for the Business reinsured hereunder.
provided, however, that the Reinsurer's liability for Ultimate Net Loss shall be
for a maximum amount of 70% (seventy percent) of the subject Gross Written
Premium with respect to each individual underwriting year covered hereunder for
all such Coverages combined.
The Company shall retain all liabilities for payment of Ultimate Net Loss in
excess of 70% (seventy percent) of Gross Written Premium with respect to each
individual underwriting year covered hereunder; provided, however, that nothing
herein shall preclude the Company from obtaining excess of loss reinsurance or
other reinsurance of such retained limits.
-3-
<PAGE>
ARTICLE VI
EXCLUSIONS:
The exclusions under this Agreement shall be co-extensive with the exclusions
set forth in the Policies reinsured hereunder.
ARTICLE VII
REINSURER'S PREMIUM:
The Premium payable to the Reinsurer for the Business ceded to the Reinsurer
hereunder shall be as set forth in Schedule A attached to this Agreement
ARTICLE VIII
CLAIMS:
The Reinsurer agrees to abide by the loss settlements of the Company, it being
understood, however, that when so requested, the Company will afford the
Reinsurer an opportunity to be associated with the Company, at the expense of
the Reinsurer, in the defense of any claim or suit or proceeding involving this
reinsurance, and that the Reinsurer may cooperate in every respect in the
defense or control of such claim, suit or proceeding.
The Company may deduct paid Loss and Allocated Loss Expenses paid as provided
for in the REPORTS AND REMITTANCES ARTICLE, and the Company shall record and
advise the Reinsurer of these deductions as provided in the REPORTS AND
REMITTANCES ARTICLE.
The Company may, as its option, demand prompt payment of any Loss where the
Reinsurer's share exceeds _____ and Reinsurer will promptly pay such amounts.
ARTICLE IX
REPORTS AND REMITTANCES:
Within forty-five (45) days of the end of each month in which premium is due
while this Agreement remains in effect, on behalf of the Company, PEGI shall
remit (a) to the Company, the Company's ceding commission for the Business
reinsured hereunder during such month after deduction of PEGI's commission as
producing agent for such Policies, and (b) to the Reinsurer, the Reinsurer's net
premium due after deduction for the Company's ceding commission.
The Company shall furnish to the Reinsurer, all statistics necessary for the
Reinsurer to prepare monthly and annual statutory reports.
Within thirty (30) days of the end of each month while this Agreement remains in
effect, the Company shall render to the Reinsurer an account current which shall
summarize Gross Written Premiums, investment income, allowances for commissions,
Losses Paid, Obligations and salvage recovered during the applicable month. The
accounting shall also state the net balance due by either party. The balance due
shall be paid by the debtor party to the other within fifteen ( 15) days after
receipt of the account current or as soon as reasonably practicable thereafter.
-4-
<PAGE>
ARTICLE X
INDEMIFICATION AND ERRORS AND OMISSIONS:
Any recitals in this Agreement of the terms and provisions of the original
policy or policies are merely descriptive and the Reinsurer is reinsuring, to
the amount herein provided, the obligations of the Company under the original
policy or policies. The Company shall be the sole judge as to what shall
constitute a claim or loss covered under the Company's original policy or
policies and as to the Company's liability thereunder and as to the amount or
amounts which it shall be proper for the Company to pay thereunder and the
Reinsurer shall be bound by the judgment of the Company as to the liability and
obligation of the Company under its policy or policies.
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such delay, omission or
error is rectified as soon as possible.
ARTICLE XI
TAXES:
The Company will be liable for taxes (except Federal Excise Tax) on premiums
reported to the Reinsurer hereunder.
Federal Excise Tax shall apply only to those Reinsurers which are not exempt
from Federal Excise Tax.
ARTICLE XII
SECURITY:
The Reinsurer shall provide to the Company on the date this Agreement is
executed by the Reinsurer, as security for the Obligations of the Reinsurer
hereunder (the "Security"), any combination of cash, United States Government
securities and/or a clean and irrevocable letter of credit in continuously
renewing form. The amount of the Security required as of the date this Agreement
is executed by the Reinsurer shall be equal to 100% (one hundred percent) of the
amount of the Unearned Premium Reserve less the amount of Losses Paid for the
Business reinsured hereunder.
The total amount of Security required shall be adjusted at December 30, 1996 and
at each December 30 thereafter to be an amount equal to 70% (seventy percent) of
the Gross Ceded Premium (as set forth in Schedule A hereto) less the amount of
Losses Paid for the expiring underwriting year, and such shall constitute the
required Security for all underwriting years covered hereunder (computed as
provided in Exhibit l hereto).
ARTICLE XIII
INSPECTION
The Company shall place at the disposal of the Reinsurer, and the Reinsurer
shall have the right to inspect, all reasonable times, through its authorized
representatives, all books records and papers of the Company in connection with
the reinsurance hereunder, or any claims in connection herewith.
-5-
<PAGE>
ARTICLE XIV
FOLLOW THE FORTUNES CLAUSE:
The Reinsurer's liability shall attach simultaneously with that of the Company
and all reinsurances for which the Reinsurer shall be liable by virtue of this
Agreement shall be subject in all respects to the same risks, terms, rates,
conditions, interpretations, assessments, waivers, and to the same
modifications, alterations and cancellations, as the respective Policy(ies) of
the Company to which this Reinsurance Agreement relates.
The true intent of this Agreement is that, in every case to which this Agreement
applies and in the proportions specified herein, the Reinsurer shall follow the
fortunes of the Company.
This Article shall not apply insofar as the Company has been tortuous in
handling a claim which is covered by this Agreement.
ARTICLE XV
INSOLVENCY:
In the event of the insolvency of the Company, reinsurance under this Agreement
shall be payable by the Reinsurer (on the basis of the liability of the Company
under contract or contracts reinsured without diminution because of the
insolvency of the Company) to the Company or its liquidator, receiver, or
statutory successor, except as provided by Section 4118 of the New York
Insurance Law or except:
(a) where the Agreement specifically provides another payee of such reinsurance
in the event of the insolvency of the Company, and
(b) where the Reinsurer, with the consent of the direct insured or insureds,
has assumed such policy obligations of the Company as direct obligations,
of the Reinsurer to the payees under such policies and in substitution for
the obligations of the Company to such payees.
It is agreed, however, that the liquidator or receiver or statutory successor of
the insolvent Company shall give written notice to the Reinsurer of the pendency
of a claim against the insolvent Company on the contract or contracts reinsured
within a reasonable time after such claim is filed in the insolvency proceeding
and that, during the pendency of such claim the Reinsurer may investigate such
claim and interpose at their own expense in the proceeding where such claim is
to be adjudicated, any defense or defenses which they may deem available to the
company or its liquidator or receiver or statutory successor. The expense thus
incurred by the Reinsurer shall be chargeable, subject to court approval against
the insolvent Company as part of the expense of liquidation to the extent of a
proportionate share of the benefit which may accrue to the Company solely as a
result of the defense undertaken by the Reinsurer.
ARTICLE XVI
ARBITRATION:
All disputes or differences arising out of the interpretation of this Agreement
except as covered by Article XIX--Service of Suit, shall be submitted to the
decision of two (2) Arbitrator, one to be chosen by each party, and in the event
the Arbitrator fail to agree, to the decision of an Umpire to be chosen by the
Arbitrators. The Arbitrators and Umpire shall be executive officials of Fire or
Casualty Insurance or Reinsurance Companies. If either of the parties fails to
appoint an Arbitrator within one (1) month after being required by the other
party in writing to do so, or if the Arbitrators fail to appoint an Umpire,
within one ( 1) month of a request in writing by either of them to do so, such
Arbitrator or Umpire, as the case may be, shall at the request of either party
be appointed by a Justice of the Supreme Court of the State of New York.
-6-
<PAGE>
The Arbitration proceedings shall take place in New York, New York. The
applicant shall submit its case within one (1) month after the appointment of
the Court of Arbitration, and the respondent shall submit his reply within one
(1) month after receipt of a claim. The Arbitrators and Umpire are relieved from
all Judicial formality and may abstain from following the strict rules of law.
They shall settle any dispute under this Agreement according to an equitable
rather than a strictly legal interpretation of its terms and their decision
shall be final and not subject to appeal.
Each party shall bear the expense of its Arbitrator and shall jointly and
equally share with the other the expenses of the Umpire and the of the
Arbitration.
This Article shall survive the termination of this Agreement.
ARTICLE XVII
RESERVES:
The Reinsurer will maintain legal reserves with respect to Outstanding Losses
and Loss Expenses, reduced to net present value, and Unearned Premium Reserves.
ARTICLE XVIII
TERMINATION:
(1) Either the Company or the Reinsurer may terminate this Agreement as of
12:01 A.M. Eastern Standard Time the first day of any calendar quarter by
giving the other not less than one hundred-eighty (180) days' prior notice
in writing by Certified Mail.
(2) Either party shall have the right to terminate this Agreement immediately
by giving the other party notice:
(a) If the performance of the whole or any part of this Agreement be
prohibited or rendered impossible de jure or de facto in particular
and without prejudice to the generality of the preceding words in
consequence of any law or regulation which is or shall be in force in
any country or territory or if any law or regulation shall prevent
directly or indirectly the remittance of any or all or any part of the
balance or payments due to or from either party.
(b) If the other party at any time shall:
(i) Become insolvent, or
(ii) Suffer any impairment of capital, or
(iii) File a petition in bankruptcy, or
(iv) Go into liquidation or rehabilitation, or
(v) Have a receiver appointed, or
(vi) Be acquired or controlled by any other insurance company or
organization.
(c) In the event of the severance or obstruction of free and unfettered
communication and/or normal commercial and/or financial intercourse between
the United States of America and the country in which the Reinsurer is
incorporated or as its principal office as a result of war, currency
regulations, or any circumstances arising out of political, financial or
economic emergency.
-7-
<PAGE>
All notices of termination in accordance with any of the provisions of this
paragraph may be by Telex or Telegram and shall be deemed to be served upon
dispatch, or where communications between the parties and interrupted, upon
attempted dispatch.
(3) All notices of termination served in accordance with any of the provisions
of this Article shall be addressed to the party concerned at its head
office or at any other address previously designated by that party herein.
(4) In the event of this Agreement being terminated at any date other than at
an annual anniversary date then the premium due to the Reinsurer shall be
calculated pro rata of the net premiums written for the year concerned up
to date of termination. The Reinsurer shall not be liable for any Losses
arising from occurrences after the date of such Termination. The rights and
obligations of both parties of this Agreement shall remain in full force
until the effective date of termination.
(5) As respects coverage hereunder, it is understood and agreed that upon
termination of this Agreement, coverage will continue hereunder beyond such
termination date for all Losses occurring under Business in force at the
termination of this Agreement until the natural expiration date, the
cancellation date, or the date which the Company, as a matter of law, may
terminate such Business.
(6) Should this Agreement terminate while a loss occurrence is in progress, the
Reinsurer shall be liable to the extent of their interest, subject to the
other conditions of this contract, for all losses resulting from such loss
occurrence whether such losses arise before of after such termination.
ARTICLE XIX
SERVICE OF SUIT:
It is agreed that in the event of the failure of the Reinsurer to pay any amount
claimed to be due hereunder or the breach of any other term or condition of this
Agreement and for which the Company in its sole discretion has chosen not to
file for Arbitration under Article XVII, the Reinsurer, at the request of the
Company, will submit to the jurisdiction of any court of competent jurisdiction
within the United States and will comply with all requirements necessary to give
such court jurisdiction and all matters arising hereunder shall be determined in
accidence with the law and practice of such court.
It is further agreed that service of process in such suit may be made upon Baer
Marks & Upham, 805 Third Avenue, New York, New York 10022, Attention: Donald J.
Bezahler, Esquire and that in any suit instituted against the Reinsurer upon
this Agreement, the Reinsurer will abide by the final decision of such court or
of any appellate court in the event of an appeal.
The above-mentioned are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give a written undertaking to the Company that they will enter a general
appearance upon Reinsurer's behalf In the event such a suit shall be instituted.
Further, pursuant to any statute of any state, territory, or district of the
United States which make provisions therefor, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for that purpose in the statute, or his successor or successors in
office, as its true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding instituted by or on behalf of the
Company or any beneficiary hereunder arising out of this Agreement of
reinsurance, and hereby designate the above named as the person to whom the said
office is authorized to mail such process or a true copy thereof.
-8-
<PAGE>
ARTICLE XX
CURRENCY:
All premium and loss payment hereunder shall be in Dollars.
Premium due hereunder in other than Dollars shall be paid by the Company in
Dollars at the rates of exchange at which the original accounts were settled.
Failing this the rate of exchange applied shall be that used by the Company in
their own books of account or in accordance with any subsequent adjustment
thereto.
The amounts recoverable for losses in other than Dollars shall be converted into
Dollars at the same rates of exchange as were applied in the settlement of the
original losses. Failing this the rate of exchange applied shall be that used by
the Company in their own books either at the time of the settlement or in
accordance with any subsequent adjustment thereto.
ARTICLE XXI
OFFSETS:
The Company and the Reinsurer shall have the right to offset any balance(s) due
from one to the other under this Agreement. The party asserting the right of
offset may exercise such right at any time whether the balance(s) due are on
account of premiums or losses or otherwise. In the event of the insolvency of a
party hereto, offsets shall only be allowed in accordance with the provisions of
Section 7427 of the Insurance Law of the State of New York.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed by its duly authorized representative.
In New York, New York this In ___________,_______, this
22 day of October, 1996. _______day of _____, 1996.
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA., FOR
itself and on behalf of its affiliated insurance
companies constituting the Company
____[NAME OF REINSURER]___
By: ______________________ By: __________________________
Title:_____________________ Title: ________________________
Division
Address: 70 Pine Street Address: ______________________
New York, NY 10270 ______________________
-9-
<PAGE>
** Confidential
Treatment Requested
SCHEDULE A
Effective _______, 1996
to
REINSURANCE AGREEMENT
Effective ________, 1996
(hereinafter "this Areement")
between
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,
AIU INSURANICE COMPANY (a New York corporation),and
NEW HAMPSHIRE INSURANCE COMPANY
(collectively the "Company")
and
--------------------------
a Bermuda corporation
(the "Reinsurer")
The premium of the Company and the ceded premium to the Reinsurer effective as
of the effective date of this Schedule shall be as stated in the Schedule set
forth below:
1. Gross Premiums Written **
LESS
2. Excess and Aggregate Reinsurance **
-----
EQUALS
3. Subject Premium **
LESS
4. State Premium Taxes **
5. Residual Market Loads **
6. Claims Administration Fees **
7. Profit and Administration, Boards and Bureaus **
8. Direct Commission **
9. Company's Service Fee **
-----
10. Subtotal (add lines 4 through 9) **
=====
EQUALS
11. Gross Ceded Premium **
=====
(line 3 less line 10)
-10-
<PAGE>
** Confidential
Treatment Requested
Exhibit I REINSURANCE AGREEMENT
between
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA.,
THE INSURANCE COMPANY OF THE STATE OF PENNSYLVANIA,
AIU INSURANCE COMPANY (a New York corporation), and
NEW HAMPSHIRE INSURANCE COMPANY
(collectively the "Company")
and
--------------------------------------
( the "Reinsurer")
Illustration of Cumulative Amounts Due under Reinsurance Agreement and Related
Security
Initial transfer includes Policies with inception dates from January 1, 1996 to
October 11, 1996 (illustration as of date)
<TABLE>
<CAPTION>
Computation Date: 11-Oct-96 30-Dec-96
============= =============
Projected Projected
Initial Initial
Transfer Transfer
------------- -------------
<S> <C> <C> <C>
Gross Written Premium ("GWP") ** **
------------- -------------
Ultimate Net Losses @ 55% of GWP ** **
Estimated loss payment
percentage in 1st year @ 50% ** **
------------- -------------
Estimated Losses Paid (a) ** **
Excess and aggregate
reinsurance @5% of GWP ** **
Program expenses @28.83% of GWP ** **
------------- -------------
Total deductions ** **
Net premiums due Reinsurer (cumulative) ** **
============= =============
Computation of Security
=======================
Gross Written Premium ** ** Estimated GWP
Estimated Unearned Premium Reserve Factor ** ** Gross Ceded Premium Rate
------------- -------------
Unearned Premium Reserve ** ** Gross Ceded Premiums
Security percentage ** ** Security percentage
Gross Security required ** ** Total security required
Less: Losses Paid (a) ** ** Estimated Losses Paid
------------- -------------
Net Security required (cumulative) ** ** Net Security required
============= =============
</TABLE>
NOTE: All amounts illustrated herein are cumulative.
-11-
<PAGE>
COST SHARING AGREEMENT
----------------------
THIS COST SHARING AGREEMENT ("Agreement") is entered into on
the 3rd day of January, 1996, by and between PREFERRED EMPLOYERS
GROUP, INC., a Florida corporation ("Preferred"), and INTERNATIONAL
INSURANCE GROUP, INC., a Florida corporation ("IIG").
W I T N E S S E T H:
--------------------
WHEREAS, Preferred currently provides office space, use of
equipment and other administrative services to IIG at 10800
Biscayne Boulevard, l0th Floor, Miami, Florida; and
WHEREAS, Preferred is the lessee of the aforementioned 10800
Biscayne Boulevard, l0th Floor, Miami, Florida, with the obligation
to pay rent therefor; and
WHEREAS, Preferred owns or leases certain business equipment
at the subject premises; and
WHEREAS, Preferred employs certain staff members to perform
administrative services and pays such personnel therefor; and
WHEREAS, the two companies wish to enter into a cost sharing
agreement setting forth the obligations of IIG to pay Preferred for
IIG's use of equipment and other administrative services to IIG at
10800 Biscayne Boulevard, l0th Floor, Miami, Florida;
NOW, THEREFORE, in consideration of the mutual covenants set
forth below, the parties do hereby agree as follows:
1. Payment for Use of Equipment and other Administrative
Services. IIG agrees to pay Preferred such sums as are set forth
in Exhibit "A" hereto, as amended from time to time by agreement of
the parties.
2. Term of Agreement. This agreement shall commence on
January 1, 1996, and shall be effective for so long as IIG uses any
portion of Preferred's rental space, equipment and other
administrative services at 10800 Biscayne Boulevard, l0th Floor,
Miami, Florida, or such other location upon which such items are
located.
3. Notices. Any notice required or permitted to be given
under this Agreement shall be sufficient if in writing and
delivered in person or sent by certified mail, return receipt
requested, as follows:
If to Preferred: Preferred Employers Group, Inc.
10800 Biscayne Boulevard
l0th Floor
Miami, Florida 33161
1
<PAGE>
Attn: William R. Dresback
Chief Financial Officer
If to IIG: International Insurance Group, Inc.
10800 Biscayne Boulevard
Penthouse Floor
Miami, Florida 33161
Attn: Nancy Ryan
Vice President
4. Breach of Agreement. Upon breach of IIG's obligation to
pay such sums as are set forth in Exhibit "A" attached hereto, as
amended from time to time, within ten (10) days from due date,
Preferred shall have a cause of action in the Circuit or County
Courts of Dade County (based on the jurisdictional amount claimed);
further, the prevailing party shall be entitled to a reasonable
attorney's fee and the parties agree to waive a trial by jury.
5. Miscellaneous. This Agreement may be amended but only by
an instrument in writing executed by the party to be burdened
thereby. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction
only, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
hereof or affecting the validity or enforceability of such
provision in any other jurisdiction. This Agreement shall be
governed by, and construed and enforced in accordance with, the
laws of the State of Florida.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date and year first above written.
PREFERRED EMPLOYERS GROUP, INC.
WITNESSES:
______________________________ By:____________________________
William R. Dresback
Chief Financial Officer
______________________________
INTERNATIONAL INSURANCE GROUP,
INC.
2
<PAGE>
PREFERRED EMPLOYERS GROUP, INC.
Elements of Cost Sharing Agreement - Rent
<TABLE>
<CAPTION>
%-age time
allacated Charge Charge Charge Charge
Area Sq footage To PEGI PEGI IIG CMM RAC Total
- ----------------------------------- ------------ ----------- -------- -------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
MH office, bath and kitchen 587.73 75% 440.80 146.93 0.00 0.00
MH conference room 360.00 75% 270.00 90.00 0.00 0.00
KS reception area 193.61 50% 96.81 96.81 0.00 0.00
NR office 258.67 50% 129.34 129.34 0.00 0.00
DT office 265.60 75% 199.20 66.40 0.00 0.00
Empty office 187.20 0% 0.00 187.20 0.00 0.00
Color Me Mine office 189.93 0% 0.00 0.00 189.33 0.00
Color Me Mine secretarial area 100.00 0% 0.00 0.00 100.00 0.00
MA office 186.37 75% 139.78 0.00 0.00 46.59
------------ ----------- ----------- ----------- ----------- -----------
Office space allocated 2,328.51 55% 1,275.92 716.67 289.33 46.59
PEGI direct 9,258.90 100% 9,258.90 0.00 0.00 0.00
------------ ----------- ----------- ----------- ----------- -----------
Total direct 11,587.41 91% 10,534.82 716.67 289.33 46.59
------------ ----------- ----------- ----------- ----------- -----------
Common Areas:
Restrooms 337.09 91% 306.47 20.55 8.42 1.38
Reception/waiting area 679.50 91% 617.77 42.03 16.97 2.73
------------ ----------- ----------- ----------- ----------- -----------
Total common areas 1,015.59 91% 924.24 62.88 25.38 4.09
------------ ----------- ----------- ----------- ----------- -----------
Total square footage 12,604.00 91% 11,459.06 779.55 314.71 50.68 12,604.00
============ =========== =========== =========== =========== ===========
Effective date: 01-Jan-96 01-Jan-96 22-Jul-96 01-Jan-96
Total =========== =========== =========== ===========
Rental payments: -----------
Jan. 1996 $6,893.39 $6,267.20 $598.47 $0.00 $27.72
Feb. 1996 $6,893.39 $6,267.20 $598.47 $0.00 $27.72
Mar. 1996 $6,893.39 $6,267.20 $598.47 $0.00 $27.72
Apr. 1996 $13,786.78 $12,534.40 $1,196.95 $0.00 $55.44
May. 1996 $13,786.78 $12,534.40 $1,196.95 $0.00 $55.44
Jun. 1996 $13,786.78 $12,534.40 $1,196.95 $0.00 $55.44
Jul. 1996 $13,786.78 $12,534.40 $1,196.95 $0.00 $55.44
Aug. 1996 $13,786.78 $12,534.40 $852.70 $344.25 $55.44
Sep. 1996 $13,786.78 $12,534.40 $852.70 $344.25 $55.44
Oct. 1996 $0.00 $0.00 $0.00 $0.00 $0.00
Nov. 1996 $0.00 $0.00 $0.00 $0.00 $0.00
Dec. 1996 $0.00 $0.00 $0.00 $0.00 $0.00
----------- ----------- ----------- ----------- -----------
Total $103,400.85 $94,007.96 $8,288.62 $688.49 $415.77
===========
Paid - to - date $103,400.85 $0.00 $0.00 $0.00
----------- ----------- ----------- -----------
Rental balance due ($9,392.89) $8,288.62 $688.49 $415.70 $9,392.89
===========
Equipment balance due $9,716.36 $0.00 $322.35 $10,048.72
----------- ----------- ----------- ----------
Total balance due $18,004.98 $688.49 $748.12 $19,441.60
=========== =========== =========== ==========
</TABLE>
<PAGE>
PREFERRED EMPLOYERS GROUP, INC.
Elements of Cost Sharing Agreement-Equipmentt
<TABLE>
<CAPTION>
Telephone Computer Furniture Total
Area Count and Printer Cost Artwork Furn/Art
- ---------------------------------------- --------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
MH office, bath and kitchen 1 1 $35,888 $1,505 $37,393
MH conference room 0 0 $30,476 $251 $30,729
KS reception area 2 1 $13,580 $1,254 $14,834
NR office 2 1 $0 $753 $753
DT office 1 1 $2,000 $502 $2,502
Empty office 1 0 $2,000 $502 $2,502
Color Me Mine office 1 0 $4,080 $0 $4,080
Color Me Mine secretarial area 1 1 $500 $0 $500
MA office 1 1 $2,000 $0 $2,000
IIG file room 1 0 $0 $0 $0
PEGI 0 0 $0 $4,014 $4,014
--------- ---------- --------- ------- --------
Total direct 11 6 $90,526 $8,781 $99,307
--------- ---------- --------- ------- --------
Common Areas:
Restrooms 0 0 $0 $0 $0
Reception/waiting area 2 0 $16,207 $2,007 $18,214
--------- ---------- --------- ------- --------
Total common areas 2 0 $16,207 $2,007 $18,214
--------- ---------- --------- ------- --------
Total allocated 13 6 $106,733 $10,788 $117,521
========= ========== ========= ======= ========
Total system count 53
=========
Total system cost $70,973
=========
Average cost per system $1,339 $3,500
========= ==========
</TABLE>
<PAGE>
PREFERRED EMPLOYERS GROUP, INC.
Elements of Cost Sharing Agreement - Equipmentt
<TABLE>
<CAPTION>
%-age
Telephone Computer Total Total Allacated Charge Charge Charge Charge
Area Cost and Printer Furn/Art Cost To PEGI PEGI IIG CMM RAC
---- ---- ----------- --------- ---- ------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MH office, bath and kitchen $1,339 $3,500 $37,393 $42,232 75% $31,674 $10,558
MH conference room $0 $0 $30,729 $30,729 75% $23,047 $7,882
KS reception area $2,878 $3,500 $14,834 $21,013 50% $10,508 $10,506
NR office $2,678 $3,500 $753 $6,931 50% $3,465 $3,485
DT office $1,339 $3,500 $2,502 $7,341 75% $5,506 $1,835
Empty office $1,339 $0 $2,502 $3,841 0% $0 $3,841
Color Me Mine office $1,339 $0 $4,080 $5,419 0% $0 $5,419
Color Me Mine secretarial area $1,339 $3,500 $500 $5,339 0% $0 $5,339
MA office $1,339 $3,500 $2,000 $6,839 75% $5,129 $1,710
IIG file room $1,339 $0 $0 $1,339 0% $0 $1,339
------- ------- -------- -------- -- ------- ------- ------- ------
Total $14,730 $21,000 $95,293 $131,023 61% $793 $39,227 $10,758 $1,710
------- ------- -------- -------- -- ------- ------- ------- ------
Common Areas:
Restrooms $0 $0 $0 $0 91% $0 $0 $0 $0
Reception/waiting area $2,678 $0 $18,214 $20,892 91% $18,994 $1,440 $395 $63
------- ------- -------- -------- -- ------- ------- ------- ------
Total common areas $2,678 $0 $18,214 $20,892 91% $18,994 $1,440 $395 $63
------- ------- -------- -------- -- ------- ------- ------- ------
Total allocated $17,408 $21,000 $113,507 $151,915 65% $98,322 $40,667 $11,153 $1,773
======= ======= ======== ======== == ======= ======= ======= ======
Assumed lease term (mos) 48 48 48
======= ======= ======
Monthly equipment payment:
Jan. 1996 $1,080 $0 $37
Feb. 1996 $1,080 $0 $37
Mar. 1996 $1,080 $0 $37
Apr. 1996 $1,080 $0 $37
May. 1996 $1,080 $0 $37
Jun. 1996 $1,080 $0 $37
Jul. 1996 $1,080 $0 $37
Aug. 1996 $1,080 $0 $37
Sep. 1996 $1,080 $0 $37
Oct. 1996 $0 $0 $0
Nov. 1996 $0 $0 $0
Dec. 1996 $0 $0 $0
------- ------- ------
Total $9,716 $0 $332
Paid - to - date $0 $0 $0
------- ------- ------
Balance due $9,716 $0 $332
======= ======= ======
</TABLE>
<PAGE>
FORM OF EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made as of
____________, 1997 by and among PREFERRED EMPLOYERS HOLDINGS, INC. (the
"Company"), having an address at 10800 Biscayne Boulevard, 10th Floor, Miami,
Florida 33161 and HOWARD ODZER, an individual having an address at 1399
Northeast 103rd Street, Miami Shores Florida 33138 ("Odzer").
W I T N E S S E T H
WHEREAS, Odzer is currently the President and a director of
Preferred Employers Group, Inc. ("PEGI"), pursuant to an employment agreement
made as of May 15, 1995 by and between PEGI and Odzer (the "PEGI Agreement");
WHEREAS, pursuant to a Share Exchange Agreement dated as of
________, 1997, the Company and PEGI effected an exchange and reorganization
whereby all the outstanding shares of capital stock of PEGI were exchanged for
all of the shares of capital stock of the Company resulting in PEGI becoming a
wholly-owned subsidiary of the Company;
WHEREAS, the Company and Odzer wish to set forth the terms
upon which Odzer shall hereinafter be employed by the Company.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Term. Odzer shall be employed by the Company for a period
of time which shall terminate on May 15, 1998, unless sooner terminated in
accordance with the terms hereof; provided, however, that this Agreement shall
be automatically renewed for additional periods of one (1) year, unless either
party has given the other not less than ninety (90) days notice of its desire to
terminate the Agreement at the end of that period (such period, together with
any renewals thereof are referred to herein as the "Term").
2. Positions. During the Term, Odzer (i) shall serve as the
President of the Company, reporting directly to the Chief Executive Officer, and
shall continue to perform only such duties as have previously been performed by
him as the President of the Company, and (ii) may serve as a director of the
Company and at each election of directors during the Term the Company agrees to
nominate and recommend Odzer for election as a director of the Company;
provided, however, in the event Odzer shall not be a director of the Company, he
shall have the right to attend and participate in all meetings of the Board of
Directors of the Company and the Executive Committee thereof; and, provided
further, Odzer shall not be required to perform such duties outside of Dade or
Broward County, whichever county the
<PAGE>
Company shall be located except for duties performed while on trips required of
him. In his capacity, Odzer shall be permitted to maintain previous
relationships developed by him to the same extent as he has heretofore
maintained.
3. Compensation. Odzer shall receive an annual salary of
$200,000 payable in the same manner as other executives. Odzer shall also
receive perquisites similar to perquisites made available to other senior
executives of the Company.
4. Expenses. Odzer shall be entitled to prompt reimbursement
of all reasonable business expenses in accordance with the Company's policy for
such reimbursements.
5. Time Commitment; Other Interests. During the Term, Odzer
shall devote substantially all of his working time to the operations of the
Company and shall not, directly or indirectly, alone or as a member of a
partnership, or as an officer, director or shareholder of any other corporation,
be engaged in any other commercial duties or pursuits relating to the insurance
industry, except that nothing contained herein shall prohibit Odzer from
acquiring publicly traded securities of companies which are involved, directly
or indirectly, in the insurance industry, provided that such securities are
traded on a national securities exchange or on an over the counter market and in
no event shall Odzer's ownership of such securities exceed 5% of the outstanding
common stock of such company.
6. Non-Competition. For a period of one (1) year after the
Term, Odzer shall not, directly or indirectly, compete with or be engaged in the
same business as the Company, or be employed by, or act as consultant or lender
to, or be a director, officer, employee, owner or partner of, any business
organization which , directly or indirectly competes with or is engaged in the
same business as the Company is in at the end of the Term; provided, however,
that Odzer shall be permitted to own no more than 5% of the outstanding common
stock of any company, the stock of which is traded on a national securities
exchange or on an over the counter market; provided, further, that nothing in
this Agreement shall prohibit Odzer from serving as an employee of or a
consultant to a diversified business organization which derives no more than 5%
of its consolidated gross revenues from a line of business competing with that
of the Company. Under no circumstances, however, may Odzer's services to such
organization consist of any activities in competition with the business of the
Company.
7. Termination. (a) This Agreement may be terminated by the
Company at any time "For Cause." For purposes of this Agreement, "For Cause"
shall mean the following: (i) if Odzer has persistently and wilfully failed to
devote substantially all of his working time to the operations of the Company,
after specific notice to Odzer of such alleged failure and a 20 day opportunity
to cure, (ii) if Odzer has been convicted of (whether or not subject to appeal)
or plead "nolo contendere" or has made any similar plea to any criminal offense
involving a violation of federal or state securities laws or regulations,
embezzlement, fraud, wrongful taking or misappropriation of property, theft, or
any other crime involving dishonesty, (iii) if Odzer has violated or materially
breached any material provision of this Agreement or that certain
-2-
<PAGE>
Shareholders Agreement dated as of _____________, 1997 by and among the Company,
Odzer and Mel Harris, after specific notice to Odzer of such alleged violation
or breach and a 20 day opportunity to cure or (iv) if Odzer ceases to be a
shareholder of the Company.
(b) In the event this Agreement shall be terminated
by the Company for any reason other than pursuant to Section 7(a) or Section 8
hereof, Odzer shall be entitled to receive all payments and benefits to which he
was entitled pursuant to this Agreement to the end of the Term.
8. Disability; Death. (a) If, during the Term, Odzer becomes
physically or mentally disabled, whether by injury, illness or otherwise, so
that he is unable to perform his duties for a period of six successive months,
then the Company may, at its option, terminate this Agreement upon thirty days'
written notice to Odzer without further obligation; provided, however, that the
Company shall continue to pay Odzer his monthly salary until the earlier of (i)
the end of such period of disability and notice, or (ii) the end of the Term.
(b) In the event of Odzer's death during the Term,
this Agreement shall terminate and be of no further force and effect, provided
that Odzer shall be entitled to all salary and other benefits to which he is
entitled through the date of death.
9. Miscellaneous. This Agreement (i) contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements of the parties, written or oral, of any nature
whatsoever, (ii) shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors, and (iii) shall be governed by
the laws of the State of Florida, without giving effect to the conflicts of law
provisions thereof.
10. Arbitration. Any dispute or controversy arising out of or
relating to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or any breach of this
Agreement or any such document or instrument shall be settled by arbitration to
be held in the County of Dade, State of Florida in accordance with the
Commercial Arbitration Rules then in effect of the American Arbitration
Association or any successor thereto, and judgment upon the award rendered by
the Arbitrator(s) may be entered in an Court having jurisdiction thereof. The
Arbitrator(s) may grant injunctions or other relief in such dispute or
controversy. The costs and expenses of such arbitration shall be assumed as
determined by the Arbitrator(s), and each party shall separately pay his own
attorneys' fees and expenses.
11. Notices. Any notice or other communication to be given
hereunder shall be in writing and shall be mailed by certified mail, return
receipt requested, or delivered against receipt to the party to whom it is to be
given at the address of such party set forth below.
Mr. Odzer: 1399 Northeast 103rd Street
- ---------- Miami Shores, Florida 33138
-3-
<PAGE>
with a copy to:
Thomas R. McGuigan, P.A.
Steel Hector & Davis
200 South Biscayne Boulevard, 40th Floor
Miami, Florida 33131-2398
The Company: 10800 Biscayne Boulevard, 10th Floor
- ------------ Miami, Florida 33161
with a copy to:
Donald J. Bezahler, Esq.
Baer Marks & Upham
805 Third Avenue
New York, New York 10022-7513
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and delivered as of the day of , 1997.
PREFERRED EMPLOYERS HOLDINGS, INC.
By:__________________________________
Name: Mel Harris
Title: Chairman of the Board and
Chief Executive Officer
_____________________________________
Howard Odzer
-5-
<PAGE>
GENERAL
GA\ ACCIDENT
INSURANCE
Agency
Agreement
General Accident Insurance Company of America
The Camden Fire Insurance Association
Potomac Insurance Company of Illinois
Pennsylvania General Insurance Company
PG Insurance Company of New York
GA Insurance Company of New York
General Assurance Company
<PAGE>
<TABLE>
AGENCY AGREEMENT
=========================================================================================================================
<S> <C> <C> <C>
|X| General Accident Insurance |X| The Camden Fire |X| Pennsylvania General |X|Potomac Insurance
Company of America Insurance Association Insurance Company Company of Illinois
|_| GA Insurance |_| General |_| PG Insurance
Company of New York Assurance Company Company of New York
==========================================================================================================================
</TABLE>
Each company designated above, as now or hereafter constituted, its successors
and assigns, is a party to this Agreement and is severally, but not jointly
referred to as "Company", and has its agency administration office in
Philadelphia, Pennsylvania.
Preferred Employers Group, Inc.
- --------------------------------------------------------------------------------
NAME
Suite 301 1125 N.E. 125th St North Miami, Florida 33161
- --------------------------------------------------------------------------------
ADDRESS
is a party to this Agreement and is hereafter referred to as "Agent". It is
agreed between Company and Agent that:
1. Authority of Agent
Agent is an independent contractor, and not an employee of Company, for all
purposes, including federal tax, and Agent shall have exclusive control over the
conduct of Agent's business and the selection of companies Agent shall
represent, subject to requirements imposed by law, the terms of this Agreement
and schedules, addenda, or attachments hereto, and the underwriting rules and
regulations of Company.
Company grants Agent the following authority:
a. To operate as an agent for Company in the jurisdictions where Agent is
properly licensed with respect to the classes of risks specified in
paragraph l.b. below. Agent shall not, however, have the exclusive right to
act on Company's behalf in such jurisdictions.
b. To solicit, receive, accept, bind, issue or endorse insurance contracts to
the extent authorized by the Statement of Binding Authority attached to
this Agreement, covering classes of risks for which commission is specified
in commission schedules or addenda attached hereto, and as outlined in
Company underwriting guides or any other document. The Statement of Binding
Authority may be changed at any time at the sole discretion of the Company
upon written notice to Agent. Agent shall transmit copies of all evidence
of insurance and endorsements issued or shall otherwise notify Company of
all liability accepted not later than the third business day following
inception of coverage.
c. To collect and account for premium in accordance with Company procedures on
business written by Agent. Agent shall act in a fiduciary capacity with
respect to all premiums collected.
d. To request cancellation or nonrenewal of any policy placed by Agent with
Company.
1. Upon Agent's request, Company shall give advance written notice of
cancellation or nonrenewal to the policyholder or obligor.
2. Nothing in this Agreement shall interfere with Company's right to
cancel or nonrenew any insurance policy issued by or through Agent.
3. The rights and obligations contained in this paragraph d. with respect
to cancellation and nonrenewal of insurance policies are subject to
requirements imposed by law and must be in compliance with any
applicable provisions contained within the insurance contracts.
II. Premium Accounting
Unless otherwise noted, the following provisions are applicable to all business
placed by Agent with Company except business written under Company's direct
billing system.
a. Agent shall be responsible for all earned premium, whether original,
renewal, installment or other, on business written by Agent and placed with
Company and Company shall not have responsibility for premium advanced by
Agent.
b. Whenever a policy or binder is issued, premium shall be deemed to have been
earned unless such policy or binder is returned within thirty (30) days
after the effective date or date of issue, whichever is later, with
evidence satisfactory to Company that the issuance of such policy or binder
did not result in contractual or other liability on the part of Company.
c. Premium which has been determined by audits, retrospective rating
adjustments and interim reports shall be fully earned. Agent's
responsibility for such premium shall be waived if Agent furnishes written
notice of collection difficulties to Company within thirty (30) days of
date Agent receives the billing notice. Otherwise, Agent accepts full
responsibility for payment and must forward to Company such premium when
due. No commission shall be allowed on premium collected directly by
Company under this provision.
d. Itemized statements of money due Company or due Agent shall be prepared
monthly by Company unless both parties agree that Agent should prepare said
statements. Any such statement prepared by Agent shall be received by
Company within fifteen (15) days following the end of the month for which
the statement was prepared.
e. The balance shown in the statement due Company or due Agent shall be
payable not later than forty-five (45) days after the end of the account
month for which such statement was prepared.
f. If Agent is delinquent in paying any premium due Company, any and all
monies payable to Agent, including profit sharing contingencies and direct
bill commission, may be applied against such outstanding premium.
g. Omission of any item from a monthly statement or disagreement over the
accuracy of any item that appears on the statement shall not relieve either
party of the responsibility to account for and pay all amounts due the
other, nor shall it prejudice the right of either party to collect all such
amounts due from the other.
h. All financial and accounting records of Agent pertaining to business
written through Company shall be subject to inspection or audit by Company
representatives at all reasonable times.
<PAGE>
III. Direct Billed Policies
On policies for which Company will bill insureds directly, the following
provisions apply:
a. Agent shall submit all applications to Company and shall collect and remit
to Company with each application any required deposit premium in gross,
without deducting any commission which may be due Agent by Company under
the terms of this Agreement.
b. Following issuance of the initial policy and collection of the initial
premium, Company shall assume full responsibility for billing and
collecting all premium, including any endorsement premium.
c. Company shall pay commissions within thirty (30) days after the end of the
month in which it receives and records premium, subject to any setoff to
which it is entitled.
d. Company shall clearly identify Agent by name on all policies, endorsements,
premium notices, renewal certificates, and cancellation and nonrenewal
notices to policyholders.
IV. Commissions
a. As full compensation for services, Company shall pay Agent commissions in
accordance with the most recent commission schedule made part of this
Agreement ("Schedule") on premium reported and paid to Company on business
written by Agent. Agent agrees to refund unearned commission, whenever
premiums are refunded by Company, at the same rate at which such commission
was originally paid or retained.
b. Any commission rate set forth in the Schedule, shall not be changed by
Company except that:
1. Agent and Company may agree in writing to amend the commission rate
for any and all lines of business specified in the Schedule.
2. Company may change any commission rate upon not less than ninety (90)
days written notice to Agent. No change in any rate of commission may
be made until such rate of commission has been in effect for a period
of twelve (12) months or more or unless the change is a result of
governmental authority having effectively amended the provision for
commission in the rate structure.
3. If this Agreement is terminated under Section IX.a.1, 2 or 3,
commission payments shall cease on the date of termination. If this
Agreement is terminated under Section IX.a.4., commission payments
shall be paid in accordance with the terms of the agreement between
Company and Agent. If this Agreement is terminated under Section
IX.a.5., commissions shall be paid in accordance with subparagraph
(vi) of Section IX.a.5.
4. Nothing in this Agreement, or in the Schedule, shall be construed to
prohibit Agent and Company from negotiating special rates of
commission applicable to individual risks or policies. Any agreement
regarding such special rates must be in writing and signed by Agent
and an authorized representative of Company.
V. Recovery Credits
Company shall include subrogation and salvage recoveries in the preparation of
statistical data pertaining to Agent's business with Company.
VI. Amendments to Agreement
This Agreement may be amended at any time by written agreement of Agent and
Company. This section does not apply to amendments of the Statement of Binding
Authority or Schedule, which may be revised by Company in accordance with
sections l.b. and IV.b.2
VII. Indemnification
a. Company shall indemnify and hold Agent harmless from and against all
sums, including costs and expenses of suit defense and settlement, net
of any insurance proceeds or other realized recoveries received, which
Agent shall become legally obligated to pay by reason of liability
imposed on Agent by law for damages sustained by policyholders of
Company, caused solely and directly by error or omission of Company in
the preparation and handling of policies, or, in the instance of
direct billed business, by Company's failure to send to any
policyholder, before due date, a notice of premium due.
b. Company agrees to indemnify and hold Agent harmless against any civil
claim or liability for damages and expenses, including the costs of
defending suit, net of any insurance proceeds or other realized
recoveries received, which Agent may be obligated to pay as a direct
result of Company's failure to comply with the requirements of any law
pertaining to Company's conduct of the insurance business, except when
such failure is the result of the negligence or willful or intentional
act or omission of Agent.
c. Agent shall promptly notify Company upon receipt of any claim or suit
which may be referred to Company under paragraphs a. or b. above.
d. With regard to any claim to which paragraphs a. or b. of this Section
Vll applies, Agent shall not (i) make any hold harmless agreement or
contract any expense nor voluntarily assume liability in any situation
nor (ii) make or contract any settlement of a claim against Agent,
except at Agent's own cost and responsibility, without the written
authorization of Company. Agent shall at all times fully cooperate
with Company in the defense of any claim hereunder, shall assist in
the preparation for trial and shall, if requested, attend the trial of
any such claim.
VIII. Suspension
If Agent does not make timely accounting for or payment of any sums due Company,
Company reserves the right, upon written notice to Agent, to suspend Agent's
authority to bind coverage, write any new or renewal business, or change any
policy during the period of the suspension. Agent shall not be suspended because
of routine differences in the accounting records of Agent and Company unless
such differences involve the willful withholding of premium collected by Agent.
X. Termination
a. This Agreement, and any Schedule, addendum or attachment hereto, shall
be terminated:
1. By Company, immediately and without notice to Agent, if any
public authority cancels or declines to renew Agent's license or
certificate of authority;
2. By Company, immediately and without notice to Agent, in the event
of Agent's fraud, insolvency, gross and willful misconduct,
abandonment, or failure to pay over to Company monies due after
receipt of written demand therefor;
3. By Company, immediately and without notice to Agent, on the
effective date of sale or transfer of Agent's business; Agent's
merger, consolidation, or reformation; or termination of any
partnership, unless Company has first agreed in writing to the
assignment of this Agreement;
4. By mutual written agreement of Company and Agent, and in
accordance with the terms and conditions to which they have
agreed; or
<PAGE>
5. By either party for any reason, upon not less than ninety (90)
days written notice to the other, in which event the following
conditions shall apply:
(i) Agent's authority to issue claim drafts and to solicit,
bind, execute, or issue contracts of insurance for new
business, certificates or renewals shall cease as of the
time notice of termination of this Agreement is given.
(ii) Unexpired policies shall be continued in force until
expiration, subject to earlier termination in accordance
with Company's underwriting standards or for nonpayment of
premium.
(iii) Company shall, if Agent so requests, renew all policies
written through Agent for the next one year policy period
which commences on the effective date of termination. In no
event shall the period be more than one year, unless such
period is extended by law. Company shall have no obligation
to renew or continue coverage through the terminated Agent
under this subsection unless:
A. The risk being insured is acceptable to Company
according to the underwriting standards in effect on
the renewal or anniversary date; and
B. Agent is not in violation of this Agreement; and
C. Agent's license is in force; and
D. The policy is not cancelled or nonrenewed for statutory
cause.
(iv) Company shall honor any direct request by a policyholder for
coverage through another agent or for cancellation of the
policy.
(v) Agent shall be authorized, subject to underwriting rules and
practices of Company, to effect any necessary changes on
inforce policies of insurance, provided that the changes do
not increase or extend Company's liability under, or alter
the terms of, any such policy. Agent shall collect and remit
premium to Company on such policies as a fiduciary and in
accordance with Company procedures and this Agreement.
(vi) Company shall pay commissions for all policies renewed under
the provisions of subparagraph (iii) above, either at the
rate specified in the Schedule, or at Company's standard
rate at time of renewal, whichever is less. This provision
shall not apply if Company is legally prohibited from
issuing nonrenewal notices or nonrenews a policy of
insurance according to proper nonrenewal procedure, but is
nonetheless required by law or regulation to reinstate it,
unless commissions on such renewals are required by law to
be paid. This provision shall also not apply following
expiration of the one-year renewal cycle described in
subparagraph (iii), above.
(vii) Subparagraph (iii), (v) and (vi) above shall apply only if
ownership of the policies remains with Agent, pursuant to
Section X below.
b. Upon termination, Agent shall return to Company any unused
applications, policies, claim drafts, forms or other Company supplies
furnished to Agent. These shall always remain the property of the
Company and must be accounted for upon demand by Company.
c. Company shall, at Agent's request, provide a record of unexpired
direct billed policies Agent has placed with Company.
X. Ownership of Business
a. While this Agreement is in effect, Company shall not use its records
of insurance placed by Agent to directly contact policyholders for the
purpose of offering other kinds of insurance, products or services.
This provision shall not apply when Company is required by law to
directly contact its policyholders or when Company is acting on the
Agent's behalf. In either case, Company shall send Agent an advance
copy of such documents and they shall refer the policyholder to Agent
for additional information.
b. In the event of termination of this Agreement, Agent having promptly
accounted for and paid over to Company all premium for which Agent may
be liable, Agent's records, and use and control of expirations, shall
remain the property of Agent and be left in Agent's undisputed
possession; otherwise records, and use and control of expirations
shall be vested in Company with right of sale. In the exercise of its
right to collect any indebtedness due from Agent, including the sale
of expirations, Company shall be accountable to Agent for any sums
received which, net of expenses, exceed the amount of Agent's
indebtedness including accumulated interest, and Agent shall remain
liable for the amount by which such indebtedness and interest exceeds
the sums actually received by Company and such excess shall be payable
by Agent at any time upon demand by Company and without regard to the
terms of any promissory note, agreement of sale, or other collection
agreement providing for periodic or postponed payment of the
indebtedness.
XI. Underwriting Pools
The provisions of this Agreement shall not apply to business administered by
Underwriting Associations Syndicates or Pools.
XII. Brokered Business
Agent shall submit to Company only that business which Agent has directly
solicited and which is under Agent's direct control. Agent shall not broker
business for another producer without the prior written approval of an
authorized Company representative.
XIII. Financial Statements
Upon request, Agent shall provide Company with Agent's financial statements
prepared in accordance with generally accepted accounting principles and upon
which a certified public accountant has rendered a compilation letter.
XIV. Non-Waiver
Failure or delay of Company for any reason, or for any length of time, to
exercise any of its rights under this Agreement or to insist upon Agent's
compliance with any or all provisions of this Agreement shall not constitute
waiver thereof in whole or in part.
XV. Records
In the event of a discrepancy between Agent's and Company's records regarding
insurance placed with Company by Agent, the records of the Company shall
control.
XVI. Advertising
a. Agent may broadcast, publish and distribute materials referring to
Company and to its products and services; provided, however, that
Agent shall first secure Company's written authorization with respect
to any such materials which were not prepared by Company.
<PAGE>
b. With respect to materials which were prepared by Company and which
refer to Company and to its products and services, Agent shall not
alter any such materials and thereafter broadcast, publish or
distribute them as altered without first obtaining Company's written
authorization.
c. Agent shall not employ, reproduce or display Company trademark,
service mark, logo or other identifying symbols in any manner
whatsoever without first obtaining written authorization from Company.
XVII. Data Entry Systems
a. With regard to all Company data entry systems, in entering appropriate
new business or policy change data into said systems, Agent shall:
(1) adhere to the current underwriting guides and binding authority
for the specific line of business;
(2) retain on file signed application forms for any new business
transactions where required by law;
(3) retain on file any state-mandated forms that require the
insured's signature; and
(4) correct any data entry errors, whether such errors are discovered
by Company or by Agent.
b. With regard to Company's Personal Property Data Entry System Agent
shall retain on file:
(1) the Home Cost Estimator;
(2) the following Company underwriting forms where required by
Company underwriting guides:
(i) Appraisal;
(ii) Home Security Credit form;
(iii) Suburban Rating form;
(3) any other form required by Company; and
(4) a photograph of the dwelling, if required.
c. With regard to Company's Personal Auto Data Entry System, Agent shall:
(1) retain the following Company underwriting forms where required by
Company underwriting guides:
(i) A. Good Student Certificate; (ii) B. Defensive Driver
Certificate; and (iii) C. Anti-Theft Credit form;
(2) retain any other forms required by Company;
(3) forward to the appropriate Branch Office Underwriting Department
all Physical Damage Inspection reports and photographs, where
required by law; and
(4) for each applicant, either order an MVR through Company's system
or send an MVR to the Company underwriter assigned to Agent.
d. Company has the right to inspect Agent's files to confirm that Agent
is in possession of all documents named herein upon reasonable notice,
at any time during normal working hours. Any file criticized as a
result of a data entry systems audit shall be corrected by the Agent
as soon as practicable.
e. Agent shall keep all underwriting documents named herein for that
period of time required by applicable state law, and in no event for
less than three years from the date of policy expiration.
f. Company agrees to hold Agent harmless from any damages arising
directly from the destruction of any or all of the underwriting
documents named in this Section XVII when such destruction is due to
property damage from natural causes or causes beyond the knowledge and
control of Agent.
XVIII. Automatic Compliance
Any provision or stipulation of this Agreement not in accord or compliance with
applicable law shall be nonetheless construed to be limited or broadened, as the
case may be, to comply with such law.
XIX. Headings
The section headings in this Agreement are for convenience of reference only and
shall not affect its interpretation.
XX. Governing Law
This Agreement shall be governed by and construed in accordance with the laws of
the Commonwealth of Pennsylvania without giving effect to principles of
conflicts of laws.
XXI. Plural
The singular shall be deemed to include the plural and vice versa as the context
may require.
XXII. Agreement Effective
This Agreement supersedes all previous agency agreements, whether written or
oral, between Company and Agent, and
a. shall be effective 9/14/94, ________; and
b. shall continue in full force and effect until amended, suspended or
terminated as elsewhere provided herein.
IN WITNESS WHEREOF, Agent and Company have caused this Agreement to be executed
this __________________ day of _____________________________, __________.
For Agent By: For Company By:
/s/ /s/ Anne E. Cassidy
- -------------------------------- -----------------------------------
CHIEF FINANCIAL OFFICER Manager
- -------------------------------- -----------------------------------
(Title) (Title)
Agency Code No.: 850116 and 850120
<PAGE>
Addendum to Agency Agreement
1. Authority of Agent
b. The following sentence will be added:
Company agrees that Binding Authority will not be changed for the purpose
of company directly or indirectly assisting another agency in placing
similar coverage.
11. Premium Accounting
h. The following sentence will be added:
All financial and accounting records of the Company pertaining to business
written through Agency shall be subject to inspection or audit by Agency
representatives at all reasonable times.
IV. Commissions
b.2. The first sentence of this section is modified to read 360 days in
place of 90 days.
b.3. The first sentence is modified to eliminate Section IX.a.3.
b.5. This Section is Added to Agreement as follows:
If this Agreement is terminated under Section IX.a.3. commission payments
shall continue to be paid to Agent for the remaining current one-year
policy period, subject to earlier termination in accordance with Company's
underwriting standards or for nonpayment of premium. At the end of the
current one-year policy period commission payments to Agency will cease.
IX. Termination
a.2. Is replaced by:
By Company, immediately with certified return receipt notice to Agent, in
the event of Agent's fraud, insolvency, gross and willful misconduct,
abandonment or, except for direct billed policies, failure to pay over to
Company monies due after receipt of written demand therefor;
a.3. Change
Change "without notice" to "with certified return receipt notice".
<PAGE>
X. Ownership of Business
b. Entire Section is replaced by:
In the event of termination of the Agreement for any reason except IX.a.1.
and or that portion of IX.a.2. excluding "or failure to pay over to Company
monies due after receipt of written demand therefor", Agent's records and
use and control of expirations shall remain property of Agent: however, to
the extent of any unpaid premium on an existing policy, Company shall
control the records and expirations regarding the unpaid premium.
XII Brokered Business
Section is removed entirely.
XV Records
Section is removed entirely.
This Addendum forms part of the Agency Agreement. All other terms and
conditions of the Agency Agreement shall remain the same.
In Witness Whereof, Agent and Company have caused this Addendum to be
signed this _____________________ day of_______________________.
For Agent by: For Company by:
/s/ /s/
------------------------- ----------------------------------
CHIEF FINANCIAL OFFICER Manager
------------------------- ----------------------------------
(Title) (Title)
Agent Code No(s)
850116
850120
<PAGE>
GA\
GENERAL Association and Franchise Branch
ACCIDENT PO Box 108
INSURANCE Philadelphia PA 19105-0108
215 574.1600
215 574 1696 (FAX)
ASSOCIATION & FRANCHISE
BONUS COMMISSION AGREEMENT
General Accident Insurance, its successors or assigns is a party to this
Agreement and is severally, but not jointly referred to as the "Company".
Preferred Employers Group Inc.
- ------------------------------
Name
Suite 301 1125 N.E. 125th St.. N. Miami FL 33161
- ------------------------------------------------
Address
is party to this Agreement and is referred to as the "Agent". It is agreed
between the Company and the Agent that: In consideration of the special effort
of the Agent to increase writings of profitable business through the production
of association and or franchise business and to comply with all terms of the
Agency Agreement between the Company and the Agent dated 9/1/94, the Company
agrees to pay
("Agency Agreement")
the Agent as additional compensation to that outlined in the Association &
Franchise Commission Schedule to the Agency Agreement, a percentage share of the
premiums earned during the Bonus Period.
Definitions
Earned Premium - Written Premium for the Profit Sharing Period, plus unearned
premium reserve as of the first day of the Profit Sharing Period, less unearned
premium reserve as of the last day of the Profit Sharing Period. This is for
direct business only.
Loss Ratio - The loss ratio shown on the Agent's Producer Experience Reports for
the Bonus Period, excluding loss ratio attributable to Agent's surety business.
This includes both direct & broker business.
Bonus Commission - Amount of compensation due Agent under the terms of this
Agreement for the Bonus Period.
Bonus Factor - The percentage amount located at the intersection of the row
representing Agent's Written Premium for direct business, for the Bonus Period
and the column representing the Agent's Loss Ratio for the Bonus Period as shown
on the
General Accident Insurance Company of America, The Camden Fire Insurance
Association, Potomac Insurance Company of Illinois, Pennsylvania General
Insurance Company, GA Insurance Company of New York, General Assurance Company,
PG Insurance Company of New York.
<PAGE>
Bonus Commission Schedule which is attached. Both the direct and broker agency
codes will be used in the determination of the loss ratio.
Bonus Period - Calendar year for which the Agents Bonus Commission is being
calculated.
Qualifying Premium - Minimum amount of direct Written Premium which the Agent
must produce during the Bonus Period in order to be eligible for compensation
under the terms of this Agreement.
Written Premium - The amount of written premium, excluding surety premium, shown
on the Agent's Producer Experience Report for the Bonus Period and generated
through the Agency code shown in this Agreement for direct business. All other
premium shall be excluded from this number unless inclusion of such premium
amount is agreed to in writing by both the Agent and the Company.
Qualification
In order to be eligible for Bonus Commission under the terms of this Agreement,
the Agent must produce the minimum premium at the loss ratio shown on the
attached Bonus Commission Schedule.
Calculation Provisions
Within 90 days of the end of the Bonus Period, the Company shall determine the
Agent's Bonus Commission by multiplying the Agents Earned Premium for such
period by the appropriate Bonus Factor. Only the Earned Premium for the direct
agency code will be used in this calculation.
There are no Stop Loss Provisions
General Provisions
Amendment
The Company may amend this Agreement at any time upon sixty (60) days written
notice to the Agent. The effective date of such amendment shall be January 1 of
the Bonus Period immediately following the calendar year in which such notice is
given.
This agreement may be amended at any time upon written agreement of the Company
and the Agent.
<PAGE>
Offset - The Company may apply any compensation due the Agent under this
Agreement toward any indebtedness owed the Company by the Agent, excluding
Account Current balances that are not overdue and including any collection cost
incurred by the Company.
Suspension of Payment - If the Agent is delinquent in the payment of any monies
due the Company or in settling an Account Current balance, any amount due the
Agent under this Agreement may be withheld by the Company until such time as
payment in full of the balance due is received by the Company. Payment of the
Agent's Bonus Commission under this paragraph shall be net of any expenses
incurred by the Company in attempting to collect the above referenced delinquent
amount.
Termination -
This Agreement may be terminated by either party at any time upon ninety (90)
days' written notice to the other.
This Agreement shall terminate immediately upon termination of the Agency
Agreement.
No Bonus Commission shall be paid to the Agent for the Bonus Period during which
the Agreement terminates.
Assignment - This Agreement shall not be assignable by the Agent except upon the
written consent of the Company.
Records - In the event that the records of the Company and of the Agent do not
agree for purposes of this Agreement, the records of the Company shall control.
Notices - Any notices required to be given shall be sufficiently given if sent
by certified mail, return receipt requested, to the Agent at the address shown
on previous page and to the Company at the following address:
General Accident Insurance Company of America
436 Walnut Street
Philadelphia, PA 19105
Attention: Marketing Department
Governing Law - This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Pennsylvania without giving effect to
principles of conflict of laws.
<PAGE>
Headings - The section headings in this Agreement are for the convenience of
reference only and shall not affect its interpretation.
Supersession - This Agreement supersedes all previous Bonus Commission
agreements between the Company and the Agent and shall continue in full force
and effect until amended, suspended or terminated.
In Witness Wherof, the Agent and the Company have caused this Agreement to be
executed on ________________________________.
For Agent by: For Company by:
/s/ /s/
------------------------- ----------------------------------
CHIEF FINANCIAL OFFICER Manager
------------------------- ----------------------------------
(Title) (Title)
Direct Agency Code No.: 850116
Broker Agency Code No.: 850120
<PAGE>
GA \ Statement of
Binding Authority
================================================================================
Agency Name: Preferred Employers Group, Inc.
Date: 9/14/94 Code: 850116 And 850120
1. Binding Authority
a. Agent's binding authority is subject to all Company underwriting
guides. Agent shall not bind Company to any business that is in
violation of those guides.
b. Agent's authority for the following lines of business is set forth
opposite each:
<TABLE>
<CAPTION>
Commercial Lines of Business Limits of Liability
- --------------------------------------------------------------------------------------------
<S> <C>
Property: Fire, Packages, BOP, GF MCP, MOP/PPP, Plate Glass 1,000,000
- --------------------------------------------------------------------------------------------
Inland Marine: Builders' Risk, Motor Truck Cargo, EDP and
Contractors' Equipment 1,000,000
- --------------------------------------------------------------------------------------------
Burglary: 25,000
- --------------------------------------------------------------------------------------------
Commercial Auto Liability: CSL 1,000,000
- --------------------------------------------------------------------------------------------
General Liability: 1,000,000 OCC
Including Sect. II of Package: 2,000,000 PROD. AGG.
Premises/Operations - Agg/Occur BOP & MCP
Products/Comp Ops - Agg/Occur 1,000,000 OCC
Personal/Advertising Injury: GF, MCP, BOP 3,000,000 AGG.
- --------------------------------------------------------------------------------------------
Excess Catastrophe Policy: 1,000,000
- --------------------------------------------------------------------------------------------
Workers' Compensation:
Accident- Each Accident 100,000
Disease - Policy Limit 500,000
Disease - Each Employee 100,000
- --------------------------------------------------------------------------------------------
Other:
- --------------------------------------------------------------------------------------------
Personal Lines of Business Limits of Liability
- --------------------------------------------------------------------------------------------
Property: Fire, Homeowners N/A
- --------------------------------------------------------------------------------------------
Liability: Homeowners N/A
- --------------------------------------------------------------------------------------------
Personal IM: Per Item N/A
Per Schedule
- --------------------------------------------------------------------------------------------
Personal Auto: Liability N/A
- --------------------------------------------------------------------------------------------
Personal Umbrella: N/A
- --------------------------------------------------------------------------------------------
Other: N/A
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BONUS COMMISSION
Preferred Employers Group Inc.
<TABLE>
<CAPTION>
Written Premium Loss Ratio
- ------------------------------------------------------------------------------------------------------------------
0-29.9 30-39.9 40-44.9 45-49.9 50-52.9 53-54.9 55.0 & Up
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less Than 500,000 0 0 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------
500,001-1,250,000 6.5 4.5 3.0 1.5 .5 0 0
- ------------------------------------------------------------------------------------------------------------------
1,250,001 -2,000,000 7.0 5.1 3.6 2.2 1.2 0 0
- ------------------------------------------------------------------------------------------------------------------
2,000,001 -2,750,000 7.5 5.7 4.2 2.9 1.9 0 0
- ------------------------------------------------------------------------------------------------------------------
2,750,001 -3,500,000 8.0 6.3 4.8 3.6 2.6 .5 0
- ------------------------------------------------------------------------------------------------------------------
3,500,001-4,000,000 8.5 6.9 5.4 4.3 3.3 1.0 O
- ------------------------------------------------------------------------------------------------------------------
Greater Than 4,000,001 9.0 7.5 6.0 5.0 4.0 2.0 0
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
For Agent By: For Company By:
/s/ /s/
- ----------------------------- ------------------------------
CHIEF FINANCIAL OFFICER Manager
- ----------------------------- ------------------------------
(Title) (Title)
2/2/95
- ----------------------------- ------------------------------
(Date) (Date)
Agency Code No (s) Direct 850116
Brokered 850120
<PAGE>
** Confidential Treatment Requested
GA\ Association & Franchise
Commission Schedule
================================================================================
A & F
Agency Code(s) 850116 Agency name Preferred Employers Group Inc. (Direct)
State Florida
In accordance with the terms of the Agency Agreement to which this is attached,
the rates of commission payable on Association & Franchise business for each of
the following lines of business and the effective date of each rate are as
follows:
<TABLE>
<CAPTION>
All companies
------------------------------------------------------------
1. Commercial Property Policies New Renewal Effective Date
------------------------------------------------------------
<S> <C> <C> <C>
(a) Comm. Fire & Allied Lines
------------------------------------------------------------
(b) Commercial Package ** ** **
------------------------------------------------------------
(c) Business Owners ** ** **
------------------------------------------------------------
(d) Master Craftsman
------------------------------------------------------------
(e) Premier Property Policy ** ** **
------------------------------------------------------------
(f) Other Comm. Inland Marine ** ** **
------------------------------------------------------------
2. Commercial Casualty Policies
(a) Commercial Auto ** ** **
------------------------------------------------------------
(b) General Liability
------------------------------------------------------------
(c) Professional Liability
------------------------------------------------------------
(d) Commercial Umbrella ** ** **
------------------------------------------------------------
(e) Workers' Comp graded from ** ** **
------------------------------------------------------------
(f) Plate Glass
------------------------------------------------------------
(g) Burglary
------------------------------------------------------------
(h) Surety
------------------------------------------------------------
Contract
------------------------------------------------------------
Non Contract
3. Personal Property Policies
(a) Dwelling Fire & Allied Lines
------------------------------------------------------------
(b) Homeowners - Owners
(including inland marine forms attached thereto)
------------------------------------------------------------
(c) Homeowners - Tenants
(including inland marine forms attached thereto)
------------------------------------------------------------
(d) Personal Inland Marine
4. Personal Casualty Policies
(a) Private Passenger Automobile policies except as listed in (b) below
------------------------------------------------------------
(b) Class 2 or class codes 82-89
------------------------------------------------------------
(c) Personal Umbrella
</TABLE>
<PAGE>
** Confidential Treatment Requested
GA\ Association & Franchise
Commission Schedule
================================================================================
A & F
Agency Code(s) 850120 Agency name Preferred Employers Group Inc. (Brokered)
State Florida
In accordance with the terms of the Agency Agreement to which this is attached,
the rates of commission payable on Association & Franchise business for each of
the following lines of business and the effective date of each rate are as
follows:
<TABLE>
<CAPTION>
All companies
------------------------------------------------------------
1. Commercial Property Policies New Renewal Effective Date
------------------------------------------------------------
<S> <C> <C> <C>
(a) Comm. Fire & Allied Lines
------------------------------------------------------------
(b) Commercial Package ** ** **
------------------------------------------------------------
(c) Business Owners ** ** **
------------------------------------------------------------
(d) Master Craftsman
------------------------------------------------------------
(e) Premier Property Policy ** ** **
------------------------------------------------------------
(f) Other Comm. Inland Marine ** ** **
------------------------------------------------------------
2. Commercial Casualty Policies
(a) Commercial Auto ** ** **
------------------------------------------------------------
(b) General Liability
------------------------------------------------------------
(c) Professional Liability
------------------------------------------------------------
(d) Commercial Umbrella ** ** **
------------------------------------------------------------
(e) Workers' Comp graded from ** ** **
------------------------------------------------------------
(f) Plate Glass
------------------------------------------------------------
(g) Burglary
------------------------------------------------------------
(h) Surety
------------------------------------------------------------
Contract
------------------------------------------------------------
Non Contract
3. Personal Property Policies
(a) Dwelling Fire & Allied Lines
------------------------------------------------------------
(b) Homeowners - Owners
(including inland marine forms attached thereto)
------------------------------------------------------------
(c) Homeowners - Tenants
(including inland marine forms attached thereto)
------------------------------------------------------------
(d) Personal Inland Marine
4. Personal Casualty Policies
(a) Private Passenger Automobile policies except as listed in (b) below
------------------------------------------------------------
(b) Class 2 or class codes 82-89
------------------------------------------------------------
(c) Personal Umbrella
</TABLE>
<PAGE>
GENERAL AGENCY AGREEMENT
made this 1st day of January 1993
by and between
The Insurance Company(ies) subscribing hereto,
(collectively hereinafter referred to as the "Company")
and
PREFERRED EMPLOYERS GROUP, INC.
(hereinafter referred to as the "General Agent")
W I T N E S S E T H:
In consideration of the mutual covenants and promises herein contained, the
parties hereto agree as follows:
1. APPOINTMENT:
Subject to the terms and conditions of this Agreement, the General Agent is
hereby appointed to solicit, bind, write and administer insurance as expressly
set forth in Addendum A to this Agreement. The General Agent hereby accepts such
appointment, and agrees to perform faithfully the duties thereof to the best of
its knowledge, skill and judgment. Nothing herein shall be construed as
permitting the General Agent to bind or obligate the Company or subject the
Company to any liability unless specifically authorized by this Agreement or
otherwise in writing by the Company.
2. TERMS OF THE AGREEMENT:
The word "Agreement" herein shall be understood to include any and all
Addenda attached in accordance with the terms and conditions herein specified.
3. TERRITORY:
The territory within which the General Agent shall operate is described in
Addendum A. Such territory is not assigned exclusively to the General Agent.
4. RELATIONSHIP:
Nothing herein contained shall be construed to create the relation of
employer and employee between the General Agent and the Company or between the
Company and any of the General Agent's employees or representatives. It is the
express intent of the parties hereto that the General Agent is not an employee
of the Company for any purpose, but is an independent contractor for all
purposes and in all situations. The General Agent shall not represent that he is
an employee of the Company, nor shall he in any manner hold himself out to be an
employee of the Company.
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The General Agent shall be free to exercise independent judgment as to the
time, place and manner of soliciting insurance and servicing policy-holders;
however, the General Agent shall perform its duties at all times in accordance
with this Agreement.
5. AUTHORITY OF THE GENERAL AGENT:
The General Agent shall have no power or authority other than as granted
and set forth herein and no other or greater power shall be implied from the
grant or denial of powers specifically mentioned herein. The General Agent shall
have no power or authority on lines of business other than those set forth in
the attached Addendum A.
6. ADMINISTRATIVE SERVICES OF THE GENERAL AGENT:
The General Agent shall perform the following administrative services on
behalf of the Company:
A. Assist Company to develop underwriting and Producer Guidelines and
modifications thereof for the underwriting program, to be approved by
the Company in writing prior to use, which use shall include
advertising, program implementation, and binding insurance coverage.
B. Process applications for insurance.
C. Collect and account for premiums.
D. Unless otherwise directed by the Company in writing, rate, quote and
issue policies of insurance, and certificates of insurance consistent
with Company's rate, rule and form filings made or adopted in writing
by Company, and the authority granted herein, as well as to provide
policy information services for insureds.
E. Cooperate in the preparing and submitting of information for rate and
form filings to the Company for filing with the insurance supervisory
authorities. The General Agent shall have no authority to make
modifications in underwriting or binding coverage not already approved
by Company in an Addendum, Underwriting Guideline or related manual
without prior written approval of Company.
F. Develop and maintain proper underwriting files on behalf of Company
which become the property of Company, except as to the ownership of
expirations which are the property of the General Agent if the General
Agent has paid all monies owed to Company and if the General Agent has
performed faithfully all duties set forth in this Agreement.
G. Use its best efforts and act in good faith to achieve an underwriting
profit on all business placed with company.
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H. Provide the Company with proper and timely cancellation or non-renewal
notices to policyholders, certificate holders and regulatory bodies as
required by the policy, any statute or regulation, any regulatory
order or by the Company, so that the Company may process such
cancellations and non-renewals as required by applicable law.
I. Remit premiums received net of the compensation due to General Agent,
according to the provisions of the Paragraph entitled "Premiums",
below.
In addition, the General Agent hereby guarantees the payment of all
premiums due the Company and does hereby forever waive presentment, demand,
protest, notice of protest and notice of nonpayment or dishonor of any
instrument used to pay premium to the Company.
If premium is not paid in full the General Agent agrees to pay all costs
and expenses of collection including reasonable attorney's fees.
7. LIMITATION OF AUTHORITY:
In addition to any other limitations expressed or implied in this
Agreement, any exhibits or addendum hereto or any Underwriting Guideline,
bulletin or instruction which may be issued from time to time by the Company to
General Agent, the General Agent has no authority to:
A. Make, accept or endorse notes or otherwise incur any liability which
is not incurred in the ordinary course of business of the General
Agent on behalf of the Company, pursuant to the terms and conditions
of this Agreement.
B. Waive a forfeiture or issue a guaranty, other than as permitted
expressly in writing by the Company.
C. Extend the time for the payment of premiums or other monies due the
Company, or accept payments other than cash or cash equivalents on
behalf of the Company.
D. Institute, prosecute, defend or maintain any legal proceedings in
connection with any matter pertaining to the Company's business,
without prior written approval of the Company, unless such proceedings
are related solely to the General Agent.
E. Directly or indirectly solicit, sell, offer, bind, issue, or deliver
any insurances at any reduction or deviation from the rates, terms or
conditions specified therefor by the Company, and shall adhere
strictly to the rates and forms promulgated and filed by the Company.
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F. Transact business in contravention of the rules and regulations of any
Insurance Department and/or other governmental authorities having
jurisdiction of the subject matters of this Agreement; all instruction
issued by the Company; and the applicable laws of any jurisdiction
concerned.
G. Hold himself out as an agent of the Company in any other manner, or
for any other purpose than is specifically contained in this
Agreement.
H. Waive premium payment.
I. Withhold any monies or property of the Company.
J. Offer or pay any rebate of premium.
K. Negotiate or place any reinsurance on behalf of Company or any
insurance company represented by Company whether such reinsurance is
elective or required by the Underwriting Guidelines.
L. Bind coverage subsequent to effective date without prior written
approval of Company, except during the fifteen (15) day period after
the coverage effective date but only if the insured has warranted in
writing that there are no known losses and if the Company has given
its prior written approval.
M. Effect or authorize a flat cancellation without prior written approval
of Company. In the event of such flat cancellation, the General Agent
shall document the existence of substituted coverage or other reasons
why Company has no liability for payment of loss while coverage was in
force.
N. Reinstate policies or certificates cancelled by Company for other than
non-payment of premium without the prior written approval of Company.
O. Assign or delegate its rights and duties hereunder or to appoint
sub-agents for Company without prior written approval of Company.
P. Endorse checks payable to Company or any insurance company represented
by Company.
Q. Bind coverage hereunder if the General Agent is aware that the risk
was previously declined or cancelled by any office of the Company, its
affiliates or subsidiaries without disclosing such prior declination
or cancellation to the Company.
8. CLAIMS AUTHORITY:
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A. Except as may otherwise be authorized in an Addendum to this
Agreement, the General Agent shall have no authority to investigate,
defend, approve or deny any claim made against the Company or an
insurance company represented by the Company or under any policy
issued pursuant to this Agreement and the General Agent shall have no
authority to assign an adjuster or attorney to investigate or defend
any claims.
B. The General Agent agrees to give Company prompt written notice of any
claim, demand, action, suit or proceeding raised, brought, threatened,
made or commenced against the Company or an insurance company
represented by Company that relates to any matter to which the
provisions of this Agreement shall apply.
C. The General Agent agrees to send to office designated by Company
copies of all binders, policies, endorsements and evidence of
cancellations to be reviewed by the Company within thirty (30) days of
the effective date of such binder, policy, endorsement or
cancellation.
9. ERRORS AND OMISSIONS AND FIDELITY BOND:
The General Agent warrants that it now has and shall maintain during the
term of this Agreement insurance coverage for Errors and Omissions Liability in
an amount not less than Five million dollars ($5,000,000) for any one event or
occurrence and in an amount not less than Five million dollars ($5,000,000) in
the aggregate, with a deductible not to exceed Fifty Thousand Dollars ($50,000).
The Company shall receive a Certificate of Insurance in its name containing the
following provision: The Company shall receive thirty (30) days written notice
of any change, cancellation or other termination of this Policy.
General Agent shall provide the Company with a Fidelity Bond covering all
operations, employees and subcontractors servicing the business of this
Agreement, in an amount and on a form and with a deductible satisfactory to the
Company. General Agent shall provide a certificate for the Fidelity Bond with
the same provision as provided for the Errors and Omissions Coverage. The
General Agent shall, if so requested by the Company, provide Company with a
clean, irrevocable, evergreen Letter of Credit from a bank acceptable to the
Company (in place of the Fidelity Bond, if the General Agent is unable or
unwilling to provide same.)
10. ADVERTISING AND REPRESENTATION:
The General Agent shall use no advertising material, prospectus, proposal,
or representation, either in general or in relation to a particular policy of
the Company, or use the Company's name or the name of its affiliates or member
companies, or associated companies unless furnished by the Company or until the
consent of the Company thereto in writing shall have first been secured. Such
approval shall not in any event be construed as
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charging or binding the Company to bear any part of the cost or expenses
thereof. The General Agent shall not issue or circulate any illustration,
circular, statement or memorandum of any sort misrepresenting the terms,
benefits, or advantages of any policy issued by the Company or make any
misleading statement as to the financial security of the Company.
11. RULES AND REGULATIONS:
The General Agent shall comply with and be bound by all of the underwriting
guides, rules, bulletins, manuals or other written instructions issued by the
Company now in force or as they hereafter may be amended or supplemented, and
all applicable laws and regulations of the appropriate jurisdiction.
12. LICENSING AND COUNTER SIGNATURE REQUIREMENTS:
The General Agent warrants that it now has and shall maintain during the
term of this Agreement the license or licenses necessary to place the business
described in this Agreement. In the event the General Agent will comply with
licensing laws by utilizing the license of a principal, director, officer, or
employee, then the General Agent promises, warrants and guarantees that the
licensee will comply with all requirements of this Agreement and specifically
with this Paragraph. The General Agent is responsible for all damages,
penalties, fines and liabilities incurred by said parties and for which the
Company is responsible to the same extent as if the applicable license was held
directly by the General Agent. In the event that any license the General Agent
utilizes to fulfill the requirements of this Agreement expires, terminates or is
suspended for any reason, this Agreement terminates automatically with respect
to the jurisdictions(s) to which the license(s) applied, and the Company may
avail itself of any rights provided under the paragraph entitled "Termination."
The General Agent shall be responsible to assure that all business is
properly countersigned. The General Agent shall be responsible for and pay any
necessary countersignature expense. The Company shall not be responsible for
payment of any countersignature expense.
13. PREMIUMS:
A. The General Agent agrees to pay the Company all premiums on behalf of
Company, whether or not collected by the General Agent from insureds.
The General Agent does not possess the funds for any other reason. All
such premiums received by the General Agent pursuant to this Agreement
shall be held by the General Agent in a fiduciary capacity as trustee
for the Company. The privilege of taking commissions from premium
monies received by the General Agent shall not be construed as an
alteration of this fiduciary capacity.
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B. All monies received on behalf of the Company shall be promptly
deposited in a fiduciary account in a bank which is a member of the
Federal Reserve System, and shall be invested in the following types
of accounts and/or instruments and no other: demand accounts, time
accounts, certificates of deposit and U.S. Treasury instruments, all
subject to the Company's approval. General Agent will cooperate with
Company if Company attempts to perfect a security interest in the
account and/or instrument. The General Agent shall not commingle any
premium monies collected pursuant to this Agreement with any operating
fund or funds held by the General Agent in any other capacity. The
General Agent must procure and maintain a separate fiduciary account
or accounts dedicated to funds held for policies written for the
Company and its affiliates. The General Agent may retain any interest
or income earned from such investments. Withdrawals from bank accounts
must be in accordance with the laws of the various states and this
Agreement. The net amounts due to Company shall be forwarded to
Company, as described in this Agreement.
C. The General Agent shall submit all binders, policies, endorsements and
cancellations within fifteen (15) days of the effective date of the
binder, policy, or endorsement, or cancellations, respectively.
D. The General Agent shall submit a detailed and itemized monthly Account
Current to the Company of all premiums written and adjustments made
(whether additional or return premiums) with respect to all business
and transactions effective in that month no later than the fifteenth
(15th) day of the subsequent month. For example, binders, policies,
monthly reports and endorsements effective in the month of December
are to be reported no later than January 15. However, the Company
shall have the privilege, exercisable at its option, of revising the
Account Current for any errors.
E. Premiums on each binder, policy or transaction are due within
forty-five (45) days of the end of the month in which the binder,
policy or transaction was effective. Additional premiums developed by
adjustments or audits are due within forty-five (45) days of the date
of the billing by Company to the General Agent.
F. The General Agent agrees to provide Company with all pertinent
statistical information as requested by Company in the form required
by Company.
G. The General Agent shall be responsible for conducting a quality
assurance program for all premium, accounting and statistical reports
and all policy transactions to assure
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compliance with all terms of this Agreement and reconciliation
procedures.
H. If the General Agent is delinquent in either accounting for or payment
of monies due to the Company, then the Company may, by written notice
to the General Agent, suspend or modify any of the provisions of this
Agreement or terminate this Agreement in accordance with the
provisions of Section 20 herein.
I. The Company may offset any amounts due from the General Agent under
this Agreement or any other against any amounts Company holds which
are due to the General Agent under this Agreement or any other.
14. BOOKS. ACCOUNTS. AND RECORDS:
The General Agent shall keep complete and accurate records of the business
transacted under this Agreement, including but not limited to all policy and
premium records during the term of this Agreement and for a period of seven (7)
years thereafter and shall forward to the Company such reports of said business
as the Company may prescribe. The General Agent shall be responsible for
retaining all policy and premium records on behalf of the Company in hard copy
form, microfilm and/or any other generally accepted information storage medium,
as well as in any reasonable back-up form requested by the Company for the
period described above. The Company shall have the right to examine said books,
files and records at any time during normal business hours on the premises of
the General Agent and may make copies of such records as it may deem necessary
at its sole cost and expense. All books, accounts, or other documents relating
to the business of the Company are the property of Company; however, the General
Agent may retain copies of such books, accounts or other documents as it deems
necessary.
The provisions of this Section, which are binding upon the parties
subsequent to the termination of this Agreement, shall survive such termination
until all obligations are finally discharged.
In the event of termination of this Agreement, the General Agent shall
forward to the Company all supplies and policy files pertaining to the
terminated Underwriting Program and shall return all unused policy forms with an
accounting of all such policies provided to the General Agent. At the option of
the Company, the General Agent may handle to conclusion the run-off of any
administrative duties on policies.
15. CURRENCY:
Unless otherwise specified in the Addenda to this Agreement, all
transactions will be reported and paid in U. S. dollars.
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16. EXPENSES:
The General Agent shall be responsible for all expenses incurred by the
General Agent in the performance of its obligation under this Agreement
including but not limited to rentals, transportation facilities, remuneration of
clerks, solicitors or other employees, postage, advertising, city license fees,
and all other agency expenses of whatever nature. The conduct by the General
Agent of its business shall be its own sole cost, credit, risk, and expense.
The General Agent shall not charge or commit the Company to any expense,
agreement, payment, debt or obligation other than the insurance expressly
described in the Addenda hereto which the General Agent is authorized to write.
17. SUPPLIES:
The ownership of all books, supplies, undelivered policies, or other
property furnished by the Company to the General Agent shall be vested in the
Company, and these shall be delivered to the Company or its authorized
representatives immediately upon the termination or cancellation of this
Agreement or at any time upon the request of the Company. The General Agent
agrees, without expense to the Company, to surrender the same peaceably. The
General Agent has no authority to release blank policy, certificate supplies ,
executed or unexecuted legal agreements involving the Company, or any of the
Company's policy documentation to sub-brokers or sub-agents, or any other
entities, without the Company's prior express written consent. The General Agent
must keep a policy register and all voided policies must be returned to the
Company every thirty (30) days.
18. COMPANY'S RIGHT TO CANCEL AND NON-RENEW:
The Company shall have the right at any time to cancel or non-renew all
policies or contracts of insurance issued by the General Agent under this
Agreement in accordance with the applicable state insurance regulations.
Furthermore, the Company reserves the right to withdraw authority from the
General Agent to solicit, bind, or write one or more particular lines or classes
of insurance and to decline to accept any particular risk or class of risk, by
written notice to the General Agent, and by advance written notice if possible
and permissible by applicable law or regulation.
19. COMPENSATION:
Subject to the provisions hereof, the General Agent's sole remuneration for
all services that the General Agent may perform for the Company shall be its
commissions at the rates set forth on the attached Addendum. Unless otherwise
agreed, such commissions include the complete compensation to the General Agent
for its services hereunder. The General Agent is responsible for all expenses in
connection with
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solicitation of insurance or performance of any duties or obligations of the
General Agent, all countersignature fees and commissions, all commissions to
sub-producers and any other expenses of the General Agent, such as rent, office
upkeep, salaries, promotional and advertising expenses and traveling expenses.
In the event of policy cancellation or endorsement resulting in a premium
return to a policy-holder, the General Agent shall be responsible for refunding
to Company the entire amount of any commission paid or allowed on the returned
premium, including commissions to sub-producers.
Notwithstanding any provision in this Agreement to the contrary, no
commissions shall be payable to the General Agent subsequent to the termination
of this Agreement if the General Agent or any of its principals shall commit any
act of fraud, malfeasance or non-feasance in the performance of any duties
imposed under the terms of this Agreement, withhold or misappropriate any monies
or other property of the Company, its policy holders or applicants, or induce
any policy holder of the Company to cancel or otherwise terminate a policy
issued by the Company hereunder.
If the Company shall become liable for the return of any premiums for any
reason whatever, the General Agent shall repay to the Company the total amount
of compensation previously paid or allowed to the General Agent on such
premiums.
IT IS FURTHER AGREED that the Company shall have a lien against commissions
or other compensation due or to become due hereunder to the extent of any
indebtedness of the General Agent to the Company and the Company may at any time
offset the amount of any such indebtedness against such commissions or other
compensation due to the General Agent.
No commissions, rights or interests of the General Agent arising from this
Agreement shall be subject to assignment without the prior written consent of
the Company. Any such assignment shall be subject to the prior lien of the
Company for any indebtedness to the Company that may be due or become due from
the General Agent.
In the event of the delinquency by the General Agent in either accounting
or payment of monies due the Company, the Company may, notwithstanding the
provisions regarding the termination of this Agreement by notice to the General
Agent, suspend General Agent's authority to write any new or renewal business
during such delinquency.
20. TERMINATION:
Either party hereto shall have the right at any and all times to terminate
this Agreement by written notice specifying the effective date of termination,
which shall be not less than thirty (30) days thereafter, such notice to be by
certified mail,return
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receipt requested, to the other party at its address hereinafter set forth. Any
such termination shall not affect the rights and obligations of the parties
hereto as to transactions, acts, or things done by either party prior to the
effective date of termination.
This Agreement shall terminate automatically in the event that reinsurance
purchased by the Company, which the Company considers to be an integral part of
the underwriting program, has been restricted or cancelled by the reinsurers, in
which event, the date of the restriction or cancellation shall become the
termination date of this Agreement.
This Agreement shall terminate automatically in the event that the Company,
in its sole discretion, determines that the General Agent has not acted in
compliance with the Underwriting Guidelines or rules of the Company or the
insurance companies that it represents, in connection with the underwriting
program involved. This Agreement may be cancelled by the Company at its option
upon the breach, non-performance, or violation by the General Agent or any
person for whom the General Agent may be responsible, of any provision, term or
condition hereof, with at least ten (10) days' prior written notice by Certified
Mail to the General Agent. The Company may, at its option, permit the General
Agent to cure such breach, non-performance, or violation within ten (10)
business days after receipt of written notice from the Company or, where the
cure period would take longer, to commence to cure within five (5) business days
and shall continue in good faith to cure thereafter. The Company shall not,
however, be required to so permit the General Agent. This Agreement may be
terminated immediately in the event that the General Agent shall have committed
an illegal or fraudulent act. Furthermore, this Agreement shall terminate
automatically if the General Agent becomes insolvent or bankrupt or commits an
act of bankruptcy or makes an assignment for the benefit of creditors.
This Agreement shall also terminate automatically upon the effective date
of the sale, transfer or merger of the General Agent's business. Further, this
Agreement shall terminate automatically if the General Agent knowingly violates
any provision of this Agreement. For purposes of this Section, minor clerical
errors or insubstantial monetary amounts shall be disregarded by the Company.
In addition, this Agreement may be terminated automatically:
(i) If the General Agent induces cancellations of policies issued by the
Company;
(ii) Upon the dissolution of the General Agent's Partnership or Corporate
form;
(iii) If the General Agent loses the endorsement of the association(s)
representing insureds under this program.
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Upon termination of this Agreement, unless otherwise stipulated by the
Company, the General Agent shall account to the Company for all premiums or
other transactions unaccounted for at the time of termination or arising
thereafter with respect to insurance covered by this Agreement.
If this Agreement is terminated and the General Agent has paid to the
Company all monies owing thereto, the expirations on business written pursuant
to this Agreement shall remain the property of the General Agent. If the General
Agent is in default on the payment of monies to the Company under their terms of
this Agreement for any reason, any and all expirations of other business shall
become the property of the Company upon the termination of this Agreement. The
General Agent shall not receive commissions on premiums which the General Agent
fails to collect and which the Company collects; however, the General Agent
shall receive credit for the premium collected in their mutual account.
Notwithstanding the provisions of Section 28 of this Agreement, all
termination provisions of this Agreement are subject to the laws of the
jurisdiction applicable to this termination.
After the effective date of termination of this Agreement, the General
Agent shall neither issue any new policies nor bind any new insurance on behalf
of the Company, nor extend, renew or increase the Company's liability on any
existing policy or binder, but at the Company's option and except as aforesaid,
all of the General Agent's powers and authorities and all of the rights and
obligations of the parties hereto, including the collection of the premiums and
the accounting of premiums and commissions and settling of all balances, shall
remain in full force and effect until all liabilities of the Company under the
policies issued by the General Agent hereunder are finally discharged.
21. FINANCING OF PREMIUMS:
The General Agent shall forward to the Company immediately upon receipt, or
upon the General Agent's knowledge thereof, all correspondence or notices with
relation to the financing or proposed financing of premiums by any
policy-holder. The General Agent shall not accept premium financing on policies
for which the premium is provisional, deposit, minimum, or otherwise adjustable.
The General Agent is not and shall not hold itself out as the agent of the
Company for the purpose of obtaining premium financing.
The Company reserves the right to refund premiums directly to the premium
finance company upon cancellation of a policy(ies). The General Agent agrees to
procure the agreement of any sub-producer to Company's action. The General Agent
shall refund applicable commission to the premium finance company in the event
of a cancellation of a policy(ies).
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Premium finance company must agree, and General Agent agrees to procure any
sub-producer's consent, to:
(A) Directly notify Company in writing if premium finance company cancels
a policy(ies); and
(B) Acknowledge that Company is under no duty to reinstate a policy(ies)
if the policy(ies) is cancelled.
General Agent also agrees to:
(1) Notify Company in writing if General Agent desires to reinstate a
policy(ies) that has been cancelled; and
(2) Remain responsible as provided in the Paragraph entitled "Premium" for
collecting the gross written premium of any financed policy(ies)
regardless of the financing of premium.
The provisions of this Section, which are binding upon the parties
subsequent to the termination of this Agreement, shall survive such termination
until all obligations are finally discharged.
22. INDEMNIFICATION:
The General Agent agrees to indemnify and save the Company, its affiliates
and subsidiaries and their officers, directors, and employees harmless from any
damage and against any liability for loss, cost, expenses, fines, penalties,
including punitive or exemplary damages and all costs of defense resulting from:
(i) any act, error or omission, whether intentional or unintentional, by the
General Agent and its officers, directors, employees, and its sub-producers,
related to or which arise out of the business covered by this Agreement, or (ii)
any obligation, act or transaction created or performed by the General Agent in
violation of, in excess of, and/or in contravention of the power and authority
of the General Agent as set forth in this Agreement; except to the extent that
any such loss was caused or contributed to by the Company.
Provided the General Agent is in material compliance with all terms and
conditions of this Agreement and further provided the General Agent shall not
have caused or contributed to the making or a claim on one or more policy(ies)
of insurance which the General Agent has issued and/or bound, then the Company
agrees to indemnify and save the General Agent, its affiliates and subsidiaries
and their officers, directors and employees harmless from any damage and against
any liability for loss, cost, expenses, fines, penalties, including punitive or
exemplary damages and all costs of defense resulting from: (i) any act, error or
omission, whether intentional or unintentional, by the Company and its officers,
directors and employees related to or which arise out of the business covered by
this Agreement, or (ii) any obligation, act or transaction created or performed
by the Company in violation of, in
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excess of, and/or in contravention of the power and authority of the Company as
set forth in this Agreement; except to the extent that any such loss was caused
or contributed to by the General Agent.
The Company shall choose defense counsel for all lawsuits hereunder and
defend itself. The Company shall decide in its sole opinion whether claims or
lawsuits shall be settled.
23. ASSIGNMENT:
No assignment of this Agreement, or of any commissions or fees hereunder
shall be valid unless authorized in advance in writing by the Company. Every
assignment shall be subject to any indebtedness and obligation of the General
Agent that may be due or become due at any time.
24. AMENDMENT:
The Company shall have the exclusive right to amend this Agreement or any
of its provisions or terms of compensation by written notice to said effect, but
such amendments shall not affect any rights accruing or compensation or
commissions earned prior thereto. This Agreement cannot be amended by any
subsequent practices or courses of dealing by the parties inconsistent herewith.
No oral agreement or representation concerning this Agreement or the General
Agent's relationship to the Company shall be binding on the Company. Any
amendment to this Agreement must be in writing and signed by an officer of the
Company, and by an officer of the General Agent.
25. NOTICE:
All notices required or permitted to be given hereunder shall be in
writing and shall be given as follows:
A. If given by the Company:
Mailed by certified mail to the General Agent at its address as shown
herein, or to such other address as the General Agent may have
previously specified to the Company in writing; or
B. If given by the General Agent:
Mailed by certified mail, to the Company's office as above specified
and copy to National Union Fire Insurance Company of Pittsburgh, Pa.;
Corporate Law Department, 70 Pine Street, New York, New York 10270.
With a copy to AIG Risk Management, Inc. 110 William Street, New York,
New York 10038, Attention: General Counsel.
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26. SERVICE OF PROCESS:
In the event any legal process or notice is served on the General Agent in
a suit or proceeding against the Company, the General Agent shall forthwith
forward such process or notice to the Company, at 70 Pine Street (Corporate Law
Department), City of New York, County of New York, State of New York 10270, by
Registered Mail, Attention: General Counsel, with copies to AIG Risk Management,
Inc. (Legal Department) 110 William Street, New York, N.Y. 10038, Attention:
General Counsel.
27. WAIVER:
No waiver or modification of this Agreement shall be effective unless it be
in writing and signed by a duly authorized officer of the Company and by a duly
authorized officer of the General Agent. The failure of the Company to enforce
any provision of this Agreement shall not constitute a waiver by the Company of
any such provision. The past waiver of a provision by the Company shall not
constitute a course of conduct or a waiver in the future of that same provision.
28. CHOICE OF LAWS, VENUE, JURISDICTION:
The laws of New York shall govern all matters concerning the validity,
performance, and interpretation, of this Agreement. The Venue for any action in
law or equity between the parties shall be designated exclusively as the Supreme
Court of the State of New York, County of New York. The parties consent to the
jurisdiction of the Supreme Court of the State of New York for any action
between the parties in law or equity.
29. DIVISIBILITY:
If any separable provision hereof shall be held to be invalid, or
unenforceable under the laws of Insurance Department regulations now or
hereafter in effect in the jurisdiction governing this Agreement, such
invalidity or unenforceability shall not affect any other provisions hereof.
30. REGULATORY NOTICES:
The General Agent shall forward promptly to the Company all correspondence
pertaining to this Agreement received from any government regulatory agency.
31. MERGER:
This instrument with Addenda attached embraces the entire Agreement between
the parties and supersedes all previous Agreements entered into between the
parties hereto, and any prior statements, agreements or representations between
the parties are merged herein.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement in
duplicate.
INSURANCE COMPANY(IES) SUBSCRIBING TO THIS AGREEMENT
In New York, New York, this 16th day of August, 1993.
AIU INSURANCE COMPANY THE INSURANCE COMPANY OF THE
STATE OF PENNSYLVANIA
Name: /s/ Name: /s/
---------------------------- ------------------------------
Title: VICE PRESIDENT Title: VICE PRESIDENT
---------------------------- ------------------------------
Address: 70 Pine Street Address: 70 Pine Street
New York, NY 10270 New York, NY 10270
FOR THE GENERAL AGENT
and in N. Miami, FL, this 12th day of August, 1993.
PREFERRED EMPLOYERS GROUP, INC.
Name: /s/ Howard Odzer
-----------------------------
Title: President
-----------------------------
Address: 1125 N.E. 125TH STREET
Suite 301
North Miami, FL 33161
16
<PAGE>
** Confidential Treatment Requested
ADDENDUM A
This Addendum A is made a part of, and is subject to the conditions of the
General Agency Agreement effective Jan 1 1993 between the Insurance Companies
Subscribing Hereto (hereinafter collectively referred to as "the Company") and
PREFERRED EMPLOYERS GROUP, INC. (hereinafter referred to as the "General
Agent".)
Issuing Company(ies): The Insurance Company of the State of
Pennsylvania/AIU Insurance Company
A. The General Agent shall bind and write the following lines of business, at
the commission rates shown herein, for the Burger King/Fast Food/McDonald's
Programs, in accordance with the Underwriting Guidelines, rules, manuals and
instructions of the Company to General Agent, as follows:
Line of Business Commission
---------------- ----------
Workers' Compensation **
It is agreed and understood that the Territory within which the General
Agent shall operate is: Continental U.S.
The General Agent shall deduct and retain commission on net written
premiums written and collected hereunder. For the purpose of this Agreement, net
written premiums means gross premiums written less cancellation and return
premiums.
IN WITNESS WHEREOF, the parties hereto have duly executed this Addendum in
duplicate.
INSURANCE COMPANIES SUBSCRIBING TO THIS AGREEMENT
In New York, New York, this 16th day of August, 1993.
THE INSURANCE COMPANY OF THE
STATE OF PENNSYLVANIA
Name: /s/
------------------------------
Title: VICE PRESIDENT
------------------------------
Address: 70 Pine Street
New York, NY 10270
AIU INSURANCE COMPANY
Name: /s/
----------------------------
Title: VICE PRESIDENT
----------------------------
Address: 70 Pine Street
New York, NY 10270
17
<PAGE>
FOR THE GENERAL AGENT
and in N. Miami, FL, this 12th day of August, 1993.
PREFERRED EMPLOYERS GROUP, INC.
Name: /s/ Howard Odzer
-----------------------------
Title: President
-----------------------------
Address: 1125 N.E. 125TH STREET
Suite 301
North Miami, FL 33161
18
<PAGE>
** Confidential Treatment Requested
ADDENDUM B
This Addendum B is made a part of, is an addition to, and is subject to the
conditions of the General Agency Agreement effective January 1, 1993 between the
Insurance Companies subscribing hereto (hereinafter collectively referred to as
"the Company") and PREFERRED EMPLOYERS GROUP, INC. (hereinafter referred to as
the "General Agent".)
Issuing Company(ies): The Insurance Company of the State of
Pennsylvania/AIU Insurance Company
1. Effective as of May 1, 1995, the General Agent shall bind and write the
following lines of business, at the commission rates shown herein, for The Food
Merchants Fund Program, in accordance with the Underwriting Guidelines, rules,
manuals and instructions of the Company to General Agent, as follows:
Lines of Business Commission
----------------- ----------
Workers' Compensation **
Employers' Liability **
It is agreed and understood that the Territory within which the General
Agent shall operate is: Continental U.S.
The General Agent shall deduct and retain commission on net written
premiums written and collected hereunder. For the purpose of this Agreement, net
written premiums means gross premiums written less cancellation and return
premiums.
IN WITNESS WHEREOF, the parties hereto have duly executed this Addendum in
duplicate.
INSURANCE COMPANIES SUBSCRIBING TO THIS AGREEMENT
In New York, New York, this 22nd day of Nov., 1995.
THE INSURANCE COMPANY OF THE
STATE OF PENNSYLVANIA
Name: /s/ Barbara Wegler
------------------------------
Title: A.V.P.
------------------------------
Address: 70 Pine Street
New York, NY 10270
AIU INSURANCE COMPANY
Name: /s/ Barbara Wegler
----------------------------
Title: A.V.P.
----------------------------
Address: 70 Pine Street
New York, NY 10270
19
<PAGE>
FOR THE GENERAL AGENT
and in Miami, FL, this 15th day of November, 1995.
PREFERRED EMPLOYERS GROUP, INC.
Name: /s/ Howard Odzer
-----------------------------
Title: President
-----------------------------
Address: 1125 N.E. 125TH STREET
Suite 301
North Miami, FL 33161
20
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
P.E.G. Reinsurance Company, Ltd.- a wholly owned subsidiary of the Company
Preferred Employers Group, Inc.- a wholly owned subsidiary of the Company
(effective upon consummation of recapitalization immediately prior to public
offering)
<PAGE>
The Board of Directors
Preferred Employers Holdings, Inc.
We consent to the use of our reports included herein and to the reference
to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Miami Florida
January 30 ,1997
