<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
SUMMIT HOLDING SOUTHEAST, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 6411 59-3409855
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Code Number) Number)
</TABLE>
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
WILLIAM B. BULL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SUMMIT HOLDING SOUTHEAST, INC.
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
(941) 665-2926 (FAX)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
SIDNEY J. NURKIN MICHAEL L. JAMIESON
M. HILL JEFFRIES ROBERT J. GRAMMIG
ALSTON & BIRD HOLLAND & KNIGHT
ONE ATLANTIC CENTER 400 NORTH ASHLEY
1201 WEST PEACHTREE STREET SUITE 2300
ATLANTA, GEORGIA 30309-3424 TAMPA, FLORIDA 33602
(404) 881-7000 (813) 227-8500
(404) 881-4777 (FAX) (813) 229-0134 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
MAXIMUM PROPOSED
TITLE OF EACH AMOUNT OFFERING MAXIMUM AMOUNT OF
CLASS OF SECURITIES TO BE PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE(2)(3)
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<S> <C> <C> <C> <C>
Series A Preferred Stock, par value $10 per
share..................................... 1,639,866 shares $10.00(2) $16,398,660(2) $4,970
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Common Stock, par value $.01 per share...... 5,750,000 shares(1) $12.00(3) $69,000,000(3) $20,910
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</TABLE>
---------------------
(1) Includes up to 750,000 shares of Common Stock subject to the over-allotment
option granted to the Underwriters by the Registrant.
(2) Calculated in accordance with Rule 457(f)(2) based on the book value of
Employers Self Insurers Fund as of September 30, 1996.
(3) Calculated in accordance with Rule 457(a) based on the estimated maximum
offering price of the Common Stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains (i) a Proxy Statement/Prospectus
relating to (a) a special meeting of eligible members of Employers Self Insurers
Fund ("ESIF") to vote on the conversion of ESIF to a stock insurance company
(the "Conversion"); (b) an offering of 1,639,866 shares of Series A Preferred
Stock, par value $10 per share, of Summit Holding Southeast, Inc. ("Summit") to
eligible members of ESIF; and (c) a concurrent subscription offering (the
"Subscription Offering") of up to 5,000,000 shares of Common Stock, par value
$.01 per share (the "Common Stock"), of Summit to eligible members of ESIF and
all directors and officers and certain management employees of Summit and its
subsidiaries (including the converted stock insurance company), and (ii) a
separate Prospectus relating to a concurrent public offering by Summit of all or
a portion of the shares of Common Stock not subscribed for by eligible members
in the Subscription Offering (the "Public Offering"). The Proxy
Statement/Prospectus and the Prospectus are substantially the same, except that
(u) the cover pages for the two documents differ, (v) the Prospectus contains
condensed descriptions of the special meeting of ESIF members and the
Conversion, (w) the Prospectus omits a "Risk Factor" not pertinent to the Public
Offering, (x) the Prospectus omits the description of the tax consequences of
the Conversion, (y) the Prospectus includes a section captioned "Underwriting,"
and (z) certain other sections of the two documents contain non-substantive
changes to distinguish between the proxy solicitation/Subscription Offering and
the Public Offering.
<PAGE> 3
[EMPLOYERS SELF INSURERS FUND LETTERHEAD]
December , 1996
Dear Members:
The Board of Trustees of Employers Self Insurers Fund ("ESIF") has adopted
an Amended Plan of Conversion and Recapitalization (the "Plan of Conversion")
pursuant to which ESIF will convert from a group self-insurance fund to a stock
insurance company (the "Conversion") with a new name, Bridgefield Employers
Insurance Company ("Bridgefield"). Under the Plan of Conversion, eligible
members of ESIF will receive shares of Series A Preferred Stock, par value $10
per share (the "Series A Preferred Stock"), of Summit Holding Southeast, Inc.
("Summit"), a newly formed holding company for Bridgefield, and eligible members
and certain other persons are being offered the right to purchase shares of
Common Stock, par value $.01 per share, of Summit (the "Common Stock") in a
subscription offering. Shares not sold in the subscription offering are being
simultaneously offered to new investors in a public offering, and Summit may
also offer such shares to new investors in one or more private placement
transactions.
We believe that conversion to a stock insurance company has several
advantages for ESIF, our members and the markets we serve. Among other things,
the Conversion may enable ESIF to continue expanding its business in order to
serve more employers. The Conversion will also relieve the members of any
assessment for the liabilities of ESIF. Moreover, the Conversion will not affect
ESIF's contractual obligations to its members. All existing indemnity agreements
issued by ESIF will remain in force in accordance with their terms, except that
members will no longer be liable for assessments.
The Florida Department of Insurance (the "Florida DOI") held a public
hearing on the Plan of Conversion on October 10, 1996 and issued an order
approving the Plan of Conversion on November 15, 1996. In the order, the Florida
DOI found that the Plan of Conversion is in compliance with applicable insurance
laws of Florida and is equitable to the members of ESIF. A copy of the Florida
DOI's order approving the Plan of Conversion is included in the attached Proxy
Statement/Prospectus. However, the approval of the Plan of Conversion by the
Florida DOI does not constitute a recommendation or endorsement of the Plan of
Conversion by the Florida DOI.
ESIF's Board of Trustees, with the benefit of advice from independent
financial advisors and legal counsel, has approved the Plan of Conversion,
together with the Restated Articles of Incorporation and Restated Bylaws of
Bridgefield, the new stock company, and will submit this matter to a vote of
members at a special meeting of members (the "Special Meeting") to be held at
10:00 a.m. Eastern Time on , January , 1997, at the offices of ESIF
in Lakeland, Florida. Holders of indemnity agreements issued by ESIF and in
effect on December 16, 1996 are entitled to vote at the Special Meeting and have
a proxy card enclosed with this mailing. THE BOARD OF TRUSTEES UNANIMOUSLY
RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE PLAN OF CONVERSION AND THE RELATED
TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING ADOPTION AND APPROVAL OF THE
RESTATED ARTICLES OF INCORPORATION AND RESTATED BYLAWS OF BRIDGEFIELD. The
effectiveness of the Plan of Conversion and related transactions is conditioned
upon approval by both a majority of the members of ESIF that are entitled to
vote on this matter and two-thirds of the votes that are cast at the Special
Meeting, as well as the satisfaction of certain conditions described in the
attached Proxy Statement/Prospectus.
The Proxy Statement/Prospectus is designed to help you understand the Plan
of Conversion and related transactions and to provide certain information about
ESIF, Summit and the Preferred Stock and rights to subscribe for Common Stock of
Summit that are being offered to you. Please review it carefully. Please call
the ESIF Information Center at 1-800-331-7742 if you have questions about the
Plan of Conversion or your right to vote thereon. Please call Raymond James &
Associates, Inc. at 1-800-248-8863 if you have questions about the Series A
Preferred Stock or about the Common Stock offered in the subscription offering.
We urge you to complete, date, sign and return your proxy promptly in the
accompanying postage-paid envelope.
Thank you for your continued support and confidence.
Sincerely,
GREG C. BRANCH
Chairman of the Board of Trustees
<PAGE> 4
EMPLOYERS SELF INSURERS FUND
2310 A-Z PARK ROAD
LAKELAND, FLORIDA 33801
(941) 665-6060
---------------------
NOTICE OF SPECIAL MEETING OF MEMBERS
TO VOTE ON A PROPOSAL TO APPROVE
AN AMENDED PLAN OF CONVERSION AND RECAPITALIZATION
---------------------
TO THE MEMBERS OF EMPLOYERS SELF INSURERS FUND:
Notice is hereby given that a special meeting of members (the "Special
Meeting") of Employers Self Insurers Fund ("ESIF") will be held at the offices
of ESIF, 2310 A-Z Park Road, Lakeland, Florida, on , January ,
1997, at 10:00 a.m. Eastern Time. The purpose of the Special Meeting is for the
members to consider and vote upon an Amended Plan of Conversion and
Recapitalization (the "Plan of Conversion") and the transactions contemplated
thereby, pursuant to which ESIF will convert from a group self-insurance fund to
a stock insurance company with the name Bridgefield Employers Insurance Company
("Bridgefield"). Also pursuant to the Plan of Conversion, Summit Holding
Southeast, Inc. ("Summit"), a Florida corporation formed at the direction of
ESIF, will acquire all of the common stock of the converted stock insurance
company in return for shares of Summit's Series A Preferred Stock, which will be
issued to eligible members of ESIF, and subscription rights to purchase shares
of Summit's Common Stock, which will be issued to eligible members of ESIF and
certain other persons. The approval of the Plan of Conversion by the members
will constitute approval and adoption of the Restated Articles of Incorporation
and Restated Bylaws of Bridgefield, which contain provisions appropriate for a
stock insurance company.
Information related to this proposal is set forth in the attached Proxy
Statement/Prospectus.
The members who shall be entitled to receive notice of and to vote at the
Special Meeting shall be all persons who, as reflected on the records of ESIF,
were owners of In-Force Policies (as defined below) of ESIF at the close of
business on December 16, 1996. "In-Force Policies" means the indemnity
agreements issued by ESIF (other than any agreement pursuant to which ESIF has
ceded or assumed reinsurance) pursuant to which a binder has been issued,
provided that the effective date noted in such binder has passed and such
indemnity agreement has not been surrendered or otherwise terminated and has not
expired by its terms. In general, the owner of an individual In-Force Policy is
the person specified on ESIF's records as the insured. The owner of a group
In-Force Policy is the person or persons specified on ESIF's records as the
owner or "policyholder."
THE BOARD OF TRUSTEES OF ESIF HAS DETERMINED THAT THE CONVERSION IS IN THE
BEST INTERESTS OF ESIF AND ITS MEMBERS AND UNANIMOUSLY RECOMMENDS THAT MEMBERS
VOTE "FOR" APPROVAL OF THE PLAN OF CONVERSION AND THE TRANSACTIONS CONTEMPLATED
THEREBY, INCLUDING ADOPTION AND APPROVAL OF THE RESTATED ARTICLES OF
INCORPORATION AND THE RESTATED BYLAWS OF BRIDGEFIELD.
By Order of the Board of Trustees,
GREG C. BRANCH
Chairman of the Board of Trustees
December , 1996
Lakeland, Florida
THE BOARD OF TRUSTEES URGES YOU TO CONSIDER CAREFULLY THE ATTACHED PROXY
STATEMENT/PROSPECTUS AND, WHETHER OR NOT YOU PLAN TO BE PRESENT IN PERSON AT THE
SPECIAL MEETING, TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD AS
SOON AS POSSIBLE TO ENSURE THAT YOUR VOTE WILL BE COUNTED. THIS WILL NOT PREVENT
YOU FROM VOTING IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 5
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 1996
PROXY STATEMENT
FOR A SPECIAL MEETING OF MEMBERS OF
EMPLOYERS SELF INSURERS FUND
---------------------
PROSPECTUS
RELATED TO 1,639,866 SHARES OF SERIES A PREFERRED STOCK
AND 5,000,000 SHARES OF COMMON STOCK OF
SUMMIT HOLDING SOUTHEAST, INC.
This Proxy Statement and Prospectus (the "PROXY STATEMENT/PROSPECTUS")
relates to the proposed conversion of Employers Self Insurers Fund ("ESIF") from
a Florida group self-insurance fund to a Florida stock insurance company
pursuant to an Amended Plan of Conversion and Recapitalization (the "PLAN OF
CONVERSION"), a copy of which is attached hereto as Exhibit A, and the related
issuance by Summit Holding Southeast, Inc. ("SUMMIT"), a Florida corporation
formed at the direction of ESIF, of: (i) 1,639,866 shares of its Series A
Preferred Stock, par value $10.00 per share (the "SERIES A PREFERRED STOCK"), to
Eligible Policyholders (as defined below) of ESIF and (ii) non-transferable
subscription rights to purchase up to 5,000,000 shares of its Common Stock, par
value $.01 per share (the "COMMON STOCK"), to Eligible Policyholders and all
directors and officers and certain other management employees (the "MANAGEMENT
GROUP") of Summit and its subsidiaries (including the converted stock insurance
company) (the "SUBSCRIPTION OFFERING"). Summit is concurrently offering to sell
all or a portion of the shares of Common Stock not subscribed for in the
Subscription Offering to the public in an underwritten public offering (the
"PUBLIC OFFERING"). In lieu of or in addition to the Public Offering, Summit may
elect to sell all or a portion of the shares of Common Stock not subscribed for
in the Subscription Offering in one or more private placement transactions (the
"PRIVATE PLACEMENTS"), subject to any prior approval of the Department of
Insurance of the State of Florida (the "FLORIDA DOI") that may be required. The
Subscription Offering, the Public Offering and the Private Placements are
hereinafter referred to collectively as the "OFFERINGS." The transactions
contemplated by the Plan of Conversion are hereinafter referred to collectively
as the "CONVERSION."
Pursuant to the Plan of Conversion, Summit will acquire all of the capital
stock of the converted stock insurance company, the name of which will be
Bridgefield Employers Insurance Company ("BRIDGEFIELD"), and Bridgefield will
thereby become a wholly owned subsidiary of Summit. See "THE
CONVERSION -- General." Eligible Policyholders will receive in exchange for
their membership interests in ESIF ("MEMBERSHIP INTERESTS") shares of the Series
A Preferred Stock and rights to subscribe for shares of the Common Stock. In
addition, pursuant to the Conversion, the members of ESIF will no longer be
subject to assessments for any liabilities of ESIF arising before or after the
effective date of the Conversion (the "EFFECTIVE DATE"). Pursuant to the
Subscription Offering, Summit will offer up to an aggregate of 5,000,000 shares
of the Common Stock to the Eligible Policyholders less the amount of shares
subscribed for by the Management Group, who are being offered up to 500,000
shares of the Common Stock, all subject to the limitations described herein and
in the Plan of Conversion. "ELIGIBLE POLICYHOLDERS" include any person who owned
an indemnity agreement (hereinafter a "POLICY") issued by ESIF at any time
during the period August 20, 1993 through and including August 20, 1996. See
"THE CONVERSION -- Consideration."
The Series A Preferred Stock and the subscription rights to purchase Common
Stock will be issued to Eligible Policyholders without consideration other than
the extinguishment of their Membership Interests. The price of the Common Stock
in the Subscription Offering (the "SUBSCRIPTION PRICE") will be $11.00 per
share. The Subscription Price was set by Summit after consultation with its
financial advisors and was not based on an appraisal or any other objective
factors. The number of shares of Series A Preferred Stock that will be issued to
each Eligible Policyholder and the number of shares of Common Stock that each
Eligible Policyholder will be entitled to subscribe for in the Subscription
Offering were determined in accordance with formulas established by the Plan of
Conversion. See "THE OFFERINGS -- Subscription Offering." The number of shares
of Common Stock to be issued to purchasers in the Subscription Offering in
exchange for full payment at the Subscription Price will be (i) increased if the
per
<PAGE> 6
share price to the public in the Public Offering (the "PUBLIC OFFERING PRICE")
or the Revised Subscription Price (as defined in "THE OFFERINGS -- Subscription
Offering -- Subscription Price") is less than the Subscription Price, and (ii)
decreased if the Public Offering Price or the Revised Subscription Price is
greater than the Subscription Price. See "THE OFFERINGS -- Subscription
Offering -- Subscription Price" and "-- Payment for Shares."
The issuance of Common Stock in the Subscription Offering is not contingent
upon the receipt by Summit of subscriptions for a minimum number of shares of
Common Stock in the Subscription Offering or the consummation of the Public
Offering or any Private Placement. HOWEVER, THE CONVERSION IS CONTINGENT UPON
THE RECEIPT BY SUMMIT OF NET PROCEEDS FROM THE OFFERINGS OF A MINIMUM OF
$50,000,000. See "Use of Proceeds." There can be no assurance that subscribers
for Common Stock in the Subscription Offering will in fact be able to purchase
such shares because Summit may be unable to raise such minimum net proceeds or
because the Board of Trustees of ESIF may determine to cancel the Conversion at
any time prior to the Effective Date.
In accordance with the terms of the Plan of Conversion, no person alone or
in conjunction with any affiliated person (as defined in "THE
OFFERINGS -- Subscription Offering -- Limitations on Common Stock Purchases")
may purchase in the Offerings more than 4.99% (the "PURCHASE LIMIT") of the
shares of Common Stock to be outstanding after the Conversion (the "POST
OFFERING OUTSTANDING SHARES"). The Purchase Limit will be 249,999 shares if all
shares of Common Stock offered in the Offerings are sold (assuming no exercise
of the over-allotment option to be granted by Summit to the underwriters of the
Public Offering). Summit may, in its discretion, permit any purchaser in the
Offerings to purchase a number of shares of Common Stock exceeding the Purchase
Limit, subject to each such purchaser obtaining the prior approval of the
Florida DOI. See "THE OFFERINGS." In such event, a single shareholder or a small
group of shareholders could acquire a sufficient number of shares of the Common
Stock of Summit to control election of its Board of Directors.
Following the Effective Date, the insurance laws of Florida (together with
all applicable regulations, the "FLORIDA INSURANCE CODE"), as applicable to
Summit as the holding company of a wholly owned Florida insurance company, will
prohibit any person from acquiring 10% or more of the outstanding voting
securities of Summit without the prior approval of the Florida DOI, and any
person who acquires at least 5% but less than 10% of the outstanding voting
securities of Summit will be permitted to do so only by filing a disclaimer of
affiliation and control that is not disallowed by the Florida DOI.
ALL SUBSCRIPTION RIGHTS IN THE SUBSCRIPTION OFFERING ARE NONTRANSFERABLE
AND WILL EXPIRE UNLESS THE ACCOMPANYING STOCK ORDER FORM, TOGETHER WITH FULL
PAYMENT (IN CASH IF DELIVERED IN PERSON, OR OTHERWISE BY CHECK OR MONEY ORDER)
AT THE SUBSCRIPTION PRICE, IS RECEIVED BY , AS ESCROW AGENT (THE
"ESCROW AGENT"), AT , , FLORIDA , BY 4:00
P.M., EASTERN TIME, ON , JANUARY , 1997 (THE "SUBSCRIPTION
EXPIRATION DATE"). SUBSCRIPTION FUNDS WILL BE HELD IN AN ESCROW ACCOUNT WITH THE
ESCROW AGENT PENDING CONSUMMATION OF THE SUBSCRIPTION OFFERING OR THE REFUND OF
SUCH FUNDS TO SUBSCRIBERS. PLEASE READ THIS PROXY STATEMENT/PROSPECTUS FOR
ADDITIONAL INFORMATION ON SUBSCRIPTION PROCEDURES AND ON OTHER ASPECTS OF THIS
SUBSCRIPTION OFFERING.
Prior to the Effective Date, there will be no public market for the Common
Stock. Summit has applied to have the Common Stock quoted on the Nasdaq National
Market under the proposed symbol "SHSE." There can be no assurance that such
quotation will be obtained.
This Proxy Statement/Prospectus is being furnished to all Eligible
Policyholders and to all persons (the "VOTING POLICYHOLDERS") who were owners of
In-Force Policies of ESIF as of the close of business on December 16, 1996 (the
"RECORD DATE") in connection with the solicitation by and on behalf of the Board
of Trustees of ESIF of proxies for use at the Special Meeting of Members of ESIF
(the "SPECIAL MEETING") to be held at 10:00 a.m. Eastern Time on ,
January , 1997, at the offices of ESIF, 2310 A-Z Park Road, Lakeland, Florida
and at any adjournment or postponement thereof. The purpose of the Special
Meeting is for the Voting Policyholders to consider and vote upon the Plan of
Conversion and the transactions contemplated thereby, as described in greater
detail herein. The approval of the Plan of Conversion by the Voting
Policyholders will constitute approval and adoption of the Restated Articles of
Incorporation ("ARTICLES") of Bridgefield, which, among other
(ii)
<PAGE> 7
things, will change the name of ESIF to Bridgefield Employers Insurance Company
and authorize the issuance of common stock, and the Restated Bylaws ("Bylaws")
of Bridgefield, which contain provisions appropriate for a stock insurance
company. A copy of the Articles is attached hereto as Exhibit B, and a copy of
the Bylaws is attached hereto as Exhibit C. THE CONVERSION IS CONTINGENT UPON
APPROVAL OF THE PLAN OF CONVERSION BY THE VOTING POLICYHOLDERS, INCLUDING
APPROVAL BY BOTH A MAJORITY OF THE VOTING POLICYHOLDERS ENTITLED TO VOTE THEREON
AND TWO-THIRDS OF THE VOTES CAST AT THE SPECIAL MEETING.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ANY STATE SECURITIES
COMMISSION, OR THE FLORIDA DOI, NOR HAS THE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE FLORIDA DOI PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE FLORIDA DOI HAS APPROVED THE PLAN OF CONVERSION. HOWEVER, THE APPROVAL
OF THE PLAN OF CONVERSION BY THE FLORIDA DOI DOES NOT CONSTITUTE IN ANY WAY A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE FLORIDA DOI.
<TABLE>
<CAPTION>
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ESTIMATED NET
COMMON STOCK SUBSCRIPTION PRICE ESTIMATED EXPENSES(1) PROCEEDS(2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share(3)........................... $11.00 $1.00 $10.00
- ------------------------------------------------------------------------------------------------------
Total(4)............................... $55,000,000 $5,000,000 $50,000,000
- ------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Consists of estimated expenses of ESIF and Summit incurred in connection
with the Conversion, including the Offerings. See "USE OF PROCEEDS."
(2) The Conversion is contingent upon the receipt by Summit of net proceeds from
the Offerings of a minimum of approximately $50,000,000. See "USE OF
PROCEEDS."
(3) If the Public Offering Price or the Revised Subscription Price is less than
the Subscription Price, the effective price per share to Eligible
Policyholders and the amount of proceeds per share to Summit will be
reduced because the number of shares of Common Stock issued to Eligible
Policyholders in exchange for full payment at the Subscription Price will
be increased. If the Public Offering Price or the Revised Subscription
Price is greater than the Subscription Price, the effective price per share
to Eligible Policyholders and the amount of proceeds per share to Summit
will be increased because the number of shares of Common Stock issued to
Eligible Policyholders in exchange for full payment at the Subscription
Price will be decreased. See "THE OFFERINGS -- Subscription
Offering -- Subscription Price" and "-- Payment for Shares."
(4) Assumes all shares of Common Stock are sold in the Subscription Offering.
THIS PROXY STATEMENT/PROSPECTUS RELATES SOLELY TO THE OFFERING OF SERIES A
PREFERRED STOCK TO ELIGIBLE POLICYHOLDERS AND TO THE SUBSCRIPTION OFFERING AND
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY,
COMMON STOCK IN THE PUBLIC OFFERING. COMMON STOCK, IF ANY, TO BE OFFERED IN THE
ANTICIPATED PUBLIC OFFERING OR ANY PRIVATE PLACEMENT WILL BE OFFERED ONLY BY
MEANS OF A SEPARATE PROSPECTUS.
IN CONNECTION WITH THE ANTICIPATED PUBLIC OFFERING, THE UNDERWRITERS FOR
SUCH PUBLIC OFFERING MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR
MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
APPROVAL OF THE PLAN OF CONVERSION WILL NOT ALTER MEMBERS' INSURANCE
COVERAGE UNDER POLICIES WITH ESIF, INCLUDING, WITHOUT LIMITATION, POLICY COVER-
(iii)
<PAGE> 8
AGES AND BENEFITS. APPROVAL OF THE PLAN OF CONVERSION WILL NOT AFFECT MEMBERS'
ENTITLEMENT TO RECEIVE DIVIDENDS AS PROVIDED IN THEIR FLEXIBLE RETENTION
POLICIES. HOWEVER, FROM AND AFTER THE EFFECTIVE DATE OF THE PLAN OF CONVERSION,
(A) THE MEMBERSHIP INTERESTS WHICH MEMBERS HAVE IN ESIF WILL NO LONGER EXIST,
AND (B) MEMBERS WILL NO LONGER BE SUBJECT TO ANY ASSESSMENT FOR THE LIABILITIES
OF ESIF ARISING EITHER BEFORE OR AFTER THE EFFECTIVE DATE. ADDITIONALLY,
ELIGIBLE POLICYHOLDERS WILL RECEIVE OTHER CONSIDERATION IN EXCHANGE FOR THEIR
MEMBERSHIP INTERESTS AS DESCRIBED HEREIN, INCLUDING THE SERIES A PREFERRED STOCK
OF SUMMIT AND THE RIGHT TO PURCHASE COMMON STOCK OF SUMMIT.
THE FLORIDA DOI RECOGNIZES ONLY STATUTORY ACCOUNTING PRACTICES FOR
DETERMINING AND REPORTING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
AN INSURANCE COMPANY, FOR DETERMINING ITS SOLVENCY UNDER THE FLORIDA INSURANCE
CODE, AND FOR DETERMINING WHETHER ITS FINANCIAL CONDITION WARRANTS THE PAYMENT
OF A DIVIDEND TO ITS SHAREHOLDERS. NO CONSIDERATION IS GIVEN BY THE FLORIDA DOI
TO FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES IN MAKING SUCH DETERMINATIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND, IF SO
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS SHALL
NOT IMPLY THAT THE INFORMATION CONTAINED HEREIN OR IN THE DOCUMENTS ATTACHED
HERETO IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE A SOLICITATION FOR A
PROXY IN ANY JURISDICTION IN WHICH SUCH SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH SOLICITATION IS NOT QUALIFIED TO DO SO, OR FROM ANY
PERSON FROM WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION IN SUCH JURISDICTION.
NOTICE TO NORTH CAROLINA PURCHASERS: THE COMMISSIONER OF INSURANCE OF THE
STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS
THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS IN CONNECTION WITH THE OFFERING, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS
PROXY STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL
OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROXY STATEMENT/PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROXY STATEMENT/PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
(iv)
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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<S> <C>
SUMMARY
The Company........................................................................
The Conversion.....................................................................
Interests of Certain Persons in the Offerings......................................
The Offerings......................................................................
Summary Pro Forma Financial and Other Data.........................................
Summary Historical Financial and Other Data........................................
RISK FACTORS
Florida Workers' Compensation Market...............................................
Government Regulation..............................................................
Florida Special Disability Trust Fund
Competition........................................................................
Concentration in a Single State....................................................
Adequacy of Loss Reserves..........................................................
Renewal Risks; Quarterly Fluctuations in Operating Results.........................
Ability to Service Debt............................................................
Need for Capital...................................................................
Reliance on Independent Insurance Agencies.........................................
Reliance Upon Key Personnel........................................................
Dependence Upon Reinsurance........................................................
Absence of Prior Market............................................................
Shares Eligible for Future Sale; Possible Volatility of Stock Price................
Effect of Partial Subscription for Common Stock; Withdrawal........................
Obstacles to Changes in Control; Certain Anti-Takeover Effects.....................
Benefits of Conversion to an Officer and Director..................................
Potential Control by Private Placement Shareholders; Possible Depressive
Effect on the Price of Summit's Securities......................................
Director and Officer Indemnification and Exculpation...............................
Effect of Holding Company Structure; Dividends.....................................
THE COMPANY..........................................................................
THE SPECIAL MEETING
General............................................................................
Voting Rights and Vote Required for Approval.......................................
Proxies............................................................................
THE CONVERSION
General............................................................................
Reasons for the Conversion.........................................................
Conditions to Effectiveness........................................................
Identification of Eligible and Voting Policyholders................................
Extinguishment of Membership Interests.............................................
Consideration......................................................................
Amendments to or Withdrawal of the Plan of Conversion; Effects of Failure to
Consummate......................................................................
Interpretation of the Plan of Conversion...........................................
Fairness Opinion...................................................................
THE OFFERINGS
Subscription Offering..............................................................
Public Offering....................................................................
Private Placements.................................................................
</TABLE>
(v)
<PAGE> 10
<TABLE>
<CAPTION>
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<S> <C>
MARKET FOR STOCK
Series A Preferred Stock...........................................................
Common Stock.......................................................................
DIVIDEND POLICY
Series A Preferred Stock...........................................................
Common Stock.......................................................................
USE OF PROCEEDS......................................................................
CAPITALIZATION.......................................................................
SELECTED FINANCIAL DATA..............................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview...........................................................................
Results of Operations..............................................................
Liquidity and Capital Resources....................................................
Losses and Loss Adjustment Expense.................................................
BUSINESS
Overview...........................................................................
Industry...........................................................................
Strategy...........................................................................
Managed Care.......................................................................
Products and Services..............................................................
Reinsurance........................................................................
Investment Portfolio...............................................................
Competition........................................................................
A.M. Best Rating...................................................................
Regulation.........................................................................
Disposal of Business...............................................................
Information Technology Systems.....................................................
Employees..........................................................................
Properties.........................................................................
Legal Proceedings..................................................................
MANAGEMENT OF THE COMPANY
General............................................................................
Compensation Committee Interlocks and Insider Participation........................
Executive Compensation.............................................................
Employment Agreements..............................................................
401(k) Plan........................................................................
Incentive Plan.....................................................................
CERTAIN TRANSACTIONS.................................................................
PRINCIPAL SHAREHOLDERS...............................................................
DESCRIPTION OF CAPITAL STOCK
Preferred Stock....................................................................
Common Stock.......................................................................
Other Characteristics of Capital Stock.............................................
Anti-Takeover Provisions...........................................................
Transfer Agent.....................................................................
</TABLE>
(vi)
<PAGE> 11
<TABLE>
<CAPTION>
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<S> <C>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General Discussion.................................................................
Taxpayer Identification Number.....................................................
Ordinary Income and Capital Gains Tax Rate Differential............................
SHARES ELIGIBLE FOR FUTURE SALE......................................................
LEGAL MATTERS........................................................................
EXPERTS..............................................................................
CHANGE IN ACCOUNTANTS................................................................
ADDITIONAL INFORMATION...............................................................
INDEX TO FINANCIAL STATEMENTS
EXHIBIT A -- AMENDED PLAN OF CONVERSION AND RECAPITALIZATION....................... A-1
EXHIBIT B -- RESTATED ARTICLES OF INCORPORATION OF BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY......................................................................... B-1
EXHIBIT C -- RESTATED BYLAWS OF BRIDGEFIELD EMPLOYERS INSURANCE COMPANY............ C-1
EXHIBIT D -- CONSENT ORDER OF THE FLORIDA DEPARTMENT OF INSURANCE APPROVING THE
PLAN............................................................................ D-1
EXHIBIT E -- FAIRNESS OPINION OF THE CHICAGO CORPORATION........................... E-1
EXHIBIT F -- TAX OPINION OF ALSTON & BIRD.......................................... F-1
EXHIBIT G -- INSTRUCTIONS FOR COMPLETING THE REQUEST FOR TAXPAYER IDENTIFICATION
NUMBER CARD..................................................................... G-1
</TABLE>
(vii)
<PAGE> 12
SUMMARY
Pursuant to the Plan of Conversion, and upon the approval of the Voting
Policyholders at the Special Meeting, ESIF will convert from a Florida group
self-insurance fund to a Florida stock insurance company, Bridgefield, and
become a wholly owned subsidiary of Summit. Unless the context requires
otherwise, as used herein, the "COMPANY" refers to Summit and its subsidiaries
as of and following the completion of the Conversion and a simultaneous
reorganization of the Company's operating structure. Unless otherwise indicated,
information in this Proxy Statement/Prospectus assumes no exercise of the
Underwriters' over-allotment option. All financial information set forth herein
is presented in accordance with generally accepted accounting principles
("GAAP"), unless otherwise noted. The following summary is qualified in its
entirety by the more detailed information and consolidated financial statements
(including the notes thereto) appearing elsewhere in this Proxy
Statement/Prospectus.
THE COMPANY
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
administrative group (the "ADMINISTRATIVE SUBSIDIARIES"), the Company provides
administrative services for four self-insurance funds (the "FUNDS") for the
Company's two wholly owned workers' compensation insurance companies (the
"INSURANCE SUBSIDIARIES") and for certain municipalities. These administrative
services include most aspects of the daily operations of the Funds and the
Insurance Subsidiaries, including sales and marketing, underwriting, claims
administration, loss control and policy administration. These services are
provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds which are entities formed to provide workers compensation coverage for
self-insured employer groups on a pooled basis.
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty Insurance Company ("BRIDGEFIELD CASUALTY"), underwrite and assume the
underwriting risk with respect to workers' compensation insurance policies for
Florida employers of all sizes, primarily in the construction, manufacturing,
wholesale and retail, and service industries. As of September 30, 1996, the
Company's insurance products and administrative services are provided to
approximately 15,500 employers representing approximately $219.0 million in
premiums, including approximately $102.0 million in premiums attributable to the
Funds and $117.0 million in premiums attributable to the Insurance Subsidiaries.
See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place, and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best Company ("A.M. BEST").
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," "BUSINESS -- Strategy" and "-- Managed Care."
The Company believes that the Conversion provides new opportunities for
improving its return on invested capital through growth in its core workers'
compensation business. Key aspects of the Company's business strategy following
the Conversion include: (i) continued use of both self-insurance and indemnity
products; (ii) emphasis on profitable underwriting results; (iii) proactive
implementation of managed care; (iv) leveraging of administrative services
capabilities; (v) emphasis on excellent customer service; and (vi) geographic
expansion in the South. See "BUSINESS -- Strategy."
1
<PAGE> 13
The Company's administrative business was started in 1977, when Summit
Consulting, Inc. ("SCI") was formed to establish and administer workers'
compensation self-insurance programs for trade associations. The Company's
primary Insurance Subsidiary, ESIF (which pursuant to the Conversion will become
Bridgefield), was formed in 1978 with SCI as its administrator. Beginning in
1979, SCI assisted with the formation of three of the Funds and has been the
administrator of each of those Funds since its inception. See "BUSINESS --
Products and Services." Summit was incorporated as a Florida corporation in
November 1996 for the purpose of becoming a holding company for Bridgefield and
the other Company subsidiaries. The executive offices of the Company are located
at 2310 A-Z Park Road, Lakeland, Florida 33801. The telephone number at such
office is (941) 665-6060.
THE CONVERSION
Reasons for the Conversion. The Board of Trustees of ESIF has unanimously
adopted the Plan of Conversion and is seeking the approval of ESIF's members for
ESIF to convert from a Florida group self-insurance fund to a Florida stock
insurance company and become a wholly owned subsidiary of Summit. The trustees
of ESIF stated that they adopted the Plan of Conversion because they believe
that the Conversion will provide several important benefits. The conversion of
ESIF to a stock insurance company that is wholly owned by a publicly traded
holding company is expected to provide improved access to capital markets and
increased flexibility for raising additional capital in the form of equity and
debt financings. The holding company structure is also expected to provide
increased opportunities for growth, either internally or through acquisitions,
that are generally not available to a group self-insurance fund and provide
greater flexibility for the diversification of business activities through
existing or newly formed subsidiaries or through strategic partnerships.
Furthermore, pursuant to the Conversion, the policies held by members of ESIF
will be converted from assessable policies to non-assessable policies, relieving
the members of any assessment for the liabilities of ESIF arising either before
or after the Effective Date. Through the ownership of capital stock of Summit,
Eligible Policyholders are expected to realize an economic benefit for their
Membership Interests, which is currently not available to them.
Description of the Conversion. Currently, each member of ESIF has certain
Membership Interests arising under the organizational documents of ESIF, the
Florida Insurance Code and otherwise, including, without limitation, the right
to vote for the election of trustees and the right to participate in any
distribution of the surplus of ESIF in the event of its liquidation. If the Plan
of Conversion is approved at the Special Meeting and thereafter becomes
effective, all Membership Interests will be extinguished in the Conversion (such
extinguishment, however, will not affect the insurance coverage under ESIF's
In-Force Policies). In exchange for such Membership Interests, the Plan of
Conversion provides that Eligible Policyholders will receive certain
consideration including the elimination of potential assessments, an allocable
portion of the Series A Preferred Stock of Summit and subscription rights to
purchase shares of Common Stock of Summit in the Subscription Offering. Up to
5,000,000 shares of the Common Stock are being offered to Eligible Policyholders
less the amount of shares subscribed for by the Management Group, who are being
offered up to 500,000 shares of the Common Stock in the Subscription Offering.
See "THE CONVERSION -- Consideration" and "-- Identification of Eligible
Policyholders and Voting Policyholders," and "THE OFFERINGS -- Subscription
Offering." All or a portion of any shares of Common Stock that are not
subscribed for by Eligible Policyholders in the Subscription Offering are
simultaneously being offered for sale to the public in the Public Offering. See
"THE OFFERINGS -- Public Offering." In lieu of or in addition to the Public
Offering, Summit may elect to sell all or a portion of any shares of Common
Stock not subscribed for in the Subscription Offering in one or more Private
Placements, subject to obtaining the approval of the Florida DOI. See "THE
OFFERINGS -- Private Placements."
On the Effective Date, several transactions will occur contemporaneously:
(i) ESIF will convert from a group self-insurance fund to an assessable mutual
insurance company, an interim step required to satisfy the Florida Insurance
Code; (ii) the assessable mutual company will convert to a stock insurance
company with the name Bridgefield Employers Insurance Company; (iii) ESIF's
current Constitution and Bylaws will be replaced with the Articles and the
Bylaws containing provisions appropriate for a stock insurance company; (iv)
Eligible Policyholders will exchange their rights to receive common stock of
Bridgefield for Summit's Series A Preferred Stock, causing Bridgefield to become
a wholly owned subsidiary of Summit; and
2
<PAGE> 14
(v) Summit will issue its Series A Preferred Stock to Eligible Policyholders and
its Common Stock to purchasers in the Offerings. See "THE
CONVERSION -- General." The Conversion will become effective upon the
satisfaction of certain conditions identified in the Plan of Conversion,
including the Board of Trustees of ESIF declaring the Plan of Conversion
effective. See "THE CONVERSION -- Conditions to Effectiveness." The Board of
Trustees may amend the Plan of Conversion, with the concurrence of the Florida
DOI, or withdraw the Plan of Conversion, at any time prior to the Effective
Date.
Application, Public Hearing and Approval by the Florida DOI. On August 20,
1996, ESIF submitted an application, including an initial Plan of Conversion and
Recapitalization, to the Florida DOI for permission to convert from a group
self-insurance fund to a stock insurance company. The Florida DOI held a public
hearing on October 10, 1996, and thereafter ESIF submitted certain amendments to
such initial application. The Florida DOI issued a Consent Order dated November
15, 1996 (the "ORDER") approving the Conversion, subject to the satisfaction of
certain conditions, including the requirement that the Florida DOI approve the
final forms of certain documents to be submitted by ESIF. On , 1996,
ESIF filed the Plan of Conversion and submitted other documents, and the Florida
DOI granted its final approval of the Conversion. In the Order, the Commissioner
of Insurance of the State of Florida found that the Plan of Conversion is in
compliance with the Florida Insurance Code and is equitable to the members of
ESIF. A copy of the Order is attached hereto as Exhibit D. THE ORDER ISSUED BY
THE FLORIDA DOI DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN
OF CONVERSION OR THE TRANSACTIONS CONTEMPLATED THEREBY.
Opinion of Financial Advisor. On July 31, 1996, the Board of Trustees of
ESIF received a written fairness opinion (which has been confirmed in a letter
dated as of the date of this Proxy Statement/Prospectus) from The Chicago
Corporation ("CHICAGO CORP.") to the effect that the consideration to be
received by the Eligible Policyholders pursuant to the Plan of Conversion is
fair to such members from a financial point of view. Such consideration includes
extinguishment of assessment liability, the receipt of the Series A Preferred
Stock, and the receipt of subscription rights to purchase certain shares of the
Common Stock. A copy of such written opinion of Chicago Corp., which sets forth
certain of the procedures followed, as well as the assumptions and
qualifications made and the matters considered by Chicago Corp. in formulating
its opinion, is attached hereto as Exhibit E and should be read in its entirety.
See "THE CONVERSION -- Fairness Opinion."
Special Meeting of Members. The Special Meeting will be held at the
offices of ESIF, 2310 A-Z Park Road, Lakeland, Florida, at 10:00 a.m. Eastern
Time on , January , 1997, for the purpose of considering and voting
upon a proposal to approve the Plan of Conversion and the transactions
contemplated thereby, including the adoption and approval of the Articles and
the Bylaws of Bridgefield. The affirmative vote of at least two-thirds of all
validly cast votes, and the affirmative vote of a majority of all Voting
Policyholders entitled to vote thereon, will be required to approve the Plan of
Conversion. As further described herein, the term "VOTING POLICYHOLDERS"
generally means a person whose name appears on ESIF's records as of December 16,
1996 as the owner of an In-Force Policy. As further described herein, an
"IN-FORCE POLICY" is a policy that has been issued by ESIF (other than any
agreement or policy pursuant to which ESIF has ceded or assumed reinsurance)
pursuant to which a binder has been issued, provided that the effective date
noted in such binder has passed and such policy has not been surrendered or
otherwise terminated and has not expired by its terms. Abstentions will not be
counted at the Special Meeting as votes cast for or against the Plan of
Conversion and, therefore, will have the same effect as votes against the Plan
of Conversion. The presence in person or by proxy of any number of Voting
Policyholders constitutes a quorum for the transaction of business at the
Special Meeting. THE BOARD OF TRUSTEES OF ESIF RECOMMENDS A VOTE "FOR" THE
APPROVAL OF THE PLAN OF CONVERSION AND TRANSACTIONS CONTEMPLATED THEREBY.
Conditions to Effectiveness. For the Conversion to become effective, all
of the conditions listed below must be satisfied:
(i) The Plan of Conversion must be approved by not less than
two-thirds of the votes cast in person or by proxy by the Voting
Policyholders at the Special Meeting and by a majority of all Voting
Policyholders entitled to vote thereon.
3
<PAGE> 15
(ii) The Board of Trustees of ESIF must declare the Plan of Conversion
effective. Pursuant to the Plan of Conversion, the Effective Date must
occur on or before May 14, 1997, which is 180 days after the date of the
Order. However, the Board of Trustees may request a six-month extension of
the Effective Date from the Florida DOI.
(iii) The Articles and Bylaws of Bridgefield must have been approved
by the Florida DOI and the Articles must have been filed with the Florida
Secretary of State.
(iv) Bridgefield must have surplus as to policyholders and a ratio of
premiums to surplus sufficient to satisfy the requirements of the Florida
Insurance Code for a stock property and casualty insurance company.
(v) ESIF must not have imposed any assessments against its members.
(vi) The Company must have received an opinion of tax counsel to the
effect that the Conversion will be treated as a tax-free transaction under
Sections 368 and 351 of the Internal Revenue Code of 1986, as amended
(together with all regulations promulgated thereunder, the "TAX CODE").
Certain Federal Income Tax Consequences. It is intended that the
Conversion, the Subscription Offering, the Public Offering and any Private
Placements will be regarded for federal income tax purposes as one transaction
with several discrete steps having the tax consequences outlined herein. The
Conversion of ESIF into an assessable mutual insurance company is intended to be
treated as a tax-free reorganization under Section 368(a)(1)(F) of the Tax Code.
The Conversion of the assessable mutual company into a stock insurance company
is intended to be treated as a tax-free recapitalization under Section
368(a)(1)(E) of the Tax Code. The exchange by Eligible Policyholders of their
Membership Interests in ESIF in return for the Series A Preferred Stock, and the
exchange by Eligible Policyholders, the Management Group and the purchasers in
the Public Offering and Private Placements of cash for Common Stock, are
intended to be treated as a tax-free exchanges under Section 351 of the Tax
Code. The Plan of Conversion should constitute a plan to effect a change in the
identity of ESIF, a plan of recapitalization and a plan of exchange under
Section 351 of the Tax Code. ESIF has received an opinion of Alston & Bird, tax
counsel to ESIF, supporting the above-described intended tax consequences, and a
copy of such tax opinion is attached hereto as Exhibit F. However, such opinion
is not binding on the Internal Revenue Service (the "IRS"), and there can be no
assurance that the IRS will agree with the opinion. ESIF does not intend to seek
a ruling from the IRS with respect to the tax consequences of the Conversion.
See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
In addition to the foregoing tax matters, the receipt of subscription
rights to purchase Common Stock by the Eligible Policyholders also should be
treated as tax free so long as the terms of purchase in the Subscription
Offering, the Public Offering and any Private Placements are the same, as they
will be, and, as is also anticipated, the purchase price in the Offerings
represents the fair market value of the Common Stock of Summit. Finally,
although the receipt of the Series A Preferred Stock should be tax free, holders
of such stock may be taxed at ordinary income rates when the Series A Preferred
Stock is sold or redeemed by Summit. Each Eligible Policyholder will be required
to complete a REQUEST FOR TAXPAYER IDENTIFICATION NUMBER card to prevent the
application of certain tax withholding requirements. The rules described above
do not apply to all Eligible Policyholders, some of whom may be subject to
special rules. For a more complete discussion of the tax consequences of receipt
of consideration and a discussion of special rules that may apply to Eligible
Policyholders, see "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
Description of Cards and Forms Enclosed with this Proxy
Statement/Prospectus. Enclosed with this Proxy Statement/Prospectus for each
Eligible Policyholder is (i) a policyholder record card that lists the ESIF
policies for which such Eligible Policyholder has been identified as the owner
and shows the number of shares of Series A Preferred Stock that such Eligible
Policyholder will receive if the Plan of Conversion becomes effective, and (ii)
a Request For Taxpayer Identification Number card that gives information about
tax withholding in connection with any dividends that such Eligible Policyholder
may receive on the Series A Preferred Stock or any Common Stock.
Enclosed with this Proxy Statement/Prospectus for each Voting Policyholder
is a proxy card that allows such Voting Policyholder to cast a vote on the Plan
of Conversion without attending the Special Meeting. The
4
<PAGE> 16
Board of Trustees urges each Voting Policyholder to mark, sign, date and return
its proxy card as soon as possible, but no later than 4:00 p.m. Eastern Time on
, 1997, to ensure that its vote will be counted, even if such Voting
Policyholder does not plan to purchase Common Stock.
For more information about each card and form, see the instructions
indicated on each such card and form enclosed with this mailing or call ESIF's
Information Center at 1-800-331-7742.
INTERESTS OF CERTAIN PERSONS IN THE OFFERINGS
All directors and officers and certain other management employees of the
Company have been granted subscription rights to purchase in the Subscription
Offering an aggregate of up to 10% of the Common Stock being offered in the
Subscription Offering. Each member of the Management Group will be subject to
the same terms and conditions of the Subscription Offering as the Eligible
Policyholders, including, without limitation, the requirement to pay the
Subscription Price of $11.00 per share. It is expected that the Management Group
will purchase approximately 235,000 shares (approximately $2.6 million aggregate
subscription amount). See "THE OFFERINGS -- Subscription Offering."
Certain members of the Management Group may be affiliated with employers
who will receive Series A Preferred Stock and subscription rights because such
employers are Eligible Policyholders. In no event, however, shall any member of
the Management Group, alone or as a result of control or deemed control of an
Eligible Policyholder, directly or indirectly, purchase more than the Purchase
Limit (249,999 shares if all shares offered in the Offerings are sold) without
the approval of Summit and the DOI.
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with ESIF's acquisition of Summit
Holding Corporation ("SHC") on January 16, 1996 (the "ACQUISITION"), the Florida
DOI issued a consent order (the "JANUARY CONSENT ORDER") requiring that Mr. Bull
personally indemnify ESIF up to a maximum of $5 million for certain loss, injury
or damage (if any) to ESIF that may result from that acquisition transaction.
Under the terms of the January Consent Order, Mr. Bull's indemnification
obligations will expire fully on the earlier of January 11, 2001 or the date
upon which certain loans to SHC from the First Union National Bank of North
Carolina and certain other participating banks (collectively, the "BANK") are
paid in full. Pursuant to the Order issued by the Florida DOI, if the Conversion
is not consummated for any reason, all provisions of the January Consent Order
shall be enforceable by the parties thereto. See "RISK FACTORS -- Benefits of
Conversion to an Officer and Director" and "THE OFFERINGS -- Subscription
Offering -- Interests of Certain Persons."
5
<PAGE> 17
THE OFFERINGS
<TABLE>
<S> <C>
Series A Preferred Stock Offered by Summit... 1,639,866 shares
Common Stock Offered by Summit............... 5,000,000 shares
Series A Preferred Stock to be Outstanding
After the Effective Date................... 1,639,866 shares
Common Stock to be Outstanding After the
Effective Date............................. 5,000,000 shares(1)
</TABLE>
- ---------------
(1) Assumes that all shares of Common Stock offered pursuant to the Offerings
are sold and does not include 500,000 shares of Common Stock reserved for
issuance under the Incentive Plan and 45,000 shares of Common Stock
reserved for issuance under the 401(k) Plan, as such terms are defined in
"RISK FACTORS -- Shares Available for Future Sale; Possible Volatility of
Stock Price." See "MANAGEMENT OF THE COMPANY -- Incentive Plan" and
"-- 401(k) Plan."
Use of Proceeds............ Assuming that all shares of Common Stock offered
hereby are sold in the Offerings at the
Subscription Price, the net proceeds to Summit
from the Offerings are expected to be
approximately $50,000,000 million, after
deducting the estimated expenses of the
Offerings. Substantially all of such proceeds
will be contributed to Bridgefield to increase
its capital to satisfy applicable requirements of
the Florida Insurance Code, and the remainder of
such proceeds, if any, will be retained by Summit
for general corporate purposes. The Conversion is
contingent upon receipt by Summit of net proceeds
from the Offerings of a minimum of approximately
$50,000,000. See "USE OF PROCEEDS."
Proposed Nasdaq National
Market Symbol............ Summit has applied to have the Common Stock quoted
on the Nasdaq National Market under the symbol
"SHSE," but no assurances can be given that such
application will be approved. Summit does not
currently intend to apply to have the Series A
Preferred Stock listed on any securities exchange
or on the Nasdaq National Market. See "MARKET FOR
STOCK."
Dividend Policy............ The holders of shares of the Series A Preferred
Stock shall be entitled to receive, out of funds
legally available for the payment of dividends,
annual cash dividends of $0.40 per share,
reflecting the rate of 4% per annum. Such
dividends shall accrue from the date of issue
whether or not declared by the Board of Directors
of Summit and whether or not there are funds
legally available for the payment of such
dividends, but they shall be payable only as and
when declared by such Board of Directors;
provided, however, that all accrued but unpaid
dividends shall be paid upon any redemption of
the Series A Preferred Stock or liquidation of
Summit. See "DIVIDEND POLICY -- Series A
Preferred Stock."
The Company does not anticipate paying cash
dividends on the Common Stock in the immediate
future. Under the terms of the Series A Preferred
Stock, the Company is prohibited from paying
dividends on the Common Stock so long as there
are any accrued but unpaid dividends on the
Series A Preferred Stock. See "DIVIDEND POLICY --
Common Stock."
6
<PAGE> 18
Subscription Price......... $11.00 per share of Common Stock. If the Public
Offering Price or the Revised Subscription Price
is lower than the Subscription Price, the
effective price per share of Common Stock in the
Subscription Offering will be less than the
Subscription Price because the number of shares
to be issued in exchange for full payment at the
Subscription Price will be increased. If the
Public Offering Price or the Revised Subscription
Price is higher than the Subscription Price, the
effective price per share of Common Stock in the
Subscription Offering will be greater than the
Subscription Price because the number of shares
to be issued in exchange for full payment at the
Subscription Price will be decreased.
The Revised Subscription Price is defined in "The
OFFERINGS -- Subscription
Offering -- Subscription Price," and it generally
means a per share price for the Common Stock
determined by Summit, subject to Florida DOI
approval, in the event that the Public Offering
does not occur before the Effective Date. See
"THE OFFERINGS -- Subscription
Offering -- Subscription Price."
Number of Shares of Series
A Preferred Stock Being
Offered to Each Eligible
Policyholder............. For each Eligible Policyholder, (a) 10 shares, plus
(b) a number of shares based on the Eligible
Policyholder's contribution to ESIF's premiums
earned during the Eligibility Period, plus (c) a
number of shares based on the Eligible
Policyholder's premium volume and loss experience
during the Eligibility Period. The formulae for
determining the numbers of shares described in
(b) and (c) are set forth in the Plan of
Conversion and are described more fully in "THE
CONVERSION -- Consideration."
Maximum Number of Shares of
Common Stock Offered to
Each Eligible
Policyholder Pursuant to
the Subscription
Offering................. 4.99% of the Post Offering Outstanding Shares,
which will be 249,999 shares if all shares
offered in the Offerings are sold.
Stock Purchase
Limitations................ No person, alone or in conjunction with any
affiliated person, may purchase, directly or
indirectly, in the Offerings, more than 4.99% of
the Post Offering Outstanding Shares, which is
249,999 shares if all shares offered in the
Offerings are sold. Summit may, in its
discretion, elect to permit any purchaser in the
Offerings to purchase a number of shares of
Common Stock exceeding the Purchase Limit,
subject to each such purchaser's obtaining the
prior approval of the Florida DOI. As a result, a
single shareholder or group of shareholders could
acquire a sufficient number of shares of Common
Stock to control election of Summit's Board of
Directors. To the extent that Common Stock is
available, each subscriber in the Subscription
Offering must subscribe for a minimum of 100
shares. See "RISK FACTORS -- Potential Control by
Private Placement Shareholders; Possible
Depressive Effect on the Price of the Company's
Securities" and "THE OFFERINGS -- Subscription
Offering -- Limitations on Common Stock
Purchases."
7
<PAGE> 19
Subscription Procedures.... Together with this Proxy Statement/Prospectus, each
Eligible Policyholder is receiving a subscription
order form. To exercise its rights to subscribe
for such shares, an Eligible Policyholder must
complete and sign the subscription order form,
and such form must be received, together with
payment in full for the shares subscribed for, by
(the Escrow Agent) not later than 4:00
p.m. Eastern Time on , 1997 (the
"SUBSCRIPTION EXPIRATION DATE"). Payment for the
shares may be made by cash (if delivered in
person), check or money order in United States
dollars. SUBSCRIPTION RIGHTS ARE NONTRANSFERABLE.
See "THE OFFERINGS -- Subscription Offering."
Subscription order forms received by the Escrow
Agent may not be modified, amended or rescinded
without the consent of Summit. See "THE
OFFERINGS -- Subscription
Offering -- Subscription Price."
Escrow of Subscription
Funds...................... Subscription funds will be held in an escrow
account with the Escrow Agent pending
consummation of the Subscription Offering or the
refund of such funds to subscribers. If the
period from the Subscription Expiration Date to
the Effective Date exceeds 60 days, interest will
be paid to each subscriber on its subscription
amount from such 60th day until the Effective
Date at an annual rate of interest, adjusted on
Monday of each week, equal to the average yield
on thirteen-week United States Treasury Bills
auctioned for the previous week, as such yield is
reported in The Wall Street Journal on that day
(the "REFUND INTEREST RATE"). See "THE
OFFERINGS -- Subscription Offering --
Subscription Price."
Cancellation of Subscription
Offering................. The Subscription Offering will not be consummated
in the event that: (i) the Plan of Conversion is
not approved by the requisite vote of the Voting
Policyholders at the Special Meeting or any
adjournment thereof; (ii) Summit receives net
proceeds from the Offering of less than
approximately $5,000,000; or (iii) the Plan of
Conversion is withdrawn by ESIF's Board of
Trustees. If Summit cancels the Subscription
Offering, cash payments made by subscribers will
be promptly refunded with interest from the
Subscription Expiration Date to the date of
refund at the Refund Interest Rate. See "THE
CONVERSION" and "THE OFFERINGS -- Subscription
Offering -- Cancellation of the Subscription
Offering."
Escrow Agent and Transfer
Agent.................... , , . See "THE
OFFERINGS -- Subscription Offering -- Payment for
Shares" and "DESCRIPTION OF CAPITAL
STOCK -- Transfer Agent."
8
<PAGE> 20
SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following unaudited pro forma financial data reflect the Acquisition
and all of the transactions constituting the Conversion. The pro forma Statement
of Income data for the fiscal years ended March 31, 1995 and 1996 reflect the
Acquisition and Conversion as if they had been completed as of April 1, 1994 and
1995, respectively. The pro forma Statement of Income data for the six-month
period ended September 30, 1995 reflect the Acquisition and the Conversion as if
they had been completed as of April 1, 1995. The pro forma Statement of Income
data for the six-month period ended September 30, 1996 reflect the Conversion as
if it had occurred on April 1, 1996. The pro forma Balance Sheet data at
September 30, 1996 reflect the Conversion as if it had been completed as of
September 30, 1996. This information should be read in conjunction with the pro
forma consolidated financial statements and notes thereto appearing elsewhere in
this Proxy Statement/Prospectus. See "SELECTED FINANCIAL DATA."
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Statement of Income Data:
Total revenue..................................... $ 188,818 $ 172,299 $ 92,789 $ 74,531
Losses and loss adjustment expenses............... 69,116 94,844 42,365 32,135
Other underwriting, general and administrative
expenses....................................... 70,394 63,008 34,034 29,848
Total losses and operating expenses............... 139,510 157,852 76,399 61,983
Interest expense.................................. 3,624 3,978 2,029 1,831
Amortization and depreciation..................... 5,318 5,340 2,698 2,479
Net income before taxes........................... 40,366 5,129 11,663 8,238
Net income........................................ 25,365 3,645 7,791 5,037
Preferred dividends............................... 656 656 328 328
Net income available to common shareholders....... $ 24,709 $ 2,989 $ 7,463 $ 4,709
========== ========== ========== ==========
Net income per common share....................... $ 4.94 $ 0.60 $ 1.49 $ 0.94
========== ========== ========== ==========
Weighted average common shares outstanding........ 5,000,000 5,000,000 5,000,000 5,000,000
Other Data(1):
Insurance Subsidiaries:
Net loss ratio................................. 53.8% 82.5% 67.1% 65.5%
Expense ratio.................................. 32.3% 34.1% 34.2% 32.6%
Combined ratio................................. 86.1% 116.6% 101.3% 98.1%
Administrative Subsidiaries:
EBITDA......................................... $ 17,649 $ 11,804 $ 7,377 $ 3,577
Coverage Ratio:
Ratio of earnings to fixed charges on preferred
stock dividends................................ 8.80 1.94 5.19 4.22
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.............................................. $263,829
Total assets.......................................................... 548,085
Loss and loss adjustment expenses..................................... 373,971
Debt.................................................................. 36,500
Total shareholders' equity............................................ 74,993
</TABLE>
- ---------------
(1) Excludes inter-company eliminations.
9
<PAGE> 21
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following financial data for ESIF for the fiscal years ended March 31,
1992 through 1996 and the six-month periods ended September 30, 1995 and 1996
include the Acquisition as of January 16, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenue............. $ 143,750 $ 192,067 $158,951 $140,815 $140,328 $ 71,752 $ 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ -- -- -- -- 1,103 -- 2,499
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 32.6%
Combined ratio............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.1%
Coverage Ratio:
Ratio of earnings to fixed
changes and preferred
stock dividends(2)...... -- -- -- -- 0.87 -- 3.99
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested
assets.................. $ 147,056 $ 176,931 $201,688 $224,956 $223,517 $ 231,288 $ 213,829
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 498,085
Loss and loss adjustment
expenses................ 304,205 360,425 368,000 367,391 387,632 364,210 373,971
Debt...................... -- -- -- -- 44,000 -- 36,500
Total equity (deficit).... (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
</TABLE>
- ---------------
(1) Ratio for Insurance Subsidiaries.
(2) ESIF had no fixed charges or preferred stock dividends prior to the year
ended March 31, 1996.
10
<PAGE> 22
RISK FACTORS
An investment in the Series A Preferred Stock or the Common Stock involves
a high degree of risk. In addition to other information contained in this Proxy
Statement/Prospectus, prospective investors should consider carefully the
following risk factors in evaluating an investment in the shares of Series A
Preferred Stock or the Common Stock offered hereby. This Proxy
Statement/Prospectus contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results reflected in those forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed below, as well as those discussed elsewhere in this Proxy
Statement/Prospectus.
FLORIDA WORKERS' COMPENSATION MARKET
The workers' compensation insurance industry in Florida is highly
competitive. During the past fifteen years, a significant portion of the Florida
market has been serviced by certain group self-insurance funds, which are
entities that allow employers to obtain workers' compensation coverage on a
pooled basis, typically subjecting each employer to joint and several liability
for the group's losses. Primarily as a result of certain changes in the Florida
Insurance Code, there has been an increasing trend in the workers' compensation
industry in Florida to shift away from coverage offered by such funds and toward
traditional insurance products. Generally, policies issued by insurance
companies are non-assessable; therefore, an insurance company cannot assess its
policyholders for its underwriting or other losses. This structure affords
policyholders greater financial certainty and security, which has led to the
increased demand and availability in Florida of conventional, non-assessable
insurance products. The Administrative Subsidiaries have historically derived a
substantial portion of their revenues from managing the Funds, which in the
fiscal year ended March 31, 1996 accounted for 22% of the Company's total
revenue, on a pro forma basis after giving effect to the Conversion. The Company
believes that the market for workers' compensation products will continue to
shift away from coverage offered by assessable funds to traditional insurance
products. The loss or cancellation of any of the Company's significant client
groups, or the general availability of traditional non-assessable insurance
coverage to members of such groups on more favorable terms than provided under
the Company's programs, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Government
Regulation" and "-- Competition."
GOVERNMENT REGULATION
The workers' compensation insurance business is subject to state-by-state
regulation (which in some instances includes rate regulation and mandatory fee
schedules). These regulations are primarily intended to protect covered
employees and policyholders, not workers' compensation insurance companies,
administrators or their shareholders. Changes in workers' compensation insurance
laws or regulations or their interpretation or administration could have a
material adverse effect on the Company's business, financial condition and
results of operations. State regulatory agencies have discretionary power with
respect to most aspects of the Company's business, including premium rates,
capital surplus requirements, reserve requirements and investment criteria. Many
states, including Florida, limit the maximum amount of dividends and other
payments that can be made by insurance companies. This may limit the amount of
dividends that may be paid by the Insurance Subsidiaries to Summit, which in
turn may limit the amount of capital available to Summit for debt service,
expansion, dividend payments to shareholders and other purposes. See "-- Effect
of Holding Company Structure; Dividends," "DIVIDEND POLICY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" and "BUSINESS -- Regulation."
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the kinds of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its assets more conservatively than it would if it were
not subject to the state law restrictions and may prevent the Company from
obtaining as high a return on its assets as it might otherwise be able to
realize. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Results of Operations" and "BUSINESS -- Investment
Portfolio."
11
<PAGE> 23
Numerous proposals have been debated in Congress and in several state
legislatures regarding healthcare legislation intended to control the cost and
availability of healthcare services. It is not possible to determine what
healthcare reform legislation will be adopted by Congress or any state
legislature, or if and when any such legislation will be adopted and
implemented. In the event that such legislation is adopted and implemented,
there can be no assurance that the Company will be able to adjust effectively to
any regulatory changes made by future healthcare reform legislation and remain
profitable. The Company is unable to predict accurately the nature and effect,
if any, that the adoption of healthcare legislation or regulations or changing
interpretations at the federal or state level would have upon the Company.
Except for certain statutorily prescribed credits, Florida law does not
permit companies to compete on the basis of price in workers' compensation
insurance. This approach is followed in relatively few other states. If Florida
were to adopt an open rating system in which premium rates would be established
with little or no regulatory intervention, the Company's business, financial
condition and results of operations could be materially adversely affected.
FLORIDA SPECIAL DISABILITY TRUST FUND
Florida operates a Special Disability Trust Fund (the "SDTF") that
reimburses insurance carriers, self-insurance funds and self-insured employers
in Florida for certain workers' compensation benefits paid to injured employees.
The SDTF is managed by the State of Florida and is funded through assessments
against Florida insurers and self-insurers. For the three fiscal years ended
March 31, 1994, 1995 and 1996, the Company received SDTF recoveries of
$4,508,000, $5,671,000 and $5,603,000, respectively, and paid assessments of
$5,600,000, $4,724,000 and $5,620,000, respectively. In addition, the Company's
consolidated balance sheet as of September 30, 1996 included an asset of
approximately $21.1 million representing SDTF recoveries that the Company
estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF; however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries. Under
Florida sunset laws, the SDTF is currently scheduled for review by the Florida
legislature in the year 2000. The Florida legislature may, however, review the
SDTF earlier, and no assurance can be made with regard to the legislature's
possible actions. In addition, the Florida DOI is currently reviewing its
regulations with respect to how insurers and self-insurers may account for
estimated future SDTF recoveries, and there is no assurance that the Florida DOI
will continue to permit such entities to include estimated future recoveries on
its financial statements. Discontinuation of the SDTF, or changes in its
operations which decrease the availability of recoveries from the SDTF, increase
the SDTF assessments payable by the Company, prohibit the Company from including
estimated future recoveries on its financial statements or limit the amount that
may be so included, could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"BUSINESS -- Regulation -- Special Disability Trust Fund."
COMPETITION
The market to provide workers' compensation insurance and services is
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of insurance services. A number
of the Company's current and potential competitors are significantly larger,
with greater financial and operating resources than the Company and can offer
their services nationwide. The Company's Insurance Subsidiaries do not offer
multi-line insurance products that are offered by some of such competitors. In
addition, after a period of absence from the market, traditional national
insurance companies have re-entered the Florida workers' compensation insurance
market, thereby increasing competition in the Company's principal market. The
general lack of assessibility features in the policies of traditional indemnity
insurance companies gives them a competitive advantage over self-insurance
funds, including the Funds managed by the Company.
12
<PAGE> 24
Additionally, because of Bridgefield's short operating history as a stock
insurance company, the Company does not currently have a letter rating from A.M.
Best, the leading national insurance rating organization, and it is not yet
entitled to receive such a rating. The Company intends to apply for a letter
rating from A.M. Best in the future, when it is deemed eligible to do so. There
can be no assurance that the Company will receive a rating or that if a rating
is received it will be favorable. The absence of a rating, or an unfavorable
rating in the future, may be a competitive disadvantage in some markets,
especially regarding larger customers with in-house risk managers.
CONCENTRATION IN A SINGLE STATE
All of the Company's insurance policies are written to entities whose
principal places of business are in Florida, and over 90% of the Company's total
revenue for the fiscal year ended March 31, 1996, on a pro forma basis after
giving effect to the Conversion, was derived from insurance products and
administrative services in Florida. Accordingly, the Company could be adversely
affected by economic downturns, significant unemployment, regulatory
developments and other conditions that may occur from time to time in Florida,
which may not significantly affect its more geographically diversified
competitors.
ADEQUACY OF LOSS RESERVES
The Insurance Subsidiaries are required to maintain reserves to cover their
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims. Reserves are estimates involving
actuarial and statistical projections at a given time of what the insurer
expects to be the cost of the ultimate settlement and administration of claims
based on facts and circumstances then known, predictions of future events,
estimates of future trends in claims severity and judicial theories of
liability, legislative activity and other variable factors, such as inflation.
The establishment of appropriate reserves is an inherently uncertain process,
particularly in the workers' compensation industry in which claims payments can
extend for lengthy periods of time. There can be no assurance that ultimate
losses will not materially exceed the Insurance Subsidiaries' loss reserves. To
the extent that reserves prove to be inadequate in the future, the Insurance
Subsidiaries would have to increase such reserves and incur a charge to earnings
in the period such reserves are increased, which could cause fluctuations in
quarterly operating results and which could have a material adverse effect on
the Company's business, financial condition and results of operations.
RENEWAL RISKS; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The members of each of the Funds, and most of the policyholders of
Bridgefield, are eligible to renew their memberships or policies each year on a
common anniversary date. With respect to Bridgefield, this anniversary date each
year is April 1. If a large number of members of any Fund, or a large number of
Bridgefield's policyholders, were to decline renewal in any given year, the
Company's results of operations could be materially adversely affected in the
renewal quarter and subsequent quarters. Results of operations may also
fluctuate as a result of a variety of other factors, including, without
limitation, changes in pricing policies by the Company or its competitors, the
results of actuarial analysis of loss development, demand for the services of
the Administrative Subsidiaries, the introduction of new services and service
enhancements by the Company or its competitors, the market acceptance of new
services, competitive conditions in the industry, changes in operating expenses,
changes in Company strategy, changes in applicable legislation and regulation
and general economic conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ABILITY TO SERVICE DEBT
In connection with the Acquisition, SHC borrowed $44 million from the Bank,
with $36 million pursuant to a term loan and $8 million pursuant to a revolving
line of credit. The outstanding principal balance of such debt at September 30,
1996 was approximately $36.5 million. The interest rate for such debt is prime
plus 1% for "Base Rate" portions. Scheduled quarterly payments of the term loan
began on September 30, 1996 and extend through June 30, 2002, with principal
payments totaling approximately $1.6 million, $3.8 million, $4.6 million, $9.0
million, $10.0 million and $4.0 million due in calendar years 1997, 1998, 1999,
2000, 2001 and 2002, respectively Accrued interest is due with each principal
payment. The commitment under the revolving
13
<PAGE> 25
line of credit was reduced to $5.0 million in November 1996, and it will reduce
by $1.5 million on each of June 30, 2000 and June 30, 2001, with the remaining
$2.0 million becoming due on June 30, 2002. As collateral for the debt, SHC has
pledged to the Bank the issued and outstanding stock of SCI, Bridgefield
Casualty, Summit Healthcare Holdings, Inc. and Meritec Solutions, Inc.
("MERITEC"). SHC intends to restructure certain terms of this debt before the
Effective Date. Pursuant to the Plan of Conversion, all of this debt will be
assumed by Summit following the Effective Date. Summit, which is a holding
company, will have only income from distributions from its wholly owned
subsidiaries with which to service this debt, and there are certain restrictions
on the ability of the Insurance Subsidiaries to make distributions to Summit.
See "-- Government Regulation" and "BUSINESS -- Regulation -- Financial and
Investment Restrictions." There can be no assurance that Summit will have
adequate funds available to pay the required payments on its debt, and the
inability of Summit to service the debt would have a material adverse effect on
the Company's business, financial condition and results of operations.
NEED FOR CAPITAL
As a self-insurance fund, the Company recorded for statutory reporting an
asset for future investment income determined by discounting loss and loss
adjustment expense reserves at a statutory prescribed rate. Upon conversion to a
stock insurance company, the Company will be permitted to record discounts only
on permanent disability cases. As a result of this change, the Company intends
to use substantially all of the net proceeds from the Offerings for the purpose
of satisfying the Florida Insurance Code's minimum capital requirements
applicable to Bridgefield as a stock insurance company. From time to time, the
Company may be required to increase the capital surplus of the Insurance
Subsidiaries to remain in compliance with state regulatory requirements. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to reduce its growth. There can be no
assurance that capital will continue to be available when needed or, if
available, will be on terms acceptable to the Company. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
The Company markets its managed care workers' compensation insurance
products and services through independent insurance agencies. See
"BUSINESS -- Products and Services." As of September 30, 1996, ESIF's top ten
independent agencies accounted for approximately 20% of ESIF's direct in-force
premiums, with the top independent insurance agency accounting for approximately
4%. These agencies offer and sell competitors' products, as well as the
Company's products. As a result, the Company's business depends in part on the
marketing efforts of these agencies and on the Company's ability to offer
workers' compensation insurance products and services that meet the requirements
of these agencies and their customers. In addition, if the Company expands into
additional states, it must establish a network of independent agencies in such
states if it is to successfully market its products. Failure of independent
insurance agencies to market the Company's products and services successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RELIANCE UPON KEY PERSONNEL
Summit's success will, to a large extent, depend upon the continued
services of certain executive officers, particularly, William B. Bull, President
and Chief Executive Officer of the Company, and upon the efforts and abilities
of certain other key management personnel. The loss of the services of Mr. Bull
could materially adversely affect the Company. Mr. Bull is a party to an
employment agreement with Summit, which contains certain confidentiality and
noncompetition provisions. In addition, the Company maintains and is the sole
beneficiary of key-man life insurance policies on the life of Mr. Bull in the
aggregate amount of $9.1 million. See "MANAGEMENT OF THE COMPANY -- Employment
Agreements."
The Company intends to continue hiring additional personnel as necessary to
meet its management, marketing and sales service needs from time to time.
Although the Company believes that, to date, the organization has been
successful in attracting and retaining highly qualified professionals and other
adminis-
14
<PAGE> 26
trative personnel as required by its business, there can be no assurance that
the Company will continue to be successful in this regard. The Company believes
that the future success and development of its business is dependent to a
significant degree on its ability to continue to attract such individuals.
DEPENDENCE UPON REINSURANCE
The Insurance Subsidiaries have excess of loss policies ("EXCESS
REINSURANCE") for the current fiscal year with several reinsurers, including
Lloyds of London, National Union Insurance Company and Continental Casualty
Company, and policies providing coverage for prior fiscal years with several
other reinsurers, under which the reinsurers have agreed to pay claims and
claims expenses over a specific dollar amount per occurrence. In addition,
Bridgefield Casualty has a quota-share reinsurance agreement in effect with
American Re-Insurance Company ("AM RE") under which Bridgefield Casualty cedes
to Am Re a percentage (currently 80%) of all written workers' compensation
premiums and Am Re assumes that same percentage of risks ("QUOTA SHARE
REINSURANCE"). This Quota Share Reinsurance allows Bridgefield Casualty to
write, within regulatory guidelines, a larger number of policies than it could
otherwise. The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all claims and claims expenses which the
Company has ceded to such reinsurer. Pursuant to the Order, Bridgefield is
permitted to cede reinsurance only to authorized reinsurers, unless it obtains
the prior written approval of the Florida DOI. Any failure on the part of the
Company's reinsurers, any inability to obtain reinsurance in the future or any
significant increase in the cost of such reinsurance, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, in the event that the Quota Share Reinsurance agreement
with Am Re is terminated for any reason, Bridgefield Casualty could be required
to substantially increase its capital or to reduce its level of workers'
compensation premiums, unless it is able to establish another Quota Share
Reinsurance arrangement. This could result in material adverse consequences to
the Company's business and growth prospects. See "BUSINESS -- Reinsurance."
ABSENCE OF PRIOR MARKET
Prior to the Offerings, there has been no public market for the Company's
securities and, particularly if the Plan of Conversion becomes effective but the
Company determines not to proceed with the Public Offering, there can be no
assurance that an established and liquid trading market for such securities will
develop or, if developed, will be sustained or that the market price of the
Common Stock will not decline below the Public Offering Price. Although the
Company has applied for approval to list the Common Stock on the Nasdaq National
Market, there can be no assurance that such application will be approved or that
the Company will be able to maintain such a listing. See "MARKET FOR STOCK."
If the Common Stock is listed on the Nasdaq National Market but the Company
is unable to satisfy the maintenance requirements for the Nasdaq National
Market, the Common Stock may be deleted from such system. In such event, trading
in the Common Stock, if any, would be thereafter conducted in the over-the-
counter market on the "pink sheets" or through the National Association of
Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity of
the Common Stock could be impaired, not only in the number of securities which
could be bought and sold but also through delays in the timing of transactions,
the reduction or elimination of security analysts' and the news media's coverage
of the Company, and lower prices for the Company's securities than might
otherwise be attained. See "MARKET FOR STOCK."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE VOLATILITY OF STOCK PRICE
All shares of Common Stock distributed in the Subscription Offering and the
Public Offering will have been registered under the Securities Act of 1933, as
amended (the "SECURITIES ACT") and will be freely tradeable without restriction
or further registration under the Securities Act except for shares held by
"affiliates" of the Company, as that term is defined in Rule 144 ("RULE 144")
under the Securities Act. Based on information provided to the Company by its
affiliates, the Company believes that shares of Common Stock ( % of the
Post Offering Outstanding Shares) will be beneficially owned by affiliates on
the Effective
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Date (without taking into account any possible purchases of Common Stock by
affiliates in the Public Offering). See "THE OFFERINGS -- Subscription
Offering -- Interests of Certain Persons." All shares held by affiliates of the
Company are subject to a lock-up agreement with the Representatives that
prohibits their resale prior to 180 days after the Effective Date without the
prior consent of Raymond James & Associates, Inc. In addition, 500,000 shares of
Common Stock are reserved for issuance under the Summit Holding Southeast, Inc.
1996 Long-Term Incentive Plan (the "INCENTIVE PLAN") and 45,000 shares are
reserved for issuance under the Summit Consulting, Inc. Retirement Plan (the
"401(K) PLAN"). See "MANAGEMENT OF THE COMPANY -- Incentive Plan" and "-- 401(k)
Plan." To date, the Company has not issued any options to purchase Common Stock
under the Incentive Plan, but it plans to issue options on the Effective Date.
See "MANAGEMENT OF THE COMPANY -- Incentive Plan." The Company intends to file a
registration statement on Form S-8 with the Commission following the completion
of the Conversion to register the shares of Common Stock that may be issued
under the Incentive Plan and in connection with the 401(k) Plan. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock and
could impair the Company's future ability to obtain capital through an offering
of equity securities. See "SHARES ELIGIBLE FOR FUTURE SALE."
In addition, the market price of the Common Stock could be subject to
significant fluctuations in response to variations in financial results or
announcements of material events by the Company or its competitors. It is
possible that in some future periods the Company's operating results could be
below market expectations and, in such an event, the price of the Common Stock
would likely be materially adversely affected. Regulatory changes in the
insurance industry or changes in the general condition of the economy or the
financial markets or other events that are beyond the Company's control could
also adversely affect the market price of the Common Stock. In addition to the
foregoing, the stock market has from time to time experienced price and volume
fluctuations which have significantly affected the market prices of the stocks
of many public companies but which are unrelated to the operating performance of
such companies. See "-- Renewal Risks; Fluctuations in Operating Results."
EFFECT OF PARTIAL SUBSCRIPTION FOR COMMON STOCK; WITHDRAWAL
The Summit Board of Directors may elect to terminate the Public Offering if
market conditions do not permit the Public Offering on terms satisfactory to
Summit. In such event, the Summit Board of Directors may attempt to sell all or
a portion of the shares of Common Stock not subscribed for in the Subscription
Offering to a single purchaser or to a small number of purchasers in one or more
Private Placements. The failure of the Company to raise significant proceeds in
the Offerings may adversely affect the business, financial condition and results
of operations of the Company. In addition, a partial subscription and the
failure to effect the Public Offering might have an adverse effect on the market
for the Common Stock and the ability of the Company to raise additional capital
in the equity markets in the future. The sale of all or a portion of the shares
of Common Stock not subscribed for in the Subscription Offering to one or a
small number of purchasers in one or more Private Placements, or the sale of
blocks of shares of Common Stock in excess of the Purchase Limit to purchasers
in the Public Offering, could vest effective control of the Company in such
single purchaser or small number of purchasers. In addition, the Company may
withdraw the Plan of Conversion at any time prior to the Effective Date.
Therefore, there can be no assurance that persons who wish to purchase shares of
Common Stock in the Offerings will be able to purchase such shares.
OBSTACLES TO CHANGES IN CONTROL; CERTAIN ANTI-TAKEOVER EFFECTS
After the consummation of the Conversion, Summit will be the holding
company of Bridgefield, a Florida stock insurance company. The Florida Insurance
Code will prohibit any person, individually or in conjunction with any
affiliated person, from acquiring, directly or indirectly, 5% or more of the
outstanding voting securities of Summit without prior approval of the Florida
DOI. However, a person who acquires at least 5% but less than 10% of such
outstanding voting securities may file with the Florida DOI a disclaimer of
affiliation and control and, unless such disclaimer is disallowed by the Florida
DOI, such person will not be required to seek prior approval of the Florida DOI
for the acquisition. In addition to such insurance regulation, the Florida
Business Corporation Act (the "FLORIDA ACT") contains provisions that may deter
or frustrate takeovers of
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Florida corporations such as Summit. See "DESCRIPTION OF CAPITAL
STOCK -- Anti-Takeover Provisions -- Florida Corporate Law."
In addition, Summit's Articles of Incorporation authorize the issuance of
5,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without the need
for shareholder approval, to issue preferred stock with dividend, liquidation,
conversion or other rights that could adversely affect the voting power or the
rights of the holders of the Common Stock. In the event of issuance, such
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of Summit. In
connection with the Plan of Conversion, Summit will issue 1,639,866 of such
preferred stock shares as the Series A Preferred Stock, the terms of which are
described herein. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock."
BENEFITS OF CONVERSION TO AN OFFICER AND DIRECTOR
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull personally
indemnify ESIF up to a maximum of $5 million for certain loss, injury or damage
to ESIF that may result from the Acquisition. Under the terms of the January
Consent Order, Mr. Bull's indemnification obligations will expire fully on the
earlier of January 11, 2001 or the date upon which certain loans to SHC from the
Bank are paid in full. Pursuant to the Order issued by the Florida DOI, if the
Conversion is not consummated for any reason, all provisions of the January
Consent Order shall be enforceable by the parties thereto. See "THE
OFFERINGS -- Subscription Offering -- Interests of Certain Persons." Mr. Bull is
not a trustee of ESIF and, therefore, did not vote with respect to approval of
the Plan of Conversion by ESIF's Board of Trustees. However, as President and
Chief Executive Officer of SHC, Mr. Bull may influence the trustees, and such
relief from such personal indemnification obligations could be a factor that
influences Mr. Bull's position on the Conversion.
POTENTIAL CONTROL BY PRIVATE PLACEMENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT
ON THE PRICE OF SUMMIT'S SECURITIES
If Summit determines that it is in the best interests of the Company to
proceed with one or more Private Placements, upon the consummation of such
Private Placement or Placements the purchasers in such transactions may control
the Company through the ownership of a controlling block of the Post Offering
Outstanding Shares, assuming the Eligible Policyholders and the Management Group
do not subscribe in the aggregate for a substantial number of the Post Offering
Outstanding Shares. In such event, such controlling shareholders collectively
would have the ability to elect all of the members of the Board of Directors,
the power to determine the management of the business and the power to determine
the outcome of corporate actions requiring shareholder approval. As a result,
potential acquirers may be discouraged from seeking to acquire control of the
Company through the purchase of Common Stock, which could have a depressive
effect on the price of Summit's securities.
DIRECTOR AND OFFICER INDEMNIFICATION AND EXCULPATION
The Florida Act authorizes a Florida corporation to indemnify such
company's directors, officers, employees and agents. Summit has adopted a Bylaw
provision mandating such indemnification for directors, and permitting the Board
of Directors to indemnify officers, employees and agents in certain
circumstances, to the fullest extent permitted by law. In addition, Summit has
entered into agreements with its directors and certain of its executive officers
that contractually obligate Summit to provide indemnification. Pursuant to
exculpation provisions in Summit's Articles of Incorporation, the personal
liability of a director shall be eliminated or limited to the fullest extent of
the Florida Act.
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EFFECT OF HOLDING COMPANY STRUCTURE; DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock in the
foreseeable future. In addition, the source of funds for payment of dividends by
the Company would be dividends paid to it by its subsidiaries. The Florida
Insurance Code limits the amount of dividends which the Insurance Subsidiaries
may pay to Summit and, in any event, for the foreseeable future Summit expects
to cause its subsidiaries to retain all earnings to provide capital for their
operations and business. In addition, if any shares of Series A Preferred Stock
are outstanding, no dividends may be paid to the holders of Common Stock so long
as there are accrued but unpaid dividends on the Series A Preferred Stock. See
"DIVIDEND POLICY" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
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<PAGE> 30
THE COMPANY
Summit was incorporated as a Florida corporation in November 1996 for the
purpose of becoming a holding company for Bridgefield and the other Company
subsidiaries. The executive offices of the Company are located at 2310 A-Z Park
Road, Lakeland, Florida 33801. The telephone number at such office is (941)
665-6060.
THE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to Voting Policyholders
in connection with the solicitation of proxies by the Board of Trustees of ESIF
for use at the Special Meeting to be held at the main office of ESIF, 2310 A-Z
Park Road, Lakeland, Florida 33801, on , January , 1997 at 10:00
a.m. Eastern Time and at any adjournment or postponement thereof. At the Special
Meeting, the Voting Policyholders will consider and vote upon the Plan of
Conversion and the transactions contemplated thereby pursuant to which ESIF
will, pursuant to the laws of the State of Florida, convert from a group
self-insurance fund to a stock insurance company with the name Bridgefield
Employers Insurance Company, and Summit, a Florida corporation formed at the
direction of ESIF, will acquire all of the capital stock of the converted stock
insurance company in return for the issuance of shares of the Series A Preferred
Stock to Eligible Policyholders of ESIF and subscription rights to purchase the
Common Stock to Eligible Policyholders of ESIF and certain other persons. All
Membership Interests in ESIF will be extinguished pursuant to the Conversion.
The approval of the Plan of Conversion by the Voting Policyholders will
constitute approval and adoption of the Articles, which, among other things,
will change the name of ESIF to Bridgefield Employers Insurance Company and
authorize the issuance of Common Stock, and the Bylaws, which contain provisions
appropriate for a stock insurance company. Any shares of Common Stock not
purchased in the Subscription Offering may be offered for sale in the Public
Offering or in one or more Private Placements, or Summit may determine not to
offer all or a portion of any remaining shares for sale. The Subscription Price
of the Common Stock to be issued by Summit under the Plan of Conversion will be
$11.00 per share, subject to adjustment if the Public Offering Price or Revised
Subscription Price is different. See "THE OFFERINGS -- Subscription
Offering -- Subscription Price."
The Board of Trustees of ESIF, based in part upon the opinion and analysis
of its professional advisors, has concluded that the Plan of Conversion is in
the best interests of ESIF and its members, and the Board has unanimously
approved the Plan of Conversion and related transactions. The Board recommends
that the Voting Policyholders vote FOR the Plan of Conversion and related
transactions.
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
Only the Voting Policyholders, defined as those members of ESIF who held
In-Force Policies on the Record Date, are entitled to notice of and to vote at
the Special Meeting. If there are not sufficient votes for approval of the Plan
of Conversion at the time of the Special Meeting, the Special Meeting may be
adjourned to permit further solicitation of proxies. See "THE
CONVERSION -- Identification of Eligible and Voting Policyholders."
At the Special Meeting, each Voting Policyholder will be entitled to cast
one vote for every In-Force Policy held by such person on the Record Date. As of
the Record Date, ESIF had In-Force Policies and, therefore, votes
are eligible to be cast at the Special Meeting.
Any number of persons present at the Special Meeting will constitute a
quorum for the purpose of conducting business at the Special Meeting. The
affirmative vote of at least two-thirds of all validly cast votes, and the
affirmative vote of a majority of all Voting Policyholders entitled to vote on
this matter, will be required to approve the Plan of Conversion. Any questions
as to the eligibility of a member to vote or the number of votes allocated to
each member, or any matters related to voting, will be resolved by ESIF at the
time of the Special Meeting, and the records of ESIF will control.
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PROXIES
Voting Policyholders may vote at the Special Meeting in person or by proxy.
Each proxy solicited hereby, if properly executed, duly returned and not revoked
prior to or at the Special Meeting, will be voted at the Special Meeting in
accordance with the Voting Policyholder's instructions indicated thereon. If no
contrary instructions are given, the properly executed and dated proxy will be
voted in favor of the Plan of Conversion and the related transactions.
Any Voting Policyholder giving a proxy may revoke it at any time before it
is voted by delivering to William B. Bull at the main office of ESIF, 2310 A-Z
Park Road, Lakeland, Florida 33801, either a written revocation of the proxy or
a duly executed proxy bearing a later date, or by voting in person at the
Special Meeting. Proxies are being solicited only for use at the Special Meeting
and any and all adjournments thereof and will not be used for any other meeting.
If the Plan of Conversion is approved, only holders of the Common Stock of
Summit will be entitled to vote at future meetings. Holders of Series A
Preferred Stock will not be entitled to vote (except as may be otherwise
specifically required by law).
The cost of preparing, printing and mailing this Proxy Statement/Prospectus
and proxies will be borne by the Company. In addition to the use of the mails,
proxies may be solicited by telephone, telecopy, telegraph or personal interview
by for a fee of $ , and by directors, officers and
employees of the Company without additional compensation.
The Board of Trustees of ESIF urges each Voting Policyholder to mark, sign,
date and return the enclosed proxy card in the enclosed postage-prepaid envelope
as soon as possible, even if such Voting Policyholder does not intend to
purchase Common Stock. This will ensure that its vote will be counted.
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<PAGE> 32
THE CONVERSION
THE BOARD OF TRUSTEES OF ESIF RECOMMENDS THAT VOTING POLICYHOLDERS VOTE
"FOR" THE PLAN OF CONVERSION AND THE TRANSACTIONS CONTEMPLATED THEREBY. IN
UNANIMOUSLY ADOPTING THE PLAN OF CONVERSION AND THE TRANSACTIONS CONTEMPLATED
THEREBY, THE BOARD OF TRUSTEES CONCLUDED THAT ESIF WILL DERIVE SUBSTANTIAL
BENEFITS FROM THE CONVERSION AND THAT THE CONVERSION IS IN THE BEST INTERESTS OF
ESIF AND ITS MEMBERS.
The following summary description of the Conversion, including the Plan of
Conversion, is qualified in its entirety by reference to the Plan of Conversion,
a copy of which is attached hereto as Exhibit A.
GENERAL
Pursuant to the Plan of Conversion, ESIF will convert from a Florida group
self-insurance fund to a Florida stock insurance company and become a wholly
owned subsidiary of Summit. Such Conversion will involve principally the
following actions, all of which will occur contemporaneously on the Effective
Date: (i) ESIF will convert from a group self-insurance fund to an assessable
mutual insurance company, an interim step required to satisfy the Florida
Insurance Code; (ii) the assessable mutual insurance company will convert to a
stock insurance company with the name Bridgefield Employers Insurance Company;
(iii) all Membership Interests will be extinguished, and the members of ESIF
will no longer be subject to any assessment for the liabilities of ESIF arising
before or after the Effective Date; (iv) Eligible Members will receive rights to
the common stock of Bridgefield, which will be exchanged for the rights to
receive the Series A Preferred Stock and the rights to subscribe for shares of
the Common Stock; (v) such Series A Preferred Stock and Common Stock
subscription rights will be issued by Summit; (vi) Bridgefield will issue all of
its common stock to Summit; and (vii) ESIF's current Constitution and Bylaws
will be replaced with the Articles and Bylaws, containing provisions appropriate
for a stock insurance company. The Conversion will not affect the insurance
coverage under ESIF's policies. On November 15, 1996, the Florida DOI approved
the Plan of Conversion, finding that the Conversion is in compliance with the
Florida Insurance Code and is equitable to ESIF's members.
REASONS FOR THE CONVERSION
The Conversion offers a number of advantages that could be important to the
future growth and performance of the Company and, therefore, beneficial to the
members of ESIF. The conversion of ESIF to a stock insurance company that is
wholly owned by a publicly traded holding company is expected to provide
improved access to the capital markets and increased flexibility for raising
additional capital and expanding through acquisitions. After completion of the
Conversion, Summit will have authority to issue capital stock that may permit
it, subject to market conditions and Florida DOI approval, to raise additional
equity capital through future sales of equity securities. Summit may also be
able to issue capital stock as payment in connection with acquisitions, subject
to Florida DOI approval. In addition, the holding company structure is expected
to provide greater flexibility for the diversification of business activities
through existing or newly formed subsidiaries of Summit or through strategic
partnerships, subject to Florida DOI approval. At the present time, the Company
has no plans with respect to additional offerings of securities or specific
acquisitions and has no specific plans for diversification. Following the
Conversion, Summit also will be able to use stock-related incentive programs to
reward and attempt to attract executives and other personnel for itself and its
subsidiaries.
Additionally, pursuant to the Conversion, the policies held by members of
ESIF will be converted from assessable policies to non-assessable policies. As a
consequence, members will no longer be subject to any assessment for the
liabilities of ESIF arising either before or after the Effective Date. Members
are expected to realize an economic benefit for their Membership Interests in
the form of Series A Preferred Stock and the right to subscribe for Common Stock
of Summit in the Subscription Offering.
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CONDITIONS TO EFFECTIVENESS
The Conversion will become effective on the date upon which all of the
conditions to effectiveness have been satisfied and the Board of Trustees of
ESIF declares the Plan of Conversion effective. Under the terms of the Plan of
Conversion, the conditions to effectiveness include the following:
(i) The Plan of Conversion must be approved by not less than
two-thirds of the votes cast in person or by proxy by the Voting
Policyholders at the Special Meeting, and by a majority of all Voting
Policyholders entitled to vote thereon.
(ii) The Board of Trustees of ESIF must declare the Plan of Conversion
effective. Pursuant to the Plan of Conversion, the Effective Date must
occur on or before May 14, 1997, which is 180 days after the date of the
Order. However, the Board of Trustees may request a six-month extension of
the Effective Date from the Florida DOI.
(iii) The Articles and Bylaws of Bridgefield must have been approved
by the Florida DOI, and the Articles must have been filed with the Florida
Secretary of State.
(iv) Bridgefield must have surplus as to policyholders and a ratio of
premiums to surplus sufficient to satisfy the requirements of the Florida
Insurance Code for a stock property and casualty insurance company.
(v) ESIF must not have imposed any assessments against its members.
(vi) The Company must have received an opinion of tax counsel to the
effect that the Conversion will be treated as a tax-free transaction under
Sections 368 and 351 of the Tax Code.
The Plan of Conversion may be amended, with the concurrence of the Florida
DOI, or withdrawn, at any time prior to the Effective Date by the Board of
Trustees of ESIF.
IDENTIFICATION OF ELIGIBLE AND VOTING POLICYHOLDERS
A person's eligibility to receive consideration under the Plan of
Conversion and a person's right to vote on the Plan of Conversion and related
transactions are based on such person's status as an Eligible Policyholder and a
Voting Policyholder, respectively.
A person is an Eligible Policyholder if it was the holder of an In-Force
Policy in effect at any time during the period from August 20, 1993 through and
including August 20, 1996 (the "ELIGIBILITY PERIOD"). The determination of which
members are Eligible Policyholders is dictated by the Florida Insurance Code,
relevant sections of which require that in the conversion of a self-insurance
fund to a stock insurance company, persons who had been members of the fund
within three years prior to the date of the Plan of Conversion shall participate
in the distribution of consideration to members. The initial Plan of Conversion
and Recapitalization was dated and filed with the Florida DOI as of August 20,
1996.
A person is a Voting Policyholder if is the holder of an In-Force Policy
that was in effect on December 16, 1996. In general, subject to certain limited
exceptions set forth in the Plan of Conversion, a person is the Voting
Policyholder of an In-Force Policy as of such Record Date if such person is the
first listed individual named insured of such In-Force Policy or the first
listed business named insured of such In-Force Policy as specified in ESIF's
records with respect to such In-Force Policy on the Record Date. In general, if
more than one person is identified as a holder of an In-Force Policy, all of
such persons collectively are considered to be one Eligible Policyholder,
entitled to receive collectively any consideration to be paid in respect of the
In-Force Policy. If an In-Force Policy has been assigned and ESIF has not
received notification of such assignment or has not agreed to provide coverage
for the assignee as of the Record Date, then the owner of such In-Force Policy
prior to the assignment shall be deemed to be the owner. If an In-Force Policy
has been assigned, ESIF has received notification of the assignment and a new
In-Force Policy has been issued to the assignee, the assignee of the new
In-Force Policy shall be recognized as the owner.
In general, an "IN-FORCE POLICY" means a policy pursuant to which a binder
has been issued (other than any agreement or policy pursuant to which ESIF has
ceded or assumed reinsurance) provided that the
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<PAGE> 34
effective date noted in such binder has passed and such policy has not been
surrendered or otherwise terminated and has not expired by its terms. The
identification of Eligible Policyholders and Voting Policyholders, and the
determination of whether a policy is an In-Force Policy, will be made by ESIF in
good faith on the basis of its records, and ESIF will not be obligated to
examine or consider any other facts or circumstances.
EXTINGUISHMENT OF MEMBERSHIP INTERESTS
Each person who holds an In-Force Policy on the Effective Date is a member
of ESIF and, regardless of whether such person is also an Eligible Policyholder
or a Voting Policyholder, such person has certain Membership Interests arising
under the organizational documents of ESIF, the Florida Insurance Code and
otherwise. Such Membership Interests provide, among other things, rights to vote
for the election of trustees and rights to participate in any distribution of
the surplus of ESIF in the event of its liquidation. Pursuant to the Conversion,
each member of ESIF will automatically relinquish such Membership Interests, but
will retain all ownership rights and coverage with respect to its In-Force
Policy.
Changes in Rights to Vote
Before the Conversion, policies issued by ESIF provide the right to vote on
matters submitted to a vote of members, including the election of trustees, and
each member has one vote for each policy owned regardless of the size of the
policy. Upon the Conversion, policies of Bridgefield will no longer have any
voting rights and, therefore, policyholders will not be able to vote in the
election of directors or on any other matters. Instead, all matters required to
be submitted to a vote of Bridgefield's shareholders (including the election of
directors) will be voted on by its sole shareholder, Summit. All matters
submitted to a vote of Summit's shareholders (including the election of
directors) will be voted on by the holders of Common Stock of Summit, who, upon
the Conversion, will initially consist of purchasers of Common Stock in the
Offerings. Each shareholder of Summit will be entitled to one vote for each
share of Common Stock held. Holders of Series A Preferred Stock of Summit will
have no voting rights, except as may otherwise be required by law.
Changes in Rights in Liquidation
Liquidation is a legal concept that refers to the distribution of a
company's assets after the termination of the legal existence of the company. If
a group self-insurance fund is liquidated, members are entitled to participate
in the distribution of any surplus remaining after provision for liabilities. If
a stock insurance company is liquidated, shareholders, rather than policyholders
or members, are entitled to share in the distribution of any assets remaining
after provision for liabilities. After the Conversion, if Bridgefield were
liquidated, any assets remaining after provision for Bridgefield's liabilities
would be distributed to Summit, as the sole shareholder of Bridgefield. To the
extent that Eligible Policyholders receive Series A Preferred Stock in the
Conversion or purchase shares of Common Stock in the Subscription Offering, they
will have an indirect interest in Bridgefield through their ownership of Series
A Preferred Stock and/or Common Stock of Summit, Bridgefield's parent company.
CONSIDERATION
Pursuant to the Plan of Conversion, on the Effective Date, Eligible
Policyholders will receive shares of Series A Preferred Stock and the right to
subscribe for shares of Common Stock. ELIGIBLE POLICYHOLDERS WILL NOT BE
REQUIRED TO PAY CASH FOR SERIES A PREFERRED STOCK DISTRIBUTED TO THEM IN THE
CONVERSION, BUT ONLY FOR SHARES OF COMMON STOCK THAT THEY MAY PURCHASE IN THE
SUBSCRIPTION OFFERING. A person who is indicated as an Eligible Policyholder on
the enclosed policyholder record card is entitled to receive that number of
shares of Series A Preferred Stock shown on such policyholder record card, which
number of shares has been determined as described below. Each Eligible
Policyholder is entitled to subscribe for up to that number of shares of Common
Stock equal to 4.99% of the Post Offering Outstanding Shares, as further
described in "THE OFFERINGS -- Subscription Offering" below.
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Allocation of Series A Preferred Stock
On the Effective Date, Summit will issue the Series A Preferred Stock to
the Eligible Policyholders in exchange for their Membership Interests. An
aggregate of 1,639,866 shares of Series A Preferred Stock has been allocated to
the Eligible Policyholders. In approving the Plan of Conversion, the Florida DOI
determined that all the terms thereof, including the value of the Series A
Preferred Stock proposed to be issued to the Eligible Policyholders, are
equitable to the members of ESIF.
Each Eligible Policyholder will receive a total number of shares of Series
A Preferred Stock equal to the sum of (i), (ii) and (iii) below:
(i) Ten shares.
(ii) A number of shares based on the Eligible Policyholder's
contribution to ESIF's premiums earned, determined in accordance with the
following formula:
(y) divide the premiums earned that the Eligible Policyholder paid
to ESIF during the Eligibility Period by ESIF's total premiums earned
for that period, and
(z) then multiply the resulting number by 467,757, which is 30% of
the remaining shares of the Series A Preferred Stock to be issued
pursuant to the Conversion after satisfying (i) above for all Eligible
Policyholders.
(iii) A number of shares based on the Eligible Policyholder's
contribution to ESIF's capital, based on premium volume and loss
experience, determined in accordance with the following formula:
(w) calculate the Eligible Policyholder's loss ratio by dividing
such person's incurred losses for the Eligibility Period (determined as
of September 30, 1996) by the premiums earned paid by such person to
ESIF during the Eligibility Period, and
(x) calculate the Eligible Policyholder's "capital" premiums paid
by subtracting the loss ratio calculated in (w) above from 70% and
multiplying the result by the premiums earned paid by such person to
ESIF during the Eligibility Period, and
(y) then divide the Eligible Policyholder's "capital" premium
amount determined in (x) above by the total excess premiums for all
Eligible Policyholders, and
(z) then multiply the amount determined in (y) by 1,091,669, which
is 70% of the remaining shares of the Series A Preferred Stock to be
issued pursuant to the Conversion after satisfying (i) above for all
Eligible Policyholders.
Each Eligible Policyholder will receive a minimum of ten shares. No
fractional shares of Series A Preferred Stock will be issued, and no cash will
be paid in lieu of any fraction of a shares that is otherwise calculated to be
due pursuant to the above formulae. Partial shares due will be rounded up or
down to the nearest whole share. No shares of Series A Preferred Stock will be
issued to any person other than an Eligible Policyholder.
For more information on the identification of Eligible Policyholders, see
"-- Identification of Eligible and Voting Policyholders."
Issuance of Stock Certificates
On the Effective Date, Bridgefield will deliver to the Transfer Agent, for
the respective account of each Eligible Policyholder, a global stock certificate
representing the aggregate number of shares of common stock of Bridgefield
allocated to the Eligible Policyholders. The Transfer Agent, on behalf of each
such Eligible Policyholder, will transfer such shares to Summit in exchange for
the respective number of shares of Series A Preferred Stock to be issued by
Summit to such Eligible Policyholder pursuant to the Plan of Conversion. The
Transfer Agent will then deliver to each Eligible Policyholder, as soon as
reasonably practicable after the Effective Date, a stock certificate registered
in such Eligible Policyholder's name representing the number of shares of Series
A Preferred Stock allocated to such Eligible Policyholder.
24
<PAGE> 36
Prior to the Effective Date, there are seven shares of Common Stock
outstanding, with each director of Summit holding one share. Pursuant to a
Subscription and Resale Agreement dated November 15, 1996 between Summit and
each director, each director has agreed to sell his share to Summit for an
amount equal to the purchase price paid for such share, and such purchases by
Summit shall take place on the Effective Date. The seven shares so purchased
shall be cancelled.
UNLESS OTHERWISE PROVIDED, ALL REFERENCES IN THIS PROXY
STATEMENT/PROSPECTUS TO THE RECEIPT OF SERIES A PREFERRED STOCK AS CONSIDERATION
UNDER THE PLAN OF CONVERSION INCLUDE A REFERENCE TO THE PRECEDING TRANSACTION
STEPS.
AMENDMENTS TO OR WITHDRAWAL OF THE PLAN OF CONVERSION; EFFECTS OF FAILURE TO
CONSUMMATE
The Plan of Conversion may be amended at any time before or after the
Effective Date upon the affirmative vote of not less than a majority of the
entire Board of Trustees of ESIF and with the approval of the Florida DOI. The
Plan of Conversion provides that ESIF may withdraw the Plan of Conversion at any
time before the Effective Date upon the affirmative vote of not less than a
majority of the entire Board of Trustees.
In the event that the Conversion is not effective on or before May 14,
1996, or within 180 days thereafter if the Florida DOI were to grant such
180-day extension, ESIF will be required to increase immediately the amount of
its security and collateral deposit with the Florida DOI from $5 million to $25
million. In addition, under the terms of the amended credit agreement with the
Bank, if the failure to consummate the Conversion is due to any factor other
than the failure of ESIF to obtain the requisite approval of the Florida DOI or
the Voting Policyholders, the Company will be in default under such amended
credit agreement.
INTERPRETATION OF THE PLAN OF CONVERSION
The Plan of Conversion provides that, subject to the provisions of the
Florida Insurance Code, other laws of the State of Florida and orders of the
Florida DOI, ESIF will have the power to interpret and construe the Plan of
Conversion and to determine all questions of eligibility, status and rights of
members and others under the Plan of Conversion. The determination of ESIF in
all such matters will be binding and conclusive on all persons.
FAIRNESS OPINION
Chicago Corp. was retained by the Board of Trustees of ESIF to render an
opinion as to the fairness of the consideration to be received by the Eligible
Policyholders pursuant to the Plan of Conversion, from a financial point of
view. Such consideration, including the aggregate amount of Series A Preferred
Stock to be distributed, was determined by ESIF. On July 31, 1996, Chicago Corp.
delivered a written opinion (which has been confirmed in a letter dated as of
the date of this Proxy Statement/Prospectus) to the Board that, as of such date,
based upon a review of information then available to it, and further based upon
the assumptions and qualifications contained in such written opinion, such
Consideration to be received by the Eligible Policyholders pursuant to the Plan
of Conversion is fair, from a financial point of view, to such Eligible
Policyholders. The full text of Chicago Corp.'s fairness opinion, which sets
forth the procedures followed, the assumptions and qualifications made and the
matters considered by Chicago Corp. in rendering its fairness opinion, is set
forth in Exhibit E to this Proxy Statement/Prospectus, and the Voting
Policyholders are advised to read carefully the contents of such opinion in its
entirety. As set forth in its opinion, Chicago Corp. has relied upon and
assumed, without independent verification, the accuracy and completeness of the
financial and other information provided to it by ESIF and its subsidiaries and
their representatives. Chicago Corp. has neither made nor obtained any
independent evaluation or appraisal of ESIF's assets or liabilities. Chicago
Corp. has also assumed for purposes of its fairness opinion (i) that there will
have been no assessments imposed upon the members of ESIF prior to the Effective
Date, and (ii) that there have been no material changes in ESIF's or its
subsidiaries' financial position, business or prospects since March 31, 1996.
Chicago Corp. has expressed no opinion as to the Public Offering Price or
the price at which Summit's Common Stock will trade. Chicago Corp. has also
expressed no opinion as to the fairness of the consideration to be paid pursuant
to the Plan of Conversion to any individual Eligible Policyholder or to any
class of Eligible
25
<PAGE> 37
Policyholder in connection with the Plan of Conversion. The fairness opinion was
completed for the benefit of the Board of Trustees and does not represent a
recommendation to any Individual Eligible Policyholder.
No limitations were imposed by the Board with respect to the scope of
Chicago Corp.'s investigation. ESIF paid Chicago Corp. a fee of $200,000 for its
services in rendering the opinion, and ESIF agreed to indemnify Chicago Corp.
for certain losses and expenses that may arise out of certain circumstances.
Chicago Corp. is a nationally recognized investment banking firm that
regularly engages in, among other things: (i) valuation of businesses and their
securities in connection with mergers and acquisitions, leveraged buyouts,
negotiated underwritings, secondary distributions of listed and unlisted
securities and private placements, and (ii) valuations for estate, corporate and
other purposes. Chicago Corp. was selected by the Board based primarily upon its
expertise and experience in rendering fairness opinions and its expertise in
trading and valuing securities. Chicago Corp. also was selected because of its
knowledge of the insurance industry. Furthermore, Chicago Corp. is familiar with
the operations of ESIF and SHC as a result of Chicago Corp.'s involvement in
ESIF's acquisition of SHC in January 1996. In connection with the Acquisition,
Chicago Corp. acted as advisor and placement agent to ESIF, for which it
received total fees of approximately $600,000.
THE OFFERINGS
SUBSCRIPTION OFFERING
In addition to shares of Series A Preferred Stock that will be issued to
Eligible Policyholders in the Conversion, up to 5,000,000 shares of Common Stock
are being offered pursuant to the Subscription Offering. Each Eligible
Policyholder has the right to subscribe for up to 4.99% of the Post Offering
Outstanding Shares, which is 249,999 shares, if all shares offered in the
Offering are sold. No fewer than 100 shares of Common Stock may be purchased by
any person in the Subscription Offering. Eligible Policyholders as a group may
purchase in the aggregate up to 90% of the Post Offering Outstanding Shares. In
the event the Eligible Policyholders collectively subscribe for more than 90% of
the Post Offering Outstanding Shares, each subscriber shall be entitled to
purchase 4.99% of the Post Offering Outstanding Shares, multiplied by a ratio
of: (i) the premiums earned attributable to the policies of which such Eligible
Policyholder was the owner of record during the Eligibility Period to, (ii) the
total premiums earned by ESIF during the Eligibility Period.
In addition to the shares of Common Stock which may be subscribed for by
Eligible Policyholders, the Management Group may subscribe to purchase up to an
aggregate of 10% of the Post Offering Outstanding Shares. However, no person,
either individually or in conjunction with any affiliated person and whether
purchasing shares in the Subscription Offering or the Public Offering, shall be
permitted to acquire directly or indirectly more 4.99% of the Post Offering
Outstanding Shares, which is 249,999 shares, if all shares offered in the
Offerings are sold. Summit may, in its discretion, permit any purchaser in any
Private Placement to purchase any number of shares of Common Stock, even
exceeding the Purchase Limit, subject to such purchaser's obtaining the prior
approval of the Florida DOI. In such event, a single shareholder or a small
group of shareholders could acquire a sufficient number of shares of the Common
Stock to control election of Summit's Board of Directors. See "RISK
FACTORS -- Potential Control by Private Placement Shareholders; Possible
Depressive Effect on the Price of Summit's Securities."
THE BOARD OF DIRECTORS OF SUMMIT MAY, AT ANY TIME PRIOR TO THE EFFECTIVE
DATE, ELECT TO CANCEL OR RESCIND THE SUBSCRIPTION OFFERING AND NOT TO CONSUMMATE
THE PUBLIC OFFERING OR ANY PRIVATE PLACEMENT. THE SUBSCRIPTION OFFERING WILL NOT
BE CONSUMMATED IN THE EVENT THAT: (I) THE PLAN OF CONVERSION IS NOT APPROVED AT
THE SPECIAL MEETING, OR (II) THE PLAN OF CONVERSION IS WITHDRAWN BY THE BOARD OF
TRUSTEES OF ESIF.
Expiration Date. The Subscription Offering will expire at 4:00 p.m.
Eastern Time on , 1997. Subscription rights not exercised prior to
the Subscription Expiration Date will be void. No Eligible Policyholder is
obligated in any manner to purchase Common Stock in the Subscription Offering.
Use of Order Forms. Subscription rights may only be exercised by
completion of stock order forms. Any Eligible Policyholder receiving an order
form who desires to subscribe for shares of Common Stock of Summit must do so
prior to the Subscription Expiration Date by delivering (by mail or in person)
to the Escrow Agent
26
<PAGE> 38
at , a properly executed and completed order form, together with full
payment of the Subscription Price for all shares for which subscription is made.
An executed order form, once received by the Escrow Agent, may not be modified,
amended or rescinded without the consent of Summit unless the Conversion is not
completed within 60 days after the Subscription Expiration Date.
Restrictions on Transfer of Subscription Rights. Each subscription right
may be exercised only by the Eligible Policyholder to whom it is issued and only
for its own account. The subscription rights granted under the Plan of
Conversion are not transferable or assignable. Eligible Policyholders
subscribing for shares are required to represent to Summit that they are
purchasing such shares for their account and that there is no agreement or
understanding with any other person for the sale or transfer of such shares.
Subscription Price. The Subscription Price is $11.00 per share, which was
set by Summit after consultation with its financial advisors, Raymond James &
Associates, Inc. ("RAYMOND JAMES") and Chicago Corp., and was not based on an
appraisal or any other objective factors. If the Public Offering closes on the
Effective Date, and the Public Offering Price is different from the Subscription
Price, then the effective price per share paid by subscribers shall be adjusted
to the Public Offering Price. In such event, the number of shares of Common
Stock issued to subscribers will be reduced if the Public Offering Price is
greater than the Subscription Price, or increased if the Public Offering Price
is less than the Subscription Price, to assure that the price per share paid by
Eligible Policyholders and the Management Group is the same as the Public
Offering Price. The Public Offering Price will be determined by negotiation
between Raymond James and Chicago Corp., as representatives of the underwriters
of the Public Offering (the "REPRESENTATIVES"), and Summit.
In the event that Summit determines that the Effective Date shall occur
prior to or without closing the Public Offering, then, subject to the approval
of the Florida DOI, a bona fide determination will be made by Summit, after
consultation with Raymond James and Chicago Corp., of the price per share at
which the Common Stock would trade in the public market on the Effective Date
(the "REVISED SUBSCRIPTION PRICE"). If the Revised Subscription Price is less
than or greater than the Subscription Price, then the effective price per share
paid by subscribers shall be the Revised Subscription Price, and the number of
shares of Common Stock that will be issued to subscribers will be adjusted to
offset the effect of such price difference.
No fractional shares of Common Stock will be issued, but in lieu thereof,
the value of such fractional shares will be refunded to subscribers in cash
within 60 days after the Effective Date. There has not been any public market
for the Common Stock. Some of the major factors that may influence the
determination of the Public Offering Price or the Revised Subscription Price
are, in addition to prevailing market conditions, the historical performance of
ESIF, estimates of the business potential and earning prospects of the Company,
an assessment of the Company's management and the consideration of such factors
in relation to market valuations of other insurance companies.
While it is currently the intention of Summit to offer all or a portion of
the shares of Common Stock not subscribed for in the Subscription Offering to
the public in the Public Offering, Summit may close the Subscription Offering
without commencing or closing the Public Offering. Summit may also determine to
offer and sell all or a portion of such remaining shares in one or more Private
Placements, or Summit may determine not to offer all or a portion of any
remaining shares for sale.
Payment for Shares. Payment for all subscribed shares, computed on the
basis of the Subscription Price of $11.00, must accompany all completed order
forms for subscriptions to be valid. Payment for subscribed shares may be made:
(i) in cash, if delivered in person, or (ii) by check or money order. All
payments will be placed in a segregated escrow account established with the
Escrow Agent specifically for this purpose. If the period from the Subscription
Expiration Date to the Effective Date exceeds 60 days, interest will be paid to
each subscriber on all subscription amounts from such 60th day until the
Effective Date at the Refund Interest Rate.
27
<PAGE> 39
has been appointed as Transfer Agent for the Common
Stock and as Escrow Agent for the Subscription Offering. The subscription order
form and required payment for shares subscribed for should be mailed or
delivered to the Escrow Agent as follows:
<TABLE>
<S> <C>
By mail, in the pre-addressed,
postage-paid envelope: By hand:
-------------------------------------- --------------------------------------
-------------------------------------- --------------------------------------
-------------------------------------- --------------------------------------
-------------------------------------- --------------------------------------
</TABLE>
Delivery of Share Certificates. Subscribers will be notified by mail of
the number of shares of Common Stock for which their subscriptions have been
accepted promptly upon completion of the Offerings. Certificates representing
shares of Common Stock will be delivered to subscribers by the Transfer Agent as
soon as reasonably practicable thereafter. Any certificates returned as
undeliverable will be held by Summit until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to subscribers,
subscribers may not be able to sell the shares of stock for which they
subscribed.
Cancellation of the Subscription Offering. Summit shall cancel the
Subscription Offering in the event that the Board of Trustees of ESIF withdraws
the Plan of Conversion. In the event that the Subscription Offering is canceled,
subscriptions for Common Stock will not be executed by Summit and payments will
be promptly refunded with interest at the Refund Interest Rate from the
Subscription Expiration Date to the date of the refund.
Limitations on Common Stock Purchases. The Plan of Conversion includes the
following limitations on the number of shares of Common Stock which may be
purchased by Eligible Policyholders and members of the Management Group in the
Subscription Offering and the Public Offering:
(1) No fewer than 100 shares may be purchased by any person
subscribing for shares of Common Stock.
(2) No person, alone or in conjunction with any affiliated person, may
purchase more than 4.99% of the Post Offering Outstanding Shares (249,999
shares if all 5,000,000 shares offered in the Offerings are sold).
(3) No more than an aggregate of 10% of the shares of Common Stock may
be purchased in the Subscription Offering by the Management Group.
The term "affiliated person" of another person means: (i) the spouse of
such other person; (ii) the parents of such other person and their lineal
descendants and the parents of such other person's spouse and their lineal
descendants; (iii) any person who directly or indirectly owns or controls, or
holds with power to vote 5% or more of the outstanding voting securities of such
other person; (iv) any person 5% or more of the outstanding voting securities of
which are directly or indirectly owned or controlled, or held with power to
vote, by such other person; (v) any person or group of persons who directly or
indirectly control, are controlled by, or are under common control with such
other person; (vi) any officer, director, partner, copartner or employee of such
other persons; (vii) if such other person is an investment company, any
investment adviser of such company or any member of an advisory board of such
company; (viii) if such other person is an unincorporated investment company not
having a board of directors, the depositor of such company; or (ix) any person
who has entered into an agreement, written or unwritten, to act in concert with
such other person in acquiring or limiting the disposition of securities of a
domestic stock insurer of controlling company. The term "controlling company"
means any corporation, trust, or association owning, directly or indirectly, 25%
or more of the voting securities of one or more domestic stock insurance
companies.
In addition, under guidelines of the National Association of Securities
Dealers, Inc. (the "NASD"), members of the NASD and their associates must take
certain steps to be able to exercise any subscription rights which they may have
if the offering of the Common Stock is deemed to be a "hot issue" as defined by
the NASD.
Interests of Certain Persons. All directors and officers and certain other
management employees of the Company will be granted subscription rights to
purchase in the Subscription Offering up to an aggregate of
28
<PAGE> 40
10% of the Post Offering Outstanding Shares. Each member of this Management
Group will be subject to the same terms and conditions of the Subscription
Offering as the Eligible Policyholders, including, without limitation, the
requirement to pay the Subscription Price of $11.00 per share.
It is expected that the Management Group will purchase collectively in the
Subscription Offering approximately 235,000 shares (approximately $2.6 million
aggregate subscription amount) or approximately 4.7% of the Post Offering
Outstanding Shares, based on the assumption that 5,000,000 shares of Common
Stock will be sold in the Offerings for $11.00 per share and that sufficient
shares will be available to satisfy subscriptions in all categories.
Certain members of the Management Group may be affiliated with employers
who will receive subscription rights because such employers are Eligible
Policyholders. In no event, however, shall any member of the Management Group,
alone or as a result of control or deemed control of an Eligible Policyholder,
directly or indirectly, purchase more than 4.99% of the Post Offering
Outstanding Shares. In addition, pursuant to individual indemnification
agreements, the directors and certain officers of the Company will be provided
with indemnification against liabilities incurred as a result of such person's
serving as a director or officer. Certain officers of the Company and its
subsidiaries and the nonemployee directors of Summit also will be entitled to
participate in the Incentive Plan, that Summit intends to implement, subject to
shareholder approval, providing for the issuance of Common Stock and Common
Stock-based incentive awards. See "EXECUTIVE COMPENSATION -- Stock Incentive
Plan."
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull, who was at that
time President and Chief Executive Officer and a shareholder of SHC, personally
indemnify ESIF up to a maximum of $5 million for loss, injury or damage to ESIF
resulting from the parties' execution of the merger agreement pursuant to which
ESIF acquired SHC, or resulting from SHC's execution of a certain credit
agreement with the Bank. According to the January Consent Order, Mr. Bull's
indemnification obligations will decrease by $1 million for every $4 million
increase in the statutory net worth of SHC, once SHC's statutory net worth
reaches zero or greater, and such obligations will expire fully on the earlier
of January 11, 2001 or the date upon which the loans from the Bank are paid in
full. Pursuant to the Order issued by the Florida DOI, if the Conversion is not
consummated for any reason, all provisions of the January Consent Order shall be
enforceable by the parties thereto. See "RISK FACTORS -- Benefits of Conversion
to an Officer and Director."
PLEASE CALL ESIF'S INFORMATION CENTER AT 1-800-331-7742 (TOLL FREE) WITH
ANY QUESTIONS ON THE PLAN OF CONVERSION, THE RIGHT TO VOTE AT THE SPECIAL
MEETING, OR ANY OF THE ENCLOSED MATERIALS. PLEASE CALL RAYMOND JAMES &
ASSOCIATES, INC. AT 1-800-248-8863 WITH ANY QUESTIONS REGARDING THE SERIES A
PREFERRED STOCK AND THE COMMON STOCK OFFERED IN, AND OTHER TERMS OF, THE
SUBSCRIPTION OFFERING.
PUBLIC OFFERING
If all of the shares of Common Stock offered are sold in the Subscription
Offering, there will be no Public Offering and no Private Placements. If less
than all of the shares of Common Stock offered are sold in Subscription
Offering, the Company may, in its sole discretion, offer all or a portion of
such remaining shares in the Public Offering. The Public Offering may, at the
discretion of Summit, close on or at any time after the Effective Date. It is
anticipated that the Representatives will act as representatives of the
underwriters of the Public Offering. Purchasers in the Public Offering are
subject to the Purchase Limit, but purchasers in the Public Offering will not be
required to purchase any minimum number of shares.
PRIVATE PLACEMENTS
In lieu of or in addition to the Public Offering, Summit may elect to sell
all or a portion of the shares of Common Stock not subscribed for in the
Subscription Offering in one or more Private Placements. Summit may, in its
discretion, permit a purchaser in a Private Placement to purchase any number of
shares of Common Stock, subject to such purchaser's obtaining the prior approval
of the Florida DOI. Any such Private Placement by Summit could result in a
controlling interest being owned by a single shareholder or a small group of
shareholders. See "RISK FACTORS -- Potential Control by Private Placement
Shareholders; Possible Depressive Effect on the Price of Summit's Securities."
29
<PAGE> 41
MARKET FOR STOCK
SERIES A PREFERRED STOCK
There is no established public trading market for the Series A Preferred
Stock and Summit does not currently intend to seek a listing of the Series A
Preferred Stock on any securities exchange or any NASDAQ trading system. Holders
of Series A Preferred Stock seeking to sell, transfer or otherwise trade in such
securities must do so in private transactions.
COMMON STOCK
There is no established public trading market for the Common Stock of
Summit. Summit has applied for approval for its Common Stock to be quoted on the
Nasdaq National Market under the symbol "SHSE." Quotation through the Nasdaq
National Market requires, among other things, that there be at least two market
makers for the Common Stock. The Representatives have advised Summit that they
each intend to make a market in the Common Stock by maintaining bid and asked
quotations for the Common Stock so long as the volume of trading justifies such
an undertaking. However, there can be no assurance that an established and
liquid market for the Common Stock will develop or that quotations will remain
available on Nasdaq or otherwise.
DIVIDEND POLICY
SERIES A PREFERRED STOCK
The holders of the Series A Preferred Stock will be entitled to receive,
out of funds legally available for the payment of dividends, cash dividends at
the rate of 4% per annum. Such dividends will accrue from the date of issue,
whether or not declared by the Board of Directors and whether or not there are
funds of Summit legally available for the payment of such dividends. Such
dividends will be payable only as and when declared by the Board of Directors;
provided, however, that all accrued but unpaid dividends will be paid upon any
redemption of the Series A Preferred Stock or a liquidation of Summit.
COMMON STOCK
Summit has no present intention to pay dividends on the Common Stock. Any
payment of dividends on the Common Stock in the future would be subject to
determination and declaration by the Board of Directors of Summit and the
availability of funds therefor. Any future dividend payments by Summit would
depend upon the Company's debt and equity structure, earnings, need for capital
in connection with future acquisitions, and other factors, including economic
conditions, regulatory restrictions and tax considerations.
Should Summit consider paying dividends on the Common Stock in the future,
the source of funds for payment of such dividends by Summit would be dividends
from the Insurance Subsidiaries and the Administrative Subsidiaries to Summit,
dependent on such subsidiaries' earnings. Summit currently expects to cause the
Insurance Subsidiaries to retain all of their earnings to provide capital for
their operations and business. In addition, under the Florida Insurance Code and
the Order, the Insurance Subsidiaries may not be permitted to pay cash dividends
to Summit in excess generally of 10% of the lesser of surplus or net income,
without prior approval of the Florida DOI. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
Under the terms of the Series A Preferred Stock, so long as any shares of
Series A Preferred Stock are outstanding, no dividends may be paid to the
holders of Common Stock unless any accrued but unpaid dividends on the Series A
Preferred Stock have been paid or funds have been set apart for the payment
thereof. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series A
Preferred Stock."
30
<PAGE> 42
USE OF PROCEEDS
Assuming that all 5,000,000 shares of Common Stock offered are sold at the
Subscription Price, the net proceeds to the Company are expected to be
approximately $50.0 million after deducting the estimated expenses of the
Conversion, which includes estimated underwriting and sales fees of
approximately $3,670,000. In such event, Summit expects to contribute
substantially all of such proceeds to Bridgefield to increase its capital to
satisfy applicable requirements of the Florida Insurance Code, and the remainder
of such proceeds, if any, will be retained by Summit for general corporate
purposes. The Conversion is contingent upon the receipt by Summit of net
proceeds of approximately $50.0 million which is required to satisfy applicable
provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization of ESIF and
its subsidiaries at September 30, 1996: (i) on a historical basis, and (ii) as
adjusted to reflect the Conversion and the sale of 5,000,000 shares of Common
Stock at an assumed price of $11.00 per share and the initial application of the
proceeds therefrom, after deducting the estimated expenses of the Offerings. See
"USE OF PROCEEDS," "THE CONVERSION" and "DESCRIPTION OF CAPITAL STOCK."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long term debt..................................................... $36,500 $ 36,500
Equity:
Preferred stock, $10.00 par value, 5,000,000 shares authorized;
no shares issued and outstanding, 1,639,866 shares as
adjusted...................................................... -- 16,399
Common stock, $.01 par value, 20,000,000 shares authorized; 7
shares issued and outstanding, 5,000,000 shares as
adjusted(1)................................................... -- 50
Additional paid-in capital(1)(2)................................. -- 49,950
Retained earnings................................................ 24,045 7,646
Unrealized appreciation on available for sale securities......... 948 948
------- --------
Total equity.................................................. 24,993 74,993
------- --------
Total capitalization.......................................... $61,493 $ 111,493
======= ========
</TABLE>
- ---------------
(1) Does not reflect 500,000 shares reserved for issuance under the Incentive
Plan, or 45,000 shares reserved for issuance under the 401(k) Plan. See "THE
OFFERINGS -- Public Offering," "EXECUTIVE COMPENSATION -- Incentive Plan"
and "-- 401(k) Plan."
(2) Based upon the estimated net proceeds from the sale of the Common Stock.
31
<PAGE> 43
SELECTED FINANCIAL DATA
EMPLOYERS SELF INSURERS FUND
The following selected financial data has been taken from, or derived from,
ESIF's consolidated financial statements, including the related notes thereto.
ESIF's consolidated financial statements as of March 31, 1996, and for the year
then ended, have been audited by Ernst & Young LLP, independent auditors, whose
reports thereon appear elsewhere in this Proxy Statement/Prospectus. ESIF's
consolidated financial statements as of March 31, 1995 and for the fiscal years
ended March 31, 1994 and 1995 have been audited by Brinton & Mendez, certified
public accountants, whose report thereon appears elsewhere in this Proxy
Statement/Prospectus. The selected financial data provided as of and for the
fiscal years ended March 31, 1992 and 1993 and the six months ended September
30, 1995 and 1996 are unaudited, but in the opinion of management contain all
adjustments, consisting of only normal, recurring accruals, for a fair
presentation of the results of such periods. The information set forth below is
not necessarily indicative of the results of future operations and should be
read in conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996(1) 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Premiums earned........... $ 132,067 $ 181,339 $148,441 $128,489 $114,893 $ 63,145 $ 49,029
Net investment income..... 11,683 10,728 10,510 12,205 13,210 7,598 6,363
Administrative fees....... -- -- -- 7,665 -- 17,432
Realized investment
gains................... -- -- -- -- 4,354 919 8
Other income.............. 121 205 90 216
-------- -------- -------- -------- -------- -------- --------
Total revenue............. 143,750 192,067 158,951 140,815 140,328 71,752 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ 1,103 2,499
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data:(2)
Net loss ratio............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 32.6%
Combined ratio............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.1%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996(1) 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested
assets.................. $ 147,056 $ 176,931 $201,688 $224,956 $223,517 $ 231,288 $ 213,829
Premiums receivable....... 42,648 69,197 71,520 50,391 38,093 78,229 67,179
Reinsurance recoverable... 104,229 105,541 95,851 110,141 111,519 107,451 99,636
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 498,085
Loss and loss adjustment
expenses................ 304,205 360,425 368,000 367,391 387,632 364,210 373,971
Debt...................... -- -- -- -- 44,000 -- 36,500
Total equity (deficit).... (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
</TABLE>
- ---------------
(1) Includes the Acquisition as of January 16, 1996.
(2) Ratio for Insurance Subsidiaries.
32
<PAGE> 44
SUMMIT HOLDING CORPORATION
The following selected financial data for the fiscal years ended December
31, 1992, 1993, 1994 and 1995 have been derived from the historical consolidated
financial statements of SHC and subsidiaries, including the related notes
thereto, which have been audited by Ernst & Young, LLP, independent auditors,
whose report thereon appears elsewhere in this Proxy Statement/Prospectus. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
-------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income Statement Data:
Gross service fees...................................... $61,675 $70,814 $73,833 $64,090
Direct expenses......................................... 29,593 32,972 31,639 27,470
Compensation and other employee benefits................ 13,371 14,503 15,425 16,616
Other operating expenses................................ 7,517 7,707 8,218 8,204
Interest expense........................................ 843 1,610 58 42
Amortization and depreciation........................... 4,729 4,891 4,872 5,112
Income before income taxes.............................. 6,239 9,763 14,555 8,821
Net income.............................................. $ 3,439 $ 5,929 $ 9,001 $ 5,575
======= ======= ======= =======
Other Data:
EBITDA.................................................. $11,662 $15,887 $18,747 $12,904
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,(1)
-------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested assets................................ $ 138 $ 140 $ 5,704 $ 3,998
Total assets............................................ 32,066 35,672 41,372 43,683
Current liabilities..................................... 3,625 5,590 4,706 3,666
Debt.................................................... 4,510 0 0 0
Shareholders' equity.................................... 7,439 12,168 20,570 25,645
</TABLE>
- ---------------
(1) SHC commenced operations on January 1, 1992; therefore, historical data for
1991 is not applicable.
33
<PAGE> 45
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1995(A)
<TABLE>
<CAPTION>
(C) (D)
EMPLOYERS SUMMIT
SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Premiums earned......................... $ 128,489 $ -- $ -- $ 128,489
Net investment income................... 12,205 1,025 3,125(E) 14,011
(2,344)(G)
Administrative fees..................... -- 72,709 (26,512)(F) 46,197
Other income............................ 121 -- -- 121
-------- ------- -------- --------
Total revenue................... $ 140,815 $73,734 $ (25,731) $ 188,818
-------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses..... 69,116 -- -- 69,116
Other underwriting, general and
administrative expenses.............. 41,546 55,476 (26,512)(F) 70,394
(116)(H)
Interest expense........................ -- 54 3,570(J) 3,624
Amortization and depreciation........... -- 4,886 432(I) 5,318
-------- ------- -------- --------
Total expenses.................. 110,662 60,416 (22,626) 148,452
-------- ------- -------- --------
Income before income taxes.............. 30,153 13,318 (3,105) 40,366
Income taxes............................ 10,990 5,032 (1,021)(M) 15,001
-------- ------- -------- --------
Net income................................ $ 19,163 $ 8,286 $ (2,084) $ 25,365
======== ======= ======== ========
Net income per common share............... $ 4.94
========
Weighted average common shares
outstanding............................. 5,000,000
</TABLE>
34
<PAGE> 46
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(B)
<TABLE>
<CAPTION>
(K) (L)
EMPLOYERS SUMMIT
SELF INSURERS HOLDING PRO FORMA
FUND CORPORATION ADJUSTMENTS PRO FORMA
------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................... $ 114,893 $ -- $ -- $ 114,893
Net investment income..................... 13,210 1,026 3,125(E) 15,499
(1,855)(G)
(7)(H)
Realized investment gains................. 4,354 -- -- 4,354
Administrative fees....................... 7,665 49,040 (19,358)(F) 37,347
Other income.............................. 206 921 (921)(H) 206
-------- -------- -------- --------
Total revenue..................... 140,328 50,987 (19,016) 172,299
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses....... 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses................ 43,657 40,489 (19,358)(F) 63,008
(1,780)(H)
Interest expense.......................... 847 30 3,101(J) 3,978
Amortization and depreciation............. 1,103 4,033 341(I) 5,340
(137)(H)
-------- -------- -------- --------
Total expenses.................... 140,451 44,552 (17,833) 167,170
-------- -------- -------- --------
Income before income taxes................ (123) 6,435 (1,183) 5,129
Income taxes (benefit).................... (505) 2,356 (367)(M) 1,484
-------- -------- -------- --------
Net income.................................. $ 382 $ 4,079 $ (816) $ 3,645
======== ======== ======== ========
Net income per common share................. $ 0.60
Weighted average common shares ========
outstanding............................... 5,000,000
</TABLE>
35
<PAGE> 47
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1994.
(B) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the year
ended March 31, 1995 on a consolidated basis.
(D) Includes SHC for the period April 1, 1994 through March 31, 1995.
(E) Adjustment relates to investment earnings (at an assumed rate of 6.25%) on
$50 million net proceeds (minimum amount expected to be received, assuming
the issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26 million paid by ESIF and on $11.5 million of SHC
capital distributed to SHC shareholders in connection with the Acquisition,
at an assumed interest rate of 6.25%.
(H) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit Healthcare, Inc.
("CAROLINA SUMMIT") and discontinued operations of Meritec.
(I) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible.
(J) Adjustment relates to interest expense from financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(K) Includes historical data for ESIF and subsidiaries for the year ended March
31, 1996 on a consolidated basis and includes SHC for the period January
16, 1996 through March 31, 1996.
(L) Includes SHC for the period April 1, 1995 through January 15, 1996.
(M) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
36
<PAGE> 48
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995(A)
<TABLE>
<CAPTION>
(D)
(C) SUMMIT
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned........................... $ 63,145 $ -- $ -- $ 63,145
Net investment income..................... 7,598 494 1,563(E) 8,482
(1,173)(G)
Realized investment gains................. 919 -- -- 919
Administrative fees....................... -- 32,558 (12,573)(F) 19,985
Other income.............................. 90 529 (361)(J) 258
------- -------- ------- -------
Total revenue..................... 71,752 33,581 (12,544) 92,789
Expenses:
Losses and loss adjustment expenses....... 42,365 -- -- 42,365
Other underwriting, general and
administrative expenses................ 21,623 25,707 (12,573)(F) 34,034
(723)(J)
Interest expense.......................... -- 16 2,013(I) 2,029
Amortization and depreciation............. -- 2,529 216(H) 2,698
(47)(J)
------- -------- ------- -------
Total expenses.................... 63,988 28,252 (11,114) 81,126
------- -------- ------- -------
Income before income taxes................ 7,764 5,329 (1,430) 11,663
Income taxes.............................. 2,390 1,962 (480)(K) 3,872
------- -------- ------- -------
Net income.................................. $ 5,374 $ 3,367 $ (950) $ 7,791
======= ======== ======= =======
Net income per common share................. $ 1.49
Weighted average common shares =======
outstanding............................... 5,000,000
</TABLE>
37
<PAGE> 49
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996(B)
<TABLE>
<CAPTION>
(C)
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS PRO FORMA
-------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned...................................... $ 49,029 $ -- $ 49,029
Net investment income................................ 6,363 1,563(E) 7,846
(80)(J)
Realized investment gains............................ 8 -- 8
Administrative fees.................................. 17,432 -- 17,432
Other income......................................... 216 -- 216
------- ------ -------
Total revenue................................ 73,048 1,483 74,531
------- ------ -------
Expenses:
Losses and loss adjustment expenses.................. 32,135 -- 32,135
Other underwriting, general, and administrative
expenses.......................................... 30,532 (684)(J) 29,848
Interest expense..................................... 1,831 1,831
Amortization and depreciation........................ 2,499 (20)(J) 2,479
------- ------ -------
Total expenses............................... 66,997 (704) 66,293
------- ------ -------
Income before income taxes........................... 6,051 2,187 8,238
Income taxes......................................... 2,400 801(K) 3,201
------- ------ -------
Net income............................................. $ 3,651 $ 1,386 $ 5,037
======= ====== =======
Net income per common share............................ $ 0.94
=======
Weighted average common shares outstanding............. 5,000,000
</TABLE>
38
<PAGE> 50
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1996.
(C) Includes historical information for ESIF and subsidiaries for the six
months ended September 30, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through September 30, 1995.
(E) Adjustments relate to investment earnings (at an assumed of 6.25%) on $50
million net proceeds (minimum amount expected to be received, assuming the
issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of fees paid by ESIF to SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26 million paid by ESIF and on $11.5 million of SHC
capital distributed to SHC shareholders in connection with the Acquisition,
at an assumed interest rate of 6.25%.
(H) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible.
(I) Adjustment relates to interest expense from financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(J) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit.
(K) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
39
<PAGE> 51
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with "SELECTED
CONSOLIDATED FINANCIAL DATA," the Consolidated Financial Statements and the
accompanying Notes to the Consolidated Financial Statements included elsewhere
herein.
OVERVIEW
The Company's managed care workers' compensation insurance operations are
comprised of primarily the Administrative Subsidiaries and the Insurance
Subsidiaries. The Company's income is generated principally from three sources:
fees earned from the management of the Funds, underwriting profits derived from
premiums earned on insurance policies written by the Insurance Subsidiaries, and
investment income generated by invested assets related to insurance
underwriting.
Prior to the Acquisition, ESIF and SHC were non-affiliated and historical
results are therefor not necessarily indicative of future financial results.
Although SHC (through its wholly owned subsidiary, SCI) had provided all
administrative and management services required to operate ESIF since ESIF's
inception in 1978, the two organizations had different financial objectives and
reported historical financial results independently. ESIF used a fiscal year
ending on March 31, and SHC used a fiscal year ending on December 31. As a
result of the Acquisition, SHC became a wholly owned subsidiary of ESIF, and
management began to implement an integrated strategic plan.
All of the Company's insurance policies are written for entities located in
Florida, and a significant portion of the Company's administrative services are
provided to entities operating in Florida. See "Risk Factors -- Concentration in
a Single State." Effective January 1, 1994 (with certain subsequent amendments),
Florida enacted new legislation (the "New Florida Law") that changed the
underwriting environment for workers' compensation by, among other things: (i)
limiting certain benefits that must be provided, (ii) eliminating wage loss
benefits in favor of a system of benefits based upon a schedule of impairment
ratings plus supplemental benefits, (iii) obligating employers to rehire injured
workers, (iv) adopting new procedures for dispute resolution designed to reduce
litigation costs, and (v) redefining permanent impairment.
In addition, the New Florida Law authorized insurers and self-insured
groups to apply to the Florida DOI for permission to offer premium credits of up
to 10% from January 1, 1994 through December 31, 1996 to insured employers who
participated in approved managed care arrangements and, effective January 1,
1997, required insured employers to participate in managed care arrangements.
The New Florida Law also authorized premium credits for insured employers who
participate in safety and drug-free workplace programs. In response to the New
Florida Law, which was expected to result in savings to self-insured groups and
insurers, the Florida DOI ordered a 10.6% overall rate decrease, effective
January 1, 1994. In addition, the New Florida Law eliminated the residual market
assessment that was levied against insurance companies to support the
involuntary workers' compensation market and replaced it with a self-funded
joint underwriting association. As a result, the financial obligation of funding
deficits in the residual market mechanism was shifted from traditional insurance
entities to employers who are insured by the joint underwriting association.
While the long term impact of the New Florida Law cannot be determined, the
Company believes that it has resulted in: (i) a more competitive workers'
compensation market in Florida, (ii) conversions by some of the larger
self-insured groups to traditional insurance entities, and (iii) loss portfolio
transfers by self-insured groups to insurance companies.
Effective for insurance policies written or renewing on and after January
1, 1997, self-insured groups and insurers will no longer be authorized to offer
insured employers the 10% managed care premium credit allowed under the New
Florida Law. Based in part upon the elimination of the managed care premium
credit and upon other ratemaking factors, the Florida DOI has ordered an 11.2%
overall workers' compensation insurance rate reduction, which will apply to
policies written or renewing on and after January 1, 1997.
The Company believes that it can improve its return on invested capital
following the Conversion through growth in its core workers' compensation
business. Key aspects of the Company's business strategy following
40
<PAGE> 52
the Conversion include: (i) continued use of both self-insurance and indemnity
products; (ii) emphasis on profitable underwriting results; (iii) proactive
implementation of managed care; (iv) leveraging of administrative services
capabilities; (v) emphasis on excellent customer service; and (vi) geographic
expansion in the South.
Management intends to dispose of certain operations that were not directly
related to managed care workers' compensation insurance by December 31, 1996.
See "BUSINESS -- Disposal of Business" and notes 18 and 19 of the notes to the
consolidated financial statements.
The discussion below in "Results of Operations" is divided into three
segments: (i) a comparison of fiscal years ended March 31, 1994, 1995 and 1996
for ESIF, including SHC after the date of the Acquisition; (ii) a comparison of
the six-month periods ended September 30, 1995 and 1996 for ESIF on a
consolidated basis; and (iii) a comparison of fiscal years ended December 31,
1993, 1994 and 1995 for SHC.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996 FOR ESIF
REVENUE. Revenue was $159.0 million, $140.8 million and $140.3 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. Revenue
declined for the fiscal year ended March 31, 1995, primarily due to a $20.0
million decrease in premiums earned. Revenue declined by $0.5 million for the
fiscal year ended March 31, 1996, primarily due to a decrease in premiums earned
of $13.6 million, which was offset by the addition of $7.6 million in
administrative fees as a result of the Acquisition and an increase in realized
investment gains of $4.4 million. Set forth below is a discussion of the
composition of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned................................................ $148,441 $128,489 $114,893
Net investment income.......................................... 10,510 12,205 13,210
Realized investment gains...................................... -- -- 4,354
Administrative fees............................................ -- -- 7,665
Other income................................................... -- 121 206
-------- -------- --------
Total revenue........................................ $158,951 $140,815 $140,328
======== ======== ========
</TABLE>
Premiums Earned. Premiums earned decreased by $20.0 million, or 13.4%, for
the year ended March 31, 1995, and decreased by $13.6 million, or 10.6%, for the
year ended March 31, 1996. These declines in premiums resulted in large part
from: (i) lost accounts due to the market's increasing preference for non-
assessable products; (ii) increased competition; (iii) the effects of increasing
participation in the premium credit programs; and (iv) a refinement in
estimation of accrued retrospective premiums which reduced reported premiums for
the fiscal year ended March 31, 1996 by approximately $9.3 million.
As discussed in the table below, in the fiscal years ended March 31, 1994,
1995 and 1996, the premium credit programs in the aggregate accounted for
approximately $3.9 million, $11.4 million and $14.1 million, respectively, in
credits.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1994 1995 1996
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Managed care credits............................................... $ -- $ 6,144 $ 8,811
All other credits.................................................. 3,908 5,279 5,250
------ ------- -------
Total premium credits.................................... $3,908 $11,423 $14,061
====== ======= =======
</TABLE>
The premium credits that ESIF has paid for managed care utilization have
been larger during the past two years than all other credits combined. The
percentage of ESIF's covered employers participating in the managed care credit
program is currently greater than 80%. ESIF's high rate of participation in the
managed
41
<PAGE> 53
care premium credit program will help minimize the impact of the 11.2% rate
reduction in January 1997 because the 10% managed care credit will be eliminated
at that time.
Net Investment Income. Net investment income increased from $10.5 million
for the fiscal year ended March 31, 1994, to $12.2 million for the fiscal year
ended March 31, 1995, and to $13.2 million for the fiscal year ended March 31,
1996. These increases were due in part to increases in total cash and invested
assets from $201.7 million for the fiscal year ended March 31, 1994 to $223.5
million in the fiscal year ended March 31, 1996 and in part to improved yields
on ESIF's investment portfolio. The investment income generated from the
municipal bond portion of the portfolio was $3.2 million for the fiscal year
ended March 31, 1996.
Realized Investment Gains. Realized investment gains increased from zero
for the fiscal year ended March 31, 1994, to a de minimis amount for the fiscal
year ended March 31, 1995, to $4.4 million for the fiscal year ended March 31,
1996. These gains resulted from the sale of certain invested assets to finance
the Acquisition.
Administrative Fees. The Administrative Subsidiaries generate
administrative fees primarily through contracts with the Funds, pursuant to
which the Administrative Subsidiaries provide marketing, underwriting, claims
administration, loss control and policy administration services. Fees are
generally based on a percentage of each Fund's premiums. For the period
beginning on the date of the Acquisition, January 16, 1996, and ending on March
31, 1996, the administrative fees were $7.7 million.
LOSSES AND EXPENSES. ESIF's losses and expenses decreased from $145.5
million for the fiscal year ended March 31, 1994 to $110.7 million for the
fiscal year ended March 31, 1995 and increased to $140.5 million for the fiscal
year ended March 31, 1996. Set forth below is a breakdown of the total annual
expenses.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Losses and loss adjustment expenses............................ $108,411 $ 69,116 $ 94,844
Underwriting, general and administrative expenses.............. 37,121 41,546 43,657
Interest expense............................................... -- -- 847
Amortization and depreciation.................................. -- -- 1,103
-------- -------- --------
Total losses and expenses............................ $145,532 $110,662 $140,451
======== ======== ========
</TABLE>
Losses and Loss Adjustment Expenses. ESIF establishes reserves to cover
its estimated liabilities for losses from claims and for loss adjustment (claim
settlement) expenses ("LAE"). Such loss reserves are established by management
based upon, among other factors: (i) results of actuarial reviews which
incorporate the Company's experience with similar cases, estimates of future
claim trends, and historical trends such as recurring loss payment and reporting
patterns, claim closures, and product mixes, (ii) facts known to the Company and
(iii) regulatory requirements. Losses and LAE incurred for the fiscal year ended
March 31, 1994 were $108.4 million compared to $69.1 million for the fiscal year
ended March 31, 1995 and $94.8 million for the fiscal year ended March 31, 1996.
Prior to the fiscal year ended March 31, 1995, management had recorded certain
reserves in excess of reserve levels required by actuarial reports. During the
fiscal year ended March 31, 1995, partially as a result of changes in its
regulatory status, ESIF began to record reserves at levels primarily supported
by actuarial reviews. This, together with a reduction in premiums earned and a
lower actuarial loss ratio, resulted in a $39.3 million decrease in incurred
losses for the fiscal year ended March 31, 1995 as compared to fiscal year ended
March 31, 1994. The subsequent increase of $25.7 million in losses and LAE for
the fiscal year ended March 31, 1996 was primarily the result of revised
actuarial estimates for prior years. The loss ratio for the fiscal years ended
March 31, 1994, 1995 and 1996 was 73.0%, 53.8% and 82.5%, respectively, or an
average of 69.8%.
42
<PAGE> 54
The following table shows loss and LAE ratios computed on an actuarial
basis which excludes the effects of adjustments for prior years. As a result,
these loss ratios may be more indicative of current underwriting results. The
actuarial loss and LAE ratios in the following table indicate a downward trend
for the fiscal years ended March 31, 1992 to 1996, which ESIF believes reflects
the impact of managed care and other cost containment programs.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense
ratios......................................... 66.8% 67.0% 64.3% 64.5% 59.8% 60.4%
One year later................................... 67.1 69.3 60.4 53.8 58.7
Two years later.................................. 71.9 65.9 61.0 54.3
Three years later................................ 75.6 64.2 60.7
Four years later................................. 75.3 64.7
Five years later................................. 76.8
</TABLE>
- ---------------
(1) Actuarial net loss ratios are from actuarial reports filed with the Florida
Department of Labor and Employment Security and the Florida DOI. Actuarial
net loss ratios are based on modified and discount manual premium.
Underwriting, General and Administrative Expenses. The increase in ESIF's
expenses from $37.1 million to $41.5 million in the fiscal year ended March 31,
1995 was primarily due to four factors: (i) higher administrative taxes; (ii)
higher SDTF assessments; (iii) the introduction and operation of state-wide
managed care programs; and (iv) the increase in commission expenses.
Underwriting, general and administrative expenses increased to $43.7 million
during the fiscal year ended March 31, 1996 primarily due to the Acquisition.
Interest Expense. For the fiscal years ended March 31, 1994 and 1995, ESIF
had no interest expense. In connection with the Acquisition, SHC borrowed $44.0
million from the Bank, and, as a result, interest expense on a consolidated
basis for the fiscal year ended March 31, 1996 was $0.8 million.
Amortization and Depreciation. For the fiscal years ended March 31, 1994
and 1995, ESIF had no amortization or depreciation expense. In connection with
the Acquisition, SHC recorded certain intangibles including software, noncompete
agreements, customer contracts and goodwill. For the fiscal year ended March 31,
1996, amortization of these intangible assets was $1.1 million. The expense
associated with amortization of these intangible assets is not deductible for
federal income tax purposes.
NET INCOME. Net income was $8.9 million, $19.2 million and $0.2 million
for the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
increase in net income of $10.3 million for the fiscal year ended March 31, 1995
resulted primarily from a reduction in ESIF's reserves partially offset by a
decrease in premiums earned. The $19.0 million decrease in net income for the
fiscal year ended March 31, 1996 resulted from decreased premiums as well as
increased losses and LAE.
43
<PAGE> 55
COMPARISON OF HISTORICAL RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 FOR ESIF
REVENUE. Revenue for the six months ended September 30, 1995 was $71.8
million as compared with $73.0 million for the six months ended September 30,
1996. SHC generated $17.4 million in administrative fees in the six months ended
September 30, 1996. The following table analyzes the composition and change in
revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premiums earned........................................................ $63,145 $49,029
Net investment income.................................................. 7,598 6,363
Realized investment gains.............................................. 919 8
Administrative fees.................................................... -- 17,432
Other income........................................................... 90 216
------- -------
Total revenue................................................ $71,752 $73,048
======= =======
</TABLE>
Premiums Earned. Premiums earned for the six months ended September 30,
1996 decreased by $14.1 million to $49.0 million. This loss in premium was due
to the market's increased preference for non-assessable products and the
increase in participation in mandated credit programs, which totaled $9.6
million for the six months ended September 30, 1996. The high participation
level currently experienced in the managed care credit program should reduce the
impact of the 11.2% rate decrease effective January 1, 1997 on new and renewal
policies.
Net Investment Income. Net investment income decreased by $1.2 million
primarily due to the reduction in invested assets related to the Acquisition.
Administrative Fees. SCI generated $17.4 million in administrative fees
through its contracts with administrative clients for the six months ended
September 30, 1996. Administrative fees represent 23.9% of total revenue for the
six-month period and are expected to provide additional future revenues through
SCI's contracts with clients in Florida, Louisiana and Kentucky.
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $64.0
million for the six months ended September 30, 1995 to $67.0 million for the six
months ended September 30, 1996. Set forth below is a discussion of the expenses
for the period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
---------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses.................................... $42,365 $32,135
Underwriting, general and administrative expenses...................... 21,623 30,532
Interest expense....................................................... -- 1,831
Amortization and depreciation.......................................... -- 2,499
------- -------
Total losses and expenses.................................... $63,988 $66,997
======= =======
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the six
months ended September 30, 1995 were $42.4 million compared to $32.1 for the six
months ended September 30, 1996. The loss ratio decreased from 67.1% for the six
months ended September 30, 1995 to 65.5% for the six months ended September 30,
1996. This decrease was the result of favorable loss development.
Underwriting, General and Administrative Expenses. Underwriting, general
and administrative expenses increased by $8.9 million primarily due to the
Acquisition. The SHC portion of underwriting, general and administrative
expenses was $15.1 million, which indicates a reduction of $6.2 million in
underwriting, general and administrative expenses for ESIF.
44
<PAGE> 56
The adjusted expense ratio decreased slightly from 34.2% on September 30,
1995 to 32.6% on September 30, 1996. It should be noted that the Florida
Department of Labor administrative tax has decreased retrospectively from 3.15%
to 2.50%, effective July 1996. Furthermore, the ongoing expenses related to
managed care approvals should decrease as ESIF's managed care network continues
to service more of the existing policyholder base, thereby reducing delivery
costs.
Interest Expense. Interest expense increased $1.8 million for the six
months ended September 30, 1996 from zero for the six months ended September 30,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the six months ended September 30,
1996, amortization and depreciation expense was recorded of $2.5 million
primarily in connection with intangible assets acquired in the Acquisition. The
expense associated with amortization of the intangible assets, which is expected
to be approximately $3.9 million per year, is not deductible for federal income
tax purposes.
NET INCOME. Income from continuing operations for the six months ended
September 30, 1996 was $3.7 million compared to $5.4 million for the six months
ended September 30, 1995. ESIF had $1.3 million of non-recurring charges in
September 1996 which included the disposition of discontinued operations and
conversion costs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 FOR SHC
REVENUE. Revenue for the fiscal years ended December 31, 1993, 1994 and
1995 was $70.8 million, $73.8 million and $64.1 million, respectively. Gross
service fee (administrative fee) revenue received from ESIF and the Funds is
computed as a percentage of ESIF's and the Funds' premiums. Such revenue is
recognized by SHC in proportion to ESIF's and the Funds' recognition of premiums
earned. SHC is required to pay certain direct expenses that are a percentage of
the premiums earned by ESIF and the Funds. Such direct expenses principally
include agents' commissions, reinsurance premium costs, association fees and
administrative taxes. Subsequent to the Acquisition, direct expenses are
included in underwriting, general and administrative expenses in ESIF's
consolidated financial statements. The changes in revenue for each of the three
years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross service fees................................. $ 70,814 $ 73,833 $ 64,090
Direct expenses.................................... (32,972) (31,639) (27,470)
Net service fees................................... 37,842 42,194 36,620
Investment and other income........................ 632 934 2,175
------- ------- -------
Total revenue............................ $ 38,474 $ 43,128 $ 38,795
======= ======= =======
</TABLE>
Net Service Fees. Net service fees increased from $37.8 million in 1993 to
$42.2 million in 1994 and decreased by $5.6 million to $36.6 million for the
fiscal year ended December 31, 1995. The decline in net service fees for this
period is due to a proportional decrease in gross service fees and direct
expenses during 1995, principally attributable to a decrease in premiums earned
by ESIF and the Funds. In 1994, SHC's net service fee revenue included a $3.3
million one-time reimbursement.
Investment and Other Income. Investment income for the fiscal year ended
1993, 1994 and 1995 was $0.4 million, $0.7 million and $1.0 million,
respectively. Included in other income are software consulting and maintenance
fees totaling approximately $0.9 million for the fiscal year ended December 31,
1995. These fees are associated with the Company's subsidiary, Meritec
Solutions, Inc. ("MERITEC"), which was purchased in July 1995. The disposition
of Meritec is expected to be completed by December 31, 1996.
45
<PAGE> 57
EXPENSES. Expenses for the fiscal years ended December 31, 1993, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.................... $14,503 $15,425 $16,616
Other operating expenses.............................. 7,707 8,218 8,204
Interest expense...................................... 1,610 58 42
Depreciation and amortization......................... 4,891 4,872 5,112
------ ------ ------
Total expenses.............................. $28,711 $28,573 $29,974
====== ====== ======
</TABLE>
Compensation and Employee Benefits. Compensation and employee benefits
increased by $0.9 million to $15.4 million for the fiscal year ended December
31, 1994 compared to $14.5 million for 1993. The increase was principally
attributable to increased payroll costs, combined with increased group life and
health insurance costs. Compensation and employee benefits increased by $1.2
million to $16.6 million for the fiscal year ended December 31, 1995 compared to
$15.4 million for 1994, primarily as a result of increased payroll costs coupled
with the addition of employees resulting from the purchase of Meritec, effective
July 1995.
Interest Expense. Interest expense decreased by $1.6 million or 96.4% to
approximately $58,000 for the fiscal year ended December 31, 1994 compared to
$1.6 million for 1993. In 1993, interest expense included $1.5 million for the
buyout of the Capital Appreciation Rights agreement related to a revolving loan
agreement.
Amortization and Depreciation. Amortization of intangibles for the fiscal
years ended 1993, 1994 and 1995 was $4.1 million, $4.1 million and $4.3 million,
respectively. Intangible assets were originally established in connection with
the acquisition of Summit Consulting, Inc. from Alexander and Alexander
Services, Inc. ("A&A") on January 1, 1992.
NET INCOME. Net income for the fiscal years ended 1993, 1994 and 1995 was
$5.9 million, $9.0 million and $5.6 million, respectively. The increase in net
income for 1994 as compared to 1993 of $3.1 million or 52.5% is due primarily to
a one-time reimbursement from one of the Funds, Louisiana Employers Safety
Association Self Insurers Fund, for $3.3 million. The decrease in net income for
1995 of $3.4 million, or 37.8%, is due primarily to lower administrative fee
income which is attributable to a decrease in Fund premiums.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth principally through cash flows generated from operations. The Insurance
Subsidiaries' primary sources of cash flows are premiums earned, investment
income and the proceeds from the sale or maturity of invested assets. The
Administrative Subsidiaries' primary source of cash flow is service fees
generated from ESIF and the Funds. The cash requirements of the Insurance
Subsidiaries are primarily for the payment of claims, commissions, and
reinsurance premiums and management fees to SCI and the purchase of investment
securities. The cash requirements of the Administrative Subsidiaries are
primarily for the payment of salaries, employees benefits, debt obligations and
other operating expenses.
As part of the Acquisition, SHC incurred debt which, at September 30, 1996,
consisted of a term loan in the amount of $34.5 million and $2.0 million which
was outstanding under the revolving line of credit. Scheduled quarterly payments
for the term loan began on September 30, 1996 and extend through June 20, 2002,
with principal payments totaling approximately $1.6 million, $3.8 million, $4.6
million, $9.0 million, $10.0 million and $4.0 million due in calendar years
1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company's balance sheets as of March 31, 1996 and September 30, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $4.3 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the six months ended
September 30, 1996, respectively. The SDTF has not failed to make payments on
accepted claims and the Company has no reason to believe that the SDTF will fail
to meet its obligations to pay accepted claims in the future, although there can
be no assurance.
46
<PAGE> 58
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$42.9 million and $47.3 million at March 31, 1995 and 1996, respectively, for
future investment income determined by discounting loss and loss adjustment
expense reserves at a statutory prescribed rate. Upon conversion to a stock
insurance company, Bridgefield will be permitted to record discounts only on
permanent disability cases. The amount of such discount is estimated at
approximately $4.9 million and $4.7 million at March 31, 1995 and March 31,
1996, respectively. Upon the Conversion, the Company expects to have sufficient
capital and surplus to satisfy the requirements of the Florida Insurance Code.
The NAIC has recently adopted risk-based capital standards to establish the
capital requirements of an insurance carrier based upon the risks inherent in
its operations. The standards, which have not yet been adopted in Florida,
require the computation of a risk-based capital amount which is then compared to
a carrier's actual total adjusted capital. The computation involves applying
various financial factors to address four primary risks: asset risk, insurance
underwriting risk, credit risk and off-balance sheet risk. These standards
provide for regulatory intervention when the percentage of total adjusted
capital to authorized control level risk-based capital is below certain levels.
Upon the conversion to a stock insurance company and the recapitalization, the
Company expects to exceed such risk based capital action levels, as recommended
by the NAIC.
The Company's Insurance Subsidiaries are subject to state insurance laws
and regulations that limit the amount of dividends or distributions that may be
paid by an insurance company to its shareholders. Pursuant to the Florida
Insurance Code, the Insurance Subsidiaries may not, without the prior approval
of the Florida DOI, pay to their shareholders dividends or other distributions
of cash or property the total fair market value of which exceeds generally the
lesser of 10% of surplus or net income not including realized capital gains. In
addition, the Order issued by the Florida DOI in connection with the Conversion
requires that all dividends or distributions by the Insurance Subsidiaries be
approved by the Florida DOI in advance, but the Order states that approval will
be given for any dividend or distribution otherwise complying with the Florida
Insurance Code. As a consequence of these legal restrictions and other business
considerations, the amount of dividends that may be paid by the Insurance
Subsidiaries to Summit may be limited, which may in turn limit the amount of
cash available to Summit for servicing its debt and other purposes.
LOSSES AND LOSS ADJUSTMENT EXPENSE
Beginning in 1994, workers' compensation insurers in Florida were permitted
to settle both the medical and indemnity portions of a claim; previously, an
insurer was not permitted to limit its exposure for lost wage expenses by
settling with the injured employee for a lump sum. ESIF undertook a claims
settlement initiative in 1994, which reduced outstanding claims amounts and
favorably impacted ESIF's losses and LAE for fiscal year ended March 31, 1994
and subsequent periods. ESIF actively continues to try to settle all aspects of
each claim.
The Company's consolidated financial statements include estimated reserves
for unpaid losses and loss adjustment expenses. The reserves for these expenses
are estimated using individual case-basis valuations and statistical analyses
and represent estimates of the ultimate gross and net costs of all unpaid losses
and loss adjustment expenses incurred through the Balance Sheet date of each
period presented. Those estimates are subject to the effects of trends in claim
severity and frequency. The Company's estimates are continually reviewed and, as
experience develops and new information becomes known, the reserves are adjusted
as necessary. Adjustments, including increases and decreases, are included in
current operations net of reinsurance.
Since its inception and continuing through January 1989, ESIF claims were
adjusted and managed by Adjustco, Inc. ("ADJUSTCO"), an independent claims
adjusting company, under the supervision of SCI. Adjustco was responsible for
establishing, monitoring and updating case-based loss reserves used to set loss
reserves for ESIF's financial statements. In January 1989, SCI discontinued the
contract with Adjustco and performed such claims adjustment functions through
its wholly owned subsidiary, Summit Claims Management, Inc. ("SCM"). In
subsequent periods, such Adjustco loss reserves have proved deficient resulting
in significant reserve increases for losses incurred prior to 1989. Adverse loss
reserve development has significantly decreased for the years since SCM
performed the claims management functions.
47
<PAGE> 59
The following table shows changes in historical loss reserves for ESIF for
the fiscal year ended March 31, 1987 and subsequent years. The top line of the
table shows the reserves for estimated unpaid losses and loss adjustment
expenses recorded at each fiscal year end. Each amount in the top line
represents the estimated amount of losses and loss adjustment expenses for the
losses occurring in that year as well as future payments on claims occurring in
prior years. The upper (cumulative amount paid) portion of the table presents
the amounts paid as of subsequent years on those losses for which reserves were
carried as of each specific year. The lower (reserves re-estimated) portion
shows the reestimated amounts of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes known about the actual losses for which the initial reserves
were carried. An adjustment to the carrying value of unpaid losses for a prior
year will also be reflected in the adjustments for each subsequent year. For
example, an adjustment made in the fiscal year ended March 31, 1995 for loss
reserves in the fiscal year ended March 31, 1992 will be reflected in the
re-estimated ultimate net loss for each of the fiscal years ended March 31, 1992
through March 31, 1995. The cumulative redundancy (deficiency) line represents
the cumulative change in estimates since the initial reserve was established. It
is equal to the difference between the initial reserve and the latest reserves
re-estimated amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT -- ESIF STATUTORY BASIS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------------
---------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses
and LAE at end of
period........... $ 37,297 $ 57,300 $124,425 $168,608 $207,353 $164,399 $251,748 $260,531 $238,985 $250,363
Cumulative paid as
of One year
later............ $ 23,190 $ 40,028 $ 57,482 $ 74,481 $ 88,815 $ 71,364 $ 73,839 $ 71,915 $ 64,882
Two years
later.......... 42,031 70,077 100,883 133,064 138,546 118,326 122,411 114,097
Three years
later.......... 54,469 92,466 135,490 160,896 170,259 149,424 149,175
Four years
later.......... 63,986 110,856 146,825 176,483 190,179 165,628
Five years
later.......... 70,433 119,024 151,683 185,759 199,556
Six years
later.......... 72,985 123,810 154,668 189,948
Seven years
later.......... 75,390 126,776 158,802
Eight years
later.......... 76,457 130,904
Nine years
later.......... 78,730
Reserves re-estimated as of end of year
One year later... $ 47,627 $101,405 $140,492 $183,938 $200,237 $228,556 $231,759 $234,166 $247,785
Two years
later.......... 68,549 112,475 155,440 178,390 235,515 209,306 232,455 243,431
Three years
later.......... 70,736 126,109 161,012 214,234 229,571 220,163 241,769
Four years
later.......... 76,275 131,975 181,370 209,498 236,861 230,088
Five years
later.......... 78,412 148,033 178,170 208,800 246,100
Six years
later.......... 86,978 145,749 177,402 215,588
Seven years
later.......... 85,771 143,717 184,346
Eight years
later.......... 83,725 148,595
Nine years
later.......... 87,695
Cumulative redundancy (deficiency)
Dollars.......... $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage....... -135.13% -159.33% -48.16% -27.86% -18.69% -39.96% 3.96% 6.56% -3.68%
</TABLE>
48
<PAGE> 60
The following table contains summary reconciliations of the beginning and
ending insurance reserves, displayed individually for each of the three most
recent fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net reserves for losses and LAE at beginning of year... $251,751 $260,520 $238,990
Add provision for claims occurring in:
The current year..................................... 118,889 94,520 84,058
Prior years.......................................... (10,478) (25,404) 10,786
-------- -------- --------
Incurred losses during the current year................ 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year..................................... 17,704 16,857 15,432
Prior years.......................................... 81,938 73,789 67,968
-------- -------- --------
Claim payments during the current year................. 99,642 90,646 83,400
Net reserves for losses and LAE at end of year......... 260,520 238,990 250,434
Add: Impact of reinsurance for FASB 113................ 121,463 108,440 107,092
Impact of implied special disability trust fund
recoverables................................... 15,531 24,836 31,376
Unallocated LAE assumed through the
Acquisition.......................................... -- -- 3,398
Less: Discount on reserves............................. (4,730) (4,875) (4,668)
-------- -------- --------
Gross reserves for losses and LAE at end of year (GAAP
basis)............................................... $392,784 $367,391 $387,632
======== ======== ========
</TABLE>
The March 31, 1996 reserves of $387.6 million for losses and LAE as
determined under GAAP were $133.8 million more than the reserves of $253.8
million as recorded on the statutory financial statements provided to state
regulatory authorities. The difference is an increase of $107.1 million for
reserves recoverable from third-party reinsurance carriers, a decrease for
discounting of the indemnity portion of permanent disability claims of $4.7
million, and an increase of $31.4 million for the impact of implied disability
trust fund recoverables that reduce reserves for statutory reporting. An asset
of $20.1 million has been recorded as of March 31, 1996 based on the Company's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. Furthermore, reinsurance recoverables included in the Balance
Sheet are increased by $11.8 million as the result of calculating such
recoverables using loss and LAE reserves gross of SDTF.
The Company has recorded $17.8 million in accrued recoverables from SDTF
for the six months ended September 30, 1995 and $21.1 million as September 30,
1996. The Company received $2.2 million for the six months ended September 30,
1995 and $4.3 million for the six months ended September 30, 1996. The Company
believes it will be reimbursed over a number of years. A description of the SDTF
is in the section "RISK FACTORS." During the 40 year history of the SDTF, it has
historically paid reimbursements it has determined were eligible for
reimbursement, there can be no assurance in this regard. If the SDTF were to
discontinue, the Company believes the most likely run-off procedure would be for
it not to accept new claims after some date certain. If this should occur, the
Company believes that because of the backlog of filed and accepted claims
already in the system, the impact on the Balance Sheet would be manageable.
49
<PAGE> 61
BUSINESS
OVERVIEW
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
Administrative Subsidiaries, the Company provides administrative services for
the Funds for the Insurance Subsidiaries and for certain municipalities. These
administrative services include most aspects of daily operations of the Funds
and the Insurance Subsidiaries, including sales and marketing, underwriting,
claims administration, loss control and policy administration. These services
are provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds, entities formed to provide workers' compensation coverage for self-
insured employer groups on a pooled basis
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty, underwrite and assume the underwriting risk with respect to workers'
compensation insurance policies for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail, and service industries.
As of September 30, 1996, the Company's insurance products and administrative
services are provided to approximately 15,500 employers representing
approximately $219.0 million in premiums, including approximately $102.0 million
in premiums attributable to the Funds and $117.0 million in premiums
attributable to the Insurance Subsidiaries. See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place, and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
- -- Strategy" and "-- Managed Care."
INDUSTRY
Workers' compensation benefits are state-mandated and regulated programs
that generally require employers to provide medical benefits and wage
replacement to employees injured at work, regardless of fault. In the event an
employee suffers a work-related injury, workers' compensation coverage will pay
the medical benefits associated with such injury, regardless of whether the
injured employee participates in any other health or medical benefits program.
Each individual state has a regulatory and adjudicatory system that quantifies
the level of wage replacement to be paid, determines the level of medical care
required to be provided and the cost of permanent impairment, and provides
whether the injured employee or the employer has certain options in selecting
healthcare providers. State laws generally require two types of benefits for
injured employees: (i) medical benefits that include expenses related to
diagnosis and treatment of the injury, as well as rehabilitation, if necessary,
and (ii) indemnity payments that consist of temporary wage replacement,
permanent disability payments or death benefits to surviving family members. To
fulfill this mandated financial obligation, virtually all employers are required
to either purchase workers' compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a self-insurance fund (an
entity that allows employers to obtain workers' compensation coverage on a
pooled basis, subjecting each employer to joint and several liability for the
entire fund) or, if permitted by their state, to self-insure.
50
<PAGE> 62
The Florida workers' compensation market accounted for more than 90% of the
Company's total revenue for the fiscal year ended March 31, 1996 (on a pro forma
basis after giving effect to the Conversion). Florida is the fourth largest
state in terms of population behind California, New York and Texas and,
according to the Florida DOI, the Florida workers' compensation market
approximated $3.2 billion in premiums in 1995. Approximately 63% of Florida's
population is between the ages of 15 and 64, generally considered the employment
pool subject to workers' compensation requirements. Over half of Florida's
employment is in the service and wholesale/retail trade sectors, with
manufacturing, construction and agriculture following (in order of size) to make
up the bulk of the remainder of the state's employment base. Based upon data
reported by the NAIC, had ESIF been a stock insurance company on December 31,
1995, it would have been one of the five largest workers' compensation insurers
in Florida, based on the amount of direct premiums earned. See "RISK
FACTORS -- Concentration in a Single State."
STRATEGY
The Company believes that the Conversion provides new opportunities for
improving its return on invested capital through growth in its core workers'
compensation business. Key aspects of the Company's business strategy following
the Conversion include:
Continued Use of Both Self-Insurance and Indemnity Products. The Company
will continue to offer workers' compensation products and services to its
employer customers through both management of self-insured employer groups and
issuance of traditional indemnity insurance policies. The Company believes that
its ability to offer both self-insurance and indemnity services and products
will enable it to compete more effectively in its current markets, and will
provide it with flexibility for responding to changes in its current markets and
expanding into additional markets.
Emphasis on Profitable Underwriting Results. The Company has historically
focused on underwriting results, achieving what it believes are excellent loss
results due to its integrated system of coordinating major aspects of workers'
compensation product management. The Company intends to continue to emphasize
maintaining strong underwriting results in an effort to provide a competitive
workers' compensation coverage package, to control costs and to maximize return
on invested capital.
Proactive Implementation of Managed Care. Managed care will continue to be
a key part of the Company's overall approach to effective management of workers'
compensation claims. The Company believes that its use of managed care
techniques in combination with selective underwriting enables the Company to
provide high quality and cost-effective care to injured employees, while at the
same time lowering overall insurance costs.
Leveraging of Administrative Services Capabilities. The Company's systems,
procedures and organizational structure are designed to provide effective, high
quality administrative services effectively to multiple workers' compensation
entities. The Company intends to continue pursuing opportunities to further
leverage its administrative services through management of additional
self-insurance funds, indemnity insurance carriers and self-insured governmental
entities located throughout the South.
Emphasis on Excellent Customer Service. The Company believes that the
offering of workers' compensation insurance products and services is best
implemented and managed through emphasis on customer service and frequent
contact with both employer customers and independent sales agents. The Company
intends to continue emphasizing excellent customer and sales support services.
Geographic Expansion in the South. Through the Conversion of ESIF to a
stock insurance entity, the Company will be positioned to expand into new
geographic territories with a broader insurance product offering. The Company
currently intends to grow through greater penetration of existing markets,
including Florida, Louisiana and Kentucky, and expansion into new markets,
primarily targeting employers in the South. The completion of the Offerings is
intended to provide the Company with additional capital that will assist it in
more rapidly expanding its business.
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<PAGE> 63
MANAGED CARE
Over the past eight years, the Company has implemented a managed care
approach to workers' compensation. The Company's managed care strategy reduces
costs through loss prevention, early intervention and proactive management of
claims. The Company's focus on loss prevention includes helping employers
establish workplace safety programs, making on-site visits to the workplace and
coordinating among the Company's underwriting, loss control, claims management
and sales and marketing groups. Once a claim occurs, the Company's early
intervention procedures enable the Company to identify injuries that have the
potential of resulting in significant expenses and controlling these expenses
from the outset. The Company generally uses a three-point contact system with
the goal of contacting each of the injured employee, the employer and the health
care provider within 24 hours after notification of an initial claim. The
Company's SMART(TM) (Summit Medical Alert Reaction Team) coordinates a medical
claim from inception to completion in order to provide quality health care to
the injured employee so that he or she may return to work as quickly as
possible. The Company believes returning an employee to the job quickly is an
effective means of controlling indemnity payments for lost wages, typically the
largest component of workers' compensation costs as well as medical expenses.
The Company directs claimants to healthcare providers that are part of the
Company's managed care networks. These networks currently include healthcare
providers who have contracted with Heritage/Summit Healthcare of Florida, Inc.,
the Company's wholly owned provider network subsidiary, or with Vincam
Occupational Health Systems, Inc., an unaffiliated provider network. These
arrangements currently give the Company access to healthcare providers in every
county in Florida, including approximately 2,000 total practitioners and
hospitals. The Company is currently one of four workers' compensation companies
with approved managed care provider networks in every Florida county. With such
networks, the Company emphasizes the use of cost control measures such as
utilization review. The Company's total managed care approach, including early
intervention, proactive claims management and use of provider networks, in
combination with state-mandated fee schedules, has resulted in the Company
reducing the amount it pays for medical bills submitted by an average of 44%.
PRODUCTS AND SERVICES
The Company's operations are comprised of two general types: (i)
administrative services provided by the Administrative Subsidiaries, and (ii)
insurance coverage underwritten by the Insurance Subsidiaries.
Administrative Services. The Company provides a full range of management
and administrative services for the Funds and for certain municipalities. The
Company's Administrative Subsidiaries also provide these services for the
Insurance Subsidiaries. The services include those needed to manage an
integrated workers' compensation program, including sales and marketing,
underwriting, claims management, loss control and policy administration.
Claims Management. The Company's claims management group consists of
approximately 170 claims adjusters based at the Company's headquarters and 12
field claims adjusters. The Company believes that it has developed a
sophisticated, efficient claims management system which facilitates the prompt
resolution of claims. On average, each claims adjuster has a case load of 125
outstanding claims, which the Company believes is a contributing factor in
reducing and controlling claims costs. Claims adjusters electronically track the
progress of claims filed and issue regular reviews on the status of cases. On a
bi-monthly basis, claims personnel review selected cases for changes in status
and adjustments to case-specific reserves. In order to provide consistent
service and build customer relationships, the Company assigns claims adjusters
by geographic territory. However, given the special considerations related to
medical claims, the Company has established a designated medical claims
management group which is utilized for medical related claims in all
territories.
Underwriting and Loss Control. The Company's services include assisting
the Funds, the Insurance Subsidiaries and other clients with formulating their
underwriting guidelines and then implementing those guidelines on behalf of the
client. Management believes that one of the Company's most valuable services for
its clients, and one of the ways that the Company is able to minimize its own
insurance risks, is the
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Company's general practice of recommending for membership in a Fund, or for
issuance of a policy, those employers who fit the Company's underwriting
criteria. Prior to recommending that the client or the Insurance Subsidiaries
accept a risk, the Company's underwriters review the employer's prior loss
experience and safety record, premium payment and credit history, employment
classifications and physical operation. As part of the Company's ongoing loss
control efforts, each employer undergoes a semi-annual review of its coverage.
After accepting an employer for workers' compensation coverage, the second
phase is to help the employer manage its safety risks. The Company employs a
staff of approximately 25 loss control field representatives whose goals include
visiting new employees within 90 days of coverage. Loss control professionals
complete training programs upon joining the Company, and many come with
certifications and professional designations for loss control and safety. Loss
control representatives assist employers in developing and monitoring safety
programs to reduce work related injuries and health hazards. After evaluating an
employer's loss profile, a loss control field representative will help develop a
loss control program and establish accident reporting and claims investigation
protocol. A primary objective for field representatives is to educate employers
on necessary safety systems and health issues which will enable the employers to
manage their own risk.
In an effort to evaluate the underwriting process and provide an early
warning system, the underwriting department, in cooperation with the loss
control department, produces a monthly computer-generated report identifying
specific employers where excessive losses have occurred. Triggered by these
reports, loss control representatives inspect the employer's operations and
issue recommendations based on their findings. Further, loss control
representatives conduct periodic spot checks to determine the effectiveness of
specific recommendations.
Sales and Marketing. All of the Company's products and the Fund
memberships are sold through independent insurance agents. The Company's sales
and agency relations department and telemarketing department work with more than
1,000 independent insurance agencies. The Company's agency executives are sales
professionals who work closely with the larger agencies, maintaining regular
communications with the agencies and keeping them up to date on the Company's
products and services, as well as developments and trends in workers'
compensation insurance. The Company's telemarketing representatives maintain
contact with the smaller agencies by telephone, keeping those agencies informed
about products, services and trends. Often, the Company's agency executives work
with the independent agents in making presentations to potential clients. The
sales department is responsible for maintaining the record of accounts for each
agent and ensuring that proper commissions are paid in a timely manner. Sales
conferences and seminars are held regularly for agents and their staffs.
The Company's creative services department supports the sales and agency
relations functions. This seven-person department functions as an in-house
advertising agency to produce brochures, newsletters, posters, videos and other
visual presentations to assist the independent agents, and in turn their
clients, in understanding how the Company's products and services can satisfy an
employer's workers' compensation insurance needs. The creative services
department also provides a service to members of the Funds by informing them
about developments in safety, claims and other areas of workers' compensation
through internally generated newsletters and articles in trade publications.
Policy Administration. It is an objective of the Company to provide
every insured and Fund member and their employees with timely and quality
service. The Company maintains a group of approximately 30 client service
personnel who answer all incoming client telephone calls and handle other
requests for customer support. These personnel coordinate with the sales force
and field personnel, and they are responsible for maintaining a client database.
In addition, the Company has a group of approximately 20 persons who perform
premium audits, working both internally at the Company's headquarters and in the
field at client sites. These auditors are responsible for making certain that
the payrolls and job classifications for each insured and Fund member are
accurately reflected in the premium amounts charged for coverage. The field
auditors generally conduct a premium audit for every insured and Fund member on
an annual basis. Separately, the Company has a team of approximately 15
individuals who handle collections and disputes related to premiums.
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Primary Customers. The Company's primary customers for its
administrative services are its own Insurance Subsidiaries and the four Funds,
including the Florida Retail Federation Self Insurers Fund ("FRF"), the
Louisiana Employers Safety Association Self Insurers Fund ("LESA"), the
Louisiana Retailers Association Self Insurers Fund ("LRA"), and the Kentucky
Retail Federation Self Insurers Fund ("KRF"). Each of the Funds has an
administrative contract with the Company which defines the services to be
provided and establishes an administrative fee. These contracts are intended to
be long-term in nature and provide the Company with broad rights aimed at
helping ensure the continuity of the relationship. Because the Funds have no
employees and the Company manages all aspects of their relationships with agents
and members, it would be difficult for the Funds to cancel their contracts with
the Company or move the business to a new administrator.
The following table presents the Company's annual administrative fee
revenues received from each Fund:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FRF................................................... $32,196 $31,104 $28,990
LESA.................................................. 8,708 8,000 6,035
LRA................................................... 4,573 4,595 3,904
KRF................................................... -- -- 294
------- ------- -------
Total....................................... $45,477 $43,699 $39,223
======= ======= =======
</TABLE>
Such annual administrative fee revenues are generally a contractually
agreed upon percentage of each Fund's premiums. Out of such annual
administrative fees, the Company is required to pay certain direct expenses,
including agents commissions, premium taxes and reinsurance premiums.
The following describes certain information about each of the four Funds:
Florida Retail Federation Self Insurers Fund. FRF was established in
1979 as a workers' compensation self-insurance fund targeted specifically
to retailers, service providers, wholesalers and retail-related businesses
in Florida. As of September 30, 1996, FRF had approximately 7,300 member
employers and annual premiums in excess of $80 million. FRF memberships
renew each year on January 1.
Louisiana Employers Safety Association Self Insurers Fund. LESA was
established in 1982 and currently provides coverage to over 800 member
employers in Louisiana. As of September 30, 1996, LESA had annual premiums
of approximately $12 million. LESA memberships renew each year on April 1.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund
targeting specifically wholesalers and retail-related businesses in
Louisiana. As of September 30, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $9 million. LRA memberships
renew each year on July 1.
Kentucky Retail Federation Self Insurers Fund. KRF is a workers'
compensation self-insurance fund for selected Kentucky retail businesses
and SCI assumed administration of KRF in July 1995. As of September 30,
1996, KRF had over 1,100 members and annual premiums of approximately $3
million. KRF memberships renew each year on January 1.
Insurance Operations. Prior to the Conversion, ESIF was one of the largest
workers' compensation self-insurance funds in Florida, with approximately 5,000
member employers and approximately $110 million in annual premiums as of
September 30, 1996. ESIF's policies renew each year on April 1.
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ESIF has maintained a relatively steady risk distribution of business
groups. A breakdown of all business segments is shown below:
ESIF'S RISK DISTRIBUTION
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
APPROXIMATE % OF TOTAL
INDUSTRY PREMIUMS WRITTEN
------------------------------------------------------ ----------------------
<S> <C>
Construction.......................................... 41%
Manufacturing......................................... 18%
Wholesale and retail.................................. 15%
Service............................................... 14%
Transportation........................................ 7%
Agriculture........................................... 5%
---
Total....................................... 100%
===
</TABLE>
During 1995, in an effort to compete with those workers' compensation
insurers who issue non-assessable policies, the Company formed Bridgefield
Casualty, which is licensed to underwrite property/casualty insurance in Florida
and is capitalized with $5.7 million of cash and invested assets. Bridgefield
Casualty began offering a non-assessable workers' compensation policy in Florida
effective January 1, 1996, and as of September 30, 1996 had written
approximately 400 such policies representing approximately $6.7 million of
annual premiums. Subject to receipt of licensing approvals, Bridgefield Casualty
intends to begin selling non-assessable workers' compensation policies in
Louisiana. Future plans also include possible workers' compensation offerings in
other states as well as other property/casualty products offered to members of
the Funds.
The Company's products and rating plans encompass a continuum of options
designed to fit the needs of its insured employers and employer groups. The
basic product, accounting for approximately 70% of the Insurance Subsidiaries'
premiums in force at March 31, 1996, is a guaranteed cost contract, in which the
premium for each employer is set in advance and varies only based upon changes
in the client's operations or payroll. In return, the Company agrees to assume
statutorily imposed obligations of the employer to provide workers' compensation
benefits to its employees. The premium for such a policy depends upon the type
of work performed by the employees and the general business of the insured. An
employer large enough to qualify, typically those paying more than $25,000 in
annual premiums, may choose a different product, having its premium based on its
loss experience relative to its peers as determined over a one-year period. A
client who desires to assume a certain amount of financial risk may elect a
deductible which makes the client responsible for the first portion of any
claim. In exchange for the deductible election, the employer receives a premium
reduction. The Company also offers a loss sensitive plan (retrospective rating
plan) to employers paying more than $25,000 in annual premiums. Under this plan,
final premium for a period is determined on the basis of the insured's actual
losses during that period. The Company secures substantially all of its
retrospective liability through a combination of letters of credit, cash deposit
and other instruments.
REINSURANCE
The Company obtains reinsurance principally to reduce its net liability on
individual risks, to provide protection for catastrophic losses, and to
stabilize its underwriting results. In exchange for reinsurance, the Company
pays to its reinsurers a portion of the premiums that the Company receives.
Under the terms of its administrative services contracts, the Company
advises the Funds regarding their reinsurance needs and places such reinsurance.
The Company currently has placed specific Excess Reinsurance on behalf of each
Fund. The Company pays the Funds' reinsurance premiums out of the Company's
service fee revenues, and the cost per Fund is generally in the range of
approximately 5.5% to 7.0% of premiums earned.
With respect to the Insurance Subsidiaries, the Company currently maintains
specific Excess Reinsurance with several reinsurers, under which the reinsurers
have agreed to pay claims and claims expenses over a specific dollar amount per
occurrence. Specifically, Bridgefield has an agreement with Lloyd's of London
under which Lloyd's of London has agreed to pay claims and claims expenses up to
$1.5 million per claim, to
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<PAGE> 67
the extent each claim exceeds $0.5 million, and an agreement with National Union
Insurance Company under which that reinsurer has agreed to pay claims and claims
expenses to the extent each claim exceeds $2.0 million.
Bridgefield Casualty has an Excess Reinsurance agreement with Continental
Casualty Company under which that reinsurer has agreed to pay claims and claims
expenses up to $1.0 million per claim, to the extent each claim exceeds $0.5
million. In addition, Bridgefield Casualty has a Quota-Share Reinsurance
agreement in effect with Am Re under which Bridgefield Casualty cedes to Am Re a
percentage (currently 80%) of all written workers' compensation premiums and Am
Re assumes that same percentage of risks. This Quota Share Reinsurance allows
Bridgefield Casualty to write, within regulatory guidelines, a larger number of
policies than it could otherwise. In the event that the Quota Share Reinsurance
agreement with Am Re is terminated for any reason, Bridgefield Casualty could be
required to increase its capital substantially or reduce its level of workers'
compensation premiums, unless it is able to establish another Quota Share
Reinsurance arrangement.
Reinsurance does not legally relieve an insurer from its liability under
the workers' compensation policies it issues, but it does make the assuming
reinsurer liable to the insurer for the reinsurance ceded. Therefore, the
Company is subject to credit risk with respect to the obligations of its
reinsurers. The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all claims and claims expenses which the
Company has ceded to such reinsurer. Pursuant to the Order, Bridgefield is
permitted to cede reinsurance only to authorized reinsurers, unless it obtains
the prior approval of the Florida DOI. See "RISK FACTORS -- Dependence on
Reinsurance."
The Company brokers all of its reinsurance and the reinsurance purchased
for the Funds through a wholly owned reinsurance agency, which employs one
agent. The Company receives a brokerage fee from the Funds.
INVESTMENT PORTFOLIO
The Company's investment policy focuses on safety of principal, timing of
maturities to match assets and liabilities, and diversification. The Company's
investment portfolio is managed by First Union Capital Management, Smith Barney
Capital Management and Invesco Capital Management. These managers have certain
discretion to make investments on behalf of the Company, subject to regulatory
restrictions and the Company's investment policy and guidelines.
As of September 30, 1996, approximately 74% of the assets in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 99% were either rated AA- or better by S&P or are considered Class
I under the NAIC's classification system. The average fixed-income duration of
the portfolio is approximately four years. The composition of the portfolio as
of September 30, 1995 and 1996 is depicted in the following table.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds........................................... $ 94,884 41.0% $ 62,165 29.1%
Municipal bonds............................................ 67,218 29.1% 68,349 32.0%
Corporate bonds............................................ 29,162 12.6% 42,906 20.1%
Preferred stock............................................ 2,956 1.3% 3,787 1.8%
Common stock............................................... 15,228 6.6% 12,298 5.7%
Short-term investments..................................... 17,176 7.4% 16,713 7.8%
Cash and cash equivalents.................................. 4,664 2.0% 7,611 3.5%
-------- ----- -------- -----
Total cash and invested assets................... $231,288 100.0% $213,829 100.0%
======== ===== ======== =====
</TABLE>
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COMPETITION
The markets for workers' compensation insurance products and services are
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of workers' compensation,
administration and insurance services. A number of the Company's current and
potential competitors are significantly larger, with greater financial and
operating resources than those of the Company, and can offer their services
nationwide. After a period of absence from the market in Florida, traditional
national insurance companies have re-entered that market, thereby increasing
competition. Their presence in the Company's current market, and in markets into
which the Company might consider for expansion, will likely create greater
competition for acquisitions of workers' compensation businesses, making it more
difficult for the Company to grow by acquisition.
Competitive factors in the workers' compensation insurance field include
premium rates (in some states), levels of service, A.M. Best ratings, levels of
capitalization, quality of managed care services, the ability to reduce loss
ratios and the ability to reduce claims expenses. The Company believes that its
products and services are competitively priced. In addition, the Company
believes its premium rates are typically lower than those for clients assigned
to the state-sponsored risk pools, allowing the Company to provide a viable
alternative for employers in such pools. The Company also believes that its
level of service and its ability to reduce claims are strong competitive factors
that have enabled it to retain existing clients and attract new clients.
Competitive factors relating to the Company's administrative service products
are primarily based upon pricing, service and reputation. See "RISK
FACTORS -- Competition."
A.M. BEST RATING
A.M. Best is a rating agency that reports on the financial condition of
insurance companies. Neither of the Insurance Subsidiaries has been assigned a
rating by A.M. Best because neither company has accumulated the required five
consecutive years of operating experience. Management has met with
representatives of A.M. Best to discuss whether ESIF's prior operations might be
considered in assigning a rating to Bridgefield, but there can be no assurance
that any rating will be assigned to either Insurance Subsidiary in the near
future. See "RISK FACTORS -- Competition."
REGULATION
General. Workers' compensation and managed healthcare programs are subject
to various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the provision
of managed care workers' compensation programs, assume financial risk related to
the provision of those programs, or undertake direct responsibility for making
payment or payment decisions for those services, are subject to a number of
complex regulatory schemes that govern many aspects of their conduct and
operations. The managed healthcare field is a rapidly expanding and changing
industry; it is possible that the applicable regulatory frameworks will expand
to have an even greater impact upon the conduct and operation of the Company's
business.
The Company's business is subject to state-by-state regulation of workers'
compensation insurance and workers' compensation insurance management services.
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. Such regulation is primarily for the benefit and
protection of covered employees and policyholders and not for the benefit of
investors. Changes in individual state regulation of workers' compensation or
managed healthcare may create a greater or lesser demand for some or all of the
Company's products and 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. In addition, many states limit the maximum
amount of dividends and other distributions that may be paid in any year by
insurance companies. This may limit the amount of distributions that may be made
by the Company's Insurance Subsidiaries. See "RISK FACTORS -- Government
Regulation."
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Premium Rate Restrictions. In general, state regulations governing the
workers' compensation systems and insurance business impose restrictions and
limitations on the Company's business operations that are not imposed on
unregulated businesses. Among other matters, state laws regulate not only the
amounts and types of workers' compensation benefits that must be paid to injured
workers, but also the premium rates that may be charged by the Company to insure
employers for those liabilities. As a consequence, the Company's ability to pay
insured workers' compensation claims out of the premium revenue generated from
the Company's sale of such insurance is dependent upon the level of premium
rates permitted by state laws. In this regard, it is significant that the state
regulatory agency that regulates workers' compensation may not be the same
agency that regulates workers' compensation insurance premium rates.
In Florida, the Florida DOI approves "manual" rates for each of the
approximately 650 employment classification codes prepared and filed by the
National Council on Compensation Insurance ("NCCI"). The carriers operating in
Florida are not permitted to deviate from these approved rates, and competition
is, therefore, primarily related to service and the ability to improve insureds'
experience ratings through loss prevention and effective claims management.
Levels of benefit payments, however, are regulated by the Florida Department of
Labor and Employment Security. Sometimes, mandated benefit changes will be
coupled with permission for appropriate rate changes, but not always.
Taking a different approach, Louisiana is not an NCCI-rated state, but
instead is "open rated," meaning that carriers can apply for, and may receive,
approval to sell workers' compensation coverages at varying rates. However,
since Louisiana established a competitive state-run fund, rates have generally
followed those of the state-run fund.
In both Florida and Louisiana, the legislatures have recently abolished
systems that required carriers doing business in those states to pay residual
market assessments to the states to support the involuntary workers'
compensation markets. The Company believes that such action will have the effect
of increasing competition in both states.
Statutory Accounting and Solvency Regulations. State regulation of
insurance company financial transactions and financial condition are based on
statutory accounting principles ("SAP"). Such statutory accounting principles
differ in a number of ways from GAAP, which govern the financial reporting of
most other businesses. In general, SAP financial reports are more conservative
than GAAP financial reports, reflecting lower asset values, higher liability
values and lower equity.
State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
significant financial and operating restrictions on an insurance company that
becomes financially impaired. Regulators generally have the power to impose
restrictions or conditions on the following kinds of activities of a financially
impaired insurance company: transfer or disposition of assets; withdrawal of
funds from bank accounts; extension of credit or making loans; and investment of
funds.
Financial and Investment Restrictions. Insurance company operations are
subject to financial restrictions that are not imposed on other businesses.
State laws require insurance companies to maintain minimum surplus balances and
place limits on the amount of insurance a company may write based on the amount
of the company's surplus. These limitations may restrict the rate at which the
Company's insurance operations can grow. Immediately following the Conversion,
the Company will meet relevant state minimum capital and surplus requirements.
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the kinds of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its assets more conservatively than it would if it were
not subject to the state law restrictions and may prevent the Company from
obtaining as high a return on its assets as it might otherwise be able to
realize. See "-- Investment Portfolio" and "RISK FACTORS -- Government
Regulation." In addition, pursuant to the Order, Bridgefield is required to
maintain a deposit with the Florida DOI of $5.0 million. All net investment
income on such deposit is for the account of Bridgefield.
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<PAGE> 70
In addition, under Florida law, an insurance company may not, without
regulatory approval, pay to its shareholders within a 12-month period dividends
or other distributions of cash or property, the total fair market value of which
exceeds generally the lesser of 10% of surplus or net income not including
realized capital gains. The Order requires that all dividends proposed to be
paid by the Insurance Subsidiaries be approved in advance by the Florida DOI.
However, pursuant to the Order, the Florida DOI has agreed to approve a request
for any dividend that complies with the Florida Insurance Code. This may limit
the amount of dividends that may be paid by the Insurance Subsidiaries to
Summit, which in turn may limit the amount of capital available to Summit for
debt service, expansion, dividend payments to shareholders and other purposes.
The NAIC has recently adopted risk-based capital standards to determine the
capital requirements of an insurance carrier based upon the risks inherent in
its operations. These standards require the computation of a risk-based capital
amount which is then compared to a carrier's actual total adjusted capital. The
computation involves applying factors to various financial factors to address
four primary risks: asset risk, insurance underwriting risk, credit risk and
off-balance sheet risk. These standards provide for regulatory intervention when
the percentage of total adjusted capital to authorized control level risk-based
capital is below certain levels. These standards have not yet been adopted in
Florida; however, upon the conversion to a stock insurance company and the
recapitalization, the Company expects to exceed such risk-based capitalization
levels, as recommended by the NAIC.
Special Disability Trust Fund. Florida operates a special disability trust
fund that reimburses Florida insurance carriers, self-insurance funds and
self-insured employers for certain workers' compensation benefits paid to an
employee when he or she is injured on the job and the injury merges with,
aggravates, or accelerates a preexisting injury or physical condition of that
employee. The SDTF is managed by the State of Florida and is funded through
assessments against insurance carriers, self-insurance funds and self-insured
employers providing workers' compensation coverage in Florida. The Company's
SDTF recoveries, recorded as a reduction to losses and LAE incurred, were
approximately $4.5 million, $5.7 million and $5.6 million or the fiscal years
ended March 31, 1994, 1995 and 1996, respectively. The Company's SDTF
assessments were approximately $5.6 million, $4.7 million and $5.6 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. In addition,
the Company's consolidated balance sheet as of September 30, 1996 included an
asset of approximately $21.1 million representing SDTF recoveries that the
Company estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF, however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries.
The SDTF is scheduled for further review under Florida sunset laws in the
year 2000. The Florida legislature may, however, review the SDTF earlier and no
assurance can be made with regard to the legislature's possible actions or with
regard to operations of the SDTF if any legislative changes are made. Apart from
this potential for legislative review of the viability of the SDTF, the Florida
DOI is currently reviewing its regulations with respect to how insurers and
self-insurers may account for future recoveries. There is no assurance that the
Florida DOI will continue to permit such entities to include estimated future
recoveries on their financial statements. Discontinuation of the SDTF, or
changes in its operations which decrease the availability of recoveries from the
SDTF, increase the SDTF assessments payable by the Company, or prohibit the
Company from including estimated future recoveries on its financial statements,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "RISK FACTORS -- Florida Special
Disability Trust Fund."
Participation in State Guaranty Funds. Every state has established one or
more insurance guaranty funds or associations that are charged by state law to
pay claims of policyholders insured by a company that becomes insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying policyholder claims against an insolvent insurer.
The Company's financial performance could be adversely
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<PAGE> 71
affected by guaranty association assessments as a consequence of the insolvency
of other insurers over which the Company has no control.
Holding Company Act. In addition to the regulatory oversight of the
Insurance Subsidiaries, Summit will also be subject to regulation under the
provisions of the Florida Insurance Code relating to insurance holding company
systems, defined as two or more companies, one or more of which is an insurance
company. Such provisions contain certain reporting requirements, including those
requiring the ultimate parent of a Florida insurance company to file information
relating to its capital structure, ownership and financial condition and the
general business operations of its insurance subsidiary. Such holding company
laws contain special reporting and prior approval requirements with respect to
transactions among affiliates.
Possible Future Regulation. State legislatures and the federal government
have considered and are considering a number of cost containment and healthcare
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 healthcare reforms that would
adversely affect the Company.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
have enacted laws that altered and, in many cases, increased state authority to
regulate insurance companies and insurance holding companies. Further, the NAIC
and state insurance regulators are re-examining laws and regulations,
specifically focusing on investment laws for insurers, modifications to holding
company regulations, codification of statutory accounting practices, risk-based
capital guidelines, interpretations of existing laws and the development of new
laws. In addition, Congress and certain federal agencies are investigating the
current condition of the insurance industry in the United States to determine
whether to impose federal regulation. The Company cannot predict with certainty
the effect any proposed or future legislation or NAIC initiatives may have on
the conduct of the Company's business or the financial condition or results of
operations of the Company. See "RISK FACTORS -- Government."
DISPOSAL OF BUSINESS
The Company currently has two subsidiaries whose operations no longer fit
into the Company's overall strategic growth plan. The Company is in the process
of divesting these two subsidiaries by selling the businesses and/or their
assets, or by liquidating the subsidiaries if no acceptable buyers are found.
These two businesses are briefly described below:
Meritec Solutions, Inc. In August 1995, the Company purchased Meritec, a
software company which was previously owned by New York Life Insurance Company.
The Company paid $1.0 million for the business, which had approximately $0.3
million in cash at the time of the purchase.
Carolina Summit Healthcare, Inc. Beginning in 1995, the Company formed a
health maintenance organization in North Carolina designed to provide managed
care for Medicaid recipients and, eventually, employer groups. The Company
capitalized Carolina Summit with $3 million, and the North Carolina Department
of Insurance has granted Carolina Summit an HMO license. Other than its minimum
capital, Carolina Summit has no material assets and it has never conducted
business.
See notes 18 and 19 of the notes to ESIF's consolidated financial
statements contained elsewhere in this Proxy Statement/Prospectus.
INFORMATION TECHNOLOGY SYSTEMS
The Company's centralized information technology systems department
provides, maintains and manages the information resources for all of the
Company. The department currently has four IBM AS/400 mainframe computers
supporting approximately 430 terminals in the Company's Lakeland, Florida
headquarters and remote locations. Some 100 personal computers are used in
networks, as stand-alone units or as host-connected PCs. The Company also
maintains a number of laptop computers for field personnel. More than 80% of the
department's approximately 26 employees have been with the Company five or more
years. The
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department's programming staff averages 10 years of experience. The department's
personnel include full-time programmers, quality-control engineers and
operational support specialists.
EMPLOYEES
The Company employs approximately 430 full-time employees. Approximately
395 employees are based in Florida, while 35 are based in Louisiana and
Kentucky.
PROPERTIES
The Company is headquartered in Lakeland, Florida, where it leases
approximately 80,000 square feet of space in a campus of nine buildings. The
Company also leases office space including approximately 7,000 square feet in
Atlanta, Georgia (Meritec); approximately 6,000 square feet in Raleigh, North
Carolina (Carolina Summit); approximately 5,000 square feet in Baton Rouge,
Louisiana; approximately 2,000 square feet in Lexington, Kentucky; and
approximately 1,000 square feet in Ft. Lauderdale, Florida.
LEGAL PROCEEDINGS
The Company is periodically involved as plaintiff or defendant in various
legal actions incident to its business. Based upon information presently
available to it, management is not aware of any threatened or pending litigation
that is expected to have a material adverse effect on the Company or its
business.
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MANAGEMENT OF THE COMPANY
GENERAL
The Board of Directors of Summit and the Board of Trustees of ESIF are
composed of seven and six members, respectively. Listed below is certain
information about the directors, executive officers and certain key managers of
Summit and the Trustees of ESIF.
<TABLE>
<CAPTION>
YEAR OF
YEAR FIRST EXPIRATION OF
ELECTED AS TERM AS
TRUSTEE OF DIRECTOR
NAME AGE POSITION WITH SUMMIT AND ESIF ESIF OF SUMMIT
- ----------------------------------- --- ------------------------------- ---------- -------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
William B. Bull.................... 48 President, Chief Executive -- 1997
Officer and Director of Summit
Russell L. Wall.................... 53 Vice President of Finance of -- --
Summit
Greg C. Branch..................... 49 Chairman of the Board of 1980 1998
Directors of Summit and of the
Board of Trustees of ESIF
C. C. Dockery...................... 63 Director of Summit and Trustee 1987 1999
of ESIF
John A. Gray....................... 51 Director of Summit and Trustee 1979 1997
of ESIF
Robert L. Noojin, Sr............... 62 Director of Summit and Trustee 1979 1998
of ESIF
Thomas S. Petcoff.................. 48 Director of Summit and Trustee 1987 1997
of ESIF
Robert Siegel...................... 65 Director of Summit and Trustee 1978 1999
of ESIF
Other Key Managers:
Allen C. Bennett................... 47 Vice President of Summit Loss -- --
Control Services, Inc.
David T. Cederholm................. 51 Vice President, Operations of -- --
Bridgefield Casualty
Timothy J. Ermatinger.............. 47 Vice President of Operations of -- --
SHC
Ricky T. Hodges.................... 42 Vice President of Claims of -- --
Summit Claims Management, Inc.
</TABLE>
William B. Bull has served as President and Chief Executive Officer of SHC
and its predecessors since 1987 and as President, Chief Executive Officer and a
director of Summit since November 1996. Mr. Bull joined SCI in 1984 as special
assistant to the President and subsequently became Executive Vice President in
1985 with operating responsibilities for such company. Mr. Bull is a member of
various insurance associations and serves on numerous boards including: the
Florida Association of Self-Insurance, Florida Retail Federation, Florida Group
Risk Administrators Association and First Union National Bank of Polk County.
Russell L. Wall has served as Vice President of Finance of SHC since 1988
and has served Summit in the same capacity since November 1996. Mr. Wall is
responsible for the Company's accounting, data processing and client service
operations. Before joining SHC, Mr. Wall worked for three years as a Portfolio
Manager for Eickhoff & Pieper, Inc. Mr. Wall is a Chartered Financial Analyst
and holds an M.B.A. in Finance from the University of Santa Clara.
Greg C. Branch has served as Chairman of the Board and a Trustee of ESIF
and its predecessors since 1980 and has served as Chairman of the Board and a
director of Summit since November 1996. Mr. Branch
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has served as President of Branch Properties, Inc., a manufacturer, wholesaler
and retailer of animal feeds and fertilizer located in Ocala, Florida since
1973. Mr Branch is Vice Chairman and a founding director of American Feed
Industry Insurance Company, a property and casualty insurer domiciled in Iowa.
C.C. Dockery founded and remained involved with SCI from 1977 until A&A
purchased SCI in 1984. Mr. Dockery was first elected as a Trustee of ESIF and
its predecessors in 1987 and was elected as a director of Summit in November
1996. Since 1982, Mr. Dockery has been the President, Chief Executive Officer
and majority shareholder of Crossroads Insurance Company, Ltd., a reinsurance
company located in Bermuda. For 21 years, Mr. Dockery served as a director for
Cotton States Mutual Insurance Company, and its affiliate Cotton States Life
Insurance Company, a publicly traded life insurance provider located in Atlanta,
Georgia.
John A. Gray has served as a Trustee of ESIF and its predecessors since
1979 and as a director of Summit since November 1996. Since 1992, Mr. Gray has
served as President of B.F. Deal, Inc., a yacht brokerage and charter company,
and since 1993 has served as Vice President of Marine Resources Management,
Inc., a supplier of marine equipment. From 1975 until his retirement in 1992,
Mr. Gray was President of Dura-Stress, Inc., a manufacturer of pre-stressed and
precast concrete products, located in Leesburg, Florida.
Robert L. Noojin, Sr. has served as a Trustee of ESIF and its predecessors
since 1979 and as a director of Summit since November 1996. Prior to his
retirement in 1994, Mr. Noojin was President of Eagle Supply, Inc., a roofing
supply company headquartered in Tampa, Florida, and a subsidiary of TDA
Industries, Inc. Mr. Noojin currently serves as Chairman Emeritus of Eagle
Supply, Inc.
Thomas S. Petcoff was employed by and involved with SCI from 1977 until A&A
purchased SCI in 1984. Mr. Petcoff was first elected as a Trustee of ESIF and
its predecessors in 1987 and was elected as a director of Summit in November
1996. Mr. Petcoff also serves on the Board of Trustees of FRF and the Board of
Directors of the Florida Retail Federation Association. Since 1984, Mr. Petcoff
has served as President of Centurion Insurance Services, Inc., an insurance
consulting firm and sales agency.
Robert Siegel has served as a Trustee of ESIF and its predecessors since
1978 and as a director of Summit since November 1996. Mr. Siegel is President of
Siegel Gas & Oil Products, which he founded in 1957 and which is located in
Miami, Florida.
Following is certain information about other key employees of the Company:
Allen C. Bennett has served as Vice President of Summit Loss Control
Services, Inc., ("SLCS") a wholly owned subsidiary of SCI, since 1987. Mr.
Bennett is responsible for overseeing the daily operations and staff of such
entity. For two years prior thereto, Mr. Bennett worked at SLCS as a director
and a field loss control consultant.
David T. Cederholm has served as Vice President, Operations of Bridgefield
Casualty since January 1996. Since September 1996, Mr. Cederholm has also served
as a director and Vice Chairman of Bridgefield Casualty. From May 1995 until
January 1996, Mr. Cederholm worked as the Assistant to the President of SCI.
From December 1993 until April 1995, Mr. Cederholm served as Vice President,
Atlantic Region of TIG Insurance Company in New York, New York with
responsibility for overseeing and managing the underwriting facilities in the
eastern United States. From December 1992 through December 1993, Mr. Cederholm
served as President, Production Group of Continental Risk Management Services, a
property and casualty insurance company located in New York, New York, were he
was responsible for underwriting and production. For approximately six years
prior thereto, Mr. Cederholm served as President of Continental Special Risk
Underwriters, in New York, New York, overseeing the large account casualty
underwriting unit of Continental Insurance.
Timothy J. Ermatinger has served as Vice President of Operations of SCI
since January 1996. From August 1995 through December 1995, Mr. Ermatinger
worked as the Assistant to the President of SHC. Between February 1993 and
January 1995, Mr. Ermatinger served as Vice President and Chief Financial
Officer of Independence One Mortgage Corp., a wholly owned subsidiary of
Michigan National Bank. From
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May 1986 to February 1993, Mr. Ermatinger was the Executive Vice President of
Alexsis, Inc., a third-party insurance administrator concentrating in property
and casualty claims.
Ricky T. Hodges has served as Vice President of Claims of Summit Claims
Management, Inc.("SCMI") since September 1991. Mr. Hodges has worked as SCMI in
various capacities since January 1984. Mr. Hodges is the current chairman of the
Florida Workers' Compensation Advisory Council, President of the Workers'
Compensation Claims Professionals and chairman for the Adjustor Board
Certification Program in Florida.
The Articles of Incorporation of Summit provide for staggered terms of the
members of the Board of Directors. Summit's Board of Directors is divided into
three classes designated as Class I, Class II and Class III. The current terms
of office of the Class I directors will expire at the first annual meeting of
shareholders in 1997; the current terms of office for the Class II directors
will expire at the annual meeting of shareholders in 1998; and the current terms
of office for the Class III directors will expire at the annual meeting of
shareholders in 1999, and in each case upon the election and qualification of a
successor. At each annual meeting of shareholders commencing with the meeting
held in 1997, the successors to the directors whose terms are expiring will be
elected to terms expiring at the third succeeding annual meeting of
shareholders. The division of directors into three classes is to be nearly as
equal as possible, with the Class I, Class II and Class III directors currently
consisting of three, two and two directors, respectively.
The Bylaws of Summit require the Board of Directors to designate from among
its members an Audit Committee and a Compensation Committee. The Audit Committee
has the responsibility to oversee the auditing procedures of the Company,
receive and accept the reports of the Company's internal systems of accounting
and management controls and make recommendations to the full Board of Directors
as to the selection and appointment of auditors for the Company. The
Compensation Committee has the responsibility to make relevant compensation
decisions of the Company.
Director Compensation. Each non-employee member of the Board of Directors
of Summit receives a fee of $10,000 per year and an additional $2,500 for
attendance at each meeting of the Board of Directors of Summit. In addition,
members of committees of the Board of Directors receive a fee of $2,500 for
attendance at each committee meeting. All meetings of the Board of Directors of
the Insurance Subsidiaries and the Administrative Subsidiaries are to be held in
conjunction with meetings of the Board of Directors of Summit, and no additional
compensation is received for being a member of the Board of Directors of any
such subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Greg C. Branch, C.C. Dockery
and Thomas S. Petcoff, each of whom was elected to such position upon the
formation of the Compensation Committee on November 20, 1996. Mr. Branch has
served as a Trustee of ESIF and its predecessors since 1980 and Chairman of the
Board of ESIF since 1994, and has served as Chairman of the Board and a director
of Summit since November 15, 1996. Mr. Dockery founded SCI in 1977, was first
elected as a Trustee of ESIF and its predecessors in 1987 and was first elected
as a director of Summit on November 15, 1996. Mr. Petcoff was an employee of,
and involved with, SCI from 1977 to 1984; he has been a Trustee of ESIF and its
predecessors since 1987, and he has been a director of Summit since November 15,
1996.
C.C. Dockery and Thomas S. Petcoff, directors of Summit, own 80,000 square
feet of office space in Lakeland, Florida and lease such space to SCI. The
property is currently rented by SCI for approximately $90,000 per month under a
lease which runs through March 2000. During the fiscal years ended March 31,
1994, 1995 and 1996, SCI made rental payments of approximately $1.1 million,
$1.2 million and $1.1 million, respectively, for such property.
Mr. Dockery is also the President, Chief Executive Officer and majority
shareholder of Crossroads Insurance Company, Ltd. ("CROSSROADS"), which provides
Excess Reinsurance to ESIF and the Funds. During the fiscal years ended March
31, 1994, 1995 and 1996, the Company paid Crossroads approximately $16.4
million, $12.1 million and $9.6 million, respectively, in premiums for
reinsurance relating to ESIF and
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the Funds. In addition, in each of the years 1988 through 1995, Crossroads ceded
50% of its underwriting risk to U.S. Employers Insurance Company, a wholly owned
subsidiary of ESIF.
Mr. Dockery is the Chairman of the Board of Dockery Management Corporation,
which subleases approximately 2,600 square feet of office space from the
Company, pursuant to a sublease agreement which expires in March 2000 and
provides for rent of approximately $2,800 per month. During the fiscal years
ended March 31, 1994, 1995 and 1996, the Company received approximately $34,000,
$36,000 and $36,000, respectively, in rental payments from such entity.
Mr. Dockery is the President and owner of Dockery Leasing Corporation
("DOCKERY LEASING") which provides aviation services for the Company. During the
fiscal years ended March 31, 1994, 1995 and 1996, the Company paid Dockery
Leasing approximately $32,000, $43,000 and $32,000, respectively, for such
services.
Mr. Dockery was a underwriting member (name) of Lloyd's of London from 1984
to 1986. Greg C. Branch has been an underwriting member (name) of Lloyd's of
London since 1986. ESIF and the Funds have Excess Reinsurance agreements with
Lloyd's of London from time to time.
Mr. Petcoff is President of Centurion Insurance Services, Inc.
("CENTURION"). Pursuant to an agreement between SCI and Centurion dated November
1995, and in connection with Centurion's involvement in the formation of KRF,
SCI pays Centurion an annual fee equal to 1% of KRF's premiums in each year.
During the fiscal year ended March 31, 1996, SCI paid fees of approximately
$13,000 to Centurion.
In addition, for reinsurance policies placed by SCI on behalf of KRF which
are brokered by Centurion, Centurion is entitled to brokerage commissions.
Through the end of the fiscal year ended March 31, 1996, the first year
Centurion brokered a policy for KRF, the Company paid approximately $13,000 to
Centurion for brokerage commissions. SCI also pays Centurion agency commissions
for policies placed with the Funds and through the end of the fiscal years ended
March 31, 1994, 1995 and 1996, the Company paid approximately $2,000, $6,000 and
$2,000, respectively to Centurion for such agency commissions.
Mr. Petcoff is on the Board of Trustees of one of the Funds, FRF and is on
the Board of Directors of the Florida Retail Federation (the "ASSOCIATION").
Pursuant to a written arrangement between SCI and the Association, the
Association, as the sponsoring party of FRF, is entitled to 1% of such Fund's
premiums earned in each year. During the fiscal years ended March 31, 1994, 1995
and 1996, the Company paid approximately $1.0 million, $1.0 million and $0.9
million to the Association for such fees. In addition, during the years ended
March 31, 1994, 1995 and 1996, FRF paid SCI fees for administrative services of
approximately $32.7 million, $30.5 million and $27.7 million, respectively.
EXECUTIVE COMPENSATION
Summit was incorporated on November 13, 1996 and, therefore, no executive
officer of Summit received compensation in excess of $100,000 during the fiscal
period from such date of incorporation to the date of this Proxy
Statement/Prospectus. Pursuant to the terms of their respective employment
agreements with Summit, William B. Bull, the President and Chief Executive
Officer, and Russell L. Wall, the Vice President of Finance, are to receive an
annual salary of $250,000 and $230,000, respectively. See "-- Employment
Agreements."
EMPLOYMENT AGREEMENTS
In November 1996, Summit entered into an employment agreement with Mr. Bull
pursuant to which he is employed full-time as Summit's President and Chief
Executive Officer. The agreement, which expires on the fifth anniversary of the
date thereof, provides for an annual base salary of $250,000 and the right for
Mr. Bull to receive a bonus in each year of the agreement equal to 5% of the
amount, if any, by which the
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Company's consolidated net income after taxes exceeds $6,000,000. In addition to
his cash compensation, Mr. Bull receives additional benefits, including those
generally provided to other employees of the Company. The agreement also
provides, in the event of its expiration or termination, that: (i) Mr. Bull is
to be subject to a two-year confidentiality period and limitation on the use of
trade secrets, and (ii) Mr. Bull is subject to up to a one-year non-competition
and non-solicitation arrangement with the Company for which he would receive
$8,333.33 per month as consideration for such non-competition and
non-solicitation arrangement.
Summit also entered into an employment agreement with Russell L. Wall in
November 1996, pursuant to which he is employed full-time as Summit's Vice
President and Chief Financial Officer. The agreement, which expires on the third
anniversary of the date thereof, provides for an annual base salary of $230,000
and the right for Mr. Wall to receive a bonus in each year of the agreement
equal to 1.67% of the amount, if any, by which the Company's consolidated net
income after taxes exceeds $8.25 million in calendar year 1997 and $12.16
million in each of calendar years 1998 and 1999. In addition to his cash
compensation, Mr. Wall receives additional benefits, including those generally
provided to other employees of the Company. The agreement also provides, in the
event of its expiration or termination, that: (i) Mr. Wall is to be subject to a
two-year confidentiality period and limitation on the use of trade secrets, as
such term is defined therein, and (ii) Mr. Wall is subject to up to a one-year
non-competition and non-solicitation arrangement with the Company. The agreement
further provides for a payment of $8,333.33 per month as consideration for such
non-competition and non-solicitation arrangement.
401(K) PLAN
The Company has adopted the 401(k) Plan, which is intended to qualify under
Section 401(a) of the Tax Code, so that contributions thereto by employees or
the Company and income earned on such contributions would not be taxable to
employees until withdrawn from the 401(k) Plan. All employees of the Company who
have attained the age of 21 and who have completed at least 90 days of service
with the Company are eligible to participate in the 401(k) Plan. The 401(k) Plan
provides that each participant may make elective contributions of up to 16% of
his or her compensation, subject to statutory limits. The Company currently
intends to make matching contributions to the 401(k) Plan on behalf of each
eligible employee is in an amount equal to approximately 75% of the employee's
contributions, up to 6% of such employees compensation. In addition, in
connection with the Conversion, the Company intends to make a contribution on
behalf of all persons who are otherwise eligible for the 401(k) Plan on the
Effective Date, of 100 shares of Common Stock (the "CONVERSION CONTRIBUTION"),
subject to IRS limitations. All contributions by employees are fully vested and
are not subject to forfeiture. A participant would vest in contributions made by
the Company to the 401(k) Plan, including the Conversion Contribution, at the
following rates: (i) for less than three "years of service" (as defined in the
401(k) Plan) with the Company, 0%; (ii) for three years of service with the
Company, 33 1/3%; (iii) for four years of service with the Company, 66 2/3%; and
(iv) for five or more years of service with the Company, 100%. Contributions to
the 401(k) Plan may be invested in various available investment alternatives at
the discretion of the participant. Distributions may be made from a
participant's account in the form of a lump sum upon termination of employment,
retirement, disability, death or in the event of financial hardship, subject to
certain limitations as set forth in the 401(k) Plan.
INCENTIVE PLAN
The Board of Directors and shareholders of Summit have adopted the
Incentive Plan. Under such Incentive Plan, certain directors, officers and other
employees of Summit and its subsidiaries can be granted a variety of long-term
incentives, including non-qualified stock options, incentive stock options,
grants of restricted and unrestricted stock, performance share awards, stock
appreciation rights, dividend equivalents and other stock-based awards. The
purpose of the Incentive Plan is to promote the success, and enhance the value,
of Summit and its subsidiaries by linking the personal interests of their
directors, officers and key employees to those of Summit shareholders and by
providing their directors, officers and key employees with an incentive for
outstanding performance.
The Incentive Plan will be administered by the Compensation Committee of
Summit, consisting of three non-employee directors. Such Committee which will
determine, in its discretion, among other things, which
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directors, officers and employees will receive awards under the Incentive Plan,
when the awards will be granted, the type of awards to be granted, the number of
shares or cash involved in each award, the time or times when any options
granted will become exercisable and, subject to certain conditions, the price
and duration of such options. A total of 500,000 shares of Common Stock have
been reserved for issuance under the Incentive Plan.
The Board of Directors or the Compensation Committee has the right at any
time to amend or discontinue the Incentive Plan without the consent of Summit's
shareholders or optionees, provided that no such action may adversely affect
awards previously granted without the recipient's consent.
The Incentive Plan provides that in the event of a "change of control" (as
defined in the Incentive Plan) of Summit, all awards granted under the Incentive
Plan that are in the nature of rights that may be exercised shall automatically
become fully exercisable. In addition, at any time prior to or after a change of
control, the Compensation Committee may accelerate awards and waive conditions
and restrictions on any other awards under the Incentive Plan to the extent it
may determine appropriate.
Stock Options. Options granted under the Incentive Plan may be either: (i)
options intended to qualify as incentive stock options under Section 422 of the
Tax Code, or (ii) non-qualified stock options. Incentive stock options may be
granted under the Incentive Plan to employees of Summit and its subsidiaries.
Non-qualified stock options may be granted to directors, officers or employees
of Summit and its subsidiaries. Options may be made exercisable in specified
installments.
The exercise price of incentive stock options, as determined by the
Compensation Committee, may not be less than the fair market value of the Common
Stock on the date of grant and the term of any such option may not exceed ten
years from the date of grant. With respect to any participant in the Incentive
Plan who owns shares representing more than 10% of the voting power of the
outstanding capital shares of Summit, the exercise price of any incentive stock
option may not be less than 110% of the fair market value of such shares on the
date of grant and the term of such option may not exceed five years from the
date of grant. The exercise price of non-qualified stock options is determined
by the Compensation Committee on the date of grant, and the term of such option
may not exceed ten years from the date of grant.
To date, Summit has not granted any awards under the Incentive Plan. In
connection with the Conversion, Summit plans to grant stock options on the
Effective Date to the following directors and executive officers of Summit to
purchase the following number of shares of Common Stock at the same price as the
shares offered hereby: William B. Bull -- 90,000; Russell L. Wall -- 45,000;
Greg C. Branch -- 60,000; C.C. Dockery -- 60,000; John A. Gray -- 33,000; Robert
L. Noojin, Sr. -- 33,000; Thomas S. Petcoff -- 36,000; and Robert
Siegel -- 33,000. The options to be granted to Mr. Bull and Mr. Wall will be
incentive stock options and will vest 50% in 1997 and 50% in 1998, provided that
such officer remains employed by Summit. The options to be granted to the other
named persons will be non-qualified stock options and will vest 180 days after
the Effective Date, provided that each such person remains a director of Summit.
Performance Awards. The Compensation Committee may grant performance
awards entitling the participant to receive Common Stock based upon the
achievement of individual or Company performance goals and upon such other
conditions as the Compensation Committee may determine.
Restricted Stock. A specified number of shares of Common Stock may be
awarded contingently subject to a substantial risk of forfeiture to Summit under
such conditions, and during such periods of time, as the Compensation Committee
may determine ("RESTRICTED STOCK"). A participant who has been awarded
Restricted Stock may, if the award so provides, vote and receive dividends on
such shares, but, generally, may not sell, assign, transfer, pledge or otherwise
encumber the shares during the restricted period. An award of Restricted Stock
may provide that if a participant's employment ceases prior to the end of the
restricted period, all of the participant's Restricted Stock will be forfeited.
Grants may be made without consideration or in consideration of a payment by the
participant that is less than the fair market value of the shares on the grant
date.
Unrestricted Stock. The Compensation Committee may also grant shares (at
no cost or for a purchase price determined by the Compensation Committee) which
are free from any restrictions ("UNRESTRICTED
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STOCK"). Unrestricted Stock may be issued in recognition of past services or
other valid consideration, and may be issued in lieu of cash compensation due to
the recipient.
Stock Appreciation Rights. Stock appreciation rights ("SARS") may be
granted to employees which, upon the exercise thereof, entitle the employee to
receive an amount equal to the excess of the market price of the Common Stock
over the grant price of the SAR, as determined by the Compensation Committee.
Such grant price may not be less than the fair market value of a share of Common
Stock on the date of grant in the case of any SAR related to an incentive stock
option.
Dividend Equivalents. The Compensation Committee may grant to a
participant who has received incentive stock options or SARs the right to
receive payments equal to dividends with respect to all or a portion of the
number of shares subject to such incentive stock options or SARs.
As soon as practicable after the Effective Date, Summit intends to file
with the Commission a registration statement on Form S-8 covering the Common
Stock that may be issued upon exercise of options granted under the Incentive
Plan as well as shares that may be granted under such plan and shares that may
be granted pursuant to the Conversion Contribution, thus permitting the resale
of such Common Stock by non-affiliates in the public market without restriction
under the Securities Act.
CERTAIN TRANSACTIONS
Aeromech, Inc. ("AEROMECH"), an entity in which Mr. Bull currently owns
approximately 10% of the outstanding shares, has provided services to SCI in the
form of airplane maintenance, hangar leasing and office space for the crew since
October 1994. During the fiscal years ended March 31, 1995 and 1996, SCI paid
Aeromech $62,000 and $420,000, respectively, for such services.
SCI had an arrangement with BJ Limo Services, Inc. ("BJ"), a Company in
which Mr. Bull owns 50% of the outstanding stock, pursuant to which BJ provided
the employees of the Company limousine services and, on occasion, the use of a
private airplane and charter boat. This agreement was terminated by the Company
in February 1996. During the fiscal years ended March 31, 1994, 1995 and 1996,
the Company paid approximately $38,000, $17,000 and $9,000, respectively, for
such services.
Mr. Bull is on the Board of Directors of the Florida Retail Federation (the
"ASSOCIATION"). Pursuant to a written arrangement between SCI and the
Association, the Association, as the sponsoring party of FRF, is entitled to 1%
of such Fund's premiums earned in each year. During the fiscal years ended March
31, 1994, 1995 and 1996, the Company paid approximately $1.0 million, $1.0
million and $0.9 million to the Association for such fees. In addition, during
the years ended March 31, 1994, 1995 and 1996, FRF paid SCI fees for
administrative services of approximately $32.7 million, $30.5 million and $27.7
million, respectively.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such a person, will be
on terms no less favorable to the Company than can be obtained from unaffiliated
third parties.
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull, who was at that
time President and Chief Executive Officer and a shareholder of SHC, personally
indemnify ESIF up to a maximum of $5 million for loss, injury or damage to ESIF
that may result from the parties' execution of the merger agreement pursuant to
which ESIF acquired SHC, or that may result from SHC's execution of a certain
credit agreement with the Bank. According to the January Consent Order, Mr.
Bull's indemnification obligations will decrease by $1 million for every $4
million increase in the statutory net worth of SHC, once SHC's statutory net
worth reaches zero or greater, and such obligations will expire fully on the
earlier of January 11, 2001 or the date upon which the loans from the Bank are
paid in full. Pursuant to the Order issued by the Florida DOI, if the Conversion
is not consummated for any reason, all provisions of the January Consent Order
shall be enforceable by the parties thereto. See "RISK FACTORS -- Benefits of
Conversion to an Officer and Director," and "THE OFFERINGS -- Subscription
Offering -- Interests of Certain Persons."
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
anticipated beneficial ownership of Common Stock as of the Effective Date by:
(i) each of Summit's directors; (ii) each executive officer of Summit; and (iii)
all of Summit's executive officers and directors as a group. The Company does
not believe that any person will beneficially own more than 4.99% of the shares
of Common Stock as of the Effective Date. The number of shares of Common Stock
anticipated to be beneficially owned by each person listed below includes the
number of shares offered in the Subscription Offering to any Eligible
Policyholder with which such person is affiliated. Except as noted below, each
person listed in the table will have sole investment and voting power with
respect to the shares held by such person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OWNED OWNED
- --------------------------------------------------------------------------- ------------ -------
<S> <C> <C>
William B. Bull............................................................ 100,000 2.0%
Russell L. Wall............................................................ 22,727 *
Greg C. Branch............................................................. 45,455 *
C. C. Dockery.............................................................. 45,455 *
John A. Gray............................................................... 4,545 *
Robert L. Noojin, Sr....................................................... 4,545 *
Thomas S. Petcoff.......................................................... 9,091 *
Robert Siegel.............................................................. 4,545 *
All directors and executive officers as a group (8 persons)................ 236,363 4.7%
</TABLE>
- ---------------
* Less than one percent.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary description of Summit's capital stock. This
summary does not purport to be complete and is subject to and qualified in its
entirety by the provisions of Summit's Articles of Incorporation (the "SUMMIT
ARTICLES") and Bylaws (the "SUMMIT BYLAWS"), copies of which are included as
exhibits to the Registration Statement of which this Proxy Statement/Prospectus
is a part, and by the provisions of applicable law.
PREFERRED STOCK
Summit is authorized to issue an aggregate of 5,000,000 shares of preferred
stock, par value $10 per share. The preferred stock may be issued in one or more
series, from time to time, with such designations, rights, preferences and
limitations, including but not limited to dividend rates and conversion
features, as the Board of Directors may determine. Accordingly, preferred stock
may be issued having dividend and liquidation preferences over the Common Stock
without the consent of the holders of Common Stock. In addition, the ability of
the Board to issue preferred stock could also be used by Summit as a means of
resisting a change of control of Summit and, therefore, could be considered an
"anti-takeover" device.
Series A Preferred Stock. In connection with the Conversion, Summit will
issue 1,639,866 shares of Series A Preferred Stock. Holders of the Series A
Preferred Stock have no voting rights, except as are required by the Florida
Act, or on a matter which would adversely affect the preferences, rights or
powers of the holders of Series A Preferred Stock.
Holders of Series A Preferred Stock have no preemptive or preferential
right to purchase or subscribe for any unissued or additional authorized stock
or any securities of Summit and have no rights to convert their Series A
Preferred Stock into Common Stock or any other securities.
The rights, preferences, limitations and restrictions of the Series A
Preferred Stock are set forth in the Certificate of Designation, Preferences and
Rights of Series A Preferred Stock of Summit, a copy of which is filed as an
exhibit to the Registration Statement of which this Proxy Statement/Prospectus
forms a part (the "SERIES A DESIGNATION") and which should be read in its
entirety. In summary:
(i) The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up of Summit,
rank prior to all classes or series of equity securities of Summit,
including the Common Stock.
(ii) The holders of Series A Preferred Stock shall be entitled to
receive, out of funds legally available for the payment of dividends, cash
dividends at the rate of 4% per annum. Such dividends shall accrue whether
or not declared by the Board of Directors, but shall be payable only as and
when declared by the Board; provided, however, that all accrued but unpaid
dividends shall be paid upon any redemption of the Series A Preferred Stock
or any Liquidation (as defined in the Series A Designation).
(iii) In the event of any Liquidation of Summit, after payment or
provision for payment of the debts and other liabilities of Summit, and
before any payment or distribution of Summit's assets shall be made or set
apart for the holders of any securities ranking junior to the Series A
Preferred Stock, the holders of the Series A Preferred Stock shall be
entitled to receive $10 per share of Series A Preferred Stock plus an
amount equal to all accrued but unpaid dividends thereon.
(iv) The Series A Preferred Stock shall be redeemable by Summit at any
time and from time to time, in whole or in part. Summit shall be required
to redeem all of the Series A Preferred Stock then outstanding within
thirty days following the tenth anniversary of the date upon which the
Series A Preferred Stock is issued; provided, however, that the Board of
Directors may elect to defer such mandatory redemption until the thirty
days following the twelfth anniversary date of the date upon which the
Series A Preferred Stock is issued if the Board causes Summit to pay,
within the thirty-day period following the tenth anniversary date, all then
accrued but unpaid dividends.
(v) The redemption price shall be $10 per share, together with an
amount equal to all accrued but unpaid dividends thereon to the date of
redemption.
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(vi) In the event that Summit enters into any Business Combination (as
defined in the Series A Designation), Summit or some other person shall
make an offer to purchase the then outstanding Series A Preferred Stock for
$10 per share plus an amount equal to all accrued but unpaid dividends.
COMMON STOCK
Summit is authorized to issue up to 20,000,000 shares of Common Stock, par
value $.01 per share. As of the date of this Proxy Statement/Prospectus, Summit
had seven shareholders of record and seven shares of Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record at all shareholder meetings for any purpose, including the election of
directors. There is no cumulative voting for election of directors. The Summit
Bylaws require that a majority of the issued and outstanding shares of Summit be
represented to constitute a quorum and transact business at a shareholders'
meeting.
Holders of Common Stock have no preemptive or preferential right to
purchase or subscribe for any unissued or additional authorized stock or any
securities of Summit and have no rights to convert their Common Stock into any
other securities.
Subject to the prior rights of any series of preferred stock which may from
time to time be outstanding, if any, holders of Common Stock are entitled to
receive ratably dividends when, as, and if declared by the Board of Directors
out of funds legally available therefor and, upon the liquidation, dissolution
or winding up of Summit, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accumulated dividends and
liquidation preferences on the preferred stock, if any.
OTHER CHARACTERISTICS OF CAPITAL STOCK
See "DIVIDEND POLICY" with respect to restrictions on the payment of cash
dividends and "THE OFFERINGS -- Subscription Offering -- Limitations on Common
Stock Purchases" with respect to restrictions on the purchase of securities by
any person.
ANTI-TAKEOVER PROVISIONS
Regulatory Restrictions. Section 628.461 of the Florida Insurance Code
prohibits any person, individually or in conjunction with any affiliated person
of such person, from acquiring, directly or indirectly, 5% or more of the
outstanding voting securities of a Florida-domiciled insurance company or any
controlling company thereof without prior approval of the Florida DOI. However,
a person acquiring less than 10% of such outstanding voting securities may file
with the Florida DOI a disclaimer of affiliation and control and, unless such
disclaimer is disallowed by the Florida DOI, such person will not be required to
seek prior approval of the Florida DOI for the acquisition.
Restrictions in Summit's Articles of Incorporation and Bylaws. A number of
provisions of the Summit Articles and Summit Bylaws concern matters of corporate
governance and certain rights of shareholders. The following discussion is a
general summary of certain provisions of the Summit Articles and Summit Bylaws
relating to stock ownership and transfers, the Board of Directors and business
combinations, which might be deemed to have a potential "anti-takeover" effect.
These provisions may have the effect of discouraging a future takeover attempt
which is not approved by the Board of Directors but which individual
shareholders of Summit may deem to be in their best interests or in which
shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors and management more
difficult. The following description is necessarily general and reference should
be made in each case to such Summit Articles and Summit Bylaws, which are filed
as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus forms a part.
Board of Directors. The Board of Directors of Summit is divided into three
classes, each of which contains approximately one-third of the whole number of
the members of the Board. Each class serves a
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staggered term, with approximately one-third of the total number of directors
being elected each year. The Summit Articles and Summit Bylaws prohibit
cumulative voting for the election of directors.
A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the board of
directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority of the board of directors, whereas a majority of a
non-classified board may be changed in one year. In the absence of the
provisions of the Summit Articles and Summit Bylaws classifying the Board, all
of the directors would be elected each year.
Authorized Shares. The Summit Articles authorize the issuance of
20,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. The
shares of Common Stock and preferred stock were authorized to provide Summit's
Board of Directors with as much flexibility as possible in using such shares for
financings, acquisitions, stock dividends, stock splits, employee stock options
and other similar purposes. However, these additional authorized shares may also
be used by the Board of Directors to deter future attempts to gain control of
Summit. The Board of Directors has sole authority to determine the terms of any
one or more series of the preferred stock, including voting rights, conversion
rates and liquidation preferences. As a result of the ability to fix voting
rights for a series of preferred stock, the Board has the power to issue a
series of preferred stock to persons friendly to management in order to attempt
to block a post-tender offer merger or other transaction by which a third party
seeks control, and thereby assist management to retain its position. There are
currently no plans for the issuance of preferred stock other than the Series A
Preferred Stock being offered hereby. See "DESCRIPTION OF CAPITAL
STOCK -- Preferred Stock."
Anti-Takeover Effects of Incentive Plan. The Incentive Plan provides that in
the event of a "change of control" (as defined in the Incentive Plan) of Summit,
all awards granted under the Incentive Plan that are in the nature of rights
that may be exercised shall automatically become fully exercisable. In addition,
at any time prior to or after a change of control, the Compensation Committee
may accelerate awards and waive conditions and restrictions on any other awards
under the Incentive Plan to the extent it may determine appropriate.
Florida Corporate Law. Summit will be subject to several anti-takeover
provisions under the Florida Act that apply to a public corporation under
Florida law unless the corporation has elected to opt out of such provisions in
its articles of incorporation or bylaws. Such provisions also serve to limit
certain related party transactions otherwise permissible under the Florida Act.
Summit has not elected to opt out of such provisions.
The Florida Act contains a provision that generally provides that shares
acquired in a "control share acquisition" will not possess any voting rights
unless voting rights are approved by a majority vote of a corporation's
disinterested shareholders. A "control share acquisition" is an acquisition that
immediately thereafter entitles the acquiring party to vote in the election of
directors within any of the following ranges of voting power: (i) one-fifth or
more but less than one-third of all voting power; (ii) one-third or more but
less than a majority of all voting power; and (iii) a majority or more of all
voting power. Approval of voting rights for control shares requires: (i)
approval by each class or series entitled to vote separately, by majority of all
votes entitled to be cast by the class or series being entitled to vote as a
separate class and (ii) approval by each class or series entitled to vote
separately, by a majority of all votes entitled to be cast by that group
excluding all "control shares."
The Florida Act also contains an "affiliated transactions" provision that
generally requires two-thirds approval of holders of disinterested shares of a
Florida corporation in order to engage in a broad range of transactions with an
"interested shareholder." An "interested shareholder" is defined as a person who
together with affiliates and associates beneficially owns more than 10% of the
outstanding voting shares of the corporation. Transactions that require the
approval of two-thirds of the voting shares beneficially owned by disinterested
shareholders include: (i) mergers or consolidations with the interested
shareholder; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with the interested shareholders of 5% or
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more of either the corporation's total assets or total outstanding shares, or
representing 5% or more of the earning power or net income of the corporation;
(iii) issuance or transfers of shares to the interested shareholder having a
market value of 5% or more of the total market value of the corporation's
outstanding shares (except pursuant to the exercise of stock warrants or rights,
or a dividend or distribution made pro-rata to all shareholders); (iv) a
liquidation or dissolution of the corporation proposed by or pursuant to in a
written or unwritten agreement or understanding with the interested shareholder;
(v) a reclassification of securities or the corporate reorganization with the
interested shareholder that has the effect of increasing the percentage voting
ownership of the interested shareholder by more than 5%; and (vi) any receipt by
the interested shareholder of a benefit, directly or indirectly, of any loans,
advances, guarantees, pledges, other financial assistance, or tax credits or
advantages provided by or through the corporation.
TRANSFER AGENT
The Transfer Agent and registrar for Summit's Series A Preferred Stock and
Common Stock is .
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon the Tax Code, the applicable
Treasury Regulations thereunder, judicial authority, and current administrative
rulings and practice as of the date hereof. The following discussion does not
purport to consider all aspects of U.S. federal income taxation that may be
relevant to particular Eligible Policyholders, some of whom may be subject to
special rules not discussed here (e.g., tax-exempt entities). The following
discussion is limited to those persons who are citizens or residents of the
U.S., corporations or partnerships organized in or under the laws of the U.S.,
and an estate or trust the income of which is subject to U.S. federal income
taxation regardless of its source. In addition, neither the opinion described
below nor the following discussion considers the effect of any applicable
foreign, state, local or other tax laws.
ESIF has received an opinion of its tax counsel, Alston & Bird, a copy of
which is attached hereto as Exhibit F, that the following summary of the
principal U.S. federal income tax consequences to Eligible Policyholders of
their receipt of consideration pursuant to the Plan of Conversion accurately
describes in all material respects the applicable U.S. federal income tax
consequences on the date such information was mailed (the "TAX OPINION"). The
Tax Opinion is based on current law, certain assumptions set forth therein,
certain representations from ESIF and certain other information, data,
documentation and materials. Neither this summary nor the Tax Opinion is binding
on the IRS and no ruling from the IRS has been sought or will be sought with
respect to such tax consequences.
THE FOLLOWING DISCUSSION IS A SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX
CONSEQUENCES OF THE PLAN OF CONVERSION WITHOUT REFERENCE TO THE PARTICULAR FACTS
AND CIRCUMSTANCES OF ANY PARTICULAR ELIGIBLE POLICYHOLDER. EACH ELIGIBLE
POLICYHOLDER SHOULD CONSULT ITS TAX ADVISOR TO DETERMINE THE PRECISE U.S.
FEDERAL, STATE, LOCAL AND ANY APPLICABLE FOREIGN TAX CONSEQUENCES OF THE PLAN OF
CONVERSION IN ITS PARTICULAR CIRCUMSTANCES, INCLUDING THE EFFECTS OF ANY CHANGES
IN TAX LAWS OR TREASURY REGULATIONS AFTER THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
GENERAL DISCUSSION
For U.S. federal income tax purposes, it is intended that the receipt of
Series A Preferred Stock by Eligible Policyholders in connection with the
Conversion will be treated as a non-taxable exchange. This treatment is
consistent with the position that the IRS has taken with respect to exchanges of
policyholder interests in similar conversion transactions in published and
private letter rulings, and is the position which ESIF believes the IRS would
take with respect to this transaction. The details of such tax treatment are
outlined below.
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Conversion and Offerings. ESIF has received an opinion from Alston & Bird,
special tax counsel, that the various steps constituting the Conversion of ESIF
into Bridgefield will be treated for federal income tax purposes as one or more
tax-free reorganizations under Section 368 of the Tax Code. In addition, Alston
& Bird has opined that the exchange by Eligible Policyholders of their
Membership Interests in ESIF in return for the Series A Preferred Stock and the
exchange by Eligible Policyholders, the Management Group and the purchasers in
the Offerings of cash for Common Stock will be treated as a tax-free exchange
under Section 351 of the Tax Code. As a result, Eligible Policyholders will not
be taxed on the receipt of the Series A Preferred Stock. In addition, the
receipt of subscription rights to purchase Common Stock by the Eligible
Policyholders also should be treated as tax free, so long as the terms of the
purchase in the Subscription Offering, the Public Offering and the Private
Placements are the same and the purchase price in both offerings represents the
fair market value of the Common Stock of the Company, as is anticipated.
Series A Preferred Stock. Although the receipt of the Series A Preferred
Stock should be tax free, such stock likely will be treated as "Section 306
Stock" under applicable provisions of the Tax Code. In such event, upon the
redemption or sale of the Series A Preferred Stock, the holder will be treated a
having sold his shares and generally will be taxed at capital gains rates on any
gain realized on such sale only if such sale or disposition is of his entire
interest in the Company and he either owns no Common Stock or simultaneously
sells such Common Stock. For purposes of determining the holding period of the
Series A Preferred Stock and whether any gain realized will be taxed at
long-term capital gains rates, each Eligible Policyholder will be entitled to
treat the period its In-Force Policy was held as a period during which the
Common Stock was held. Generally, an insurance policy is treated as purchased
when it has been issued and the premium has been paid. Eligible Policyholders
acquiring their policies in some other way should consult their tax advisers.
If instead the redemption or sale is solely of a portion of the Series A
Preferred Stock, or is all of the Series A Preferred Stock of such holder but
the holdings of another shareholder are attributed to him under constructive
ownership rules, some or all of the value received for the Series A Preferred
Stock may be taxed as a dividend at ordinary income rates. Under the terms of
the Series A Preferred Stock, it is possible for the Company to effect a partial
redemption of the shares, leading to possible ordinary income taxation on such
partial redemption. Similarly, if the redemption is of all of a holder's Series
A Preferred Stock but the holder continues to hold Common Stock, either directly
or after taking into account stock in the Company that may be attributed to him
under certain constructive ownership rules, some or all of the value received in
the redemption may be taxed as a dividend at ordinary income rates. Eligible
Policyholders may wish to consider this tax treatment when making a decision to
invest in or continue to hold Common Stock.
TAXPAYER IDENTIFICATION NUMBER
It is important that each Eligible Policyholder complete, sign and return
the Request For Taxpayer Identification Number card enclosed in your package.
(For most individuals, your taxpayer identification number is your social
security number.) IF AN ELIGIBLE POLICYHOLDER FAILS TO COMPLETE, SIGN AND RETURN
THE REQUEST FOR TAXPAYER IDENTIFICATION NUMBER CARD TO THE TRANSFER AGENT, SUCH
ELIGIBLE POLICYHOLDER MAY BE SUBJECT TO A $50 IRS PENALTY AND ESIF OR SUMMIT MAY
BE REQUIRED TO WITHHOLD FOR U.S. FEDERAL INCOME TAXES 31% OF ANY CASH PAYMENT,
INCLUDING ANY FUTURE DIVIDENDS ON COMMON STOCK, THAT SUCH ELIGIBLE POLICYHOLDER
WOULD OTHERWISE RECEIVE. This 31% withholding is not an additional tax and any
amount withheld may be claimed on such holder's U.S. federal income tax return
as credit against U.S. federal income tax liability for the year. The $50 IRS
penalty may not be claimed as a credit against U.S. federal income tax
liability. Detailed instructions for completing the Request For Taxpayer
Identification Number card are included in this Proxy Statement/Prospectus. The
Request For Taxpayer Identification Number card must be received by the Transfer
Agent no later than 4:00 p.m. Eastern Time on , 1997.
ORDINARY INCOME AND CAPITAL GAINS TAX RATE DIFFERENTIAL
The top marginal U.S. federal income tax rate applicable to ordinary income
(including dividend income) is 39.6% for individuals and 35% for corporations.
The U.S. federal rate applicable to "net capital gains" (i.e., net gain from the
sale of capital assets held for more than one year reduced by any net loss from
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the sale of capital assets held for one year or less) for individuals is 28%.
Capital losses generally cannot be applied to offset ordinary income.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Conversion, Summit will have outstanding 5,000,000
shares of Common Stock and 1,639,866 shares of Series A Preferred Stock, all of
which shares will have been registered under the Securities Act and will be
freely tradable without restriction or further registration under the Securities
Act, except that: (i) those shares held by "affiliates" (as defined in Rule 144
promulgated under the Securities Act) of Summit will not be freely tradable and
(ii) shares that are sold in any Private Placements will not have been
registered under the Securities Act. Based on information provided to Summit by
its affiliates, Summit believes that approximately shares of Common
Stock, equal to % of the Post-Offering Outstanding Shares, and 2,118 shares
of Series A Preferred Stock, equal to 0.1% of the Preferred Stock to be
outstanding after the Effective Date, will be beneficially owned by affiliates
of Summit. Shares beneficially owned by affiliates of Summit and shares that are
sold in any Private Placements may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, such as, in the case of the Common Stock, the exemption provided
by Rule 144 under the Securities Act. Additionally, all shares of Common Stock
held by affiliates of Summit are subject to a lock-up agreement with the
Representatives that prohibits their resale prior to 180 days after the
Effective Date without the prior consent of Raymond James & Associates, Inc.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who owns shares of Common Stock which have not been
registered under the Securities Act and as to which a minimum of two years has
elapsed since the later of the date of acquisition from and full payment to
Summit or an affiliate of Summit, and any affiliate of Summit who owns Common
Stock, will be entitled to sell, within any three-month period, beginning 90
days after the date of this Proxy Statement/Prospectus (but subject to the 180
day lock-up described above) a number of shares of Common Stock that does not
exceed the greater of: (i) 1% of the then outstanding shares of Common Stock
(50,000 shares of Common Stock upon the completion of the Conversion) or (ii)
the average weekly trading volume in the Common Stock in the public market
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales of Common Stock pursuant to Rule 144 are also
subject to certain manner of sale provisions, notice requirements and the
availability of current public information about Summit. Additionally, under
Rule 144, any person who holds shares of Common Stock which have not been
registered under the Securities Act (such as shares that are issued in any
Private Placement) as to which a minimum of three years has elapsed since the
later of the date of acquisition from and full payment to Summit or an affiliate
of Summit and who is not, and for a period of three months prior to the sale of
such shares has not been, an affiliate of Summit is free to sell such shares
without regard to the volume, manner of sale, notice and other provisions of
Rule 144.
Because there is expected to be no public trading market for the Series A
Preferred Stock, shares of Series A Preferred Stock held by affiliates of Summit
are not eligible for sale pursuant to Rule 144. Affiliates who sell shares of
Series A Preferred Stock may do so only in compliance with the registration
requirements of the Securities Act or in private transactions or otherwise
pursuant to an exemption from registration.
In addition, 500,000 shares of Common Stock are reserved for issuance under
Summit's Incentive Plan and 45,000 shares of Common Stock are reserved for
issuance in connection with the 401(k) Plan. Summit intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of Common Stock reserved for issuance under the Incentive Plan and the
401(k) Plan within 30 days after the Effective Date. Shares of Common Stock
issued under the Incentive Plan and the 401(k) Plan. Summit intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of Common Stock reserved for issuance under the Incentive Plan and the
401(k) Plan. Shares of Common Stock issued under the Incentive Plan and the
401(k) Plan to non-affiliates of Summit after the effective date of such
registration statement will be freely tradable in the public market. Shares
issued under the Incentive Plan and the 401(k)
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Plan to affiliates of Summit after the effective date of such registration
statement will be eligible for sale pursuant to Rule 144.
Prior to the Conversion, there has been no public trading market for
Summit's securities. Summit cannot predict the effect, if any, that sales of
Common Stock or Series A Preferred Stock following the Conversion, pursuant to a
registration statement, Rule 144, or otherwise, or the availability of such
shares for sale, will have on the market price prevailing from time to time.
Sales, or the availability for sale, of a substantial amount of Common Stock or
Series A Preferred Stock could adversely affect prevailing market prices for
such stock.
LEGAL MATTERS
Certain legal matters with respect to the shares of the Common Stock
offered hereby will be passed upon for the Company by Alston & Bird, Atlanta,
Georgia, and McConnaughhay, Roland, Maida & Cherr, P.A., Tallahassee, Florida,
and for the Underwriters by Holland & Knight, Tampa, Florida.
EXPERTS
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1996 and for the year then ended and the consolidated financial statements
of SHC and subsidiaries for the years ended December 31, 1993, 1994, and 1995
appearing in this Proxy Statement/Prospectus and Registration Statement have
been audited by Ernst & Young, LLP, independent auditors, as set forth in their
reports therein appearing elsewhere herein and in the Registration Statement and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1994 and 1995 and for the years then ended appearing in this Proxy
Statement/Prospectus and Registration Statement have been audited by Brinton &
Mendez, certified public accountants, as set forth in their reports therein
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
CHANGE IN ACCOUNTANTS
In June 1996, ESIF changed principal accountants from Brinton & Mendez to
Ernst & Young, LLP to audit its financial statements. Prior thereto, Brinton &
Mendez had served as ESIF's principal accountants. Prior to the Acquisition,
Ernst & Young, LLP had served as SHC's principal accountants. The decision by
ESIF to change principal accountants was made with the approval of the Board of
Trustees as a result of the decision to pursue the Conversion.
The Company believes, and has been advised by Brinton & Mendez that it
concurs in such belief, that, during the fiscal years ended March 31, 1995 and
1994 and subsequent thereto, the Company and Brinton & Mendez did not have any
disagreement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Brinton & Mendez, would have caused it to make
reference in connection with its report on the Company's financial statements to
the subject matter of the disagreement.
No report of Brinton & Mendez on the Company's financial statements for
either of the fiscal years ended March 31, 1995 and 1994 contained an adverse
opinion, a disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope or accounting principles. During such fiscal periods,
there were no "reportable events" within the meaning of Item 304(a)(1) of
Regulation S-K promulgated under the Securities Act.
ADDITIONAL INFORMATION
Summit has filed with the Commission, 450 Fifth Street, N.W. , Washington,
D.C. 20549, a Registration Statement on Form S-1 (the "REGISTRATION STATEMENT")
under the Securities Act. This Proxy State-
76
<PAGE> 88
ment/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, as permitted by the rules and
regulations of the Commission. For further information, reference is made to the
Registration Statement and to the exhibits filed therewith. Statements contained
in this Proxy Statement/Prospectus as to the contents of any contract or other
document which has been filed as an exhibit to the Registration Statement are
qualified in their entirety by reference to such exhibits for a complete
statement of their terms and conditions. The Registration Statement and the
exhibits thereto may be inspected without charge at the offices of the
Commission, and copies or all or any part thereof may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549
or at certain of the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048, and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed by the
Commission. The Commission also maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. Such reports, proxy and
information statements and other information may be found on the Commission's
site address, http://www.sec.gov.
Summit is not currently subject to the information reporting requirements
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). As a
result of the Conversion, Summit will become subject to the information
reporting requirements of the Exchange Act. Summit intends to furnish its
shareholders with annual reports, which will include consolidated financial
statements audited by its independent certified public accountants, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
77
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996........................... F-4
Consolidated Statements of Income for the years ended March 31, 1994, 1995 and
1996............................................................................. F-5
Consolidated Statements of Changes in Equity for the years ended March 31, 1994,
1995 and 1996.................................................................... F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1995 and
1996............................................................................. F-7
Notes to Consolidated Financial Statements.......................................... F-8
Consolidated Balance Sheets as of September 30, 1995 and 1996 (unaudited)........... F-24
Consolidated Statements of Income for the six months ended September 30, 1995 and
1996 (unaudited)................................................................. F-25
Consolidated Statements of Cash Flows for the six months ended September 30, 1995
and 1996 (unaudited)............................................................. F-26
Note to Consolidated Financial Statements........................................... F-27
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditor....................................................... F-28
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995............................................................................. F-29
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995.............................................................. F-30
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995......................................................................... F-31
Notes to Consolidated Financial Statements.......................................... F-32
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditor on Financial Statement Schedules..................... F-36
Schedule I -- Summary of Investments as of March 31, 1996........................... F-38
Schedule IV -- Reinsurance for the years ended March 31, 1994, 1995 and 1996........ F-39
Schedule VI -- Supplemental Information Concerning Insurance Operations for the
years ended March 31, 1994, 1995 and 1996........................................ F-40
</TABLE>
Schedule II -- Condensed Financial Statements of the Registrant is omitted
due to minimal capitalization and a lack of operations to date of Summit Holding
Southeast, Inc.
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
elsewhere herein.
F-1
<PAGE> 90
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Employers Self Insurers Fund
We have audited the accompanying consolidated balance sheet of Employers
Self Insurers Fund (the "Company") and its subsidiaries as of March 31, 1996,
and the related consolidated statements of income, changes in equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides 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 the Company
and its subsidiaries at March 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Jacksonville, Florida
July 31, 1996
F-2
<PAGE> 91
INDEPENDENT AUDITORS' REPORT
Board of Trustees
Employers Self Insurers Fund
Lakeland, Florida
We have audited the accompanying consolidated balance sheets of Employers
Self Insurers Fund and its subsidiaries as of March 31, 1995, and the related
consolidated statements of income, equity, and cash flows for each of the two
years in the period ended March 31, 1995. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1995 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Fund's
financial statements have been prepared in conformity with generally accepted
accounting principles applicable to stock property and casualty insurance
companies.
/s/ Brinton & Mendez
BRINTON & MENDEZ
Certified Public Accountants
Lakeland, Florida
July 26, 1996
F-3
<PAGE> 92
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
(IN THOUSANDS) -------- --------
<S> <C> <C>
ASSETS
Cash and invested assets:
Fixed maturities, available-for-sale............................... $204,097 $178,818
Preferred stock.................................................... 1,914 3,156
Common stock....................................................... 8,978 11,095
Short-term investments............................................. 6,983 19,770
Cash and cash equivalents.......................................... 2,984 10,678
-------- --------
Total cash and invested assets............................. 224,956 223,517
Premiums receivable (net of $2,100 and $1,500 allowance for doubtful
accounts, respectively)............................................ 50,391 38,093
Accounts receivable.................................................. -- 3,157
Reinsurance recoverable.............................................. 110,141 111,519
Recoverable from Florida Special Disability Trust Fund............... 15,879 20,060
Accrued investment income............................................ 3,409 2,936
Income taxes recoverable............................................. -- 9,690
Equipment and software............................................... -- 2,529
Capitalized computer software costs.................................. -- 6,038
Value assigned to future administration of insurance contracts....... -- 6,470
Unamortized debt acquisition cost.................................... -- 709
Excess of cost over net assets of business acquired.................. -- 49,198
Deferred income taxes................................................ 19,100 16,355
Other assets......................................................... 1,330 1,907
Net assets of discontinued operations................................ -- 612
-------- --------
Total assets............................................... $425,206 $492,790
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $367,391 $387,632
Debt............................................................... -- 44,000
Unallocated policyholder remittances............................... 18,234 14,635
Accounts payable and accrued expenses.............................. 12,690 14,492
Taxes, licenses and fees........................................... 1,861 1,493
Deferred revenue................................................... 87 7,384
Federal income taxes payable....................................... 4,878 --
-------- --------
Total liabilities.......................................... 405,141 469,636
Equity:
Retained earnings.................................................. 21,474 21,659
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... (1,409) 1,495
-------- --------
Total equity............................................... 20,065 23,154
-------- --------
Total liabilities and equity............................... $425,206 $492,790
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 93
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums earned.............................................. $148,441 $128,489 $114,893
Net investment income........................................ 10,510 12,205 13,210
Net realized investment gains................................ -- -- 4,354
Administrative fees.......................................... -- -- 7,665
Other income................................................. -- 121 206
-------- -------- --------
Total revenue........................................ 158,951 140,815 140,328
Losses and expenses:
Losses and loss adjustment expenses.......................... 108,411 69,116 94,844
Other underwriting, general and administrative expenses...... 37,121 41,546 43,657
Amortization and depreciation................................ -- -- 1,103
Interest expense............................................. -- -- 847
-------- -------- --------
Total losses and expenses............................ 145,532 110,662 140,451
-------- -------- --------
Income (loss) from continuing operations before income taxes... 13,419 30,153 (123)
Income tax expense (benefit)................................... 4,534 10,990 (505)
-------- -------- --------
Income from continuing operations.............................. 8,885 19,163 382
-------- -------- --------
Discontinued operations:
Loss from discontinued operations (net of income tax benefit
of $121).................................................. -- -- (197)
-------- -------- --------
Loss from discontinued operations.............................. -- -- (197)
-------- -------- --------
Net income........................................... $ 8,885 $ 19,163 $ 185
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 94
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
RETAINED AVAILABLE-FOR-SALE
EARNINGS SECURITY INVESTMENTS TOTAL
(IN THOUSANDS) -------- -------------------- -------
<S> <C> <C> <C>
Balance at March 31, 1993.................................. $ (6,574) $ 88 $(6,486)
Net income................................................. 8,885 -- 8,885
Change in net unrealized investment gains.................. -- (126) (126)
------- ------- -------
Balance at March 31, 1994.................................. 2,311 (38) 2,273
Net income................................................. 19,163 -- 19,163
Change in net unrealized investment gains.................. -- (1,371) (1,371)
------- ------- -------
Balance at March 31, 1995.................................. 21,474 (1,409) 20,065
Net income................................................. 185 -- 185
Change in net unrealized investment gains.................. -- 2,904 2,904
------- ------- -------
Balance at March 31, 1996.................................. $ 21,659 $ 1,495 $23,154
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 95
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $ 8,885 $ 19,163 185
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization and depreciation................................ 485 372 1,103
Net realized gains........................................... (14) -- (4,354)
Bad debt allowance........................................... (146) (216) (600)
(Increase) decrease in premiums receivable................... (6,964) 8,880 12,898
(Increase) decrease in accounts receivable................... (4) 14 (3,157)
Increase in reinsurance recoverable.......................... (26,563) (20,424) (1,377)
Increase in Special Disability Trust Fund recoverable........ (3,184) (5,950) (4,181)
(Increase) decrease in accrued investment income............. (398) (1,184) 473
Increase in federal income tax recoverable................... -- -- (9,690)
(Increase) decrease in deferred income taxes................. (7,535) 513 2,745
Increase in other assets..................................... -- -- (665)
Discontinued operations...................................... -- -- (612)
Increase in loss and loss adjustment expense................. 39,754 9,677 20,240
Increase (decrease) in unallocated policyholder
remittances............................................... 16,115 (2,155) (3,600)
Increase in accounts payable and accrued expenses............ 39 2,291 1,802
Increase (decrease) in taxes, licenses and fees.............. -- 1,201 (368)
Increase in deferred revenue................................. -- 86 7,298
Increase (decrease) in federal income tax payable............ -- 1,043 (4,878)
-------- -------- --------
Net cash provided (used) in operating activities............... 20,470 13,311 13,262
INVESTING ACTIVITIES
Purchase of investment securities.............................. (760,811) (859,038) (982,289)
Disposal and maturity of investment securities................. 685,168 846,575 972,918
Purchase of equipment and software............................. -- -- (2,697)
Purchase of Summit Holding Corporation......................... -- -- (37,500)
Other investing activities..................................... 68 152 --
-------- -------- --------
Net cash provided by investing activities...................... (75,575) (12,311) (49,568)
FINANCING ACTIVITIES
Increase in notes payable...................................... -- -- 44,000
-------- -------- --------
Net cash provided by financing activities...................... -- -- 44,000
-------- -------- --------
Net increase in cash and cash equivalents...................... (55,105) 1,000 7,694
Beginning cash and cash equivalents............................ 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents............................... $ 1,984 $ 2,984 $ 10,678
======== ======== ========
</TABLE>
F-7
<PAGE> 96
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund (the "ESIF") is domiciled in Florida as a
group self-insurance workers' compensation fund defined by section 624.4621,
Florida Statutes. ESIF is regulated by the Bureau of Self Insurance under the
Department of Insurance of the State of Florida (the "Florida DOI").
ESIF was designed to provide statutory workers' compensation coverage for
members of its wholly owned subsidiary Employers Safety Group Association, Inc.
("ESGA"). In addition to ESGA, ESIF has a wholly owned reinsurance subsidiary,
U.S. Employers Insurance, Inc. ("USEI").
ESIF is administered by Summit Consulting, Inc. ("SCI") which is wholly
owned by Summit Holding Corporation ("SHC"). Under an administrative agreement,
SCI and subsidiaries provide premium processing functions and claim processing
functions for ESIF, four other self-insurance funds and a property and casualty
insurance company. Effective January 16, 1996, ESIF and a subsidiary purchased
all of the outstanding stock of SHC (see Note 14 for further discussion of the
acquisition).
Pursuant to an Amended Plan of Conversion and Recapitalization, and subject
to certain conditions stated therein, ESIF intends to convert to a stock
property and casualty insurance company.
Consolidation and Presentation
The accompanying consolidated financial statements include the accounts,
after intercompany eliminations, of ESIF and its wholly owned subsidiaries and
have been prepared in conformity with generally accepted accounting principles
("GAAP") applicable to stock property and casualty insurance companies, which
differ from statutory accounting practices prescribed or permitted by the
Florida DOI.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Recognition of Revenues
Workers' compensation insurance premiums are based on rates established by
the National Council on Compensation Insurance ("NCCI"). Premium revenues
generally are recognized over the life of the related policies on the daily pro
rata method with a reserve for premiums earned established for the unexpired
portion of the premiums applicable to those policies. All indemnity contracts
issued by ESIF prior to March 31, 1996 have a common anniversary date of April
1, thus there was no liability for unearned premium or deferred policy
acquisition costs at March 31, 1995 or March 31, 1996.
Administrative fee revenue is recognized in proportion to the premiums
earned by the self-insurance funds at the contractual administrative fee
percentage of premiums. Adjustments to revenue for premium audits are recorded
in the period they occur. Fee for services provided to ESIF subsequent to the
date of ESIF's acquisition of SHC have been eliminated in the consolidated
statement of operations.
Reinsurance premiums ceded are recorded and recognized on a pro rata basis
of earned premium of the contract.
F-8
<PAGE> 97
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement 109, Accounting for
Income Taxes. Under that method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates.
Investments
In 1993, the FASB issued Statement 115, Accounting for Certain Investments
in Debt and Equity Securities. Statement 115 requires that debt securities are
to be classified as either held-to-maturity (carried at amortized cost),
available-for-sale (carried at market with unrealized gains or losses reported
in equity), or trading (carried at market with unrealized gains or losses
reported in net income).
ESIF believes that it has the ability and intent to hold to maturity its
debt security investments. However, ESIF also recognizes there may be
circumstances where it may be appropriate to sell a security prior to maturity
in response to unforeseen changes in circumstances. Recognizing the need for the
ability to respond to changes in tax position and in market conditions, ESIF has
designated its entire investment portfolio as available-for-sale.
Investments are reported in the accompanying balance sheets on the
following basis:
- Available-for-sale securities are reported at current market value.
Changes in market value of available-for-sale securities, after applicable
deferred income taxes, are reported as unrealized appreciation or
depreciation directly in equity and, accordingly, have no effect on net
income.
- Equity security investments, consisting of common and nonredeemable
preferred stocks, are carried at current market value with changes in such
value reported as unrealized appreciation or depreciation directly in
equity, after applicable income taxes, having no effect on net income.
- Short-term investments are reported at cost.
The cost of securities sold is based on specific identification and the
resulting realized gains and losses are included in the determination of net
income.
In the normal course of business, ESIF is party to financial instruments,
none of which have significant off-balance-sheet risk.
Loss and Loss Adjustment Expenses
The reserve for unpaid loss and loss adjustment expenses ("LAE") is based
on an independent actuarial determination and represents management's best
estimate of the ultimate cost of the loss and LAE that are unpaid at the balance
sheet date including incurred but not reported claims. The reserve for unpaid
loss and LAE is continually reviewed and as adjustments become necessary, such
adjustments are included in current operations.
The reserve for permanent indemnity disability claims has been discounted
at 4% as permitted under Florida law. For GAAP purposes, discounting is computed
based on the ESIF's anticipated payout patterns and a discount rate consistent
with that permitted by section 625.091, Florida Statutes. The amount of such
discount was $4.8 million, $4.9 million and $4.7 million at March 31, 1994, 1995
and 1996, respectively.
F-9
<PAGE> 98
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reinsurance
Under FASB Statement No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts, all assets and liabilities related
to reinsurance ceded contracts are reported on a gross basis rather than the
previous practice of reporting such assets and liabilities net of reinsurance.
The amounts recoverable from reinsurers are classified separately on the balance
sheet.
The accompanying statements of operations reflect premiums and losses
incurred, net of reinsurance ceded (see Note 6). Reinsurance arrangements allow
management to control exposure to potential losses arising from large risks. A
significant portion of the reinsurance is effected under excess of loss
reinsurance contracts. Amounts recoverable from reinsurers are estimated in a
manner consistent with the loss and loss expense reserves associated with the
reinsured policies. Similarly, reinsurance premiums, losses and loss adjustment
expenses are accounted for on bases consistent with those used in accounting for
the related original policies issued and the terms of the reinsurance contracts.
Guaranty Fund Assessments
As a self-insurance fund, ESIF has periodically been assessed by a state
guaranty fund as part of that fund's activities to collect money from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of the policyholders of the insolvent
funds. Florida statutes limit the assessment to a maximum of 2% of direct
written premiums annually.
Because there are many uncertainties regarding the ultimate amount of
assessments, ESIF's policy has been to recognize its obligation for guaranty
fund assessments when it receives notice that an amount is payable to the
guaranty fund. At March 31, 1996, ESIF was not able to estimate reasonably the
potential effects of any future assessments and, accordingly, the accompanying
financial statements do not include any provision for such future assessments.
Assessments charged to expense during the fiscal years ended March 31, 1994,
1995 and 1996 were $-0- million, $1.5 million and $1.6, respectively. Such
assessments are credited against the Company's administrative tax.
Upon conversion to a stock property and casualty insurer, ESIF will be
subject to assessment by a separate guaranty fund. Such assessments will not be
credited against ESIF's administrative tax.
Concentrations of Credit or Financial Risk
Florida law allowed ESIF to write policies only in the State of Florida.
Therefore, all ESIF's premium revenues for the fiscal years ended March 31,
1994, 1995 and 1996 were derived from policies offered to customers located in
Florida. Accordingly, ESIF could be adversely affected by economic downturns,
significant unemployment, and other conditions that may occur from time-to-time
in Florida, which may not as significantly affect its more geographically
diversified competition.
SHC has significant amounts of revenue associated with its third-party
processing as a result of its contracts with several self-insurance funds.
Changes with respect to these contracts could adversely affect ESIF.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling approximately
$49 million was recorded in conjunction with the January 1996 acquisition of
SHC. This intangible asset is being amortized on a straight-line basis over 25
years. At the balance sheet date, ESIF evaluates the recoverability of this
asset through a comparison of the forecasted operating income of the subsidiary
and the remaining asset balance.
F-10
<PAGE> 99
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESIF's cost associated with the purchase of customer listings recorded in
conjunction with the January 1996 acquisition of SHC totals approximately $6.5
million. This intangible asset is being amortized on a straight-line basis over
10 years.
Equipment and Software
Equipment and software are recorded at cost. Depreciation is computed using
the straight-line method over the useful lives of the related assets.
Cash and Cash Equivalents
ESIF considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Bad Debt Allowance
The bad debt allowance is based on ESIF's experience with uncollectible
premiums receivable and represents ESIF's best estimate of the ultimate
uncollectible amounts incurred through the balance sheet date.
2. INVESTMENTS
The amortized cost and the fair value of debt security investments are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
AT MARCH 31, 1995
U.S. Treasury and government agencies....... $ 132,116 $ 671 $2,545 $130,242
States and political subdivisions........... 60,404 324 1,023 59,705
Other debt securities....................... 14,087 72 9 14,150
-------- ------ ------ --------
Total debt securities available-for-sale...... $ 206,607 $1,067 $3,577 $204,097
======== ====== ====== ========
AT MARCH 31, 1996
U.S. Treasury and government agencies....... 57,655 487 909 57,233
States and political subdivisions........... 68,697 934 270 69,361
Industrial and miscellaneous................ 37,258 850 284 37,824
Mortgage-backed securities:
U.S. government agencies................. 14,320 240 160 14,400
-------- ------ ------ --------
Total debt securities available for sale...... $ 177,930 $2,511 $1,623 $178,818
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at March 31,
1996, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
F-11
<PAGE> 100
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................................ $ 2,366 $ 2,394
After one through five................................................. 58,621 58,743
After five through ten................................................. 89,727 90,094
After ten.............................................................. 12,896 13,187
-------- --------
$ 163,610 $164,418
Mortgage-backed securities............................................. 14,320 14,400
-------- --------
Total.................................................................... $ 177,930 $178,818
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during fiscal
year ending March 31, 1994 were $26.3 million. No gains or losses were realized
on those sales. Proceeds from the sales of investments in debt securities during
fiscal year ending March 31, 1995 were $21.8 million. No gains or losses were
realized on those sales. Proceeds from the sales of investments in debt
securities during fiscal year ending March 31, 1996 were $195.5 million. Gross
gains of $3.1 million and gross losses of $1.0 million were realized on those
sales.
Unrealized gains and losses on investments in preferred and common stocks
are reported directly in equity and do not affect operations. The gross
unrealized gains and losses on, and the cost and fair value of, those
investments are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT MARCH 31, 1995
Preferred stocks.............................. $ 1,924 $ 6 $ 16 $ 1,914
Common stocks................................. 8,717 353 92 8,978
------- ------ ---- -------
Total........................................... $10,641 $ 359 $108 $10,892
======= ====== ==== =======
AT MARCH 31, 1996
Preferred stocks.............................. $ 3,167 $ 18 $ 29 $ 3,156
Common stocks................................. 9,576 1,640 121 11,095
------- ------ ---- -------
Total........................................... $12,743 $1,658 $150 $14,251
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from:
Bonds............................................... $ 6,829 $ 9,788 $10,923
Preferred stocks.................................... -- -- 215
Common stocks....................................... 6 16 319
Short-term investments and cash..................... 3,675 2,401 1,753
------- ------- -------
Net investment income................................. $10,510 $12,205 $13,210
======= ======= =======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of loss reserves and the 1986-1995 fund years aggregate
reserve plans. The aggregate plans approved by the Florida
F-12
<PAGE> 101
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOI require the interest earned on the related reserves to accumulate with the
restricted principal. The reserves are reviewed annually and a revised funding
plan is submitted to the Florida DOI. At March 31, 1995 and 1996, the amount in
trust is approximately $59.1 million and $62.9 million, respectively. Subsequent
to March 31, 1996, the amount in trust was reduced to $50.9 million.
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at March 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment................................... $ 786
Data processing equipment........................................... 665
Airplane............................................................ 968
Leasehold improvements.............................................. 103
Software............................................................ 176
Automobiles......................................................... 17
------
2,715
Less accumulated depreciation....................................... 186
------
$2,529
======
</TABLE>
Depreciation expense for the fiscal year ended March 31, 1996 was
approximately $0.2 million. Substantially all equipment and software was
acquired in the January 1996 acquisition of SHC.
4. INTANGIBLES
The majority of ESIF's intangible assets were recorded in connection with
the acquisition of SHC and are stated at cost, which represents fair value as of
the acquisition date, less accumulated amortization, and include purchased
software, customer accounts and contracts, and the excess of the purchase price
over the fair value of identifiable net assets acquired. Purchased software,
customer accounts and contracts are being amortized on a straight-line basis
over the estimated useful lives and contract period which range from three to
ten years. The excess of cost over the fair value of identifiable net assets
acquired is being amortized on a straight-line basis over 25 years.
Intangible assets consist of the following as of March 31, 1996 (in
thousands):
<TABLE>
<S> <C>
Unamortized debt acquisition costs................................. $ 757
Purchased software................................................. 6,300
Goodwill........................................................... 49,645
Customer accounts and contracts.................................... 6,608
------
63,310
Less accumulated amortization...................................... 896
------
$62,414
======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancellable operating
leases which expire at various dates through the year 2001. These leases
generally contain renewal options and escalation clauses based on increases in
lessors' operating expenses and other charges. ESIF anticipates that most leases
will be renewed or replaced upon expiration.
F-13
<PAGE> 102
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual payments at March 31, 1996 for all noncancellable
leases are (in thousands):
<TABLE>
<S> <C>
Years ending March 31:
1997...................................................... $1,221
1998...................................................... 1,322
1999...................................................... 1,243
2000...................................................... 1,176
2001...................................................... 101
------
Total minimum future lease payments......................... 5,063
Income from subleases....................................... (124)
------
Net minimum future lease payments........................... $4,939
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the fiscal year ended March 31, 1996 for operating
leases totaled approximately $0.4 million.
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF's
insurance subsidiaries are engaged in reinsurance transactions with other
companies. Reinsurance ceded contracts do not relieve ESIF and its insurance
subsidiaries from their obligation to policyholders, as they remain liable to
their policyholders to the extent that any reinsurer does not meet its
obligations for reinsurance ceded to it under reinsurance contracts. The largest
net amount insured on any one risk is $500,000 with a $750,000 deductible for
each of the fiscal years ended 1995 and 1996. Automatic reinsurance agreements
are in force with certain maximum limits, as well as excess of loss reinsurance
agreements.
Insurance premiums for the fiscal years ended March 31, 1994, 1995 and 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Direct premiums earned................................. $155,559 $135,033 $119,028
Reinsurance ceded...................................... 7,118 6,544 4,135
-------- -------- --------
Net premiums earned.................................... $148,441 $128,489 $114,893
======== ======== ========
</TABLE>
Losses and LAE incurred for the fiscal years ended March 31, 1994, 1995 and
1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Direct losses and LAE.................................. $113,321 $ 74,368 $102,832
Reinsurance ceded...................................... 4,910 5,252 7,988
-------- -------- --------
Net losses and loss adjustment expenses incurred....... $108,411 $ 69,116 $ 94,844
======== ======== ========
</TABLE>
Reinsurance ceded premiums and losses included in the preceding table
reflect the elimination of amounts assumed by USEI through retrocession by
Crossroads Insurance Company, Limited ("Crossroads") of amounts ceded by ESIF to
Crossroads as described in the following paragraph.
Of the reinsurance ceded amounts above for fiscal year ended March 31,
1996, premiums of $5.2 million, and losses and loss adjustment expenses of $0.9
million, are attributable to reinsurance agreements with
F-14
<PAGE> 103
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Crossroads, a Bermuda domiciled insurance company, in which a Trustee of ESIF
has an ownership interest. Crossroads is licensed to do business in Florida and
is a member of the Florida Insurance Guaranty Association. Fifty percent of
business ceded to Crossroads has been retroceded by Crossroads to USEI. All of
ESIF's aggregate excess reinsurance coverage for fiscal years ended March 31,
1989 through March 31, 1995 is also ceded to Crossroads. For certain fiscal
years, there is no effective aggregate excess reinsurance coverage currently in
place. At March 31, 1995 and 1996, loss and LAE reserves recoverable of $21.6
and $18.5 million, respectively, are attributable to excess reinsurance
agreements with Crossroads.
In fiscal years ended March 31, 1995 and 1996, ESIF did not commute any
ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers. ESIF has no reinsurance recoverable balances with individual
reinsurers that exceed five percent of total assets.
7. FEDERAL INCOME TAXES
ESIF and its subsidiaries file a consolidated federal income tax return.
ESIF does not have a tax sharing agreement with two of its subsidiaries, ESGA
and USEI. ESIF does not collect from or refund to these subsidiaries the amount
of income taxes or benefits which would result if the entities filed separate
returns. An informal tax sharing agreement exists between ESIF and SHC such that
the amount of taxes or tax benefits are shared as if separate returns were
filed.
Income before federal income taxes differs from taxable income principally
due to tax-exempt investment income, dividends-received tax deductions, and
differences in loss and LAE discounting and unearned premium reserves for tax
and financial reporting purposes.
After carryback of the fiscal year ended March 31, 1996 operations loss to
prior years, federal income taxes of $6.9 million and $12.2 million for fiscal
years ended March 31, 1994 and 1995, respectively, would be subject to recovery
in the event that ESIF incurs net operating losses within three years of the
years for which such taxes were paid. State taxes paid were approximately $0.8
million for both fiscal years ended March 31, 1995 and 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-15
<PAGE> 104
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of ESIF's deferred tax liabilities and assets as of
March 31, as calculated in accordance with FASB 109, are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains...................................... $ -- $ 902
Reinsurance recoverables......................................... -- --
Special Disability Trust Fund recoverables....................... 511 175
Intangible assets................................................ -- 3,684
------- -------
Total deferred tax liabilities..................................... 511 4,761
Deferred tax assets:
Discount on loss and LAE reserves................................ 16,601 18,936
Unallocated remittances.......................................... 1,372 1,161
Uncollectible premiums........................................... 788 564
Other............................................................ -- 455
Unrealized investment losses..................................... 850 --
------- -------
19,611 21,116
Valuation allowance for deferred tax assets...................... -- --
------- -------
Total deferred tax assets.......................................... 19,611 21,116
------- -------
Net deferred tax assets............................................ $19,100 $16,355
======= =======
</TABLE>
ESIF has made an election under the Internal Revenue Code of 1986 to treat
income tax payments attributable to loss reserve discounting as special
estimated tax payments which are specifically recoverable upon reversal of the
discounting effects. Accordingly, the deferred tax assets attributable to loss
reserve discounting are considered to be fully recoverable. ESIF also has
significant tax loss carryback potential for the fiscal years ended March 31,
1994 and 1995. For those reasons, a deferred tax valuation allowance is not
considered necessary.
ESIF's consolidated federal income tax liability (asset) at March 31 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current.......................................................... $ 4,878 $ (9,690)
Deferred......................................................... (19,100) (16,355)
-------- --------
Total net asset.................................................. $(14,222) $(26,045)
======== ========
</TABLE>
Significant components of the provision for income taxes for the fiscal
years ended March 31, attributable to continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current tax expense (benefit)...................................... $11,388 $ 1,424
Deferred taxes..................................................... (397) (1,930)
------ ------
Total income tax expense (benefit) on income....................... $10,991 $ (506)
====== ======
</TABLE>
Income taxes paid by ESIF totaled $10.5 million, $12.2 million and $11.2
million in 1994, 1995 and 1996, respectively.
F-16
<PAGE> 105
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax expense (benefit) for the fiscal years
ended March 31, attributable to continuing operations computed at the U.S.
federal statutory tax rate of 35%, to income tax expense (benefit) is as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Income tax (at 35% of pretax income or loss)............... $4,697 $10,554 $ (43)
Tax-exempt investment income............................... -- (673) (1,067)
Non taxable/deductible (income) expenses................... 51 579 32
Goodwill amortization...................................... -- -- 177
State income taxes......................................... (65) (600) 495
Other items, net........................................... (149) 1,130 (99)
------ ------- -----
Provision (credit) for federal income tax expense
(benefit)................................................ $4,534 $10,990 $ (505)
====== ======= =====
</TABLE>
8. LOSSES AND LAE
The reserves for unpaid losses and LAE are estimated using individual
case-basis valuations and statistical analyses. These estimates are subject to
the effects of trends in loss severity and frequency. Although some variability
is inherent in such estimates, management believes that the reserves for losses
and LAE are adequate. The estimates are reviewed annually by independent
consulting actuaries and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current operations.
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for fiscal years ended March 31, 1994, 1995
and 1996:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross reserve for losses and LAE, at beginning of
year.............................................. $ 361,095 $ 392,784 $ 367,391
Add: Discount on reserves........................... 4,324 4,730 4,875
Less: Impact of reinsurance for FASB 113............ (103,118) (121,463) (108,440)
Impact of implied Special Disability Trust
Fund recoverables............................. (10,550) (15,531) (24,836)
--------- --------- ---------
Net reserves for losses and LAE, at beginning of
year.............................................. 251,751 260,520 238,990
Add provision for claims occurring in:
The current year.................................. 118,889 94,520 84,058
Prior years....................................... (10,478) (25,404) 10,786
--------- --------- ---------
Incurred losses during the current year............. 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year.................................. 17,704 16,857 15,432
Prior years....................................... 81,938 73,789 67,968
--------- --------- ---------
Claim payments during the current year.............. 99,642 90,646 83,400
Net reserves for losses and LAE, at end of year..... 260,520 238,990 250,434
Add: Impact of implied Special Disability Trust Fund
recoverables................................... 15,531 24,836 31,376
Impact of reinsurance for FASB 113............ 121,463 108,440 107,092
LAE assumed through acquisition of Summit..... -- -- 3,398
Less: Discount on reserves.......................... (4,730) (4,875) (4,668)
--------- --------- ---------
Gross reserve for losses and LAE, at end of year.... $ 392,784 $ 367,391 $ 387,632
========= ========= =========
</TABLE>
F-17
<PAGE> 106
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The foregoing reconciliation also shows that a $25.4 million reserve
redundancy emerged during the fiscal year ended March 31, 1995. This amount
represents the release of certain loss reserves previously carried which were
determined, based on comparisons to actuarially projected amounts, to be
redundant. The foregoing reconciliation shows that a $10.8 million reserve
strengthening in the March 31, 1995 reserve emerged during the fiscal year ended
March 31, 1996. The increased losses and LAE expense resulted principally from
settling case reserves established in prior years for more than previously
anticipated.
Estimated future Special Disability Trust Fund ("SDTF") recoveries
implicitly netted from loss reserves on a statutory basis were grossed up for
GAAP purposes. This increased loss reserves by approximately $15.5 million,
$24.8 million and $31.4 million at March 31, 1994, 1995 and 1996, respectively,
and increased reinsurance recoverables by approximately $7.2 million, $10.3
million and $11.8 million at March 31, 1994, 1995 and 1996, respectively. In
addition ESIF has recorded, as an asset, amounts recoverable from the SDTF based
upon the ESIF's historical collection experience and the amount of claims
identified as subject to SDTF recovery. The recoverable amount recorded at March
31, 1994, 1995 and 1996 was approximately $9.9 million, $15.9 million and $20.1
million, respectively.
9. ACCRUED RETROSPECTIVE PREMIUMS
Certain workers' compensation insurance policies issued by ESIF are
retrospectively rated, and premiums are based on loss experience incurred under
these contracts to date. Accrued retrospectively rated premiums, including those
relating to bulk incurred but not reported, have been determined by or allocated
to individual policyholder accounts. These amounts are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium...................................... $44,837 $33,278
</TABLE>
10. EQUITY
ESIF and its insurance subsidiaries, subsequent to the conversion to a
stock property and casualty company, will have legal restrictions as to the
transfer of funds in the form of dividends, loans, and advances. These
restrictions, determined in accordance with statutory reporting practices,
generally limit the payment of dividends to amounts based upon statutory equity
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At March 31, 1996, under regulations applicable to
stock property and casualty insurance companies, approximately $1.6 million of
ESIF's statutory net assets of $16.3 million could be transferred from the
insurance entities subject to regulatory approval.
Net income and equity as determined in accordance with statutory accounting
practices for self-insurance funds for the three fiscal years ended March 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
NET INCOME
MARCH 31, SURPLUS (LOSS)
----------------------------------------------------------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1994............................................................. 22,311 2,511
1995............................................................. 43,046 22,286
1996............................................................. $16,373 $ (4,660)
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$42.9 million and $47.3 million at March 31, 1995 and 1996, respectively, for
future investment income determined by discounting loss and LAE reserves at a
statutory prescribed rate. Upon conversion to a stock property and casualty
insurer, ESIF will be permitted to record discounts only on the indemnity
portion of permanent disability cases. The amount of such discount is estimated
at approximately $4.9 million and $4.7 million at March 31, 1995 and
F-18
<PAGE> 107
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1996, respectively. It is ESIF's intention to utilize proceeds of a
public offering to meet statutory basis capital and equity requirements for a
stock property and casualty company.
In order to improve the regulation of insurer solvency, the National
Association of Insurance Commissioners ("NAIC") issued a model law to implement
risk-based capital ("RBC") requirements for property and casualty insurance
companies, which are designed to assess capital adequacy and to raise the level
of protection that statutory equity provides for policyholder obligations. The
RBC formula for property and casualty insurance companies measures these major
areas of risk facing property and casualty insurers: (i) underwriting, which
encompasses the risk of adverse loss development and inadequate pricing; (ii)
declines in asset values arising from credit risk; and (iii) declines in asset
values arising from investment risks. Pursuant to the model law, insurers having
less statutory equity than required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy. Florida, ESIF's state of domicile, has yet to adopt the provisions
of the RBC model law. Upon completion of the conversion and recapitalization,
ESIF's insurance subsidiaries intend to maintain statutory basis equity in
excess of the amount required by RBC.
11. COMMITMENTS AND CONTINGENCIES
ESIF, in the normal course of business, is named as a defendant in various
legal actions arising principally from claims made under insurance policies and
contracts. Those actions are considered by ESIF in estimating the loss and LAE
reserves. ESIF's management believes that the resolution of those actions will
not have a material effect on ESIF's financial position or results of
operations.
12. CHANGE IN ACCOUNTING ESTIMATES
During the fiscal year ended March 31, 1996, ESIF refined its method of
estimating accrued retrospective premiums. This change decreased the accrued
retrospective premium asset and equity at March 31, 1996 by approximately $9.3
million and $6.0 million, respectively, and decreased operations results for the
fiscal year ended March 31, 1996 by approximately $6.0 million.
13. SPECIAL DISABILITY TRUST FUND
The State of Florida maintains the SDTF for the purpose of providing
benefits to workers who have a pre-existing condition and incur a second or
subsequent injury. The SDTF is funded through annual assessments against
workers' compensation insurers which are based on a percentage of gross workers'
compensation premiums written.
The SDTF has not charged adequate assessments to actuarially fund its
claims liability. In 1996, the Florida legislature reauthorized the SDTF for
four years, however, in the future the Florida legislature may impose greater
assessments on insurance carriers, such as ESIF, to satisfy pending claims.
Moreover, it is not possible to predict how the SDTF will operate, if at all, in
the future after the reauthorized period. Changes in the SDTF's operations which
decrease the availability of recoveries from the SDTF, or increase the SDTF
assessments payable by ESIF, or changes in regulations which further limit
ESIF's ability to reduce statutory basis loss reserves for a portion of SDTF
future recoverable amounts, may have a material adverse effect on ESIF's
business, financial condition or results of operations. Discontinuance of the
SDTF could have either a favorable or unfavorable effect on ESIF depending on
the relation of the amount of assessments by SDTF to the amount of recoveries
from SDTF.
Loss and LAE reserves included in the accompanying financial statements are
presented gross of future SDTF recoveries and have been determined using
historical loss data which excludes SDTF recoveries.
F-19
<PAGE> 108
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESIF has recorded an SDTF recoverable of $15.8 and $20.1 million at March
31, 1995 and 1996, respectively, for the estimated amounts expected to be
received from the SDTF. The estimated amount of recoveries was based on claims
identified as subject to SDTF recovery as well as ESIF's recovery experience.
Amounts recovered from SDTF for the fiscal years ended March 31, 1994, 1995
and 1996 were $4.5 million, $5.6 million and $5.6 million, respectively.
Assessments paid by ESIF to the SDTF were $5.6 million, $4.7 million and $5.6
million for the fiscal years ended March 31, 1994, 1995 and 1996, respectively.
ESIF records assessments from SDTF as premiums are written.
14. ACQUISITION OF SUMMIT HOLDING CORPORATION
On January 16, 1996, ESIF purchased all of the outstanding capital stock of
SHC. The purchase price consisted of $26.0 million paid in cash by ESIF, $11.5
million in cash distributed by SHC, and $44.0 million of debt incurred by SHC
(see Note 15). SHC is a third party administrator which provides insurance
related services (including marketing, policy issuance and servicing, claims
processing and administration, loss control, brokerage, audits, financial and
data processing services and risk management services) to ESIF, four other
self-insurance funds and a property and casualty insurance company. The
acquisition was accounted for using the purchase method, and the results of
operations of SHC are included in the consolidated statement of operations from
the date of acquisition.
The following unaudited proforma information presents the consolidated
results of operations of ESIF and SHC as if the acquisition had been effective
at April 1, 1994 and April 1, 1995, respectively, after giving effect to
adjustments to reflect the acquisition. This information is intended for
informational purposes only and may not be indicative of ESIF's future results
of operations:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................................. $185,693 $169,178
Income (loss) before income tax expense........................ 37,126 1,274
Net income (loss).............................................. 23,345 1,214
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5 million for certain loss,
injury or damage to ESIF which may result from the acquisition of SHC. Such
indemnification will expire on the earlier of January 11, 2001 or on the date
upon which the bank debt, incurred in the acquisition, is retired.
15. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a term loan
negotiated with rates based on LIBOR plus 3%. The balance as of March 31, 1996
for SHC was $36.0 million. Also, a revolving credit facility with rates
approximating the prime rate was entered into as part of the agreement. The
balance as of March 31, 1996 for SHC for this agreement was $8.0 million.
Interest expense incurred as of March 31, 1996 was $0.8 million.
F-20
<PAGE> 109
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities for the term loan and reductions in the availability of the
revolving credit facility are as follows (in thousands):
<TABLE>
<CAPTION>
REDUCTION IN THE
AVAILABILITY OF
TERM THE REVOLVING
LOAN CREDIT FACILITY
------- ----------------
<S> <C> <C>
Years ending March 31:
1997................................................ $ 4,650 970
1998................................................ 6,600 1,480
1999................................................ 6,600 1,480
2000................................................ 6,600 1,480
2001................................................ 6,000 1,480
Thereafter.......................................... 4,950 1,110
------- ------
$36,000 8,000
======= ======
</TABLE>
As collateral for the debt, SHC pledged the issued and outstanding stock of
SCI and three other wholly owned subsidiaries, Bridgefield Casualty Insurance
Company, Meritec Solutions, Inc. and Carolina Summit Healthcare, Inc. The credit
agreement contains certain covenants which require that certain financial ratios
and/or levels be maintained by SHC and its insurance subsidiary, Bridgefield
Casualty. Among these covenants are the following: Operating leverage, fixed
charge coverage ratio, minimum stockholder equity and risk based capital for the
insurance subsidiary:
In addition, the credit agreement places certain operational restrictions
on SHC.
16. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SCI, has a deferred savings and profit-sharing plan
(401(k)) covering substantially all employees of SHC. Under the plan, SCI makes
contributions equal to 75% of the participant's contributions, not to exceed 6%
of the participant's annual compensation. SCI's contributions to the plan
totaled $0.1 million for the period January 16, 1996 to March 31, 1996.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by ESIF in estimating its
fair value disclosures for financial instruments:
- Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate fair
values.
- Investment securities: Fair values for debt security investments are
based on quoted market prices.
- Premiums and accounts receivable: The carrying amounts of ESIF's
receivables approximate fair values.
- Notes payable: ESIF's subsidiary has $44.0 million of notes payable at
March 31, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for March 31, 1995 and 1996, respectively, as summarized below (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $110,141 $110,141 $111,519 $111,519
</TABLE>
F-21
<PAGE> 110
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development operation. This business was acquired in the January 1996
acquisition of SHC. The disposition is expected to occur during the three months
ending December 31, 1996 by abandonment of the operation. ESIF expects to
recognize an after tax loss of approximately $0.2 million on the disposition of
this operation.
The financial statements reflect the operating results and the assets and
liabilities of the discontinued operations separately from continuing
operations. The net assets of the computer software development operation at
March 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents........................................... $ 24
Equipment...................................................... 431
Other assets................................................... 468
Software....................................................... 477
------
Total assets..................................................... 1,400
Liabilities:
Accounts payable and operating liabilities..................... 789
------
Net assets....................................................... $ 611
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows:
<TABLE>
<S> <C>
Revenue.......................................................... $ 305
Expenses......................................................... 622
-----
Loss before income taxes......................................... $(317)
Income tax (benefit)............................................. (120)
-----
Net loss......................................................... $(197)
=====
</TABLE>
19. DISPOSITION
Effective July 31, 1996, ESIF decided to terminate its efforts to develop a
healthcare subsidiary in North Carolina. This start up effort was initiated by
SHC prior to the acquisition of SHC by ESIF. The disposition of this subsidiary
is expected to be completed by December 31, 1996. ESIF expects to recognize an
after tax loss of approximately $0.1 million on the disposition of this
subsidiary. The consolidated financial statements include the operating results
and assets and liabilities of this subsidiary. The net assets of the healthcare
subsidiary were as follows at March 31, 1996 (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents........................................... $3,251
Equipment...................................................... 81
Other assets................................................... 70
------
Total assets..................................................... $3,402
Liabilities:
Accounts payable and operating liabilities..................... 946
------
Net assets....................................................... $2,456
======
</TABLE>
F-22
<PAGE> 111
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results for the healthcare subsidiary for the period January
16, 1996 to March 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue.......................................................... $ 3
Expenses......................................................... 192
-----
Income (loss) before income taxes................................ (189)
Income tax (benefit)............................................. (71)
-----
Net income (loss)................................................ $(118)
=====
</TABLE>
20. SEGMENT INFORMATION
The operations of ESIF, prior to the January 1996 acquisition of SHC, were
solely in the workers' compensation insurance industry segment. Subsequent to
the acquisition of SHC, ESIF also operates in the insurance administration
segment. Financial information by industry segment for revenues, income before
income taxes, and identifiable assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1994
Revenues............................. $158,591 $158,591 -- --
Income before income taxes........... $ 13,419 $ 13,419 -- --
Identifiable assets.................. $405,765 $405,765 -- --
Year Ended March 31, 1995
Revenues............................. $140,815 $140,815 -- --
Income before income taxes........... $ 30,154 $ 30,154 -- --
Identifiable assets.................. $425,206 $425,206 -- --
Year Ended March 31, 1996
Revenues............................. $140,328 $132,393 $ 15,051 $ (7,116)
Income before from continuing
operations before income taxes.... $ (123) $ (1,559) $ 1,436 --
Identifiable assets.................. $492,178 $401,679 $ 90,499 --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
F-23
<PAGE> 112
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
(IN THOUSANDS) -------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and invested assets:
Fixed maturities, available-for-sale............................... $191,263 $173,420
Preferred stock.................................................... 2,956 3,787
Common stock....................................................... 15,228 12,298
Short-term investments............................................. 17,176 16,713
Cash and cash equivalents.......................................... 4,665 7,611
-------- --------
Total cash and invested assets............................. 231,288 213,829
Premiums receivable (net of $2,000 and $2,000 allowance for doubtful
accounts, respectively)............................................ 78,229 67,179
Accounts receivable.................................................. -- 3,102
Reinsurance recoverable.............................................. 107,451 99,636
Recoverable from Florida Special Disability Trust Fund............... 17,775 21,138
Accrued investment income............................................ 3,646 2,810
Income taxes recoverable............................................. -- 6,234
Equipment and software............................................... -- 2,358
Non-compete agreement................................................ -- 100
Capitalized computer software costs.................................. -- 5,408
Value assigned to future administration of insurance contracts....... -- 6,140
Unamortized debt acquisition cost.................................... -- 596
Excess of cost over net assets of business acquired.................. -- 47,925
Deferred income taxes................................................ 17,514 17,446
Other assets......................................................... 109 3,506
Net assets of discontinued operations................................ -- 678
-------- --------
Total assets............................................... $456,012 $498,085
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $364,210 $373,971
Debt............................................................... -- 36,500
Unallocated policyholder remittances............................... 51,208 46,000
Accounts payable and accrued expenses.............................. 7,100 10,532
Taxes, licenses and fees........................................... 2,076 1,471
Deferred revenue................................................... 34 4,618
Federal income taxes payable....................................... 297 --
-------- --------
Total liabilities.......................................... 424,925 473,092
Equity:
Retained earnings.................................................. 26,848 24,045
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... 4,239 948
-------- --------
Total equity............................................... 31,087 24,993
-------- --------
Total liability and equity................................. $456,012 $498,085
======== ========
</TABLE>
See accompanying note.
F-24
<PAGE> 113
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
(IN THOUSANDS) ------- -------
(UNAUDITED)
<S> <C> <C>
Revenue:
Premiums earned........................................................ $63,145 $49,029
Net investment income.................................................. 7,598 6,363
Realized investment gains.............................................. 919 8
Administrative fees.................................................... -- 17,432
Other income........................................................... 90 216
------- -------
Total revenue.................................................. 71,752 73,048
Losses and expenses:
Losses and loss adjustment expenses.................................... 42,365 32,135
Other underwriting, general and administrative expenses................ 21,623 30,532
Amortization and depreciation.......................................... -- 2,499
Interest expense....................................................... -- 1,831
------- -------
Total losses and expenses...................................... 63,988 66,997
------- -------
Income from continuing operations before income taxes.................... 7,764 6,051
Income tax expense....................................................... 2,390 2,400
------- -------
Income from continuing operations........................................ 5,374 3,651
------- -------
Discontinued operations:
Loss from operation (net of income tax benefit of $212)................ -- (412)
Loss from disposition (net of income tax benefit of $289).............. -- (478)
------- -------
Loss from discontinued operations...................................... -- (890)
------- -------
Income before extraordinary charge....................................... 5,374 2,761
Extraordinary charge for conversion costs (net of income tax benefit of
$226).................................................................. -- (375)
------- -------
Net income............................................................... $ 5,374 $ 2,386
======= =======
</TABLE>
See accompanying note.
F-25
<PAGE> 114
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
(IN THOUSANDS) --------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 5,374 $ 2,386
Adjustments to reconcile net income to net cash provided by operating
activities
Amortization and depreciation...................................... -- 2,499
Net realized gains................................................. (429) (8)
Bad debt allowance................................................. -- 500
Increase in premiums receivable.................................... (27,838) (29,586)
Decrease in accounts receivable.................................... -- 56
Decrease in reinsurance recoverable................................ 2,690 11,883
Increase in special disability trust fund recoverable.............. (1,896) (1,078)
(Increase) decrease in accrued investment income................... (236) 127
Decrease in federal income tax recoverable......................... -- 3,456
(Increase) decrease in deferred income taxes....................... 1,586 (1,090)
(Increase) decrease in other assets................................ 1,220 (1,905)
Discontinued operations............................................ -- (67)
Decrease in loss and loss adjustment expense....................... (3,182) (13,661)
Increase in unallocated policyholder remittances................... 32,973 31,365
Decrease in accounts payable and accrued expenses.................. (5,589) (3,960)
(Increase) decrease in taxes, license, and fees.................... 214 (22)
Decrease in deferred revenue....................................... -- (2,767)
Decrease in federal income tax payable............................. (4,580) --
--------- ---------
Net cash provided (used) in operating activities..................... 307 (1,872)
INVESTING ACTIVITIES
Purchase of investments securities................................... (410,101) (816,626)
Disposal and maturity of investment securities....................... 411,475 823,189
Purchase of equipment and software................................... -- (258)
--------- ---------
Net cash provided by investing activities............................ 1,374 6,305
FINANCING ACTIVITIES
Decrease in notes payable............................................ -- (7,500)
--------- ---------
Net cash provided by financing activities............................ -- (7,500)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 1,681 (3,067)
Beginning cash and cash equivalents.................................. 2,984 10,678
--------- ---------
Ending cash and cash equivalents..................................... $ 4,665 $ 7,611
========= =========
</TABLE>
See accompanying note.
F-26
<PAGE> 115
EMPLOYERS SELF INSURERS FUND
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Rule 10-1 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principle for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the six months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ended March 31, 1997. For further information, refer to
the financial statements and footnotes thereto for the year ended March 31, 1996
included elsewhere herein.
F-27
<PAGE> 116
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Summit Holding Corporation
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995 of Summit Holding Corporation. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Summit Holding Corporation for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
February 9, 1996
F-28
<PAGE> 117
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees................................ $70,813,669 $73,832,809 $64,089,709
Direct expenses................................... 32,971,912 31,638,931 27,469,989
----------- ----------- -----------
Net service fees............................... 37,841,757 42,193,878 36,619,720
Software consulting and maintenance fees.......... -- -- 899,629
Investment and other income....................... 631,924 934,178 1,275,712
----------- ----------- -----------
38,473,681 43,128,056 38,795,061
Expenses:
Compensation and other employee benefits.......... 14,503,311 15,425,560 16,616,339
Other operating expenses.......................... 7,707,071 8,217,870 8,203,572
Depreciation and amortization..................... 4,890,675 4,872,134 5,112,228
Interest expense.................................. 1,609,720 57,563 41,943
----------- ----------- -----------
28,710,777 28,573,127 29,974,082
----------- ----------- -----------
Income before income taxes.......................... 9,762,904 14,554,929 8,820,979
Income taxes........................................ 3,833,288 5,553,646 3,245,848
----------- ----------- -----------
Net income................................ $ 5,929,616 $ 9,001,283 $ 5,575,131
=========== =========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 118
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
--------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992.................... 1,000,000 $3,000,000 1,000,000 $1,000,000 $ 3,438,973 $ 7,438,973
Dividends payable to
preferred
stockholders......... -- -- -- -- (1,200,000) (1,200,000)
Net income.............. -- -- -- -- 5,929,616 5,929,616
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1993.................... 1,000,000 3,000,000 1,000,000 1,000,000 8,168,589 12,168,589
Dividends payable to
preferred
stockholders......... -- -- -- -- (600,000) (600,000)
Net income.............. -- -- -- -- 9,001,283 9,001,283
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1994.................... 1,000,000 3,000,000 1,000,000 1,000,000 16,569,872 20,569,872
Dividends payable to
preferred
stockholders......... -- -- -- -- (500,000) (500,000)
Net income.............. -- -- -- -- 5,575,131 5,575,131
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1995.................... 1,000,000 $3,000,000 1,000,000 $1,000,000 $21,645,003 $25,645,003
======== ========= ======== ========= ========== ==========
</TABLE>
See accompanying notes.
F-30
<PAGE> 119
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 5,929,616 $ 9,001,283 $ 5,575,131
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 4,890,675 4,872,134 5,112,228
Loss on sale of equipment............................. -- -- 10,101
Deferred income taxes................................. 221,844 (439,245) (759,852)
Decrease (increase) in accounts receivable............ (520,004) 505,264 893,999
Decrease (increase) in prepaid expenses and other
current assets..................................... (817,547) 1,129,772 22,205
(Increase) decrease in other assets................... 100,928 (376,696) (93,311)
(Decrease) increase in accrued expenses and other
current liabilities................................ 1,124,372 (643,533) (1,005,124)
Decrease in aggregate reserve......................... (599,228) (1,786,309) (869,568)
(Decrease) increase in deferred income................ 1,660,583 328,263 (1,172,511)
----------- ----------- -----------
Net cash provided by operating activities............... 11,991,239 12,590,933 7,713,298
INVESTING ACTIVITIES
Purchases of held-to-maturity securities and short-term
investments........................................... (1,437) (5,564,135) (300,000)
Maturities of held-to-maturity securities............... -- -- 2,005,793
Purchases of property and equipment..................... (965,099) (1,072,255) (1,068,297)
Payment for businesses acquired and formed.............. -- -- (918,862)
----------- ----------- -----------
Net cash used in investing activities................... (966,536) (6,636,390) (281,366)
FINANCING ACTIVITIES
Payments on long-term debt.............................. (4,509,845) -- --
Dividends paid on preferred stock....................... -- (1,200,000) (600,000)
----------- ----------- -----------
Net cash used in financing activities................... (4,509,845) (1,200,000) (600,000)
----------- ----------- -----------
Net increase in cash and cash equivalents............... 6,514,858 4,754,543 6,831,932
Cash and cash equivalents at beginning of year.......... 98,972 6,613,830 11,368,373
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 6,613,830 $11,368,373 $18,200,305
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest expense...................................... $ 109,720 $ 1,558,424 $ 41,943
=========== =========== ===========
Income taxes.......................................... $ 4,171,806 $ 4,918,000 $ 4,760,795
=========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 120
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Summit Holding Corporation ("SHC"), a Florida corporation, is the sole
stockholder of Summit Consulting, Inc. ("SCI"). SCI and its subsidiaries are
primarily engaged in providing insurance-related administrative services for
five self-insurance funds, including marketing, policy issuance and servicing,
claims processing and administration, loss control, brokerage, audits, financial
and data processing services, and risk management services. Two of these
self-insurance funds are located in Florida and account for approximately 84% of
gross recurring service fees. The remaining gross service fees are generated by
one Kentucky and two Louisiana self-insurance funds.
During 1995, SHC formed an insurance company that began issuing workers'
compensation policies January 1, 1996, and is in the process of establishing a
North Carolina-based health maintenance organization. Effective July 20, 1995,
SHC acquired substantially all of the assets of a software development company
(see Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of SHC and its
wholly-owned subsidiaries and are collectively referred to herein as SHC. All
material intercompany transactions have been eliminated in consolidation.
Revenue Recognition
Service fee revenue is recognized in proportion to the recognition of
earned premiums by the self-insurance funds' at the contractual service fee
percentage of premiums. Direct expenses are principally costs which SHC is
contractually obligated to provide. Direct expenses principally include agents'
commissions, reinsurance premium costs, association fees, and administrative
taxes. Software consulting fees are recognized as the services are rendered and
invoiced. Maintenance fees are recognized ratably over the period of the
maintenance service contracts which are generally for a one year duration.
During 1994, SHC received $3.3 million in revenues from one of the
Louisiana self-insurance funds related to SHC's payment of reinsurance premiums
on behalf of the fund prior to 1990.
Cash Equivalents
SHC considers all highly liquid investments having a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (three to
ten years), or the lease period for leasehold improvements.
Depreciation expense in 1993, 1994 and 1995 was $723,994, $730,454 and
$830,408, respectively.
Income Taxes
SHC files consolidated returns. Deferred income taxes provided in the
financial statements relate principally to expenses charged to income for
financial reporting purposes in one period and deducted for income tax purposes
in other periods.
F-32
<PAGE> 121
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles
Intangible assets are stated at cost less accumulated amortization and
include purchased software, customer accounts and contracts, noncompete
agreements, deferred financing costs, and the excess of the purchase price over
the fair value of identifiable net assets acquired (goodwill). Purchased
software, customer accounts and contracts, and noncompete agreements are being
amortized on a straight-line basis over the estimated useful lives and contract
period which range from three to five years. Deferred financing costs relate to
the incurrence of debt acquisition costs, and were completely amortized in 1995.
The excess of cost over the fair value of identifiable net assets acquired is
being amortized on a straight-line basis over 20 years. SHC evaluates the
recoverability of intangible assets through a comparison of forecasted operating
income to the remaining asset balances.
Amortization expense in 1993, 1994 and 1995 was $4,166,681, $4,141,680 and
$4,281,820, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption for
Statement No. 121 is required for all fiscal years beginning after December 15,
1995. SHC does not anticipate that the adoption of Statement No. 121 will have a
material impact on its financial results.
Aggregate Reserve
Under the terms of SHC's service agreement with the self-insurance funds,
SHC is responsible for providing certain reinsurance coverage through
independent reinsurers. As of December 31, 1993, 1994 and 1995, SHC has recorded
a liability for future premium obligations on these policies of $4,063,719,
$2,277,410, and $1,407,842, respectively, which is the present value, at 2.5%,
7.0% and 7.0%, respectively, of its estimated total liability of approximately
$5.1 million, $2.5 million, and $1.6 million, respectively. As a result of the
change in the discount rate in 1994, the aggregate reserve liability as of
December 31, 1994 was reduced by approximately $120,000.
Deferred Income
SHC defers a portion of its fees to cover future claims servicing costs
pertaining to claims incurred in the year for which SHC received its fee, and
for certain other services which SHC is contractually required to provide
subsequent to the funds' year end.
Major Customers
Significant portions of SHC's gross service fees are derived from three
major customers, Employers Self Insurers Fund ("ESIF"), Florida Retail
Federation Self Insurers Fund ("FRFSIF") and Louisiana Employers Safety
Association Self Insurers Fund ("LESASIF"). Gross service fees for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ESIF............................................ $25,336,689 $26,829,023 $24,867,269
FRFSIF.......................................... 32,195,587 31,103,771 28,990,003
LESASIF......................................... 8,708,425 11,305,177 6,034,794
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-33
<PAGE> 122
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITION
Effective August 4, 1995, SHC acquired substantially all of the assets and
assumed certain liabilities of a software development company having a total
value of approximately $1,166,000. SHC has accounted for the acquisition as a
purchase. The effects of the tangible assets acquired and the liabilities
assumed have been excluded from the 1995 statement of cash flows. Pro forma
results of operations as if the acquisition had occurred on January 1, 1994,
were not materially different from the results of operations as presented.
3. LEASES
SHC and its subsidiaries lease office premises and automobiles under
noncancelable operating leases which expire at various dates through the year
2000. These leases generally contain renewal options and escalation clauses
based on increases in lessors' operating expenses and other charges. SHC
anticipates that most leases will be renewed or replaced upon expiration. Future
minimum annual payments at December 31, 1995 for all noncancelable leases are:
<TABLE>
<S> <C>
Years ending December 31:
1996................................................................... $1,468,391
1997................................................................... 1,328,374
1998................................................................... 1,276,504
1999................................................................... 1,174,774
2000................................................................... 395,467
----------
Total minimum future lease payments............................ 5,643,510
Income from subleases.......................................... (132,010)
----------
Net minimum future lease payments.............................. $5,511,500
=========
</TABLE>
Rental expense in 1993, 1994 and 1995 for operating leases totaled
$1,429,258, $1,496,790 and $1,693,284, respectively. Sublease income for 1993,
1994 and 1995 totaled approximately $108,000, $71,000 and $31,000, respectively.
4. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1993, 1994 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $3,083,595 $5,124,170 $3,465,492
State.................................... 527,849 868,721 540,208
---------- ---------- ----------
Total current.................... 3,611,444 5,992,891 4,005,700
Deferred:
Federal.................................. 188,568 (375,573) (657,378)
State.................................... 33,276 (63,672) (102,474)
---------- ---------- ----------
Total deferred................... 221,844 (439,245) (759,852)
---------- ---------- ----------
$3,833,288 $5,553,646 $3,245,848
========== ========== ==========
</TABLE>
SHC's taxes are calculated according to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred taxes are provided
for temporary differences between income before taxes reported in the financial
statements and taxable income. Deferred taxes arise principally from
F-34
<PAGE> 123
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
temporary differences between financial reporting and income tax reporting of
depreciation, aggregate reserves, deferred income and certain start-up costs.
A reconciliation of the differences between the effective income tax rate
and the statutory federal tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income tax expense at federal statutory rate
(34%)............................................ $3,319,388 $4,994,225 $2,999,133
State income taxes, net of federal benefit......... 370,343 531,332 288,904
Nondeductible goodwill amortization................ 128,922 124,044 127,666
Interest exempt from taxation...................... -- (129,414) (248,508)
Other items, net................................... 14,635 33,459 78,653
---------- ---------- ----------
$3,833,288 $5,553,646 $3,245,848
========= ========= =========
</TABLE>
5. EMPLOYEE BENEFIT PLAN
SHC has a deferred savings and profit-sharing plan (401(k)) covering
substantially all employees. Under the plan, SHC makes contributions equal to
75% of the participant's contributions, not to exceed 6% of the participant's
annual compensation. SHC's contributions to the plan totaled $251,395, $318,955
and $350,410 in 1993, 1994 and 1995, respectively.
6. PREFERRED STOCK
At December 31, 1993, 1994 and 1995, 1,000,000 shares of Series A preferred
stock were outstanding. Each share of Series A preferred stock is entitled to
cumulative cash dividends of $0.60 per year. The dividends are not payable until
declared by the Board of Directors. During October 1993, the Board of Directors
declared a dividend of $1.20 per share (through February 28, 1994) to
stockholders of record as of December 31, 1993, payable January 15, 1994. During
December 1994, the Board of Directors declared a dividend of $0.60 per share
(through February 28, 1995) to stockholders of record as of December 31, 1994,
payable January 20, 1995. During December 1995, the Board of Directors declared
a dividend of $0.50 per share (for the period March 1 through December 31, 1995)
to stockholders of record as of December 31, 1995, payable January 12, 1996. The
Series A preferred stock has a guaranteed value of $3.00 per share. The shares
have a preference in liquidation. The Series A preferred stock has no voting
rights or rights of conversion to any other class of stock of SHC.
7. STOCK OPTION PLAN
In 1992, the Board of Directors approved the 1992 Stock Incentive Plan (the
"Plan"), which provided for the granting of 225,000 options to directors,
officers and key employees. Options to purchase SHC's common stock are
exercisable at a price of $1 per share. Options granted under the Plan generally
vest over a period of five years subject to certain acceleration provisions and
expire not later than 10 years after grant. As of December 31, 1995, 205,000 of
the 225,000 options which have been granted were vested, none of which had been
exercised.
8. SUBSEQUENT EVENT
Effective January 16, 1996, Employers Self Insurers Fund purchased all of
the outstanding stock of SHC. In connection with this transaction, stock options
that were not previously vested became vested.
F-35
<PAGE> 124
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Trustees
Employers Self Insurers Fund
We have audited the consolidated financial statements of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1996 and for the year then
ended and have issued our report thereon dated July 31, 1996 (included elsewhere
in this Registration Statement). Our audits also included the consolidated
financial statement schedules included in the Registration Statement. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Jacksonville, Florida
July 31, 1996
F-36
<PAGE> 125
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Trustees
Employers Self Insurers Fund
We have audited the consolidated financial statements of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1995 and for the years ended
March 31, 1995 and 1994 and have issued our report thereon dated July 26, 1996
(included elsewhere in this Registration Statement). Our audits also included
the consolidated financial statement schedules included in the Registration
Statement. These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Brinton & Mendez
Certified Public Accountants
Lakeland, Florida
July 26, 1996
F-37
<PAGE> 126
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST MARKET BALANCE SHEET
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities:
U.S. Government
Non-mortgage backed................................... $ 57,656 $ 57,233 $ 57,233
Mortgaged backed...................................... 14,320 14,400 14,400
States, municipalities and political subdivisions....... 68,697 69,360 69,360
Corporate obligations................................... 37,258 37,824 37,824
-------- -------- -------------
Total fixed maturities............................. 177,931 178,817 178,817
Equity securities:
Common stocks:
Public utilities...................................... 141 153 153
Banks, trusts and insurance companies................. 579 607 607
Industrial and miscellaneous.......................... 8,855 10,334 10,334
-------- -------- -------------
Total common stocks................................ 9,575 11,094 11,094
Non redeemable preferred stock.......................... 3,167 3,156 3,156
-------- -------- -------------
Total equity securities............................ 12,742 14,250 14,250
Short-term investments....................................... 19,770 19,770 19,770
-------- -------- -------------
Total investments.................................. $210,443 $212,837 $ 212,837
======== ======== ==========
</TABLE>
F-38
<PAGE> 127
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED % OF
CEDED TO FROM AMOUNT
OTHER OTHER ASSUMED
DESCRIPTION DIRECT COMPANIES COMPANIES NET TO NET
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1994
Premiums -- Workers Compensation....... $155,559 $ 7,118 $ 0 $148,441 0%
Year Ended March 31, 1995
Premiums -- Workers Compensation....... 135,033 6,544 0 128,489 0%
Year Ended March 31, 1996
Premiums -- Workers Compensation....... 119,028 4,135 0 114,893 0%
</TABLE>
F-39
<PAGE> 128
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT
EXPENSES INCURRED
RESERVES
FOR UNPAID RELATED TO
DEFERRED CLAIMS AND -----------------
POLICY CLAIM DISCOUNT NET NET PRIOR
ACQUISITION SETTLEMENT DEDUCTED UNEARNED EARNED INVESTMENT YEARS
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME CURRENT COLUMN
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G YEAR H
- ---------------------- -------------- ----------- ---------- -------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994........ Workers' $ 0 $ 392,784 $4,730 $0 $148,441 $ 10,510 $118,889 $10,478
Compensation
Insurance
March 31, 1995........ Workers' 0 367,391 4,875 0 128,489 12,205 94,520 25,404
Compensation
Insurance
March 31, 1996........ Workers' 0 387,632 4,668 0 114,893 13,209 84,058 10,786
Compensation
Insurance
<CAPTION>
AMORTIZATION NET PAID
OF DEFERRED CLAIMS &
POLICY CLAIMS NET
ACQUISITION SETTLEMENT PREMIUMS
COSTS EXPENSES WRITTEN
YEAR ENDED COLUMN I COLUMN J COLUMN K
- ---------------------- ------------ ---------- --------
<S> <C> <C> <C>
March 31, 1994........ $ 10,664 $ 99,642 $156,086
March 31, 1995........ 10,078 90,646 144,427
March 31, 1996........ 9,707 63,400 120,688
</TABLE>
F-40
<PAGE> 129
EXHIBIT A
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
<PAGE> 130
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Background...............................................................................
Purpose of Conversion....................................................................
Article I Definitions...............................................................
Article II Regulatory Approval.......................................................
Article III Policyholder Voting.......................................................
Article IV Process of Conversion.....................................................
Article V Reorganization............................................................
Article VI Consideration for Membership Interests....................................
Article VII Allocation of Policyholder Consideration..................................
Article VIII Allocation of Additional Subscription Rights..............................
Article IX Subscription and Public Offerings.........................................
Article X Stock Incentive Plan for Employees and Directors..........................
Article XI Policyholder Interests....................................................
Article XII Federal Tax Consequences..................................................
Article XIII Conditions to Effectiveness...............................................
Article XIV Failure of Plan to Become Effective.......................................
Article XV Miscellaneous Provisions..................................................
</TABLE>
EXHIBITS TO PLAN OF CONVERSION AND RECAPITALIZATION
EXHIBIT
A Articles of Incorporation of Holding Company
B Bylaws of Holding Company
C Certificate of Designation, Preferences and Rights of Series A Preferred
Stock
D Form of Amended and Restated Articles of Incorporation of Stock Company
E Form of Amended and Restated Bylaws of Stock Company
F Recapitalization Agreement
G Actuarial Contribution Memorandum
H Organizational Chart (after conversion)
<PAGE> 131
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
This Amended Plan of Conversion and Recapitalization (the "Plan"), which
has been adopted by the Board of Trustees of Employers Self Insurers Fund at a
meeting duly called and held on , 1996, provides for the ultimate
conversion of Employers Self Insurers Fund to a domestic stock insurance company
in accordance with the requirements of the Florida Insurance Code.
BACKGROUND
Employers Self Insurers Fund ("ESIF") currently exists as a group
self-insurance fund ("GSIF") authorized pursuant to Section 624.4621, Florida
Statutes. In 1995, ESIF's Board of Trustees resolved to effect the conversion of
ESIF from a GSIF to an assessable mutual insurer authorized pursuant to part II
of Chapter 628, Florida Statutes. In January 1996, ESIF purchased Summit
Consulting, Inc., ESIF's management and service company. Due in part to the need
to focus upon that acquisition, the conversion to an assessable mutual was
delayed and has yet to be completed.
Earlier this year, the Board of Trustees reiterated its desire to effect a
conversion of ESIF. The Board determined, however, that conversion to an
assessable mutual would not fully achieve its objectives, and resolved to take
the next step and propose a conversion of ESIF to a domestic stock insurance
company. The stock insurer will be recapitalized and will become a wholly-owned
subsidiary of a holding company whose outstanding shares of common stock are
traded in a public securities market. The reasons and rationale behind the
Board's decisions are set out below under "Purposes of Conversion."
The Board has submitted to the Florida Department of Insurance (the
"Department"), in conjunction with the submission of this Plan, an application
for authorization to become an assessable mutual insurer. The application, if
approved, will convert ESIF to an assessable mutual insurer (the "Mutual
Company"). This Plan, which contemplates the conversion from an assessable
mutual to a stock insurer and recapitalization by the Holding Company, is
predicated upon the approval of the aforementioned application. It is
contemplated that the Department will issue one consent order approving both the
conversion of ESIf from a group self-insurance fund to an assessable mutual and
from an assessable mutual to a stock insurer, and that both conversions will
occur in a single day.
PURPOSE OF CONVERSION
GSIFs such as ESIF have played a significant role in Florida's workers'
compensation insurance marketplace for two decades. During that time, the GSIFs
provided coverage to employers as an alternative to the limited number of
commercial carriers. As a result of the 1993 workers' compensation reforms, the
marketplace has undergone significant change, attracting significant competition
from commercial carriers. Consequently, GSIFs such as ESIF find it increasingly
difficult to maintain their market share and sustain healthy growth as
policyholders move toward more traditional products and non-assessability. In
fact, many of Florida's GSIFs have left the marketplace, either by transferring
their business to commercial carriers or by converting to stock or
non-assessable mutual companies. The Board has concluded that ESIF should join
those GSIFs which have converted to stock insurers.
ESIF's ultimate conversion to a stock company that is wholly owned by a
publicly traded holding company (the "Conversion") is expected to strengthen
ESIF's financial condition by enabling it to obtain capital from sources that
are generally available to a stock company, but not to a policyholder-owned
self-insurance fund or mutual insurer. Formation of the holding company will
provide greater flexibility than ESIF would otherwise have to diversify its
business activities through existing or newly-formed subsidiaries or through
strategic partnerships which could enhance its financial security and diversity
and permit it to grow and eventually expand into other markets. Finally,
Policyholders will be able to realize an economic benefit for
<PAGE> 132
their membership interest which is not currently available to them, in addition
to being relieved of contingent liability for assessment which currently exists
under their insurance contracts, and the Florida Insurance Code.
ARTICLE I
DEFINITIONS
As used in this Plan, the following capitalized terms shall have the
following meanings:
1.1 Special Meeting. "Special Meeting" shall mean the meeting of ESIF,
including adjournments or postponements thereof, at which this Plan is to be
submitted to the Voting Policyholders for approval as provided in Section 3.1 of
this Plan.
1.2 Board of Trustees. "Board of Trustees" shall mean the Board of
Trustees of ESIF.
1.3 Common Stock. "Common Stock" shall mean the shares of the common
stock, no par value, of the Holding Company.
1.4 Department. "Department" shall mean the Department of Insurance of the
State of Florida.
1.5 Effective Date. "Effective Date" shall mean the date on which all the
conditions to the effectiveness as provided in Article XIII of this Plan have
been satisfied. The Effective Date shall not be more than six (6) months from
the date the order of the Department approving the Plan becomes effective;
provided that such period may be extended for such an additional period as may
be requested by the Board of Trustees and approved by the Department.
1.6 Eligible Policyholders. "Eligible Policyholders" shall mean owners of
Policies issued by ESIF, who owned such Policies during the period beginning
August 20, 1993, and ending August 20, 1996, as required by Section
628.6017(1)(f), Florida Statutes.
1.7 ESOP. "ESOP" shall mean the Employee Stock Ownership Plan formed at
the direction of the Board of Trustees of the Holding Company for the benefit of
the employees of the Holding Company and its subsidiaries, including the Stock
Company.
1.8 Financing. "Financing" shall mean a transaction or transactions
resulting in the infusion into the Stock Company of Policyholders' surplus in an
amount: (i) not less than that required of a newly-licensed Florida stock
insurer pursuant to Section 624.407, Florida Statutes; (ii) not less than an
amount sufficient to satisfy the premium-to-surplus requirements of Section
624.4095, Florida Statutes; and (iii) acceptable to the Department. Section
624.4095 provides that an insurer's ratio of actual annual written premiums to
current surplus as to Policyholders must not exceed 10 to 1 for gross written
premiums and must not exceed 4 to 1 for net written premiums. For the purposes
of the foregoing, Section 624.4095 provides that premiums shall be calculated as
the product of the actual or projected premiums and the following: (i) for
property insurance, 0.90; (ii) for casualty insurance, 1.25; (iii) for health
insurance, 0.80; and (iv) for all other kinds of insurance, 1.00.
Notwithstanding the foregoing, the Department may, in practice, require a higher
level of Policyholders' surplus for a domestic insurer after taking into
consideration factors including, but not limited to: (i) the lines of business
underwritten; (ii) the maturity of the insurer and its business; (iii) the
quality of the asset portfolio of the insurer; (iv) the experience and
competence of the management of the insurer; and (v) applicable risk-based
capital requirements.
1.9 Florida Insurance Code. "Florida Insurance Code" shall mean Chapters
624 through 632, 634, 635, 637, 638, 641, 642, 648, and 651 of the Florida
Statutes, and any amendments thereto effective on the Effective Date.
1.10 Holding Company. "Holding Company" shall mean Summit Holding
Southeast, Inc., a Delaware corporation, formed for the purpose of acquiring
100% of the capital stock of the Stock Company and to facilitate the Financing.
The proposed Articles of Incorporation and Bylaws of the Holding Company are
attached as Exhibits A and B, respectively.
2
<PAGE> 133
1.11 In-Force Policy. "In-Force Policy" shall mean a Policy for which a
binder letter has been issued and the effective date noted in such letter has
passed, and such Policy has not been surrendered or otherwise terminated, or
expired by its terms.
1.12 Meeting Record Date. "Meeting Record Date" shall mean a date set by
ESIF, which date shall be no more than seventy days and no less than thirty days
prior to the date on which the Special Meeting is to be convened.
1.13 Member. "Member" shall mean a member of ESIF (as such term is used in
the Florida Insurance Code in reference to members of group self-insurance
funds).
1.14 Membership Interests. "Membership Interests" shall mean the rights of
Members of ESIF arising under the organizational documents thereof, the Florida
Insurance Code and otherwise, including, without limitation, the right to vote
for trustees and on other matters and to participate in any distribution of
surplus on liquidation, but not including contractual rights arising under
Policies, including, without limitation, the right to be paid insurance
benefits. "Membership Interests" shall include all rights of Policyholders of
whatever type in the surplus of ESIF or the Mutual Company.
1.15 Mutual Company. "Mutual Company" shall mean the interim assessable
mutual company resulting from the conversion of ESIF.
1.16 Person. "Person" shall mean an individual, corporation, partnership,
association, joint stock company, trust, unincorporated organization, government
or political subdivision thereof or any other entity not specifically listed in
this definition.
1.17 Plan. "Plan" shall mean this Amended Plan of Conversion and
Recapitalization, as it may be amended from time to time.
1.18 Policies. "Policies" shall mean the indemnity agreements issued by
ESIF.
1.19 Policyholders. "Policyholders" shall mean the owners of Policies.
1.20 Preferred Stock. "Preferred Stock" shall mean the Series A Preferred
Stock of the Holding Company, having the designation, preferences and rights,
and subject to the qualifications, limitations and restrictions as are set forth
in the "Certificate of Designation, Preferences and Rights of Series A Preferred
Stock" attached hereto as Exhibit C.
1.21 Stock Company. "Stock Company" shall mean the stock company resulting
from the conversion of Mutual Company pursuant to the Plan.
1.22 Subscription Rights. "Subscription Rights" shall mean nontransferable
rights to purchase shares of the Common Stock. All such Subscription Rights
granted as described in the Plan shall be exercisable at the same per share
price, and such price shall be determined in accordance with Section 7.2(a)
below.
1.23 Voting Policyholders. "Voting Policyholders" shall mean all Persons
who, as reflected on the records of ESIF, were owners of In-Force Policies of
ESIF at the close of business on the Meeting Record Date.
ARTICLE II
REGULATORY APPROVAL
This Plan is subject to the approval by the Department pursuant to Sections
628.461, 628.6013, and 628.6017, Florida Statutes. The approval of the
Department will constitute approval of all aspects of this Plan under the
Florida Insurance Code.
2.1 Approval of the Plan shall constitute a determination by the Department
that the terms of the Plan are fair and equitable to the Members. However, the
Department's approval of the Plan does not constitute an endorsement or
recommendation thereof.
3
<PAGE> 134
2.2 The Plan contemplates the reorganization of ESIf and its subsidiaries.
Pursuant to that reorganization, the Holding Company will become the parent of
Stock Company and its subsidiaries, either directly or indirectly. Additionally,
the companies within the holding company system shall be reorganized in
accordance with the Organizational Chart attached hereto as Exhibit H.
Accordingly, approval of the Plan will constitute approval of the reorganization
of the holding company system as required under Section 628.461, Florida
Statutes. No separate approval by the Department will therefore be required in
connection with the acquisition of one hundred percent (100%) of the voting
securities of Stock Company or its stock insurer subsidiary by the Holding
Company or the reorganization of the holding company system. The Plan also
contemplates the ESOP purchasing up to ten percent (10%) of the Common Stock.
Approval of this Plan shall constitute approval of said acquisition, or,
alternatively, a determination that no such approval is required.
2.3 The Department may deem it appropriate to conduct a public or
evidentiary hearing in connection with its review of this Plan.
ARTICLE III
POLICYHOLDER VOTING
3.1 Special Meeting. After approval of the Plan by the Department, ESIF
shall provide notice of the 1996 Special Meeting (the "Special Meeting") of its
Members at which the Plan and the Amended and Restated Articles of Incorporation
of the Stock Company (in the form attached hereto as Exhibit D) and the amended
and restated bylaws of the Stock Company (in the form attached hereto as Exhibit
E) reflecting the conversion to the Stock Company (the "Restated Articles of
Incorporation" and "Restated Bylaws," respectively) shall be submitted for the
approval of the Voting Policyholders. Such Special Meeting shall be held at the
home office of the Mutual Company or at such other reasonable location as may be
determined by the Mutual Company. Prior to such Special Meeting, ESIF shall send
to its Voting Policyholders, at their addresses as most recently reflected in
the records of ESIF, such notices, disclosure documents, proxy or ballot forms
and information or explanatory statements as shall be necessary and appropriate.
3.2 Approval. This Plan, the Articles of Incorporation of the Mutual
Company, and the Restated Articles of Incorporation and Bylaws of the Stock
Company shall be approved by the Voting Policyholders if (i) not less than
two-thirds of the votes cast by the Voting Policyholders voting thereon in
person, by proxy, or by mail and (2) not less than a majority of the votes of
Voting Policyholders, are cast in favor of the Plan.
3.3 Supervision by Department. The Department may supervise the tabulation
of votes and may appoint such voting inspectors as it deems necessary or
advisable.
3.4 Certifying and Filing the Approved Plan. If this Plan and the Articles
of Incorporation of the Mutual Company and the Restated Articles of
Incorporation and Bylaws of the Stock Company are approved at the Special
Meeting, then within five days after the Special Meeting, the Mutual Company
shall prepare under its corporate seal a certificate setting forth the date and
results of the vote cast at the Special Meeting and a copy of the Plan as
approved. Such certificate shall be executed by both ESIF's chairman and Mutual
Company's chairman and secretary (or assistant secretary) and duly sworn to by
one of them. The certificate shall be delivered to the Department.
ARTICLE IV
PROCESS OF CONVERSION
The Florida Insurance Code does not currently provide for conversion
directly from a GSIF to a stock insurer. In order to effect such a conversion, a
GSIF must convert first to an assessable mutual. The application process for
conversion to an assessable mutual is separate and distinct from this Plan.
Nevertheless, in the interest of expediting ESIF's transformation to a stock
company, this Plan shall be filed for approval by the Department concurrently
with ESIF's application to convert to an assessable mutual. It is anticipated
that both review and approval processes will run concurrently. It is further
anticipated that ESIF's application to become an assessable mutual and approval
of this Plan will occur simultaneously.
4
<PAGE> 135
ARTICLE V
REORGANIZATION
5.1 Restatement of Articles of Incorporation and Bylaws. On the Effective
Date, the Restated Articles of Incorporation and Bylaws of the Stock Company
shall be filed with the Department and the Florida Secretary of State as
required by applicable law. Such Restated Articles of Incorporation and Bylaws
may be further amended after the Effective Date in accordance with their
provisions and the laws of the State of Florida.
5.2 Recapitalization of Stock Company. On the Effective Date, the Restated
Articles of Incorporation of the Stock Company shall authorize it to issue
fifteen thousand (15,000) shares of Common Stock with a par value of one hundred
dollars ($100) per share. On the Effective Date, the Eligible Policyholders will
exchange their Membership Interest for Preferred Stock in the Holding Company,
pursuant to the Recapitalization Agreement attached hereto as Exhibit F, all of
such authorized shares of Common Stock, and in exchange therefor the Holding
Company shall issue and deliver to the Stock Company the Preferred Stock and the
Subscription Rights as described in Sections 6.1 and 6.2 below, and the Holding
Company shall contribute in cash an amount adequate to capitalize Stock Company
in the manner described in Section 13.4 of this Plan.
ARTICLE VI
CONSIDERATION FOR MEMBERSHIP INTERESTS
Upon the Effective Date, Policyholders will cease to have any rights as
Members of ESIF or the Mutual Company, including, without limitation, the right
to elect trustees or directors and vote as to other matters, and any rights to
the distribution of surplus in liquidation, subject to the provisions of
Articles VII and VIII of this Plan. In exchange for their Membership Interests,
Policyholders will (i) no longer be subject to assessment by ESIF or the Mutual
Company during their current Policy year (in the case of those Policyholders who
have In-Force Policies) or for any prior year in which they held a Policy,
unless such assessment was imposed prior to the Effective Date; (ii) be relieved
of all future contingent liabilities of ESIF and the Mutual Company arising
after the Effective Date; (iii) receive that number of shares of Preferred Stock
determined in accordance with Section 7.1 below; and (iv) receive subscription
rights to purchase that number of shares of Common Stock determined in
accordance with Section 7.2.
6.1 Preferred Stock. As consideration for their Membership Interests,
Eligible Policyholders shall receive consideration, the principal component of
which will be shares of Preferred Stock in the Holding Company. Such Preferred
Stock shall be issued to Eligible Policyholders based upon the Allocation of
Policyholder Consideration described in Section 7.1 below and shall be issued as
soon as practicable after the Effective Date. The aggregate number of shares of
Preferred Stock to be given to Eligible Policyholders pursuant to this Plan
shall be 1,640,000 shares with a par value of Ten Dollars ($10.00) per share.
The Preferred Stock is described in detail in the Certificate of Designation,
Preferences and Rights of Service A Preferred Stock, a copy of which is attached
hereto as Exhibit C.
6.2 Subscription Rights. In addition to the Preferred Stock described
above, Eligible Policyholders shall receive Subscription Rights in the Common
Stock to be issued by the Holding Company. The Subscription Rights shall, in the
aggregate, entitle the Eligible Policyholders to purchase eighty percent (80%)
of the Aggregate Common Shares (as defined in Section 7.2(a) below). Thus,
should the Eligible Policyholders determine that it is in their best interests
to capitalize the Stock Company through the purchase of Holding Company Common
Stock, the Eligible Policyholders shall be entitled to retain ownership and
control of the Stock Company and its subsidiaries through their ownership of the
Common Stock. The remaining twenty percent (20%) of the Aggregate Common Shares
shall be reserved for subscription by the ESOP and the officers, directors and
executive employees of the Holding Company and its subsidiaries, including the
Stock Company, pursuant to Article VIII below. It is contemplated that any
portion of the Aggregate Common Shares allocated to, but not issued to, Eligible
Policyholders, the ESOP or the
5
<PAGE> 136
Management Group (as defined in Section 8.1(b)) shall be offered for sale to the
public. The procedures for offering the shares of Common Stock pursuant to the
Subscription Rights are set forth in Article IX below.
ARTICLE VII
ALLOCATION OF POLICYHOLDER CONSIDERATION
The allocation of the Preferred Stock and the Subscription Rights,
described in Sections 6.1 and 6.2 above, shall be determined as follows:
7.1 Preferred Stock. Each Eligible Policyholder shall be paid
consideration based upon the allocation to such Policyholder of a number of
shares of Preferred Stock as follows:
(a) Each Eligible Policyholder shall receive a total number of shares
of Preferred Stock equal to the sum of (i) and (ii) below.
(i) A fixed number of shares of Preferred Stock based upon the
number of Policies, and earned premium attributable to each Policy, of
which such Policyholder was the owner of record during the period from
August 20, 1993, through August 20, 1996 (the "Eligibility Period").
Specifically, each Eligible Policyholder shall be entitled to Ten (10)
shares of Preferred Stock for each Policy of which such Policyholder was
the owner of record during the Eligibility Period. Additionally, each
such Policyholder shall be entitled to ( ) share of Preferred
Stock for each Dollars ($ ) of earned premium attributable
to Policies of which such Policyholder was the owner of record during
the Eligibility Period. A Policyholder shall not be entitled to a share
of Preferred Stock for any fraction of earned premium less than
Dollars ($ ).
(ii) A variable number of shares of Preferred Stock based upon an
actuarial formula determining the contribution to surplus attributable
to each Eligible Policyholder during the Eligibility Period. Only
Eligible Policyholders whose policies were "guaranteed cost" shall
receive any shares pursuant to this section 7.1(a)(ii). Subject thereto,
the number of shares of Preferred Stock comprising the variable
component for each Eligible Policyholder shall be determined according
to the Actuarial Contribution Memorandum, attached hereto as Exhibit G.
The actuarial formula explained therein is substantially similar to the
methodology utilized in determining the dividends payable to ESIF
Members during ESIF's existence as a self-insurance fund.
(b) Thirty percent (30%) of the total number of shares of Preferred
Stock that will be issued by the Holding Company pursuant to this Plan
shall be allocated as the aggregate fixed component and the remaining
seventy percent (70%) shall be allocated as the aggregate variable
component.
7.2 Subscription Rights. Each Eligible Policyholder shall receive
Subscriptions Rights based upon the allocation to such Policyholder of
Subscription Rights to purchase Common Stock as follows:
(a) The total number of shares of Common Stock that will be issued by
the Holding Company (the "Aggregate Common Shares") shall be determined by
the Board of Trustees or a committee of the Board of Trustees of the Stock
Company based upon (i) the amount of cash that the Holding Company needs to
fund the Financing, plus any other working capital needs of the Holding
Company, and its subsidiaries, including the Stock Company, and (ii) the
price per share at which the Holding Company actually offers its Common
Stock pursuant to the Subscription Rights and any subsequent sale of Common
Stock to the public (the "Per Share Offering Price"). The amounts described
in items (i) and (ii) shall be determined with the help of professional
advisors and will be agreed upon by the Board of Trustees of the Stock
Company and the Holding Company. A further description of the determination
of the Per Share Offering Price is set forth in Section 9.5.
(b) Each Eligible Policyholder shall receive Subscription Rights to
purchase up to 4.99 percent of Aggregate Common Shares at a price per share
equal to the Per Share Offering Price, with a minimum required purchase of
one hundred (100) shares of Common Stock for each Eligible Policyholder who
chooses to subscribe. In the aggregate, Eligible Policyholders shall be
allocated Subscription Rights to
6
<PAGE> 137
one hundred percent (100%) of the Aggregate Common Shares, less the shares
subscribed for by the ESOP and the Management Group, which together shall
not exceed twenty percent (20%) of the Aggregate Common Shares. In the
event that the Eligible Policyholders collectively subscribe to more than
the eighty percent (80%) of the Aggregate Common Shares that has been
initially allocated to them, such eighty percent (80%) of the Aggregate
Common Shares, plus any additional shares that are not subscribed for by
the ESOP and the Management Group (as defined in Section 8.1(b)), shall be
allocated among individual Eligible Policyholders by multiplying the ratio
of the earned premium attributable to Policies of which each Policyholder
was the owner of record during the Eligibility Period to the total premium
earned during the Eligibility Period by the total number of shares
representing the allocation to Eligible Policyholders.
(c) No Person other than the ESOP shall be permitted, individually or
in conjunction with any affiliated Person, to acquire directly or
indirectly more than 4.99 percent of the Common Stock, without Department
approval as required by section 628.461, Florida Statutes.
ARTICLE VIII
ALLOCATION OF ADDITIONAL SUBSCRIPTION RIGHTS
8.1 In order to provide incentives to the directors, officers and executive
employees of the Holding Company and its subsidiaries, including the Stock
Company, in a manner comparable to other publicly-owned companies, and to
encourage these individuals future to become partners in its development, twenty
percent (20%) of the Aggregate Common Shares shall be set aside for subscription
by or on behalf of those individuals, as follows:
(a) The Holding Company shall grant Subscription Rights to the ESOP to
purchase up to ten percent (10%) of the Aggregate Common Shares. The price
to be paid by the ESOP for the purchase of each share of Common Stock
pursuant to such Subscription Rights shall be the Per Share Offering Price.
(b) The Holding Company shall also grant Subscription Rights to
certain officers, directors and executive employees of the Holding Company
and its subsidiaries, including the Stock Company (the "Management Group")
to purchase up to an aggregate of ten percent (10%) of the Aggregate Common
Shares. The price to be paid by each member of the Management Group for the
purchase of each share of Common Stock pursuant to such Subscription Rights
shall be the Per Share Offering Price. Certain members of the Management
Group may also be granted Subscription Rights in accordance with Section
7.2 because they are Eligible Policyholders. However, no member of the
Management Group shall be permitted, individually or in conjunction with
any affiliated Person, to acquire directly or indirectly more than 4.99
percent of the Common Stock, pursuant to all Subscription Rights granted to
such member.
(c) Any shares of the Aggregate Common Shares that are not subscribed
to by the ESOP or the Management Group, as the case may be, shall be
available for purchase by Eligible Policyholders, in the event that the
Eligible Policyholders subscribe for more than the 80% of the Aggregate
Common shares initially allocated for subscription by the Eligible
Policyholders.
ARTICLE IX
SUBSCRIPTION AND PUBLIC OFFERINGS
9.1 Subscription Offering Procedures. The Stock Company and the Holding
Company will prepare a joint proxy statement/prospectus (the "Prospectus"),
pursuant to which each Voting Policyholder will be asked to vote on the
Conversion and other matters set forth in this Plan. In addition, pursuant to
the Prospectus, the Holding Company will offer for sale shares of its Common
Stock pursuant to exercise of the Subscription Rights (the "Subscription
Offering"). Also pursuant to the Prospectus and simultaneously with the
Subscription Offering, the Holding Company will offer its Preferred Stock to
Eligible Policyholders. If the
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requisite number of the Voting Policyholders approve the Conversion, the
Preferred Stock will be distributed to each Eligible Policyholder in
consideration of such Eligible Policyholder's Membership Interest, without any
exercise of Subscription Rights by Eligible Policyholders. As soon as
practicable after the Department has approved this Plan and the Prospectus has
been declared effective by the Securities and Exchange Commission, the
Prospectus will be delivered to each Eligible Policyholder, the ESOP and the
Management Group, along with an order form (the "Order Form") for use by such
Persons in exercising his or its Subscription Rights for Common Stock. Each
Order Form will contain, among other things, the following:
(a) A specified date by which all Order Forms must be received by the
Holding Company, which date shall be not less than twenty (20) nor more
than forty-five (45) days following the date on which the Order Forms are
mailed by the Holding Company, and which date shall constitute the
termination of the Subscription Offering;
(b) The Per Share Offering Price;
(c) A description of the minimum and maximum number of shares of
Common Stock which may be subscribed for pursuant to the exercise of
Subscription Rights;
(d) Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Common Stock for which such Person
elects to subscribe and the available alternative methods of payment;
(e) An acknowledgment that the recipient of the Order Form has
received a copy of the Prospectus prior to the execution of the Order Form;
(f) A statement to the effect that the Subscription Rights are
nontransferable, will be void at the end of the Subscription Offering, and
can only be exercised by the Persons to whom they are granted at least 48
hours prior to timely delivery to the Holding Company of a properly
completed and executed Order Form, together with cash (if delivered in
person) or check or money order in the full amount of the purchase price as
specified in the Order Form for the shares of Common Stock for which the
recipient elects to subscribe in the Subscription Offering; and
(g) A statement that the executed Order Form, once received by the
Holding Company, may not be modified or amended by the subscriber without
the consent of the Holding Company.
9.2 Payments for Subscriptions. (a) All payments for Common Stock
purchased pursuant to the Subscription Rights must be delivered in full to the
Holding Company, together with a properly completed and executed Order Form on
or prior to the expiration date specified on the Order Form, unless such date is
extended by the Holding Company. Notwithstanding the foregoing, if the ESOP
subscribes for shares during the Subscription Offering, the ESOP will not be
required to pay for such shares at the time it subscribes, but rather may pay
for such shares of Common Stock on the Effective Date, provided that there is in
force from the time of its subscription until the Effective Date a loan
commitment from a financial institution reasonably acceptable to the Holding
Company to lend to the ESOP, on the Effective Date, the aggregate Per Share
Offering Price owed by the ESOP pursuant to its subscription.
(b) Payment for Common Stock subscribed for in the Subscription Offering
shall be held by the Holding Company in a segregated, interest-bearing escrow
account (the "Escrow Account"). On the Effective Date, the Holding Company shall
apply each subscriber's proceeds in the Escrow Account to satisfy the applicable
subscription price owed by such subscriber. The Holding Company shall as soon as
practicable thereafter distribute to each subscriber the amount of interest
earned in the Escrow Account on such subscriber's payment, net of any costs to
the Holding Company of maintaining the Escrow Account. If for any reason the
Conversion is not consummated, all payments made by subscribers shall be
refunded to them (with interest net of any costs to the Holding Company of
maintaining the Escrow Account) as soon as practicable after the determination
that no such consummation shall occur.
9.3 Undelivered, Defective or Late Order Forms. In the event that Order
Forms (i) are not delivered and are returned to the Holding Company by the
United States Postal Service, or the Holding Company is unable to locate the
addressee, (ii) are not received back by the Holding Company or are received by
the
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<PAGE> 139
Holding Company after the expiration date specified thereon, (iii) are
defectively filled out or executed, or (iv) are not accompanied by the full
required payment for the shares of Common Stock subscribed for, the Subscription
Rights of the Person to whom such rights have been granted will lapse as
specified thereon; provided, however, that the Holding Company may, but will not
be required to, waive any immaterial irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscription shares by such date as the Holding Company may specify. The
interpretation of the Stock Company of terms and conditions of the Plan, and of
the Holding Company of terms and conditions of the Order Forms, will be final,
subject to the authority of the Department.
9.4 Public Offering. The Subscription Offering will include simultaneous
offerings to the Eligible Policyholders, the ESOP and the Management Group. If
feasible, all shares of the Aggregate Common Shares not subscribed for in the
Subscription Offering may be sold in a public or private offering, subject to
such terms, conditions and procedures as may be determined by the Holding
Company. In such offering, no Person, individually or in conjunction with any
affiliated Person, shall be permitted to acquire directly or indirectly more
than 4.99 percent of the Aggregate Common Stock, without approval of the
Department pursuant to section 628.461, Florida Statutes, provided that such
limitation shall not be applicable to underwriters for purposes of such an
offering but shall be applicable to the sales by the underwriters to the public.
The amount to be paid by the underwriters in such a public offering shall be
equal to the Per Share Offering Price less an underwriting discount to be
negotiated among such underwriters and the Holding Company. Such public offering
will be commenced as soon as practicable following the date upon which the
Subscription Offering terminates. If for any reason a public offering of any of
the Aggregate Common Shares not sold in the Subscription Offering cannot be
effected, or in the event that any insignificant number of remaining shares is
not sold in the Subscription Offering or the subsequent public offering, other
purchase arrangements may be made by the Holding Company.
9.5 Per Share Offering Price. All shares of Common Stock sold pursuant to
the Subscription Offering and the subsequent public or private offering shall be
sold for a uniform price. The Per Share Offering Price shall be agreed upon by
the Boards of Directors or a committee of the Board of the Stock Company and the
Holding Company prior to commencement of the Subscription Offering.
ARTICLE X
STOCK INCENTIVE PLAN FOR EMPLOYEES AND DIRECTORS
10.1 Employee Plan. It is anticipated that the Holding Company will
implement the 1996 Employee Incentive Plan (the "Employee Plan"), providing for
stock and stock-based incentive awards to be granted to certain key employees of
the Holding Company and its subsidiaries, including the Stock Company. The
purpose of the Employee Plan is to promote the success, and enhance the value,
of the Holding Company, by linking the personal interests of the Holding
Company's key employees to those of Holding Company shareholders and by
providing the Holding Company's key employees with an incentive for outstanding
performance. Subject to the terms and conditions set forth in the Employee Plan,
a committee of the Holding Company's Board of Trustees, comprised of at least
two directors who are not also employees of the Holding Company, will have
discretion to select the key employees who are eligible to participate and to
determine their awards.
10.2 Director Plan. It is also anticipated that the Holding Company will
implement the 1996 Stock Option Plan for Outside Directors (the "Director
Plan"), providing for the Holding Company to grant to non-employee directors
options to purchase shares of the Holding Company's Common Stock. The purpose of
the Director Plan is to advance the interests of the Holding Company by
encouraging the non-employee directors to own Common Stock of the Holding
Company, thereby giving them an increased incentive to devote their efforts to
the success of the Holding Company. Each non-employee director will be entitled
to receive a number of options determined by a predetermined formula that is set
forth in the Director Plan.
9
<PAGE> 140
ARTICLE XI
POLICYHOLDER INTERESTS
Upon Conversion, the Policies held by Policyholders will be converted from
assessable Policies to non-assessable Policies, without any endorsement or
modification thereto. Policyholders will remain liable for all assessments
imposed prior to the Effective Date. Policyholders will be relieved of all
future contingent liabilities arising after the Effective Date from such
Policies held. Insurance coverage under insurance policies issued by ESIF,
including, without limitation, Policy coverages and benefits, will continue
unaffected.
ARTICLE XII
FEDERAL TAX CONSEQUENCES
It is intended that the Conversion, the Subscription Offering and the
public or private offering will be regarded for federal income tax purposes as
one transaction with several discrete steps having the tax consequences outlined
herein. The conversion of ESIF into Mutual Company is intended to be treated for
federal income tax purposes as a tax-free reorganization under section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). The
conversion of Mutual Company into Stock Company is intended to be treated as a
tax-free Code section 368(a)(1)(E) recapitalization. Finally, the exchange by
Eligible Policyholders of their Membership Interests in Mutual Company in return
for the Preferred Stock and the exchange by Eligible Policyholders, the ESOP,
the Management Group and the underwriters of cash for Common Stock is intended
to be treated as a tax-free exchange under Code section 351. This Plan of
Conversion shall constitute a plan to effect a change in the identity of ESIF, a
plan of recapitalization and a plan of exchange under Section 351. Eligible
Policyholders and ESIF, Mutual Company, Stock Company and Holding Company shall
recognize no income, gain or loss as a result of the transaction contemplated by
this Plan. ESIF may seek a ruling from the Internal Revenue Service to confirm
the above described federal income tax consequences. As a condition to closing
the transactions contemplated by this Plan, ESIF shall have received such ruling
or have received an opinion of its counsel substantially to the same effect (in
which event it may withdraw the ruling request to the Internal Revenue Service).
ARTICLE XIII
CONDITIONS TO EFFECTIVENESS
In order for the Plan to become effective, all of the conditions listed
below must be satisfied. No Person shall have any rights or claims against ESIF,
the Mutual Company, the Stock Company, the Holding Company, or any of their
directors, officers, employees or agents, based upon the Plan not becoming
effective due to the failure of one or more of the conditions set forth below to
be satisfied.
13.1 Approval of the Plan by the Department and Policyholders. The Plan
and the Restated Articles of Incorporation and Bylaws of Stock Company shall
have been approved by the Department and by the necessary vote of the Voting
Policyholders.
13.2 Approval of the Application by the Department. ESIF's application for
approval to convert to an assessable mutual insurer shall have been approved by
the Department.
13.3 Financing. The Holding Company must have completed such equity or
debt financing transaction or transactions which is or are adequate to
capitalize Stock Company in the manner described below.
13.4 Capitalization of Stock Company. On the Effective Date, Stock Company
must have surplus as to Policyholders in an amount: (i) not less than that
required pursuant to Section 624.407, Florida Statutes, of a newlylicensed
Florida stock insurer; (ii) not less than an amount sufficient to satisfy the
premium to surplus requirements of Section 624.4095, Florida Statutes; and (iii)
acceptable to the Department. Section 624.4095 provides that an insurer's ratio
of actual annual written premiums to current surplus as to Policyholders must
not exceed 10 to 1 for gross written premiums and must not exceed 4 to 1 for net
written premiums. For the purposes of the foregoing, Section 624.4095 provides
that premiums shall be calculated as the product of the
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<PAGE> 141
actual or projected premiums and the following: (i) for property insurance,
0.90; (ii) for casualty insurance, 1.25; (iii) for health insurance, 0.80; and
(iv) for all other kinds of insurance, 1.00. Notwithstanding the foregoing, the
Department may, in practice, require a higher level of Policyholders' surplus
for a domestic insurer after taking into consideration factors including, but
not limited to: (i) the lines of business underwritten; (ii) the maturity of the
insurer and its business; (iii) the quality of the asset portfolio of the
insurer, (iv) the experience and competence of the management of the insurer;
and (v) applicable risk-based capital requirements.
13.5 Filing of Articles of Incorporation and Bylaws. The Restated Articles
of Incorporation and Bylaws of Stock Company shall be filed in the manner
provided by applicable statute or regulation.
13.6 Policyholder Assessment. No assessments shall have been imposed
against Policyholders.
13.7 Tax Ruling or Opinion. ESIF shall have received the tax ruling or
opinion described in the last sentence of Article XII.
ARTICLE XIV
FAILURE OF PLAN TO BECOME EFFECTIVE
If the Plan does not become effective, the Mutual Company will remain a
group self-insurance fund. ESIF's articles of incorporation and bylaws will not
be restated pursuant to the Plan, the Membership Interests will remain
unchanged, and Policyholders will continue to be liable for assessments for each
year that funds of ESIF are insufficient to satisfy its liabilities as if this
Plan had not been proposed. The expenses incurred in the process of proposing
the Conversion and recapitalization contemplated by the Plan shall be borne
exclusively by ESIF.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 Amendment of Plan. At any time prior to the Effective Date, the Board
of Trustees of ESIF may amend this Plan and any filing made pursuant to this
Plan so long as such amendment is consistent with the intent and purposes of the
Plan as originally filed. If an amendment is adopted after the Plan has been
approved by Voting Policyholders at the Special Meeting, and such amendment is
not, in the judgment of the Board of Trustees of ESIF, materially
disadvantageous to Policyholders, and in conformity with such intent and
purposes, the Plan, as amended, need not be submitted for reconsideration by
Voting Policyholders.
15.2 Continuity of Corporate Existence. Upon the Conversion and
recapitalization of ESIF, as provided for in this Plan, the corporate existence
of ESIF shall continue uninterrupted in the form of Stock Company. All rights,
franchises, licenses and interests of ESIF in and to every type of property,
real, personal and mixed, and all choses in action shall continue unaffected and
uninterrupted by the Conversion and recapitalization and shall accrue to the
Stock Company. This Plan shall not be construed to result in any real or
constructive issuance or exchange of any insurance Policy or any other transfer
of any assets, rights or obligations by ESIF. All obligations and liabilities of
ESIF shall continue unaffected and uninterrupted by the Conversion and
recapitalization in the Stock Company. No action or proceeding pending at the
Effective Date to which ESIF is a party shall be abated or discontinued by
reason of this transaction but may be prosecuted to final judgment by the Stock
Company in the same manner as if the recapitalization and conversion had not
taken place. For all purposes, Stock Company shall be deemed to have been
organized on April 1, 1978, the initial date of organization of ESIF.
15.3 Extensions of Time Periods. In the event that subsequent to the
approval of this Plan by the Department, this Plan or any action contemplated by
this Plan becomes the subject of one or more legal or equitable proceedings in
any state, federal court or administrative agency in the United States, then the
periods referred to in the definition of the "Effective Date" and Article III of
this Plan, respectively, may be
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lengthened by a period of time equal to the pendency of such proceeding or
proceedings plus such previously determined periods.
15.4 Governing Law. This Plan, and the rights and obligations of all
parties under this Plan, will be governed and construed in accordance with the
Florida Insurance Code and other applicable laws of the State of Florida without
regard to principles of conflicts of laws.
15.5 Interpretation of Plan. This Plan and any filing made pursuant to
this Plan shall be interpreted in good faith by ESIF, and, unless objected to by
the Department, such interpretation shall be binding upon all Policyholders and
other Persons.
15.6 Name Change. Immediately upon the Effective Date, the name of Stock
Company will be changed from Employers Self Insurers Fund to a name to be chosen
by the Board of Trustees.
15.7 Oversights. If ESIF complies substantially and in good faith with the
requirements of this Plan, the Department, the Florida Insurance Code and other
applicable laws and regulations with respect to the giving of any notice, proxy,
proxy statement or other materials to the Voting Policyholders or other Persons,
or any other determination or action required by the Plan, then the failure or
inability to comply in every respect with such requirements in any particular
case shall not impair the validity of the actions or proceedings taken under
this Plan or entitle any Person to any injunctive or other equitable relief with
respect thereto.
15.8 Right to Rely upon Documents Deemed Genuine. ESIF, its Board of
Trustees, and its agents, officers and employees shall have the right to rely
upon documents and records deemed in good faith to be genuine, authorized or
properly executed and shall incur no liability or obligation for acting in
reliance thereon.
15.9 Authority to Remedy Errors. Subject to the terms of this Plan and
with the approval of the Department, the Holding Company may issue additional
shares of Preferred or Common Stock and take any other action it deems
appropriate to remedy errors or miscalculations made in connection with this
Plan.
15.10 Corrections. ESIF may make such modifications to the Plan as are
appropriate to correct errors, clarify existing items or make additions to
correct manifest omissions in the Plan; provided, however, that material
modifications must be approved by the Department.
15.11 Costs and Expenses. All reasonable costs, including those costs
attributable to the use of the staff personnel and outside advisors, consultants
and attorneys, relating to the Plan, shall be borne by the Stock Company or the
Holding Company.
15.12 No Preemptive Rights. Other than the Subscription Rights referred to
in the Plan, no Policyholder of ESIF, Mutual Company or Stock Company shall have
any preemptive right to acquire shares of Common or Preferred Stock in the
Holding Company or Common Stock in the Stock Company in connection with or as a
result of this Plan.
IN WITNESS WHEREOF, this Amended Plan of Conversion and Recapitalization
has been executed as of the date first above written.
EMPLOYERS SELF INSURERS FUND
By:
------------------------------------
Name:
----------------------------------
Chairman of the Board of Trustees
ATTEST:
- --------------------------------------
Secretary
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<PAGE> 143
EXHIBIT B
RESTATED ARTICLES OF INCORPORATION
OF
BRIDGEFIELD EMPLOYERS INSURANCE COMPANY
Upon the affirmative vote of a majority of the voting policyholders of
BRIDGEFIELD EMPLOYERS INSURANCE COMPANY, an Assessable Mutual, the Corporation
hereby restates its Articles of Incorporation to read as follows:
ARTICLE I
NAME
The name of the Corporation shall be BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY. Its name prior to the adoption of these Restated Articles of
Incorporation was BRIDGEFIELD EMPLOYERS INSURANCE COMPANY, an Assessable Mutual.
The principal place of business of the Corporation shall be 2310 A-Z Park Road,
Polk County, Lakeland, Florida 33801.
ARTICLE II
NATURE OF BUSINESS
The purpose of the Corporation is to engage in the business of the types of
property and casualty insurance for which it is authorized.
ARTICLE III
CAPITAL STOCK
The aggregate number of shares which the Corporation is authorized to issue
is 15,000, comprised of 15,000 shares of Common Stock. The Common Stock shall be
of one class and shall have a par value of $100 per share.
The amount of capital and surplus with which the Corporation shall engage
in the business of insurance shall be not less than the greater of $5,000,000 in
capital and surplus or 10% of the Corporation's total liabilities. An amount not
less than the minimum paid-in capital stock shall be sold for lawful money of
the United States or equivalent United States Government Securities; provided,
however, that any additional sums paid for stock or any stock sold after the
minimum required capital has been so paid in money may be in the form of any
type of securities in which the Corporation is authorized to invest its funds
under Chapter 625 of the Florida Statutes.
ARTICLE IV
TERM OF EXISTENCE
The Corporation shall exist perpetually.
ARTICLE V
REGISTERED OFFICE AND AGENT
The registered office of this Corporation shall be 2310 A-Z Park Road,
Lakeland, Florida 33801, and the initial registered agent of this Corporation at
such office shall be William B. Bull, who, upon accepting this designation
agrees to comply with the provisions of Section 48.091, Florida Statutes, as
amended from time to
<PAGE> 144
time, with respect to keeping an office to receive service of process from the
Treasurer and Insurance Commissioner of the State of Florida.
ARTICLE VI
DIRECTORS
Section 1. The Corporation shall have at least five (5) directors, all of
whom are United States citizens and all of whom are over the age of eighteen
(18). The names and residence street addresses of the initial directors, whose
initial terms of office shall be for one (1) year, are:
<TABLE>
<CAPTION>
NAME ADDRESS
-------------------------------------------------------------------------- ----------
<S> <C>
Robert L. Noojin, Sr...................................................... [address]
Thomas S. Petcoff......................................................... [address]
Robert Siegel............................................................. [address]
John Gray................................................................. [address]
Greg C. Branch............................................................ [address]
C.C. Dockery.............................................................. [address]
William B. Bull........................................................... [address]
</TABLE>
Section 2. The election of directors by the shareholders is approved if a
quorum exists, as provided in the Bylaws of the Corporation, and the votes cast
favoring the election of a director exceeds the votes cast opposing the election
of a director.
Section 3. The initial term of office of all of the initial directors
shall expire at the first annual meeting of the shareholders in 1997. At that
meeting, the directors elected shall be divided into three classes, Class I,
Class II and Class III, as nearly equal in number as possible. The term of
office for each of the Class I directors shall expire at the first annual
meeting of the shareholders in 1998; the term of office for each of the Class II
directors shall expire at the annual meeting of the shareholders in 1999; and
the term of office for each of the Class III directors shall expire at the
annual meeting of the shareholders in 2000. At each annual meeting of the
shareholders commencing with the meeting held in 1997, the successors to the
directors whose terms are expiring shall be elected to terms expiring at the
third succeeding annual meeting of shareholders. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional directors of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A director shall
hold office until the annual meeting of the shareholders for the year in which
his term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Section 4. All corporate powers shall be exercised by or under the
authority of the directors and the business and affairs of the Corporation shall
be managed and administered pursuant to the policies adopted by the directors.
Section 5. The qualification, election and tenure of the directors shall
be further provided for in the Bylaws.
Section 6. A member of the Board of Directors is not personally liable for
monetary damages to any person, including, but not limited to the Corporation,
for any statement, vote, decision, or failure to act, regarding the management
or policies of the Corporation, by such director, unless:
(a) The director breached or failed to perform his duties as a
director; and
(b) The director's breach of or failure to perform his duties
constitutes:
(1) A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful. A final judgment
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<PAGE> 145
or other final adjudication against a director in any criminal
proceeding for violation of the criminal law estops that director from
contesting the fact that his breach, or failure to perform, constitutes
a violation of the criminal law; but does not estop the director from
establishing that he had reasonable cause to believe that his conduct
was lawful or had no reasonable cause to believe that his conduct was
unlawful.
(2) A transaction from which the director derived an improper
personal benefit, either directly or indirectly; or
(3) Recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and
willful disregard of human rights, safety, or property. For purposes of
these Articles of Incorporation, the term "recklessness" means the
acting, or omission to act, in conscious disregard of a risk:
(a) Known, or so obvious that it should have been known, to the
director; and
(b) Known to the director, or so obvious that it should have
been known, to be so great as to make it highly probable that harm
would follow from such action or omission.
If the Florida Business Corporation Act or the Florida Insurance Code is
amended after the approval by the shareholders of these Articles to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by such amendments.
Section 7. Directors may be removed by the shareholders with or without
cause.
ARTICLE VII
INDEMNIFICATION
The Board of Directors is hereby specifically authorized to make provisions
for indemnification of directors, officers, employees and agents to the full
extent permitted by law.
ARTICLE VIII
PARTICIPATING POLICIES
Pursuant to section 628.361, Florida Statutes (1993), as amended from time
to time, the Corporation may issue any or all of its policies with or without
participation in profits, savings, or unabsorbed portions of premiums, may
classify policies issued on a participating or non-participating basis, and may
determine the right to participate and the extent of participation of any class
or classes of policies.
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<PAGE> 146
ARTICLE IX
AMENDMENTS
These Articles of Incorporation may be amended by a majority vote of the
shareholders of the Corporation; provided that such amendment is approved by the
Florida Department of Insurance.
IN WITNESS WHEREOF, the initial directors of the Corporation have hereunto
set our hands and seals this day of , 1996.
- ------------------------------------------------------
Director
- ------------------------------------------------------
Director
- ------------------------------------------------------
Director
- ------------------------------------------------------
Director
Attest:
--------------------------------------------------------------
Secretary
(SEAL)
- ------------------------------------------------------
Director
- ------------------------------------------------------
Director
- ------------------------------------------------------
Director
CERTIFICATION OF VOTING RESULTS
The Members of BRIDGEFIELD EMPLOYERS INSURANCE COMPANY, an Assessable
Mutual, in the course of their annual meeting held on , adopted the
attached Restated Articles of Incorporation. The restatement included amendments
which require stockholder approval pursuant to Chapter 607 of the Florida
Statutes. I hereby certify that the amendments were approved by a majority of
the voting Members and that there are not multiple voting groups.
--------------------------------------
Secretary
(SEAL)
4
<PAGE> 147
EXHIBIT C
FORM OF
RESTATED BYLAWS
OF
BRIDGEFIELD EMPLOYERS INSURANCE COMPANY
ARTICLE I
CORPORATE OFFICE
The principal office of the Corporation shall be located at 2310 A-Z Park
Road, Lakeland, Polk County, Florida 33801, or at such other place within the
State of Florida as the Board of Directors may from time to time determine.
ARTICLE II
SHAREHOLDER MEETINGS
Section 1. Annual Meetings. An annual meeting of the shareholders shall be
held at 2310 A-Z Park Road, Lakeland, Florida 33801, unless another place within
the State of Florida shall have been designated by the Board of Directors.
Shareholders entitled to vote at each annual meeting shall be given at least
thirty (30) days' written notice of the date, time and place of annual meetings.
The date, time, and place of annual meetings may be changed from time to time by
giving shareholders at least thirty (30) days' written notice of the change in
date, time or place. The initial annual meeting shall be held within thirteen
(13) months after the date of incorporation and thereafter the annual meeting of
shareholders shall be held no later than thirteen (13) months after the last
annual meeting of shareholders. However, the failure to hold an annual meeting
timely shall in no way affect the terms of officers or directors of the
Corporation or the validity of actions of the Corporation.
Section 2. Special Meetings. Special meetings of the shareholders may be
called by the Chairman of the Board of Directors, by a majority of the Board of
Directors then in office, or by shareholders to whom twenty-five percent (25%)
or more of the Corporation's stock has been issued. Written notice specifying
the date, time and place of each special meeting (or any change in the date,
time or place of a special meeting) shall be given in writing, by mail,
facsimile transmission, private mail carrier handling nationwide mail service,
or by telegraph, at least thirty (30) days prior to the date of the special
meeting. The purpose of each special meeting shall be stated in the notice and
may only include purposes which are lawful and proper for shareholders to
consider.
Section 3. Waiver of Notice. A written waiver of notice signed by a
shareholder, whether before or after a meeting, shall be equivalent to the
giving of such notice. Attendance of a shareholder at a meeting shall constitute
a waiver of notice of such meeting, except when the shareholder attends for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 4. List of Shareholders Entitled to Vote. The secretary of the
Corporation shall make, at least ten (10) days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting or any adjournment thereof, with the address of each. For a period of
ten (10) days prior to such meeting, the list shall be kept on file at the
registered office of the Corporation or at the principal place of business of
the Corporation, and any shareholder shall be entitled to inspect the list at
any time during usual business hours. The list shall also be produced and kept
open at the time and place of the meeting and shall be subject to the inspection
of any shareholder at any time during the meeting. If the requirements of this
section have not been substantially complied with, then upon demand of any
shareholder in person or by proxy, the meeting shall be adjourned until the
requirements are complied with. If no such demand is made, failure to comply
with the requirements of this section shall not affect the validity of any
action taken at such meeting.
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Section 5. Shareholder Quorum and Voting. A quorum at all annual and
special meetings of shareholders will consist of one-third of the shares
entitled to vote. After a quorum has been established at an annual or special
meeting, the subsequent withdrawal of shareholders, so as to reduce the number
of shareholders entitled to vote at the meeting, shall not affect the validity
of any action taken at the meeting or any adjournment thereof. Action on a
matter is approved by the shareholders if a quorum exists and the votes cast
favoring the action exceed the votes cast opposing the action unless the
Articles of Incorporation, provisions of these Bylaws or the Florida Corportions
Act requires a greater number of affirmative votes.
Section 6. Proxies. Every shareholder entitled to vote at an annual or
special meeting or to express consent or dissent without a meeting may authorize
another person or persons to act for him by proxy. Every proxy shall be in
writing and shall be signed by the shareholder or his otherwise duly authorized
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof. Every proxy shall be revocable at the pleasure of
the shareholder executing it. Before any proxy can be voted, it shall be filed
with the secretary.
ARTICLE III
BOARD OF DIRECTORS
Section 1. General Powers. Subject to the limitations of the Articles of
Incorporation and these Bylaws concerning corporate action that must be
authorized or approved by the shareholders of the Corporation, all corporate
powers shall be exercised by or under the authority of the Board of Directors,
and the business and affairs of the Corporation shall be managed pursuant to the
policies of the Board of Directors.
Section 2. Number, Qualification and Election. The number of directors
shall be at least five (5), as elected or appointed from time to time in
accordance with these Bylaws. The number of directors may be increased or
decreased from time to time in accordance with the same procedure as is required
for amending these Bylaws, but shall never be less than five (5).
Section 3. Term of Office. The initial term of office of all of the
initial directors shall expire at the first annual meeting of the shareholders
in 1997. At that meeting, the directors elected shall be divided into three
classes, Class I, Class II and Class III, as nearly equal in number as possible.
The term of office for each of the Class I directors shall expire at the first
annual meeting of the shareholders in 1998; the term of office for each of the
Class II directors shall expire at the annual meeting of the shareholders in
1999; and the term of office for each of the Class III directors shall expire at
the annual meeting of the shareholders in 2000. At each annual meeting of the
shareholders commencing with the meeting held in 1997, the successors to the
directors whose terms are expiring shall be elected to terms expiring at the
third succeeding annual meeting of shareholders. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes so as
to maintain the number of directors in each class as nearly equal as possible,
and any additional directors of any class elected to fill a vacancy resulting
from an increase in such class shall hold office for a term that shall coincide
with the remaining term of that class, but in no case will a decrease in the
number of directors shorten the term of any incumbent director. A director shall
hold office until the annual meeting of the shareholders for the year in which
his term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
Section 4. Annual Meetings. The Board of Directors shall hold its annual
organizational meeting immediately following each annual meeting of shareholders
for the election of officers and the transaction of such other business as may
come before the meeting. If a majority of the directors are present at the
annual meeting of shareholders, no prior notice of the annual meeting of the
Board of Directors shall be required. However, another place and time for such
meeting may be fixed by written consent of all of the directors. If the annual
meeting of the Board of Directors is not held as herein provided on the date
herein specified, the election of officers may be held at any meeting held
thereafter pursuant to these Bylaws.
Section 5. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice of the time and place and shall be determined from
time to time by the Board of Directors.
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Section 6. Additional Meetings. Additional meetings of the Board of
Directors may be called by the Chairman of the Board or by a majority of the
directors. The person or persons authorized to call additional meetings of the
Board of Directors may fix a reasonable time and place for holding them.
Section 7. Telephone Meetings. Directors may participate in meetings of
the Board of Directors by means of a conference telephone or similar
communications equipment by which all persons participating can hear each other
at the same time, and participation by such means shall constitute presence in
person at such meeting.
Section 8. Action Without Meeting. Any action of the Board of Directors
may be taken without a meeting if a consent in writing setting forth the action
so taken is signed by all of the directors and is filed in the minutes of the
Board of Directors. Such consent shall have the same effect as an unanimous
vote.
Section 9. Notice and Waiver. Notice of any additional meeting shall be
given at least three (3) days prior thereto by written notice delivered
personally or by United States mail or facsimile to each director at his
residence or business address. If mailed, such notice must be mailed at least
seven (7) days prior thereto, and shall be deemed to be mailed when deposited in
the United States mail with postage prepaid. Any director may waive notice of
any meeting, either before, at, or after such meeting by signing a waiver of
notice. The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting and waiver of any and all objections of the place of such
meeting or the manner in which it has been called or convened, except when a
director states at the beginning of the meeting any objection to the transaction
of business because the meeting is not lawfully called or convened.
Section 10. Quorum and Voting. A majority of directors in office shall
constitute a quorum for the transaction of business. The vote of a majority of
directors present at a meeting at which a quorum is present shall constitute the
action of the Board of Directors. If less than a quorum is present, then a
majority of those directors present may adjourn the meeting from time to time
until a quorum is present. Any meeting of the Board of Directors at which a
quorum is present may be adjourned from day to day or from time to time by a
vote of a majority of the directors present and voting at such meeting; the same
may be adjourned from time to time until a quorum is obtained, or may be
adjourned without assigning a day for further meeting. At any adjourned meeting
at which a quorum is present, any business may be transacted which might have
been transacted at the original meeting.
Section 11. Vacancies. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors even
though it is less than a quorum of the Board of Directors, unless otherwise
provided by law or the Articles of Incorporation. A director elected or
appointed, as the case may be, to fill a vacancy shall hold office for the
unexpired term of the vacancy filled by such director. Any directorship to be
filled by reason of an increase in the number of directors shall be filled by
election at a meeting of the Board of Directors called for that purpose.
Section 12. Removal. At any meeting of shareholders called expressly for
that purpose, any director or directors may be removed from office, with or
without cause, by vote of a majority of the shareholders then entitled to vote
at an election of directors. New directors may be elected by the shareholders
for the unexpired terms of directors removed from office at the same meeting at
which such removals are voted. If the shareholders fail to elect persons to fill
the unexpired terms of removed directors, then the vacancies unfilled shall be
filled in accordance with provisions in these Bylaws for vacancies.
Section 13. Compensation. The Board of Directors may set the compensation
of directors and provide for the reimbursement of expenses of directors.
Section 14. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless he
votes against such action or abstains from voting because of an asserted
conflict of interest.
Section 15. Indemnification. The Corporation shall indemnify the directors
of the Corporation in accordance with the policy of indemnification set forth in
Article XII and Exhibit A to these Bylaws.
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Section 16. Limitation of Directors' Liability. A member of the Board of
Directors shall not be personally liable for monetary damages to any person,
including but not limited to the Corporation, for any statement, vote, decision,
or failure to act, regarding the management or policy of the Corporation, by
such director, unless:
a. The director breached or failed to perform his duties as a
director; and
b. The director's breach of, or failure to perform, his duties
constitutes:
1. A violation of the criminal law, unless the director had
reasonable cause to believe his conduct was lawful or had no reasonable
cause to believe his conduct was unlawful. A final judgment or other
final adjudication against a director in any criminal proceeding for
violation of the criminal law estops that director from contesting the
fact that his breach, or failure to perform, constitutes a violation of
the criminal law; but does not estop the director from establishing that
he had reasonable cause to believe that his conduct was lawful or had no
reasonable cause to believe that his conduct was unlawful.
2. A transaction from which the director derived an improper
personal benefit, either directly or indirectly; or
3. Recklessness or an act or omission which was committed in bad
faith or with malicious purpose or in a manner exhibiting wanton and
willful disregard of human rights, safety, or property. For purposes of
this subdivision, the term "recklessness" means the acting, or omission
to act, in conscious disregard of a risk:
a. Known, or so obvious that it should have been known, to the
director; and
b. Known to the director, or so obvious that it should have been
known, to be so great as to make it highly probable that harm would
follow from such action or omission.
ARTICLE IV
OFFICERS
Section 1. Officers. The corporate officers of this Corporation shall be a
president, one or more vice-president(s), a secretary, and a treasurer, each of
whom shall be appointed by the Board of Directors. The Board officers of this
Corporation shall be a Chairman of the Board and a Vice-Chairman of the Board.
Any two or more offices may be held by the same person. A failure to appoint a
president, vice president(s), secretary, or treasurer shall not affect the
existence of the Corporation, and the president, vice president(s), secretary,
or treasurer shall continue to serve in office until new officers are appointed
by the Board of Directors.
Section 2. Appointment and Term of Office. The corporate officers and
board officers of the Corporation shall be appointed by the Board of Directors
and shall serve at the pleasure of the Board of Directors. Each officer shall
hold office until his successor shall have been duly appointed and shall have
qualified, or until his death, or until he shall resign or have been removed in
the manner hereafter provided.
Section 3. Removal. Any officer may be removed from office on the
affirmative vote of a majority of the entire Board of Directors whenever, in its
judgment, the best interests of the Corporation shall be served thereby. Removal
shall be without prejudice to any contract rights of the person so removed, but
the election of an officer shall not of itself create contract rights.
Section 4. Vacancies. Vacancies in offices, however occasioned, may be
filled at any time by appointment by the Board of Directors of officers to serve
the unexpired terms of such offices.
Section 5. Duties. The corporate officers and board officers shall have
the following duties:
a. Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the Board of Directors and of the shareholders.
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b. Vice-Chairman of the Board. In the case of the death, absence of,
inability of the Chairman of the Board to act, the Vice-Chairman of the
Board shall preside at meetings of the Board of Directors and of the
shareholders.
c. President. The president shall perform all the usual and customary
duties of that office, including, without limitation, the general
supervision of the business of the Corporation.
d. Vice Presidents. The vice presidents shall have such power and
perform such duties as may be delegated to them by the President. In the
case of the death, absence, or inability of the president to act, except as
may be expressly limited by action of the Board of Directors, a vice
president expressly designated by the Board of Directors shall perform the
duties and exercise the power of the president following such death of the
president or during the absence or inability of the president to act.
e. Secretary. The secretary shall keep the minutes of all meetings of
the shareholders and of the Board of Directors in a book or books to be
kept for such purposes, and also, when so requested, the minutes of all
meetings of committees in a book or books to be kept for such purposes. He
shall attend to giving and serving of all notices, and he shall have charge
of all books and papers of the Corporation, except those hereinafter
described to be in the charge of the treasurer or except as otherwise
expressly directed by the Board of Directors. The secretary shall be the
custodian of the seal of the Corporation. The secretary shall have and
perform such other duties as may be delegated to him by the president.
f. Treasurer. The treasurer shall perform all the usual and customary
duties of that office. The treasurer shall also have the power and perform
such duties as may be delegated to him by the president.
Section 6. Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 7. Indemnification. The Corporation shall indemnify the officers
of the Corporation in accordance with the policy of indemnification set forth in
Article XII and Exhibit A to these Bylaws.
ARTICLE V
COMMITTEES
Section 1. Creation of Committees. The Board of Directors shall, by
resolution passed by a majority of the whole Board, designate an Audit Committee
and may, by resolution passed by a majority of the whole Board, designate a
Finance and Investment Committee, and such other committees as the Board shall
deem appropriate.
Section 2. Committee Functions. Such committees shall have such functions
and may exercise such power as can be lawfully delegated by the Board of
Directors and to the extent provided in the resolution creating such committee
or committees.
Section 3. Meetings. Regular committee meetings may be held without notice
at such time and at such place as shall from time to time be determined by the
committees, and additional meetings of the committees may be called by any
member thereof upon two (2) days' notice to the other members of such committee,
or on such shorter notice as may be agreed to in writing by each of the other
members of such committee, given either personally or in the manner provided in
these Bylaws pertaining to notice for directors' meetings.
Section 4. Members. Members of the committees shall be directors and shall
be appointed by a majority of the Board.
Section 5. Quorum. At all meetings of the committees, a majority of the
committee's members then in office shall constitute a quorum for the transaction
of business.
Section 6. Manner of Acting. The vote of a majority of the members of any
committee present at any meeting at which there is a quorum shall constitute the
action of such committee.
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Section 7. Minutes. The committee shall keep regular minutes of their
proceedings and report the same to the Board of Directors when required.
Section 8. Compensation. Members of the committees may be paid
compensation in accordance with the provisions of these Bylaws pertaining to
compensation of directors.
ARTICLE VI
MANAGEMENT COMPANY
The Board of Directors of the Corporation may contract with an authorized
management company to manage and administer the affairs of the Corporation
including, but not limited, to marketing, underwriting, billing, collection,
claims administration, terminations, reinstatement, safety and loss prevention,
reinsurance, policy issuance, accounting, custody of funds for day-to-day
operations, regulatory reporting, investments, and general administration.
ARTICLE VII
BOOKS, RECORDS AND REPORTS
The Corporation shall send a report to the shareholders of the Corporation
at least annually. Such report shall include a balance sheet as of the close of
the fiscal year of the Corporation and a profit and loss statement for the year
ending on such closing date. Such financial statements shall be prepared from
and in accordance with the books of the Corporation, in conformity with
generally accepted accounting principles applied on a consistent basis.
ARTICLE VIII
DIVIDENDS
The Board of Directors of the Corporation may from time to time apportion
and pay to the shareholders dividends only out of that part of its available and
accumulated surplus funds which is derived from realized net operating profits
on its business and net realized capital gains. Any such dividend payment shall
be made in accordance with section 628.371, Florida Statutes (1995), as amended
from time to time. This article shall not be interpreted to require any payment
of dividends.
ARTICLE IX
SEAL
The corporate seal shall bear the name of the Corporation between two
concentric circles and in the inside of the inner circle shall be the year of
incorporation.
ARTICLE X
FUNDS OF THE CORPORATION
All monies of the Corporation or under its charge deposited in any bank or
other place of deposit shall be deposited to the credit of the Corporation by
its corporate name.
ARTICLE XI
AMENDMENTS
These Bylaws may be altered, amended or replaced and new Bylaws may be
adopted by a two-thirds ( 2/3) vote of the Board of Directors or by a majority
of the shareholders.
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ARTICLE XII
INDEMNIFICATION
The Corporation shall indemnify any person who was or is threatened with or
made a party to any suit or other legal or administrative proceedings brought to
impose upon him a liability or penalty for an act alleged to have been committed
by him in his capacity as a director, officer, employee or agent of the
Corporation in accordance with the policy of indemnification set forth in
Exhibit A to these Bylaws.
IN WITNESS WHEREOF, I, the Secretary of said Corporation, have hereunto set
my hand and affixed the seal of said Corporation on this the day of
, 1996.
By:
--------------------------------------
Secretary
(SEAL)
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EXHIBIT A
POLICY OF INDEMNIFICATION
(1) Corporate Power to Indemnify. Upon the following terms and subject to
the following conditions, this Corporation shall indemnify any person who is
threatened with or made a party to any proceeding brought to impose upon him a
liability or penalty for an act alleged to have been committed by him in his
capacity as a director, officer, employee, or agent of the Corporation or by
reason of the fact that he is or was serving at the request of the Corporation
as a director, officer, or agent of another corporation, partnership, joint
venture, trust, or other enterprise (including any employee benefit plan). A
proceeding includes any threatened, pending or completed action, suit or other
type of proceeding, whether civil, criminal, administrative, or investigative
and whether formal or informal.
(2) Third Party Actions. If the proceeding is not one brought by or in the
right of the Corporation for the purpose of obtaining a judgment in its favor
and if the person acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation (or, in a
criminal action, if he was without reasonable cause for believing that his
conduct was unlawful), the Corporation shall indemnify him against judgments,
penalties, fines (including any excise taxes with respect to any employee
benefit plan), amounts paid in settlement, and all reasonable expenses,
including attorneys' fees, which he has actually and necessarily incurred as a
result of the proceeding, including any appeal. The termination of any
proceeding by judgment, order, settlement, or conviction or upon a plea of nolo
contendere or its equivalent shall not, or itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably believed to
be in, or not opposed to, the best interests of the Corporation or, with respect
to any criminal action or proceeding, that the person had reasonable cause to
believe that his conduct was unlawful.
(3) Derivative Suits. If the proceeding is brought by or in the right of
the corporation to obtain a judgment in its favor and if the person acted in
good faith in the reasonable belief that his action was in, or not opposed to,
the best interests of the Corporation, the Corporation shall indemnify him
against amounts paid in settlement, or if there is no settlement or if, in the
judgment of the Board of Directors, the costs of settlement exceed the estimated
expense of litigating the proceeding to conclusion, against any loss, liability
or damages arising out of such proceeding, as well as all reasonable expenses,
including attorneys' fees, which he has actually and necessarily incurred in
connection with the defense or settlement of the proceedings, including any
appeal, except that, if the person is adjudged to have been guilty of negligence
or misconduct in the performance of his duty to the Corporation, he shall be
entitled to indemnification only to the extent that the court, administrative
agency, or investigative body before which the proceeding is heard, shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the person is fairly and reasonably
entitled to indemnity.
(4) Right to Indemnification. To the extent a director, officer, employee
or agent of the Corporation is successful in defending any proceeding, whether
or not brought by or in the right of the Corporation, or in defending any claim,
issue, or matter therein, this Corporation shall indemnify him against all
reasonable expenses, including attorneys' fees, which he has actually and
necessarily incurred in connection therewith.
(5) Action Required by Directors. Unless indemnification is ordered by the
tribunal before which the proceeding is held, the determination of whether the
standards of conduct giving rise to indemnity under Sections (2) and (3) of this
policy have been met shall be made by a majority vote of the Board of Directors
of a quorum consisting of directors who were not parties to the proceeding.
(6) Advance Payments. The Corporation may authorize payment of the
expenses incurred by a director, officer, employee, or agent of the Corporation
in defending any proceeding in advance of the final disposition of such
proceeding, upon receipt of an undertaking by or on behalf of the director,
officer, employee, or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the Corporation.
(7) Additional Indemnification. The Corporation shall have the right and
power to make any other or further indemnification, except indemnification
against gross negligence or willful misconduct and except indemnification
contrary to law, under any bylaw, agreement, vote of shareholders or
disinterested directors, or
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otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
(8) Power to Purchase and Maintain Insurance. The Board of Directors shall
have the power to purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee, or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, or other
enterprise against liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this policy. This Section (8) shall not limit the power of the
Corporation to purchase and maintain insurance on behalf of any person who is or
was a director, officer, or employee of the Corporation.
(9) Continuing Coverage. Indemnification as provided for in this policy
shall continue as to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs, executors, and
administrators of such a person. This policy of indemnification shall be deemed
to constitute a contract between the Corporation and each officer, director,
employee, and agent of the Corporation. This policy may be amended or terminated
by the Board of Directors of the Corporation provided that such amendment or
termination shall not diminish any rights of an officer, director, employee, or
agent with respect to matters arising or causes of action accruing prior to such
action by the Board.
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EXHIBIT D
[SEAL]
THE TREASURER OF THE STATE OF FLORIDA
DEPARTMENT OF INSURANCE
BILL NELSON
IN THE MATTER OF:
CASE NO. 17191-96-C
EMPLOYERS SELF INSURERS FUND;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY, AN ASSESSABLE MUTUAL;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY; AND SUMMIT HOLDING
SOUTHEAST, INC.
- ---------------------------------------------------/
CONSENT ORDER
THIS CAUSE came on to be considered upon an application with attachments
(Collectively referred to herein as the "APPLICATION") filed on behalf of
APPLICANTS, Employers Self Insurers Fund ("ESIF"), Bridgefield Employers
Insurance Company, an Assessable Mutual ("BEIC MUTUAL"), Bridgefield Employers
Insurance Company ("BEIC STOCK"), and Summit Holding Southeast, Inc. ("SUMMIT
SOUTHEAST") with the Florida Department of Insurance (the "DEPARTMENT") on or
about August 20, 1996, pursuant to Sections 624.463, 628.461, 628.6013, and
628.6017, Florida Statutes. After a complete review of the entire record, and
upon consideration thereof and being otherwise fully advised in the premises,
the Treasurer and Insurance Commissioner, as head of the DEPARTMENT, finds as
follows:
1. The Treasurer and Insurance Commissioner, as head of the DEPARTMENT, has
jurisdiction over the subject matter and of the parties herein.
2. The proposed conversion of ESIF from a group self-insurance fund to an
interim domestic assessable mutual insurer, BEIC MUTUAL, is in compliance with
and approved pursuant to Section 624.463 and 628.6013, Florida Statutes, subject
to and contingent upon compliance with the terms of this Consent Order.
3. The proposed formation of BEIC MUTUAL is in compliance with and approved
pursuant to applicable provisions of Chapter 628, Part II, Florida Statutes
including Section 628.6013, Florida Statutes, subject to and contingent upon
compliance with the terms of this Consent Order.
4. The proposed conversion of BEIC MUTUAL from an interim domestic
assessable mutual insurer to a domestic stock insurer, BEIC STOCK, is in
compliance with and approved pursuant to Section 628.6017, Florida Statutes,
subject to and contingent upon compliance with the terms of this Consent Order.
5. The proposed acquisition of all outstanding shares of BEIC STOCK by
SUMMIT SOUTHEAST as outlined in the Amended Plan of Conversion and
Recapitalization of Employers Self Insurers Fund (hereinafter referred to as the
"Amended Plan of Conversion and Recapitalization") submitted to the DEPARTMENT
on November 5, 1996 is in compliance with and approved pursuant to Section
628.461, Florida Statutes, subject to and contingent upon compliance with the
terms of this Consent Order.
6. Pursuant to APPLICANTS' APPLICATION, including the Amended Plan of
Conversion and Recapitalization and the Plan of Operation, APPLICANTS will take
a number of intermediate steps in order to convert from a group self insurance
fund to an assessable mutual insurer and ultimately to a domestic stock insurer
which shall then be acquired by a newly formed holding company. As consideration
for the exchange of membership interests in BEIC MUTUAL, the APPLICATION
provides for the elimination of any liability the members may have for future
assessments, issuance of Preferred Stock of SUMMIT SOUTHEAST, and Subscription
Rights to purchase Common Stock of SUMMIT SOUTHEAST. Further, in
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accordance with the Amended Plan of Conversion and Recapitalization and the Plan
of Operation and pursuant to the provisions of Section 628.161(6)(d), Florida
Statutes, BEIC STOCK shall hold all of ESIF's members harmless from any
assessment for liabilities of ESIF before the effective date. Subject to the
requirements imposed by this Consent Order, the Amended Plan of Conversion and
Recapitalization of ESIF and BEIC MUTUAL has been determined to be equitable to
the members of ESIF and of BEIC MUTUAL pursuant to Sections 624.463, 628.6013,
and 628.6017, Florida Statutes.
7. APPLICANTS have submitted to, and the Department has relied upon, as
part of the APPLICATION, the following:
a) all documents which will be submitted or distributed to members of
ESIF and BEIC MUTUAL in connection with the conversions and acquisition
transactions, including, in draft form, the Proxy Statement with referenced
exhibits, the proxy card. Notice of Meeting of Members of ESIF and BEIC
MUTUAL, and the letter to members, which will accompany the notice, Proxy
Statement, and proxy card;
b) the proposed Amended Plan of Conversion of ESIF and BEIC MUTUAL to
BEIC STOCK, including the proposed Articles of Incorporation and Bylaws of
BEIC MUTUAL and proposed Restated Articles of Incorporation and Restated
By-Laws of BEIC STOCK;
c) the final version of the proposed Articles of Incorporation and
By-Laws of SUMMIT SOUTHEAST;
d) the proposed "Certificates of Designation, Preferences, and Rights
of Series A Preferred Stock" and the "Recapitalization Agreement".
e) the final version of the Plan of Operation of BEIC STOCK.
8. The Department conducted a public hearing in Tallahassee, Florida at
10:00 A.M. on Thursday, October 10, 1996 pursuant to notice in the Florida
Administrative Weekly. Further, APPLICANTS' have represented, and the Department
has relied upon said representation, and the record reflects that notice of the
public hearing was advertised in six major newspapers in six major cities
located throughout Florida in advance of the public hearing and in the form
presented to the Department at the public hearing. The Notices appeared both in
the "Legal Notices" section of each paper and in a standard advertising space
prominently displayed elsewhere in each paper. Pursuant to the notice, the
Department elicited testimony from representatives of APPLICANTS' describing the
proposed transactions and opened the floor to comments, testimony, and evidence
concerning the APPLICATION from those in attendance. The information received
has been considered by the Department in determining to enter into this Consent
Order.
9. APPLICANTS have retained THE CHICAGO CORPORATION to review the fairness
of the consideration to be paid under the Amended Plan of Conversion and
Recapitalization of ESIF and BEIC MUTUAL to the members of BEIC MUTUAL in
exchange for their membership interests, from a financial point of view, and to
render its opinion to ESIF and the Board of Organizers of BEIC MUTUAL. The
written opinion has been filed with, and relied upon by, the DEPARTMENT and is
an attachment to the Proxy Statement. THE CHICAGO CORPORATION's written opinion
states "that the Consideration to be received by the Eligible Policyholders
pursuant to the Plan [of Conversion and Recapitalization] is fair, from a
financial point of view, to the Eligible Policyholders."
10. APPLICANTS have retained the law firm of McCONNAUGHHAY, ROLAND MAIDA, &
CHERR, P.A. to render its opinion as to whether the APPLICATION and the
transactions contemplated by the APPLICATION are in conformance with Florida
law. The written opinion has been filed with, and relied upon by, the DEPARTMENT
and states that "the conversion of ESIF pursuant to the [Amended Plan of
Conversion and Recapitalization] complies with the [Florida Insurance] Code."
11. APPLICANTS have retained the law firm of ALSTON & BIRD to render its
opinion as to the Federal income tax consequences of the APPLICATION and the
transactions contemplated by the APPLICATION. The written opinion has been filed
with, and relied upon by, the DEPARTMENT, relied upon by THE CHICAGO
CORPORATION, and made an attachment to the Proxy Statement. ALSTON &
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BIRD's written opinion concludes that ". . . No gain or loss will be recognized
by the Policyholders on the deemed exchange of their membership interests in
ESIF for membership interests in . . . [BEIC MUTUAL]No gain or loss will be
recognized by . . . [BEIC MUTUAL] . . . on the deemed receipt of the assets and
liabilities of ESIF . . . No gain or loss will be recognized by ESIF on the
deemed transfer of its assets to . . . [BEIC MUTUAL] . . . and the assumption by
. . . [BEIC MUTUAL] . . . of the liabilities of ESIF . . . No gain or loss will
be recognized by the Policyholders on the deemed exchange of their membership
interests in . . . [BEIC MUTUAL] for stock of . . . [BEIC STOCK] . . . No gain
or loss will be recognized by . . . [BEIC STOCK] on its deemed issuance of stock
in exchange for the . . . [BEIC MUTUAL] . . . membership interests of
Policyholders . . . No gain or loss shall be recognized by the
. . . [Policyholders] on their transfer of property to . . . [SUMMIT SOUTHEAST]
solely in exchange for . . . [SUMMIT SOUTHEAST] . . . stock No gain or loss
shall be recognized by . . . [SUMMIT SOUTHEAST] on the issuance of its common
stock and preferred stock in exchange for common stock of . . . [BEIC STOCK]."
12. APPLICANTS have retained THE CHICAGO CORPORATION to render its opinion
as to the financial forecasts for BEIC STOCK after the implementation of the
APPLICATION and the transactions contemplated by the APPLICATION. The written
opinion has been filed with, and relied upon by, the DEPARTMENT, is consistent
with the findings made by THE CHICAGO CORPORATION in conjunction with the
issuance of the fairness opinion in this matter, and will be made an attachment
to the Proxy Statement. THE CHICAGO CORPORATION's written opinion states that
"It is our opinion that the assumptions underlying the pro forma projections
provide a reasonable basis for management's forecasts . . ."
13. APPLICANTS have retained the accounting firm of KPMG PEAT MARWICK to
render its opinion as to the March 31, 1996 statutory-basis loss and loss
adjustment expense reserves for ESIF. The written opinion has been filed with,
and relied upon by, the DEPARTMENT and relied upon by THE CHICAGO CORPORATION.
KPMG PEAT MARWICK's written opinion concludes that ". . . unpaid loss and loss
adjustment expense reserves as of March 31, 1996 described herein are computed
in accordance with accepted loss reserving standards and principles and make
reasonable provision for all unpaid loss and loss adjustment expense obligations
of the Fund under the terms of its policies and agreements." If the Effective
Date does not arise prior to March 31, 1997 APPLICANTS shall promptly submit to
the DEPARTMENT an opinion as to the March 31, 1997 statutory-basis loss and loss
adjustment expense reserves for ESIF.
14. APPLICANTS have retained the reinsurance intermediaries of BRENTWOOD
SERVICES INCORPORATED to render its opinion as to the reinsurance position of
ESIF after its conversion to BEIC STOCK. The written opinion has been filed
with, and relied upon by, the DEPARTMENT and relied upon by THE CHICAGO
CORPORATION. BRENTWOOD SERVICES INCORPORATED's written opinion concludes that
"In the event that . . . [ESIF] converts to an insurance company, we feel that
the existing excess insurance policy would continue to result in actual risk
transfer and is appropriate given the projected liabilities, the solvency
position of the fund, the pro formas and the plan of operations as we now
understand them . . ."
15. APPLICANTS have retained KPMG PEAT MARWICK to render its opinion as to
the solvency position of ESIF after its conversion to BEIC STOCK. The written
opinion has been filed with, and relied upon by the DEPARTMENT. The results of
the "Schedule of Sensitivity Analysis of Projected Statutory Policyholder
Surplus" included in the opinion performed by KPMG PEAT MARWICK indicates that
after the conversion to a stock company and based on assumptions contained in
projected financial statements, ESIF will exceed the minimum capital and surplus
requirements of Florida law in 91.5% of the ten thousand scenarios tested. KPMG
PEAT MARWICK has also concluded that ". . . the underlying assumptions [of the
projected financial statements] provide a reasonable basis for management's
projection . . ."
16. APPLICANTS hereby knowingly and voluntarily waive all rights of any
kind to challenge or to contest this Order, in any forum now available,
including the right to any administrative proceeding, Circuit or Federal Court
action, or any appeal.
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IT IS THEREFORE ORDERED:
17. Subject to the terms and conditions contained herein, the Treasurer and
Insurance Commissioner hereby approves the transactions contemplated by the
APPLICATION to include the proposed conversion of ESIF to BEIC MUTUAL, the
proposed immediately subsequent conversion of BEIC MUTUAL to BEIC STOCK, and the
proposed immediately subsequent acquisition of BEIC STOCK by SUMMIT SOUTHEAST
pursuant to the Amended Plan of Conversion and Recapitalization submitted with
the APPLICATION.
18. APPLICANTS shall not mail the Proxy Statement and related enclosures,
without first obtaining separate written approval of the DEPARTMENT for the
final draft of said documents.
19. BEIC STOCK shall file with the DEPARTMENT all premium growth reports as
required by Section 624.4243, Florida Statutes, in a complete and timely manner.
20. BEIC STOCK shall report Unearned Premiums on all of its financial
statements in compliance with Section 625.051, Florida Statutes.
21. BEIC STOCK shall follow the guidelines of the NAIC Practices &
Procedures Manual and the NAIC Annual Statement Instructions for Property &
Casualty Companies when accounting for retrospective premiums and when
accounting for return premiums on all of its financial statements.
22. Summit Consulting, Inc. shall file annual audited financial statements
with the DEPARTMENT no later than June 1st of each of the first three years
following the Effective Date. In addition, all affiliates of BEIC STOCK shall
provide the DEPARTMENT with access to their books and records, if so requested.
23. For the three year period following the Effective Date (as defined
herein), BEIC STOCK shall not have or enter into any contract or any other
agreement for a fee with an affiliated entity other than a contract or agreement
that has been approved in writing by the DEPARTMENT. For the three year period
following the Effective Date, fees payable under any such contract with an
affiliated entity shall not be materially increased without the prior written
approval of the DEPARTMENT. For the three year period following the Effective
Date, no such contract shall contain any minimum fee provisions. For the three
year period following the Effective Date, BEIC STOCK shall provide written
notice to the DEPARTMENT and receive its written approval prior to executing any
material amendment to any such contract or agreement, thereafter, BEIC STOCK
shall provide written notice to the DEPARTMENT within thirty (30) days of
executing any material amendment to any such contract or agreement.
24. BEIC STOCK shall not use any type of discounting when computing its
loss reserves and shall not report discounted loss reserves on any of its
financial statements, except for the discounting of loss reserves allowed by
Section 625.091, Florida Statutes.
25. As a condition of the granting of approval of the conversion of ESIF to
BEIC MUTUAL and from there to BEIC STOCK, ESIF has placed a $5 million security
and collateral deposit with the DEPARTMENT's Bureau of Collateral Securities. In
addition, ESIF shall immediately take all steps necessary to make the DEPARTMENT
a co-signor on First Union National Bank of Florida account number 4022015600
(hereinafter referred to as the "First Union Account") currently held in the
name of ESIF with all assets deposited therein pledged to the DEPARTMENT for the
protection of ESIF's members. The balance on the First Union Account shall
exceed $45,000,000 at the time of entry of this Order. No withdrawals shall be
made on this account without the prior written approval of the DEPARTMENT.
Furthermore, APPLICANTS shall provide the DEPARTMENT with monthly reporting on
the balance and activity of such account. If the conversion of ESIF to BEIC
MUTUAL and from there to BEIC STOCK is not effectuated within the time frame
allowed by paragraph 33 of this Order, ESIF shall immediately increase the
amount of the security and collateral deposit it has placed with the
DEPARTMENT's Bureau of Collateral Securities from $5 million to $25 million. If
the conversion of ESIF to BEIC MUTUAL and from there to BEIC STOCK is
effectuated, ESIF, by signing this Consent Order authorizes the transfer of the
$5 million security and collateral deposit now being held by the DEPARTMENT's
Bureau of Collateral Securities to the name of BEIC STOCK. APPLICANTS agree to
sign all necessary documents and render other assistance as
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necessary to effectuate such transfer. Both the funds on deposit with the
DEPARTMENT's Bureau of Collateral Securities as well as the funds on deposit in
the First Union Account shall be designated deposits pursuant to section
624.411, Florida Statutes.
26. For the three year period following the Effective Date, BEIC STOCK
shall, for purposes of financial examinations, be classified as an insurer which
is required to be examined in accordance with Section 624.316(2)(f), Florida
Statutes. Thereafter, BEIC STOCK shall remain subject to other applicable
provisions of Section 624.316, Florida Statutes.
27. BEIC STOCK shall not include the following assets on any financial
statement filed with the DEPARTMENT, as such assets shall not be admitted for
purposes of determining BEIC STOCK's compliance with the requirements of the
Florida Insurance Code: (i) Any amount representing ceded reinsurance loss that
is disputed by the reinsurer; (ii) Any amount representing the prepayment of
Income Taxes as required by section 625.031, Florida Statutes; (iii) Any amounts
representing assets that are allowed for self-insurance funds or assessable
mutual insurers that are not assets under accounting standards for domestic
insurers under Florida law; and (iv) Any assets that are hypothecated, pledged,
or otherwise encumbered, excluding real estate and mortgages on such held in the
normal course of business and assets pledged to the DEPARTMENT.
28. Any surplus from the transfer of all of the assets and liabilities of
ESIF to BEIC STOCK under the Amended Plan of Conversion and Recapitalization
submitted to the DEPARTMENT is considered contributed surplus and shall be
reported as such on all financial statements of BEIC STOCK.
29. BEIC STOCK shall maintain all assets physically in the State of Florida
in accordance with Section 628.271, Florida Statutes or in compliance with
Section 628.511, Florida Statutes, for as long as BEIC STOCK is a domestic
insurer.
30. Any material deviation from the three year Plan of Operations submitted
as part of the APPLICATION must be approved in advance and in writing by the
DEPARTMENT. APPLICANTS shall substantially comply with the Plan of Operations as
submitted as part of the APPLICATION. If the DEPARTMENT determines that
APPLICANTS are not acting in substantial compliance with the Plan of Operations
or have materially deviated from the Plan of Operations without prior written
approval from the DEPARTMENT, the DEPARTMENT may take administrative action as
appropriate, including, but not limited to, requiring APPLICANTS to bring their
activities into substantial compliance with the Plan of Operations and eliminate
any material deviation from the Plan of Operations and imposing penalties for
the violation of this Consent Order. In any proceeding resulting from the
DEPARTMENT'S administrative action, APPLICANTS shall have the burden of proving
substantial compliance and absence of material deviation by a preponderance of
evidence.
31. A loan from First Union National Bank of North Carolina (hereinafter
the "Bank") to Summit Holding Corporation (hereinafter the "Loan"), is a subject
of the January 11, 1996 Consent Order in DEPARTMENT case number 13402-95-C-AJL.
Any restructuring of the Loan, including revisions to the Credit Agreement
between the Bank and Summit Holding (hereinafter the "Credit Agreement") shall
be subject to prior approval of the DEPARTMENT. No such restructuring of the
Loan shall create any obligation for repayment by Bridgefield Casualty Insurance
Company (hereinafter BRIDGEFIELD CASUALTY) or BEIC STOCK and no assets of
BRIDGEFIELD CASUALTY or BEIC STOCK shall be pledged as collateral or otherwise
encumbered in conjunction with the Loan. Neither BRIDGEFIELD CASUALTY, BEIC
STOCK, nor U.S. EMPLOYERS INSURANCE COMPANY shall make any direct or indirect
investments in subsidiaries or affiliated entities without the DEPARTMENT's
prior written approval. The DEPARTMENT shall grant such approval if the proposed
investment complies with applicable provisions of the Florida Insurance Code
relating to investments in subsidiaries and affiliates and is made in such a
manner to prevent the investment from being subject to recovery under the Credit
Agreement. Custody of the assets of U.S. EMPLOYERS shall be maintained in
Florida, or in the United States with a financial institution which maintains
banking operations in Florida. The physical form, if any, of the assets shall be
maintained in Florida, or in compliance with section 628.511, Florida Statutes.
BRIDGEFIELD CASUALTY and BEIC STOCK shall record any investments in affiliates
as a non-admitted asset in its statutory financial statements, until such
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time as a valuation of such affiliates is rendered by the Securities Valuation
Office of the National Association of Insurance Commissioners, but in no event
in excess of the amounts allowed pursuant to section 625.151(3), Florida
Statutes. If the Bank imposes any material additional requirements on any member
of the SUMMIT SOUTHEAST holding company system which could reasonably be
expected to have a material adverse effect on the financial condition of
BRIDGEFIELD CASUALTY or BEIC STOCK, SUMMIT SOUTHEAST shall obtain the prior
written approval of the DEPARTMENT prior to the additional requirement's taking
effect. In the event that the transactions contemplated by the APPLICATION are
not consummated or for any reason those transactions are reversed or otherwise
voided, all provisions of the January 11, 1996 Consent Order in DEPARTMENT case
number 13402-95-C-AJL shall be enforceable by the parties thereto.
32. In an attempt to avoid potential policyholder confusion as a result of
the transactions contemplated by the APPLICATION, and to avoid unnecessary
impediments to those transactions, BEIC STOCK may utilize the current rates and
rating plans of ESIF through December 31, 1997. After such time, BEIC STOCK
shall file rates with the DEPARTMENT for its written approval unless using rates
not requiring such approval under the Florida Insurance Code or applicable rules
of the DEPARTMENT. BEIC STOCK shall obtain the prior written approval of the
DEPARTMENT for the use of all forms or endorsements to existing forms. Policies
issued with effective dates on or after January 1, 1998 shall be written only on
forms and with rates approved for use by the DEPARTMENT by written approval
obtained after the filing of this Consent Order.
33. The Effective Date of the APPLICATION and the transactions contemplated
by the APPLICATION shall be the date on which the conversions, acquisition and
recapitalization contemplated by the APPLICATION are effectuated. The Effective
Date shall be within six (6) months of the entry of this Consent Order.
APPLICANTS may apply to the DEPARTMENT for up to a six (6) month extension to
this deadline. The granting or denial of such request is in the sole discretion
of the DEPARTMENT. Each conversion, acquisition and recapitalization
contemplated by the APPLICATION shall follow immediately the prior transaction
without delay and all such conversions, acquisition and recapitalization, shall
be effectuated in a single day. The taking of the vote of members of ESIF and
BEIC MUTUAL and, if authorized by the vote of the members, the conversion of
ESIF to BEIC MUTUAL and of BEIC MUTUAL to BEIC STOCK shall occur in immediate
succession and in a single day. The acquisition of the stock of BEIC STOCK by
SUMMIT SOUTHEAST shall be consummated immediately upon the completion of the
conversion of BEIC MUTUAL to BEIC STOCK. Due to the rapid conversion, no
certificates of authority or permits will be physically issued to BEIC MUTUAL as
it shall not transact insurance or engage in any business activity except that
which is required to implement the transactions contemplated by the APPLICATION.
All authority granted to ESIF and BEIC MUTUAL shall terminate immediately upon
their respective conversions. ESIF shall physically surrender its certificate of
authority immediately upon completion of all transactions contemplated by the
APPLICATION.
34. In accordance with the Amended Plan of Conversion and Recapitalization,
and all attachments thereto, ESIF shall submit the Amended Plan of Conversion
and Recapitalization to its members for a vote. The Amended Plan of Conversion
and Recapitalization must be approved by:
A. an affirmative vote of a majority of the members of ESIF, and
B. an affirmative vote of not less than two-thirds ( 2/3rds) of BEIC
MUTUAL "voting policyholders" as defined in the Proxy Statement.
The Secretary of BEIC MUTUAL shall immediately certify the results of the
vote to the DEPARTMENT. A single vote of the members of ESIF and BEIC MUTUAL
approving both conversions shall satisfy the voting requirements of Sections
628.6013(1) and 628.6017(1)(b), Florida Statutes if the votes obtained are
sufficient to satisfy both the 1/2 of all members and 2/3 of all votes cast
requirements set forth therein. On the Effective Date, the Directors of BEIC
MUTUAL shall promptly ratify the execution of this Consent Order on their behalf
by Mr. William B. Bull, a member of the Board of Organizers of BEIC MUTUAL and
who is anticipated to be a Director and President of BEIC MUTUAL. The Secretary
of BEIC MUTUAL shall immediately certify the ratification to the DEPARTMENT.
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35. If the Amended Plan of Conversion and Recapitalization is not approved
by vote of not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting
policyholders" and the approval of at least a majority of all members of ESIF,
the conversion to BEIC MUTUAL and subsequent conversion to BEIC STOCK shall not
be effectuated and ESIF shall remain a group self-insurance fund pursuant to
Section 624.4621, Florida Statutes.
36. If the Amended Plan of Conversion of BEIC MUTUAL is approved by vote of
not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting policyholders" and
at least a majority of all members of ESIF, APPLICANTS shall then, on the
Effective Date, effectuate the acquisition of BEIC STOCK by SUMMIT SOUTHEAST.
Additionally, on the Effective Date, the Directors of BEIC STOCK shall promptly
ratify the execution of this Consent Order on their behalf by Mr. William B.
Bull, who is anticipated to be a Director and President of BEIC STOCK. The
Secretary of BEIC STOCK shall immediately certify the ratification to the
DEPARTMENT. Failure to promptly effectuate the acquisition in accordance with
the Amended Plan of Conversion and Recapitalization of BEIC MUTUAL as disclosed
in the Proxy Statement shall result in the recision of the conversions of BEIC
MUTUAL and ESIF and BEIC STOCK shall revert back to ESIF, a group self-insurance
fund pursuant to Section 624.4621, Florida Statutes.
37. The DEPARTMENT has relied upon various unexecuted and draft documents
submitted as part of the APPLICATION pursuant to the proposed conversions and
acquisition transactions. No later than the close of business on the next
business day following the Effective Date, except as otherwise provided below,
APPLICANTS shall submit and verify to the DEPARTMENT true, correct, and complete
copies of the executed documents supporting the conversions and acquisition
transactions. APPLICANTS shall notify the DEPARTMENT in writing of any revisions
to the documents at the time the revisions are made. If, within 30 days of
submission of the executed documents, the DEPARTMENT determines that the
executed documents vary in any material respect from those submitted to and
reviewed by the DEPARTMENT prior to the entry of this Consent Order, the
DEPARTMENT shall notify APPLICANTS in writing of the material deviation and if
the material deviation is not corrected to the DEPARTMENT's satisfaction within
ten days of the notice, the DEPARTMENT may enter a subsequent Order vacating
this Consent Order. Such Order may disapprove the conversions and acquisition
transactions. In addition, if necessary to protect policyholders or the public,
the DEPARTMENT may enter an Immediate Final Order suspending the license of BEIC
STOCK. The DEPARTMENT's determination as to the existence of a material
variation shall be in the DEPARTMENT's sole discretion and shall not be subject
to Section 120.57, Florida Statutes. APPLICANTS shall continue to promptly
report and provide documentation to the DEPARTMENT with respect to any
transactions or arrangements made or entered into for the purposes of these
conversions and acquisition agreements including, but not limited to, the
following documents to be supplied to the DEPARTMENT, except as otherwise
indicated, by close of business on the Effective Date:
(a) A certified copy of the executed Articles of Incorporation of BEIC
MUTUAL as filed with the Secretary of State as well as the executed By-Laws
of BEIC MUTUAL.
(b) A certified copy of the executed Articles of Restatement and
Certificate of Restatement for BEIC MUTUAL as filed with the Secretary of
State.
(c) A certified copy of the executed Restated Articles of
Incorporation of BEIC STOCK as filed with the Secretary of State as well as
the executed Restated By-Laws of BEIC STOCK.
(d) An original certificate of status from the Secretary of State for
BEIC STOCK.
(e) A certified copy of the executed Amended Plan of Conversion and
Recapitalization of ESIF and BEIC STOCK.
(f) The original Waiver of Hearing From Seller executed by BEIC STOCK.
(g) The original Waiver of Hearing From Buyer executed by SUMMIT
SOUTHEAST.
(h) A certified copy of the executed Certificate of Designation,
Preferences and Rights of Series A Preferred Stock.
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(i) Certified executed copies of the "Recapitalization Agreement"
between ESIF and SUMMIT SOUTHEAST.
(j) Upon mailing to members, a certified copy of the Dear Member
Letter, Notice of Meeting, and Proxy Statement together with attachments,
that were sent to the policyholders of ESIF and BEIC MUTUAL for their
conversion to BEIC STOCK.
(k) Within twenty (20) days of the special meeting of policyholders of
ESIF, certified copies of minutes of the meeting.
(l) When available, and in any event, within 30 days of the Effective
Date, certified copies of the minutes of all meetings of APPLICANTS held on
the Effective Date.
(m) A certified copy of the fidelity bond in the name of BEIC STOCK.
(n) Prior to release to any prospective subscribers, a true and
correct copy of the Prospectus of SUMMIT SOUTHEAST.
38. Except as otherwise provided in this Consent Order, upon conversion of
ESIF and BEIC MUTUAL to BEIC STOCK, APPLICANTS shall comply with all
requirements of the Florida Insurance Code relating to the reporting
requirements applicable to domestic stock insurers.
39. APPLICANTS shall, pursuant to section 624.408, Florida Statutes, at and
after the Effective Date, have and maintain policyholder surplus in an amount
not less than that required of a domestic stock insurer and shall be in and
maintain compliance with the requirements of section 624.4095, Florida Statutes,
regarding the ratio of premium to surplus. If implementation of the Amended Plan
of Conversion and Recapitalization results in, BEIC STOCK having policyholder
surplus in an amount that differs in a material amount from the amount shown on
the pro formas submitted to the DEPARTMENT with the APPLICANTS' APPLICATION,
BEIC STOCK shall submit updated pro formas to the DEPARTMENT reflecting the
correct amount of policyholder surplus.
40. Neither ESIF, BEIC MUTUAL, nor BEIC STOCK shall declare, set aside or
pay any dividends or make or agree to make any other distributions or payment or
enter into any transaction, other than in the ordinary course of business and
consistent with past practices, prior to the Effective Date. After the Effective
Date and prior to the Loan Termination Date, neither BEIC STOCK nor BRIDGEFIELD
CASUALTY shall declare, set aside or pay any dividends or premium refunds, or
make any other distributions of the surplus of BEIC STOCK or BRIDGEFIELD
CASUALTY without the prior written approval of the DEPARTMENT. The DEPARTMENT
shall grant such approval if the proposed dividend or premium refund complies
with applicable provisions of the Florida Insurance Code. The term "premium
refunds" as used in this paragraph does not refer to the return of premiums due
under the retrospectively rated plans offered by ESIF, BEIC MUTUAL, and BEIC
STOCK.
41. For the three year period immediately following the Effective Date,
BEIC STOCK shall not assume reinsurance without the prior written approval of
the DEPARTMENT. In addition, BEIC STOCK shall cede reinsurance only to
authorized reinsurers unless prior written approval has been given by the
DEPARTMENT. Furthermore, BEIC STOCK shall within twenty (20) days from the
effective date of any reinsurance treaty for reinsurance ceded or assumed by
BEIC STOCK, submit to the DEPARTMENT a true and correct copy of the cover notes
of such treaty and shall provide a true and correct copy of the entire treaty to
the DEPARTMENT, if so requested. Further, BEIC STOCK shall notify the DEPARTMENT
of any proposed or prospective changes in its reinsurance prior to implementing
such changes.
42. APPLICANTS hereby represent that they have, in the APPLICATION,
described all material terms and conditions that will constitute the conversions
and acquisition and have disclosed and described all transactions and agreements
related thereto. The representations made in the documents, and herein, are
material to the entry of this Consent Order and the APPLICANTS shall conduct
themselves in accordance with the representations and requirements of such
documents.
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43. That APPLICANTS have made material representations that none of its
officers and/or directors have been charged with or convicted of a felony or
misdemeanor other than minor traffic violations. If the completed fingerprint
cards of said officers and directors furnished to the DEPARTMENT or other
sources utilized by the DEPARTMENT in its investigation process reveal
otherwise, those individuals involved shall be removed as an officer and/or
director of said APPLICANTS, within thirty (30) days after notification by the
DEPARTMENT and replaced with an officer or a director acceptable to the
DEPARTMENT.
44. APPLICANTS have further represented that they have submitted complete
information on each of the principals. If material information on one or more
principal(s) has not been provided, and the DEPARTMENT would not have approved
this APPLICATION if such information had been provided, those individuals
involved shall be removed within thirty (30) days of receipt of notification
from the DEPARTMENT.
45. With respect to the officers and directors identified in the
APPLICATION, upon receipt of such notification from the DEPARTMENT, as described
under paragraphs 44 and 45 above, if the required corrective action is not
timely taken by APPLICANTS, APPLICANTS agree that such failure to act would
constitute an immediate danger to the public and the DEPARTMENT immediately may
suspend or revoke the license of BEIC STOCK without further proceedings.
APPLICANTS further affirm that the above representations are material to the
issuance of this Consent Order.
46. Within 45 days after the Effective Date, BEIC STOCK shall file an
amended Holding Company Registration Statement with the DEPARTMENT. Thereafter,
BEIC STOCK shall file updates to its Holding Company Registration Statement with
the DEPARTMENT as required by Section 628.801, Florida Statutes, and Rule
4-143.046, Florida Administrative Code.
47. For the three year period following the Effective Date, prior to
conducting business in another state, BEIC STOCK shall notify the DEPARTMENT in
writing and submit a copy of the business plan submitted to that state, the
earlier of 60 days prior to writing business or at the time of filing the
business plan with that state.
48. Any administrative contracts entered into by BEIC STOCK must meet the
requirements of Sections 626.091, 626.7451 and 626.7491, Florida Statutes. Any
contract in which BEIC STOCK contracts, with a managing general agent or
administrator, for services must be subject to writing limitations which may be
exercised at the option of the BEIC STOCK.
49. Upon issuance of this Consent Order, APPLICANTS' failure to adhere to
one or more of the terms and conditions contained herein after having been
provided written notice of the failure by the DEPARTMENT and thirty business
days to cure the deviation (Notice and Opportunity to Cure), except as provided
in paragraph 46 herein, may result, without further proceedings, in the
Treasurer and Insurance Commissioner withdrawing approval of the APPLICATION and
the transactions contemplated by the APPLICATION or in the revocation of BEIC
STOCK's certificate of authority. Compliance by APPLICANTS after being provided
a Notice and Opportunity to Cure shall not foreclose the DEPARTMENT from
pursuing disciplinary proceedings as appropriate. The remedy provided herein for
APPLICANTS' failure to adhere to one or more of the terms and conditions
contained herein is not exclusive and shall not foreclose the DEPARTMENT from
pursuing other enforcement or disciplinary actions as provided for by law or
other provisions of this order and including emergency actions with immediate
effect.
50. The parties agree that this Consent Order will be deemed to be executed
when the Treasurer and Insurance Commissioner or his designee has signed a copy
of this Consent Order which bears the signatures of APPLICANTS or their
authorized representatives, notwithstanding the fact that the copy was
transmitted to the agency by facsimile machine. APPLICANTS further agree that
the original of this Consent Order with original signatures will be forwarded to
the DEPARTMENT within three (3) days of its receipt from the DEPARTMENT. Failure
to forward a signed original within the specified time period shall render this
agreement voidable.
9
<PAGE> 165
WHEREFORE, subject to the terms and conditions herein, the APPLICATION and
the transactions contemplated by the APPLICATION are APPROVED, and FURTHER, all
terms and conditions contained herein are hereby ORDERED.
DONE and ORDERED at Tallahassee, Florida, this 15th day of November, 1996.
/s/ PETE MITCHELL
--------------------------------------
Pete Mitchell
Chief of Staff
By execution hereof, ESIF consents to entry of this Consent Order, agree
without reservation to all of the above terms and conditions and shall be bound
by all provisions herein. The undersigned represents, that he/she has the
authority to bind, ESIF to the terms and conditions of this Consent Order.
EMPLOYERS SELF INSURERS FUND
By: /s/ GREG C. BRANCH
------------------------------------
Greg C. Branch
Chairman
CORPORATE SEAL
By execution hereof, BEIC MUTUAL consents to entry of this Consent Order,
agree without reservation to all of the above terms and conditions and shall be
bound by all provisions herein. The undersigned represents, that he/she has the
authority to bind, BEIC MUTUAL to the terms and conditions of this Consent
Order.
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY, AN ASSESSABLE MUTUAL
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
By execution hereof, BEIC STOCK consents to entry of this Consent Order,
agree without reservation to all of the above terms and conditions and shall be
bound by all provisions herein. The undersigned represents, that he/she has the
authority to bind, BEIC STOCK to the terms and conditions of this Consent Order.
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
10
<PAGE> 166
By execution hereof, SUMMIT SOUTHEAST consents to entry of this Consent
Order, agree without reservation to all of the above terms and conditions and
shall be bound by all provisions herein. The undersigned represents, that he/she
has the authority to bind, SUMMIT SOUTHEAST to the terms and conditions of this
Consent Order.
SUMMIT HOLDING SOUTHEAST, INC.
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
By execution hereof, SUMMIT CONSULTING, INC. consents to entry of this
Consent Order, agree without reservation to all of the above terms and
conditions and shall be bound by all provisions herein. The undersigned
represents, that he/she has the authority to bind, SUMMIT CONSULTING, INC. to
the terms and conditions of this Consent Order.
SUMMIT CONSULTING, INC.
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
11
<PAGE> 167
EXHIBIT E
THE CHICAGO CORPORATION
July 31, 1996
The Board of Trustees
Employers Self Insurers Fund
2310 A-Z Park Road
Lakeland, Florida 33801
Trustees:
We understand that, pursuant to the Plan of Conversion and Recapitalization
(Draft dated July 26, 1996) (the "Plan") of Employers Self Insurers Fund ("ESIF"
or the "Fund"), a group self insurance fund authorized pursuant to Section
624.4621 of the Florida Statutes, (i) ESIF will convert from a group self
insurance fund to an assessable mutual insurance company and subsequently to a
non-assessable stock insurance company; (ii) ESIF will become a wholly-owned
subsidiary of a newly formed holding company ("NEWCO"); (iii) the articles of
incorporation and by-laws of ESIF will be restated; (iv) newly issued common
stock of NEWCO will be sold in an initial public offering ("IPO") in an amount
necessary to capitalize ESIF in accordance with the Plan; and (v) in exchange
for their Membership Interests, policyholders of ESIF (the "Eligible
Policyholders") (a) will no longer be subject to assessments during their
current policy year (in the case of those Policyholders who have In-Force
Policies) or for any prior year in which they held a Policy with ESIF or any
predecessor thereto unless such assessment was imposed prior to the effective
date of the Plan (the "Effective Date"), and will also be relieved of all future
contingent liabilities arising after the Effective Date; (b) will cease to have
any rights as members of ESIF, including, without limitation, the right to vote
for trustees and rights in liquidation; (c) will retain all policy coverages and
benefits as unchanged and the Plan will not result in any real or constructive
issuance or exchange of any Policy; (d) will receive cumulative, redeemable
preferred stock of NEWCO (the "Preferred Stock") with total par value of $16.4
million; and (e) will receive non-transferable subscription rights (the
"Subscription Rights") to acquire, at the IPO price, all of NEWCO's common stock
except for those shares (not to exceed 20% of all NEWCO shares) sold to NEWCO's
officers, directors and employees; collectively (a) through (e) are hereinafter
referred to as the "Consideration". The effectiveness of the Plan is
conditional, among other things, upon approval by the requisite vote of Eligible
Policyholders, approval by the Department of Insurance of the State of Florida,
and the raising of sufficient equity to adequately capitalize NEWCO, all of
which are more fully described in the Plan.
You have asked us to render our opinion (the "Opinion") as to the fairness,
from a financial point of view, of the Consideration to be received by the
Eligible Policyholders pursuant to the Plan. In rendering our Opinion, among
other things, we have:
(i) reviewed the Plan;
(ii) reviewed the audited statutory financial statements of ESIF for
the years of March 31, 1994 and 1995, as well as an audited GAAP balance
sheet (draft dated) as of March 31, 1996.
(iii) reviewed certain financial forecasts of ESIF and Summit Holding
Corporation (together with its wholly-owned subsidiary and the Fund's
administrator. Summit Consulting, Inc., hereinafter collectively referred
to as "Summit"), including those given pro forma effect to the Plan;
(iv) reviewed the report of the Fund's independent actuarial firm,
dated March 31, 1996, analyzing ESIF's liability for unpaid losses and
allocated and unallocated loss adjustment expenses as of March 31, 1996
(the "Actuarial Report");
(v) discussed with certain officers of Summit the business and
operations of Summit and the terms of the Management Agreement, and toured
the facilities of Summit at 2310 A-Z Park Road;
<PAGE> 168
(vi) discussed with certain trustees of ESIF and its outside corporate
and Florida regulatory counsel, independent actuaries and independent
auditors, as well as certain officers of Summit, the Plan, the business,
financial condition and prospects of ESIF and Summit, and other matters we
believe relevant to our inquiry;
(vii) reviewed financial and market data for selected publicly-traded
workers' compensation insurance companies and compared NEWCO's pro forma
financial data to such companies as if the Fund had been properly
capitalized and operated on a stand-alone basis;
(viii) reviewed the financial terms of recent sales of selected
workers' compensation insurance companies; and
(ix) performed such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In arriving at our Opinion, we have relied upon, without independent
verification, the accuracy and completeness of the financial and other
information provided to us by ESIF and Summit and their representatives. We have
neither made nor obtained any independent evaluation or appraisal of the Fund's
properties and facilities or any of the Fund's assets or liabilities, and we
have not had an additional independent actuarial firm examine or review the
Actuarial Report. We have assumed that the financial forecasts for ESIF and
Summit prepared by management have been reasonably prepared and are based on the
best currently available estimates and business judgements of management at the
time of preparation. We have also assumed that there have been no material
changes in the Fund's or Summit's financial position, business or prospects
since March 31, 1996. We have also assumed for purposes of our opinion that
there will have been no assessment imposed upon the Eligible Policyholders prior
to the Effective Date. In addition, we have assumed that the final forms of all
materials will not differ in any material respect from the drafts of such
materials reviewed by us as of the date of this letter. Our Opinion is further
based upon our analyses of the foregoing and upon our assessment as of the date
of this letter of general economic, financial and market conditions.
We express no opinion as to the IPO price, or the price at which the NEWCO
Common Stock will trade. The IPO price and the subsequent market prices of the
NEWCO Common Stock will be a function of, among other things, the market
conditions and outlook for the Fund. In delivering the Opinion, we have made the
assumption, which we believe to be reasonable, that (i) the members of NEWCO's
pricing committee will act in compliance with their fiduciary duties, and (ii)
the underwriters of the IPO will follow pricing practices which are consistent
with customary practices for comparable initial public offerings. You have not
asked for our opinion and we have not expressed any opinion as to (i) which of
the Fund's policyholders are to be included among the Eligible Policyholders,
and (ii) the fairness of the consideration to be paid to any individual Eligible
Policyholder or to any class of Eligible Policyholders in connection with the
Plan.
Based upon the foregoing and in reliance thereon, it is our Opinion as of
the date hereof that the Consideration to be received by the Eligible
Policyholders pursuant to the Plan is fair, from a financial point of view, to
the Eligible Policyholders.
Very truly yours,
THE CHICAGO CORPORATION
2
<PAGE> 169
EXHIBIT G
INSTRUCTIONS FOR COMPLETING THE REQUEST
FOR TAXPAYER IDENTIFICATION CARD
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------
SUBSTITUTE FORM W-9
PAYER'S NAME: SUMMIT HOLDING SOUTHEAST, INC. ("SUMMIT")
- --------------------------------------------------------------------------------------------------------
SUBSTITUTE PART I -- PLEASE PROVIDE YOUR TIN PART III -- Social Security Number
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY BY or
DEPARTMENT OF THE TREASURY SIGNING AND DATING BELOW. Employer Identification Number
INTERNAL REVENUE SERVICE
---------------------------------
(If awaiting TIN write "Applied
For")
- --------------------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER PART II -- For Payees exempt from backup withholding, see the
IDENTIFICATION NUMBER (TIN) enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 and complete as instructed under
Instruction 6.
- --------------------------------------------------------------------------------------------------------
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a
number to be issued to me);
(2) I am not subject to backup withholding either because I have not been notified by the Internal
Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report
all interest or dividends, or the IRS has notified me that I am no longer subject to backup
withholding; and
(3) The information provided on this form is true, correct and complete.
CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have been notified by the IRS
that you are subject to backup withholding because of under reporting interest or dividends on your tax
return. However, if after being notified by the IRS that you are subject to backup withholding, you
received another notification from the IRS that you are no longer subject to backup withholding, do not
cross out item (2).
(Also see the enclosed Guidelines).
Signature ________________________________________________ Date __________________________ ,
1996
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31%
OF ANY CASH PAYMENT MADE TO YOU. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 AND INSTRUCTION 3 HERETO FOR ADDITIONAL
DETAILS.
- --------------------------------------------------------------------------------------------------------
</TABLE>
SUBSTITUTE FORM W-9; BACK-UP WITHHOLDING TAX. Under the Federal income tax
law, a person surrendering their interest in ESIF must provide Summit Holding
Southeast, Inc. ("Summit") with his/her correct taxpayer identification number
("TIN") on Substitute Form W-9 (set forth in this Letter of Transmittal). If the
correct TIN is not provided, a $50 penalty may be imposed by the Internal
Revenue Service and cash payments may be subject to backup withholding of 31%.
The TIN that must be provided on Substitute Form W-9 is that of the
registered holder of any surrendered certificate(s) of the last transferee
appearing on the transfers attached to, or endorsed on, the certificate(s). The
TIN for an individual is his/her social security number. If the shareholder has
not been issued a TIN and has applied for a number or intends to apply for a
number in the near future, such shareholder should so indicate in the box in
part III on the Substitute Form W-9. If you have indicated in the box in Part
III that a TIN has been applied for and Summit is not provided with a TIN within
60 days, Summit will withhold 31% of all payments of the purchase price, if any,
made thereafter pursuant to the Merger until a TIN is provided to Summit. For
additional guidance, see the enclosed Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If such withholding results in an overpayment of taxes, a refund may
be obtained. Certain registered holders (including, among others, all
corporations) are not subject to backup withholding, and by signing the
Substitute Form W-9, such persons certify to their exempt status. A foreign
individual may qualify as an exempt person by submitting an I.R.S. Form W-8 or
comparable form, signed under penalties of perjury, certifying such individual's
foreign status. Form W-8 can be obtained from Summit. PERSONS SUBJECT TO BACKUP
WITHHOLDING MUST SO INDICATE BY CROSSING-OUT ITEM (2) OF THE CERTIFICATION
PRECEDING THEIR SIGNATURE ON THE SUBSTITUTE FORM W-9.
<PAGE> 170
REVOCABLE PROXY APPENDIX
EMPLOYERS SELF INSURERS FUND
THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES FOR
A SPECIAL MEETING OF POLICYHOLDERS.
The undersigned hereby appoints Greg C. Branch and Russell L. Wall, and each
of them, proxies, with full power of substitution, to vote for and in the name
of the undersigned at a Special Meeting of Policyholders of Employers Self
Insurers Fund ("ESIF"), to be held at ESIF's headquarters, 2310 A-Z Park Road,
Lakeland, Florida on , , 199 at :00 .m, local time, and at
any and all adjournments thereof, as indicated below.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" THE FOLLOWING PROPOSAL.
Approval and adoption of the Amended Plan of Conversion and Recapitalization
(the "Plan") and the transactions contemplated thereby pursuant to which ESIF
will, pursuant to the laws of the State of Florida, convert contemporaneously
from a group self insurance fund to an assessable mutual insurance company to a
stock insurance company with the name Bridgefield Employers Insurance Company
("Bridgefield"), and Summit Holding Southeast, Inc. (the "Holding Company"), a
Florida company formed by ESIF, will acquire all of the capital stock of the
converted stock insurance company in return for the issuance of shares of the
Holding Company's Series A Preferred Stock to eligible policyholders of ESIF and
subscription rights to purchase shares of the Holding Company's Common Stock to
eligible policyholders of ESIF and certain other persons. The approval of the
Plan by the policyholders will constitute approval and adoption of the Amended
and Restated Articles of Incorporation of Bridgefield, which, among other
things, change the name of ESIF to Bridgefield Employers Insurance Company and
authorize the issuance of Common Stock, and the Bylaws of Bridgefield, which
contain provisions appropriate for a stock insurance company.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY CARD IN THE ENCLOSED PREPAID
ENVELOPE.
(Continued, and to be signed and dated, on the reverse side)
<PAGE> 171
(Continued from other side)
PROXY-SOLICITED BY THE BOARD OF TRUSTEES
THIS PROXY CARD WILL BE VOTED AS DIRECTED. IF NO INSTRUCTIONS ARE SPECIFIED,
THIS PROXY CARD WILL BE VOTED IN THE DISCRETION OF THE PROXIES 'FOR' THE
PROPOSAL.
If the undersigned elects to withdraw this proxy card on or before the time
of the Special Meeting or any adjournments thereof and notifies the Secretary of
ESIF at or prior to the Special Meeting of the decision of the undersigned to
withdraw this proxy card, then the power of said proxies shall be deemed
terminated and of no further force and effect. If the undersigned withdraws this
proxy card in the manner described above and prior to the Special Meeting does
not submit a duly executed and subsequently dated proxy card to ESIF, the
undersigned may vote in person at the Special Meeting.
<PAGE> 172
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED NOVEMBER , 1996
5,000,000 Shares
SUMMIT HOLDING SOUTHEAST, INC.
Proposed Holding Company for Bridgefield Employers
Insurance Company
Common Stock
------------------------
All of the 5,000,000 shares of Common Stock offered hereby are being issued
and sold by Summit Holding Southeast, Inc. ("SUMMIT"). It is currently estimated
that the initial public offering price will be between $11.00 and $12.00 per
share. See "UNDERWRITING" for factors considered in determining the public
offering price. Summit has applied to have the Common Stock quoted on the Nasdaq
National Market under the proposed symbol "SHSE." There can be no assurance that
such quotation will be obtained.
The shares offered hereby constitute such portion of the 5,000,000 shares of
Common Stock that are offered to but not subscribed for by the Eligible
Policyholders (as defined herein) of Employers Self Insurers Fund ("ESIF") and
all directors, officers and certain other management employees (the "MANAGEMENT
GROUP") of Summit and its subsidiaries (including ESIF) in a concurrent
subscription offering that expires on January , 1997 (the "SUBSCRIPTION
OFFERING," and together with this offering (the "PUBLIC OFFERING"), the
"OFFERINGS"). See "THE OFFERINGS -- Subscription Offering." The Offerings are
part of an Amended Plan of Conversion and Recapitalization (the "PLAN OF
CONVERSION") pursuant to which ESIF will convert from a Florida group
self-insurance fund to a Florida stock insurance company (the "CONVERSION") and
become a wholly owned subsidiary of Summit. There can be no assurance that the
members of ESIF will approve the Plan of Conversion. Additionally, if the Plan
of Conversion is approved, there can be no assurance that any shares of Common
Stock offered hereby will be available for sale to the public because, among
other reasons, the Eligible Policyholders may subscribe for all of the 5,000,000
shares of Common Stock in the Subscription Offering.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), ANY STATE SECURITIES
COMMISSION, OR THE DEPARTMENT OF INSURANCE OF THE STATE OF FLORIDA
(THE "FLORIDA DOI"), NOR HAS THE COMMISSION, ANY STATE SECURITIES
COMMISSION OR THE FLORIDA DOI PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE FLORIDA DOI HAS APPROVED THE PLAN OF CONVERSION. HOWEVER, THE APPROVAL OF
THE PLAN OF CONVERSION BY THE FLORIDA DOI DOES NOT CONSTITUTE IN ANY WAY A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY THE FLORIDA
DOI.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) SUMMIT(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- ----------------------------------------------------------------------------------------------------------------
Total(3)(4)................................ $ $ $
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Summit has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses of the Conversion, including the Offerings,
estimated at $ , which are payable by Summit.
(3) Assumes no shares of Common Stock are sold in the Subscription Offering.
(4) Summit has granted the Underwriters a 30-day option to purchase up to
750,000 additional shares of Common Stock (assuming all 5,000,000 shares are
sold in the Public Offering) on the same terms and conditions as the
securities offered hereby solely to cover over-allotments, if any. If the
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Summit will be $ , $ and
$ , respectively. See "UNDERWRITING."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to certain
other conditions including the right of the Underwriters to withdraw, cancel,
modify or reject any order in whole or in part. It is expected that delivery of
the shares will be made on or about , 1997, at the offices of Raymond
James & Associates, Inc., St. Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC. THE CHICAGO CORPORATION
The date of this Prospectus is , 1997
<PAGE> 173
[PICTURES, CHARTS, ETC.?]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE> 174
PROSPECTUS SUMMARY
Pursuant to the Plan of Conversion, and upon the approval of the Conversion
by the members of ESIF at a Special Meeting of Policyholders to be held on
January , 1997 (the "SPECIAL MEETING"), ESIF will convert from a Florida group
self-insurance fund to a Florida stock insurance company, Bridgefield Employers
Insurance Company ("BRIDGEFIELD"), and become a wholly owned subsidiary of
Summit. Unless the context requires otherwise, as used herein, the "Company"
refers to Summit and its subsidiaries as of and following the completion of the
Conversion and a simultaneous reorganization of the Company's operating
structure. Unless otherwise indicated, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. All financial information
set forth herein is presented in accordance with generally accepted accounting
principles ("GAAP"), unless otherwise noted. The following summary is qualified
in its entirety by the more detailed information and consolidated financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
THE COMPANY
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
administrative group (the "ADMINISTRATIVE SUBSIDIARIES"), the Company provides
administrative services for four self-insurance funds (the "FUNDS"), for the
Company's two wholly owned workers' compensation insurance companies (the
"INSURANCE SUBSIDIARIES") and for certain municipalities. These administrative
services include most aspects of the daily operations of the Funds and the
Insurance Subsidiaries, including sales and marketing, underwriting, claims
administration, loss control and policy administration. These services are
provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds, which are entities formed to provide workers' compensation coverage
for self-insured employer groups on a pooled basis.
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty Insurance Company ("BRIDGEFIELD CASUALTY"), underwrite and assume the
underwriting risk with respect to workers' compensation insurance policies for
Florida employers of all sizes, primarily in the construction, manufacturing,
wholesale and retail, and service industries. As of September 30, 1996, in the
aggregate, the Company's insurance products and administrative services are
provided to approximately 15,500 employers representing approximately $219.0
million in premiums, including approximately $102.0 million in premiums
attributable to the Funds and $117.0 million in premiums attributable to the
Insurance Subsidiaries. See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place, and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best Company ("A.M. BEST").
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS OF
OPERATIONS." See "BUSINESS -- Strategy" and "-- Managed Care."
The Company believes that the Conversion provides new opportunities for
improving its return on invested capital through growth in its core workers'
compensation business. Key aspects of the Company's business strategy following
the Conversion include: (i) continued use of both self-insurance and indemnity
products; (ii) emphasis on profitable underwriting results; (iii) proactive
implementation of managed care; (iv) leveraging of administrative services
capabilities; (v) emphasis on excellent customer service; and (vi) geographic
expansion in the South. See "BUSINESS -- Strategy."
3
<PAGE> 175
The Company's administrative business was started in 1977, when Summit
Consulting, Inc. ("SCI") was formed to establish and administer workers'
compensation self-insurance programs for trade associations. The Company's
primary Insurance Subsidiary, ESIF (which pursuant to the Conversion will become
Bridgefield), was formed in 1978 with SCI as its administrator. Beginning in
1979, SCI assisted with the formation of three of the Funds and has been the
administrator of each of those Funds since its inception. See "BUSINESS --
Products and Services." Summit was incorporated as a Florida corporation in
November 1996 for the purpose of becoming a holding company for Bridgefield and
the other Company subsidiaries. The executive offices of the Company are located
at 2310 A-Z Park Road, Lakeland, Florida 33801. The telephone number at such
office is (941) 665-6060.
THE CONVERSION
The Board of Trustees of ESIF has unanimously adopted the Plan of
Conversion whereby ESIF, subject to the approval of its policyholders at the
Special Meeting, will convert from a Florida group self-insurance fund to a
Florida stock insurance company and become a wholly owned subsidiary of Summit.
The Trustees of ESIF stated that they adopted the Plan of Conversion because
they believe that the Conversion will provide several important benefits. The
conversion of ESIF to a stock insurance company that is wholly owned by a
publicly traded holding company is expected to provide improved access to the
capital markets and increased flexibility for raising additional capital in the
form of equity and debt financings. The holding company structure is also
expected to provide increased opportunities for growth, either internally or
through acquisitions, that are generally not available to a group self-insurance
fund and provide greater flexibility for the diversification of business
activities through existing or newly formed subsidiaries or through strategic
partnerships.
Currently, each member of ESIF has certain membership interests in ESIF
("MEMBERSHIP INTERESTS") arising under the organizational documents of ESIF, the
insurance laws of the State of Florida (together with all applicable
regulations, the "FLORIDA INSURANCE CODE") and otherwise, including, without
limitation, the right to vote for the election of trustees and the right to
participate in any distribution of the surplus of ESIF in the event of its
liquidation. If the Plan of Conversion is approved at the Special Meeting and
thereafter becomes effective, all Membership Interests will be extinguished in
the Conversion. In exchange for such Membership Interests, the Plan of
Conversion provides that certain policyholders (the "ELIGIBLE POLICYHOLDERS")
will receive certain consideration including the elimination of potential
assessments, an allocable portion of shares of the Series A Preferred Stock of
Summit and subscription rights to purchase shares of Common Stock of Summit in
the Subscription Offering at a price of $11.00 per share (the "SUBSCRIPTION
PRICE"). Up to 5,000,000 shares of the Common Stock are being offered to
Eligible Policyholders less the amount of shares subscribed for by the
Management Group, who are being offered up to 500,000 shares of the Common Stock
in the Subscription Offering. All or a portion of any shares of Common Stock
that are not subscribed for by Eligible Policyholders in the Subscription
Offering are simultaneously being offered for sale to the public in the Public
Offering. See "THE CONVERSION."
The Florida DOI has approved the Plan of Conversion. However, such approval
does not constitute a recommendation or endorsement of the Plan of Conversion by
the Department of Insurance of the State of Florida (the "FLORIDA DOI"). The
Conversion will become effective upon the satisfaction of certain conditions
identified in the Plan of Conversion and upon the Board of Trustees of ESIF
declaring the Plan of Conversion effective. The Board of Trustees may amend the
Plan of Conversion, with the concurrence of the Florida DOI, or withdraw the
Plan of Conversion, at any time prior to the Effective Date.
In accordance with the terms of the Plan of Conversion, no person or
entity, together with associates and persons acting in concert, may purchase in
the Offerings more than 4.99% of the shares of Common Stock to be outstanding
after the Conversion (the "POST OFFERING OUTSTANDING SHARES"). Following the
effective date of the Conversion (the "EFFECTIVE DATE"), the Florida Insurance
Code, as applicable to Summit as the holding company of a wholly owned Florida
insurance company, will prohibit any person from acquiring 10% or more of the
outstanding voting securities of Summit without the prior approval of the
Florida DOI. Any person who acquires at least 5% but less than 10% of the
outstanding voting securities of Summit will be permitted to do so only by
filing a disclaimer of affiliation and control that is not disallowed by the
Florida DOI.
4
<PAGE> 176
THE OFFERINGS
Common Stock Offered by Summit...... 5,000,000 shares(1)
Common Stock to be Outstanding After
the Effective Date.................. 5,000,000 shares(2)
Series A Preferred Stock Offered to
Policyholders by Summit and to be
Outstanding After the Effective
Date.............................. 1,639,866 shares(3)
Use of Proceeds..................... To increase Bridgefield's capital to
satisfy applicable requirements of
the Florida Insurance Code, and the
remainder of such proceeds, if any,
will be retained by Summit for
general corporate purposes.
Proposed Nasdaq National Market
Symbol.............................. SHSE
- ---------------
(1) The number of shares of Common Stock available for sale in the Public
Offering will be such portion of the 5,000,000 shares not subscribed for by
Eligible Policyholders in the Subscription Offering.
(2) Assumes that all shares of Common Stock offered pursuant to the Offerings
are sold and does not include 500,000 shares of Common Stock reserved for
issuance under the Incentive Plan and 45,000 shares of Common Stock
reserved for issuance under the 401(k) Plan, as such terms are defined in
"RISK FACTORS -- Shares Available for Future Sale; Possible Volatility of
Stock Price." See "MANAGEMENT OF THE COMPANY -- Incentive Plan" and
"-- Employee Benefit Plans."
(3) The holders of the Series A Preferred Stock will be entitled to receive
annual cash dividends of $0.40 per share, reflecting the rate of 4% per
year, accruing from the date of issue but payable only as and when declared
by the Board of Directors of Summit; provided, however, that all accrued
but unpaid dividends shall be paid upon any redemption of the Series A
Preferred Stock or liquidation of Summit. See "DIVIDEND POLICY -- Series A
Preferred Stock."
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<PAGE> 177
SUMMARY PRO FORMA FINANCIAL AND OTHER DATA
The following unaudited pro forma financial data reflect the acquisition of
Summit Holding Corporation ("SHC") on January 16, 1996 (the "ACQUISITION") and
all of the transactions constituting the Conversion. The pro forma Statement of
Income data for the fiscal years ended March 31, 1995 and 1996 reflect the
Acquisition and Conversion as if they had been completed as of April 1, 1994 and
1995, respectively. The pro forma Statement of Income data for the six-month
period ended September 30, 1995 reflect the Acquisition and the Conversion as if
they had been completed as of April 1, 1995. The pro forma Statement of Income
data for the six-month period ended September 30, 1996 reflect the Conversion as
if it had occurred on April 1, 1996. The pro forma Balance Sheet data at
September 30, 1996 reflect the Conversion as if it had been completed as of
September 30, 1996. This information should be read in conjunction with the pro
forma consolidated financial statements and notes thereto appearing elsewhere in
this Prospectus. See "SELECTED FINANCIAL DATA."
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
--------------------- ---------------------
1995 1996 1995 1996
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Statement of Income Data:
Total revenue..................................... $ 188,818 $ 172,299 $ 92,789 $ 74,531
Losses and loss adjustment expenses............... 69,116 94,844 42,365 32,135
Other underwriting, general and administrative
expenses....................................... 70,394 63,008 34,034 29,848
Total losses and operating expenses............... 139,510 157,852 76,399 61,983
Interest expense.................................. 3,624 3,978 2,029 1,831
Amortization and depreciation..................... 5,318 5,340 2,698 2,479
Net income before taxes........................... 40,366 5,129 11,663 8,238
Net income........................................ 25,365 3,645 7,791 5,037
Preferred dividends............................... 656 656 328 328
Net income available to common shareholders....... $ 24,709 $ 2,989 $ 7,463 $ 4,709
========== ========== ========== ==========
Net income per common share....................... $ 4.94 $ 0.60 $ 1.49 $ 0.94
========== ========== ========== ==========
Weighted average common shares outstanding........ 5,000,000 5,000,000 5,000,000 5,000,000
Other Data(1):
Insurance Subsidiaries:
Net loss ratio................................. 53.8% 82.5% 67.1% 65.5%
Expense ratio.................................. 32.3% 34.1% 34.2% 32.6%
Combined ratio................................. 86.1% 116.6% 101.3% 98.1%
Administrative Subsidiaries:
EBITDA......................................... $ 17,649 $ 11,804 $ 7,377 $ 3,577
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------
(IN THOUSANDS)
<S> <C>
Balance Sheet Data:
Cash and invested assets.............................................. $263,829
Total assets.......................................................... 548,085
Loss and loss adjustment expenses..................................... 373,971
Debt.................................................................. 36,500
Total shareholders' equity............................................ 74,993
</TABLE>
- ---------------
(1) Excludes inter-company eliminations.
6
<PAGE> 178
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following financial data for ESIF for the fiscal years ended March 31,
1992 through 1996 and the six-month periods ended September 30, 1995 and 1996
include the Acquisition as of January 16, 1996.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Total revenue............. $ 143,750 $ 192,067 $158,951 $140,815 $140,328 $ 71,752 $ 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ -- -- -- -- 1,103 -- 2,499
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data(1):
Net loss ratio............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 32.6%
Combined ratio............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.1%
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested
assets.................. $ 147,056 $ 176,931 $201,688 $224,956 $223,517 $ 231,288 $ 213,829
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 498,085
Loss and loss adjustment
expenses................ 304,205 360,425 368,000 367,391 387,632 364,210 373,971
Debt...................... -- -- -- -- 44,000 -- 36,500
Total equity (deficit).... (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
</TABLE>
- ---------------
(1) Ratio for Insurance Subsidiaries.
7
<PAGE> 179
RISK FACTORS
An investment in the Common Stock involves a high degree of risk. In
addition to other information contained in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating an
investment in the shares of the Common Stock offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from the
results reflected in those forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below, as well as those discussed elsewhere in this Prospectus.
FLORIDA WORKERS' COMPENSATION MARKET
The workers' compensation insurance industry in Florida is highly
competitive. During the past fifteen years, a significant portion of the Florida
market has been serviced by certain group self-insurance funds, which are
entities that allow employers to obtain workers' compensation coverage on a
pooled basis, typically subjecting each employer to joint and several liability
for the group's losses. Primarily as a result of certain changes in the Florida
Insurance Code, there has been an increasing trend in the workers' compensation
industry in Florida to shift away from coverage offered by such funds and toward
traditional insurance products. Generally, policies issued by insurance
companies are non-assessable; therefore, an insurance company cannot assess its
policyholders for its underwriting or other losses. This structure affords
policyholders greater financial certainty and security, which has led to the
increased demand and availability in Florida of conventional, non-assessable
insurance products. The Administrative Subsidiaries have historically derived a
substantial portion of their revenues from managing the Funds, which in the
fiscal year ended March 31, 1996 accounted for 22% of the Company's total
revenue, on a pro forma basis after giving effect to the Conversion. The Company
believes that the market for workers' compensation products will continue to
shift away from coverage offered by assessable funds to traditional insurance
products. The loss or cancellation of any of the Company's significant client
groups, or the general availability of traditional non-assessable insurance
coverage to members of such groups on more favorable terms than provided under
the Company's programs, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "-- Government
Regulation" and "-- Competition."
GOVERNMENT REGULATION
The workers' compensation insurance business is subject to state-by-state
regulation (which in some instances includes rate regulation and mandatory fee
schedules). These regulations are primarily intended to protect covered
employees and policyholders, not workers' compensation insurance companies,
administrators or their shareholders. Changes in workers' compensation insurance
laws or regulations or their interpretation or administration could have a
material adverse effect on the Company's business, financial condition and
results of operations. State regulatory agencies have discretionary power with
respect to most aspects of the Company's business, including premium rates,
capital surplus requirements, reserve requirements and investment criteria. Many
states, including Florida, limit the maximum amount of dividends and other
payments that can be made by insurance companies. This may limit the amount of
dividends that may be paid by the Insurance Subsidiaries to Summit, which in
turn may limit the amount of capital available to Summit for debt service,
expansion, dividend payments to shareholders and other purposes. See "--Effect
of Holding Company Structure; Dividends," "DIVIDEND POLICY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Liquidity and Capital Resources" and "BUSINESS -- Regulation."
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the kinds of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its assets more conservatively than it would if it were
not subject to the state law restrictions and may prevent the Company from
obtaining as high a return on its assets as it might otherwise be able to
realize. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Results of Operations" and "BUSINESS-- Investment
Portfolio."
8
<PAGE> 180
Numerous proposals have been debated in Congress and in several state
legislatures regarding healthcare legislation intended to control the cost and
availability of healthcare services. It is not possible to determine what
healthcare reform legislation will be adopted by Congress or any state
legislature, or if and when any such legislation will be adopted and
implemented. In the event that such legislation is adopted and implemented,
there can be no assurance that the Company will be able to adjust effectively to
any regulatory changes made by future healthcare reform legislation and remain
profitable. The Company is unable to predict accurately the nature and effect,
if any, that the adoption of healthcare legislation or regulations or changing
interpretations at the federal or state level would have upon the Company.
Except for certain statutorily prescribed credits, Florida law does not
permit companies to compete on the basis of price in workers' compensation
insurance. This approach is followed in relatively few other states. If Florida
were to adopt an open rating system in which premium rates would be established
with little or no regulatory intervention, the Company's business, financial
condition and results of operations could be materially adversely affected.
FLORIDA SPECIAL DISABILITY TRUST FUND
Florida operates a Special Disability Trust Fund (the "SDTF") that
reimburses insurance carriers, self-insurance funds and self-insured employers
in Florida for certain workers' compensation benefits paid to injured employees.
The SDTF is managed by the State of Florida and is funded through assessments
against Florida insurers and self-insurers. For the three fiscal years ended
March 31, 1994, 1995 and 1996, the Company received SDTF recoveries of
$4,508,000, $5,671,000 and $5,603,000, respectively, and paid assessments of
$5,600,000, $4,724,000 and $5,620,000, respectively. In addition, the Company's
consolidated balance sheet as of September 30, 1996 included an asset of
approximately $21.1 million representing SDTF recoveries that the Company
estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF; however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries. Under
Florida sunset laws, the SDTF is currently scheduled for review by the Florida
legislature in the year 2000. The Florida legislature may, however, review the
SDTF earlier, and no assurance can be made with regard to the legislature's
possible actions. In addition, the Florida DOI is currently reviewing its
regulations with respect to how insurers and self-insurers may account for
estimated future SDTF recoveries, and there is no assurance that the Florida DOI
will continue to permit such entities to include estimated future recoveries on
its financial statements. Discontinuation of the SDTF, or changes in its
operations which decrease the availability of recoveries from the SDTF, increase
the SDTF assessments payable by the Company, prohibit the Company from including
estimated future recoveries on its financial statements or limit the amount that
may be so included, could have a material adverse effect on the Company's
business, financial condition or results of operations. See
"BUSINESS -- Regulation -- Special Disability Trust Fund."
COMPETITION
The market to provide workers' compensation insurance and services is
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of insurance services. A number
of the Company's current and potential competitors are significantly larger,
with greater financial and operating resources than the Company and can offer
their services nationwide. The Company's Insurance Subsidiaries do not offer
multi-line insurance products that are offered by some of such competitors. In
addition, after a period of absence from the market, traditional national
insurance companies have re-entered the Florida workers' compensation insurance
market, thereby increasing competition in the Company's principal market. The
general lack of assessibility features in the policies of traditional indemnity
insurance companies gives them a competitive advantage over self-insurance
funds, including the Funds managed by the Company.
9
<PAGE> 181
Additionally, because of Bridgefield's short operating history as a stock
insurance company, the Company does not currently have a letter rating from A.M.
Best, the leading national insurance rating organization, and it is not yet
entitled to receive such a rating. The Company intends to apply for a letter
rating from A.M. Best in the future, when it is deemed eligible to do so. There
can be no assurance that the Company will receive a rating or that if a rating
is received it will be favorable. The absence of a rating, or an unfavorable
rating in the future, may be a competitive disadvantage in some markets,
especially regarding larger customers with in-house risk managers.
CONCENTRATION IN A SINGLE STATE
All of the Company's insurance policies are written to entities whose
principal places of business are in Florida, and over 90% of the Company's total
revenue for the fiscal year ended March 31, 1996, on a pro forma basis after
giving effect to the Conversion, was derived from insurance products and
administrative services in Florida. Accordingly, the Company could be adversely
affected by economic downturns, significant unemployment, regulatory
developments and other conditions that may occur from time to time in Florida,
which may not significantly affect its more geographically diversified
competitors.
ADEQUACY OF LOSS RESERVES
The Insurance Subsidiaries are required to maintain reserves to cover their
estimated ultimate liability for losses and loss adjustment expenses with
respect to reported and unreported claims. Reserves are estimates involving
actuarial and statistical projections at a given time of what the insurer
expects to be the cost of the ultimate settlement and administration of claims
based on facts and circumstances then known, predictions of future events,
estimates of future trends in claims severity and judicial theories of
liability, legislative activity and other variable factors, such as inflation.
The establishment of appropriate reserves is an inherently uncertain process,
particularly in the workers' compensation industry in which claims payments can
extend for lengthy periods of time. There can be no assurance that ultimate
losses will not materially exceed the Insurance Subsidiaries' loss reserves. To
the extent that reserves prove to be inadequate in the future, the Insurance
Subsidiaries would have to increase such reserves and incur a charge to earnings
in the period such reserves are increased, which could cause fluctuations in
quarterly operating results and which could have a material adverse effect on
the Company's business, financial condition and results of operations.
RENEWAL RISKS; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS
The members of each of the Funds, and most of the policyholders of
Bridgefield, are eligible to renew their memberships or policies each year on a
common anniversary date. With respect to Bridgefield, this anniversary date each
year is April 1. If a large number of members of any Fund, or a large number of
Bridgefield's policyholders, were to decline renewal in any given year, the
Company's results of operations could be materially adversely affected in the
renewal quarter and subsequent quarters. Results of operations may also
fluctuate as a result of a variety of other factors, including, without
limitation, changes in pricing policies by the Company or its competitors, the
results of actuarial analysis of loss development, demand for the services of
the Administrative Subsidiaries, the introduction of new services and service
enhancements by the Company or its competitors, the market acceptance of new
services, competitive conditions in the industry, changes in operating expenses,
changes in Company strategy, changes in applicable legislation and regulation
and general economic conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ABILITY TO SERVICE DEBT
In connection with the Acquisition, SHC borrowed $44 million from the Bank,
with $36 million pursuant to a term loan and $8 million pursuant to a revolving
line of credit. The outstanding principal balance of such debt at September 30,
1996 was approximately $36.5 million. The interest rate for such debt is prime
plus 1% for "Base Rate" portions. Scheduled quarterly payments of the term loan
began on September 30, 1996 and extend through June 30, 2002, with principal
payments totaling approximately $1.6 million, $3.8 million, $4.6 million, $9.0
million, $10.0 million and $4.0 million due in calendar years 1997, 1998, 1999,
2000, 2001 and 2002, respectively. Accrued interest is due with each principal
payment. The commitment under the
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<PAGE> 182
revolving line of credit was reduced to $5.0 million in November 1996, and it
will reduce by $1.5 million on each of June 30, 2000 and June 30, 2001, with the
remaining $2.0 million becoming due on June 30, 2002. As collateral for the
debt, SHC has pledged to the Bank the issued and outstanding stock of SCI,
Bridgefield Casualty, Summit Healthcare Holdings, Inc. and Meritec Solutions,
Inc. ("MERITECH") SHC intends to restructure certain terms of this debt before
the Effective Date. Pursuant to the Plan of Conversion, all of this debt will be
assumed by Summit following the Effective Date. Summit, which is a holding
company, will have only income from distributions from its wholly owned
subsidiaries with which to service this debt, and there are certain restrictions
on the ability of the Insurance Subsidiaries to make distributions to Summit.
See "-- Government Regulation" and "BUSINESS -- Regulation -- Financial and
Investment Restrictions." There can be no assurance that Summit will have
adequate funds available to pay the required payments on its debt, and the
inability of Summit to service the debt would have a material adverse effect on
the Company's business, financial condition and results of operations.
NEED FOR CAPITAL
As a self-insurance fund, the Company recorded for statutory reporting an
asset for future investment income determined by discounting loss and loss
adjustment expense reserves at a statutory prescribed rate. Upon conversion to a
stock insurance company, the Company will be permitted to record discounts only
on permanent disability cases. As a result of this change, the Company intends
to use substantially all of the net proceeds from the Offerings for the purpose
of satisfying the Florida Insurance Code's minimum capital requirements
applicable to Bridgefield as a stock insurance company. From time to time, the
Company may be required to increase the capital surplus of the Insurance
Subsidiaries to remain in compliance with state regulatory requirements. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to reduce its growth. There can be no
assurance that capital will continue to be available when needed or, if
available, will be on terms acceptable to the Company. See "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
The Company markets its managed care workers' compensation insurance
products and services through independent insurance agencies. See
"BUSINESS -- Products and Services." As of September 30, 1996, ESIF's top ten
independent agencies accounted for approximately 20% of ESIF's direct in-force
premiums, with the top independent insurance agency accounting for approximately
4%. These agencies offer and sell competitors' products, as well as the
Company's products. As a result, the Company's business depends in part on the
marketing efforts of these agencies and on the Company's ability to offer
workers' compensation insurance products and services that meet the requirements
of these agencies and their customers. In addition, if the Company expands into
additional states, it must establish a network of independent agencies in such
states if it is to successfully market its products. Failure of independent
insurance agencies to market the Company's products and services successfully
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RELIANCE UPON KEY PERSONNEL
Summit's success will, to a large extent, depend upon the continued
services of certain executive officers, particularly, William B. Bull, President
and Chief Executive Officer of the Company, and upon the efforts and abilities
of certain other key management personnel. The loss of the services of Mr. Bull
could materially adversely affect the Company. Mr. Bull is a party to an
employment agreement with Summit, which contains certain confidentiality and
noncompetition provisions. In addition, the Company maintains and is the sole
beneficiary of key-man life insurance policies on the life of Mr. Bull in the
aggregate amount of $9.1 million. See "MANAGEMENT OF THE COMPANY -- Employment
Agreements."
The Company intends to continue hiring additional personnel as necessary to
meet its management, marketing and sales service needs from time to time.
Although the Company believes that, to date, the
11
<PAGE> 183
organization has been successful in attracting and retaining highly qualified
professionals and other administrative personnel as required by its business,
there can be no assurance that the Company will continue to be successful in
this regard. The Company believes that the future success and development of its
business is dependent to a significant degree on its ability to continue to
attract such individuals.
DEPENDENCE UPON REINSURANCE
The Insurance Subsidiaries have excess of loss policies ("EXCESS
REINSURANCE") for the current fiscal year with several reinsurers, including
Lloyds of London, National Union Insurance Company and Continental Casualty
Company, and policies providing coverage for prior fiscal years with several
other reinsurers, under which the reinsurers have agreed to pay claims and
claims expenses over a specific dollar amount per occurrence. In addition,
Bridgefield Casualty has a quota-share reinsurance agreement in effect with
American Re-Insurance Company ("AM RE") under which Bridgefield Casualty cedes
to Am Re a percentage (currently 80%) of all written workers' compensation
premiums and Am Re assumes that same percentage of risks ("QUOTA SHARE
REINSURANCE"). This Quota Share Reinsurance allows Bridgefield Casualty to
write, within regulatory guidelines, a larger number of policies than it could
otherwise. The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all claims and claims expenses which the
Company has ceded to such reinsurer. Pursuant to the Order, Bridgefield is
permitted to cede reinsurance only to authorized reinsurers, unless it obtains
the prior written approval of the Florida DOI. Any failure on the part of the
Company's reinsurers, any inability to obtain reinsurance in the future or any
significant increase in the cost of such reinsurance, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, in the event that the Quota Share Reinsurance agreement
with Am Re is terminated for any reason, Bridgefield Casualty could be required
to substantially increase its capital or to reduce its level of workers'
compensation premiums, unless it is able to establish another Quota Share
Reinsurance arrangement. This could result in material adverse consequences to
the Company's business and growth prospects. See "BUSINESS -- Reinsurance."
ABSENCE OF PRIOR MARKET
Prior to the Offerings, there has been no public market for the Company's
securities and, particularly if the Plan of Conversion becomes effective but the
Company determines not to proceed with the Public Offering, there can be no
assurance that an established and liquid trading market for such securities will
develop or, if developed, will be sustained or that the market price of the
Common Stock will not decline below the Public Offering Price. Although the
Company has applied for approval to list the Common Stock on the Nasdaq National
Market, there can be no assurance that such application will be approved or that
the Company will be able to maintain such a listing. See "MARKET FOR STOCK."
If the Common Stock is listed on the Nasdaq National Market but the Company
is unable to satisfy the maintenance requirements for the Nasdaq National
Market, the Common Stock may be deleted from such system. In such event, trading
in the Common Stock, if any, would be thereafter conducted in the over-the-
counter market on the "pink sheets" or through the National Association of
Securities Dealer's "Electronic Bulletin Board." Consequently, the liquidity of
the Common Stock could be impaired, not only in the number of securities which
could be bought and sold but also through delays in the timing of transactions,
the reduction or elimination of security analysts' and the news media's coverage
of the Company, and lower prices for the Company's securities than might
otherwise be attained. See "MARKET FOR STOCK."
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE VOLATILITY OF STOCK PRICE
All shares of Common Stock distributed in the Offerings will have been
registered under the Securities Act of 1933, as amended (the "SECURITIES ACT")
and will be freely tradeable without restriction or further registration under
the Securities Act except for shares held by "affiliates" of the Company, as
that term is defined in Rule 144 ("RULE 144") under the Securities Act. Based on
information provided to the Company by its affiliates, the Company believes that
shares of Common Stock ( % of the Post Offering
12
<PAGE> 184
Outstanding Shares) will be beneficially owned by affiliates on the Effective
Date (without taking into account any possible purchases of Common Stock by
affiliates in the Public Offering). See "THE OFFERINGS -- Subscription
Offering -- Interests of Certain Persons." All shares held by affiliates of the
Company are subject to a lock-up agreement with the Representatives that
prohibits their resale prior to 180 days after the Effective Date without the
prior consent of Raymond James & Associates, Inc. In addition, 500,000 shares of
Common Stock are reserved for issuance under the Summit Holding Southeast, Inc.
1996 Long-Term Incentive Plan (the "INCENTIVE PLAN") and 45,000 shares are
reserved for issuance under the Summit Consulting, Inc. Retirement Plan (the
"401(K) PLAN"). See "MANAGEMENT OF THE COMPANY -- Incentive Plan" and "-- 401(k)
Plan." To date, the Company has not issued any options to purchase Common Stock
under the Incentive Plan, but it plans to issue options on the Effective Date.
See "MANAGEMENT OF THE COMPANY -- Incentive Plan." The Company intends to file a
registration statement on Form S-8 with the Commission following the completion
of the Conversion to register the shares of Common Stock that may be issued
under the Incentive Plan and in connection with the 401(k) Plan. Sales of
substantial amounts of Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for the Common Stock and
could impair the Company's future ability to obtain capital through an offering
of equity securities. See "SHARES ELIGIBLE FOR FUTURE SALE."
In addition, the market price of the Common Stock could be subject to
significant fluctuations in response to variations in financial results or
announcements of material events by the Company or its competitors. It is
possible that in some future periods the Company's operating results could be
below market expectations and, in such an event, the price of the Common Stock
would likely be materially adversely affected. Regulatory changes in the
insurance industry or changes in the general condition of the economy or the
financial markets or other events that are beyond the Company's control could
also adversely affect the market price of the Common Stock. In addition to the
foregoing, the stock market has from time to time experienced price and volume
fluctuations which have significantly affected the market prices of the stocks
of many public companies but which are unrelated to the operating performance of
such companies. See "-- Renewal Risks; Fluctuations in Operating Results."
OBSTACLES TO CHANGES IN CONTROL; CERTAIN ANTI-TAKEOVER EFFECTS
After the consummation of the Conversion, Summit will be the holding
company of Bridgefield, a Florida stock insurance company. The Florida Insurance
Code will prohibit any person, individually or in conjunction with any
affiliated person, from acquiring, directly or indirectly, 5% or more of the
outstanding voting securities of Summit without prior approval of the Florida
DOI. However, a person who acquires at least 5% but less than 10% of such
outstanding voting securities may file with the Florida DOI a disclaimer of
affiliation and control and, unless such disclaimer is disallowed by the Florida
DOI, such person will not be required to seek prior approval of the Florida DOI
for the acquisition. In addition to such insurance regulation, the Florida
Business Corporation Act (the "FLORIDA ACT") contains provisions that may deter
or frustrate takeovers of Florida corporations such as Summit. See "DESCRIPTION
OF CAPITAL STOCK -- Anti-Takeover Provisions -- Florida Corporate Law."
In addition, Summit's Articles of Incorporation authorize the issuance of
5,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without the need
for shareholder approval, to issue preferred stock with dividend, liquidation,
conversion or other rights that could adversely affect the voting power or the
rights of the holders of the Common Stock. In the event of issuance, such
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change of control of Summit. In
connection with the Plan of Conversion, Summit will issue 1,639,866 of such
preferred stock shares as the Series A Preferred Stock, the terms of which are
described herein. See "DESCRIPTION OF CAPITAL STOCK -- Preferred Stock."
BENEFITS OF CONVERSION TO AN OFFICER AND DIRECTOR
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the
13
<PAGE> 185
Acquisition, the Florida DOI issued the January Consent Order requiring that Mr.
Bull personally indemnify ESIF up to a maximum of $5 million for certain loss,
injury or damage to ESIF that may result from the Acquisition. Under the terms
of the January Consent Order, Mr. Bull's indemnification obligations will expire
fully on the earlier of January 11, 2001 or the date upon which certain loans to
SHC from the Bank are paid in full. Pursuant to the Order issued by the Florida
DOI, if the Conversion is not consummated for any reason, all provisions of the
January Consent Order shall be enforceable by the parties thereto. See "THE
OFFERINGS -- Subscription Offering -- Interests of Certain Persons." Mr. Bull is
not a trustee of ESIF and, therefore, did not vote with respect to approval of
the Plan of Conversion by ESIF's Board of Trustees. However, as President and
Chief Executive Officer of SHC, Mr. Bull may influence the trustees, and such
relief from such personal indemnification obligations could be a factor that
influences Mr. Bull's position on the Conversion.
POTENTIAL CONTROL BY PRIVATE PLACEMENT SHAREHOLDERS; POSSIBLE DEPRESSIVE EFFECT
ON THE PRICE OF SUMMIT'S SECURITIES
If Summit determines that it is in the best interests of the Company to
sell some or all of the shares of Common Stock in one or more private
placements, upon the consummation of such placements the purchasers in such
transactions may control the Company through the ownership of a controlling
block of the Post Offering Outstanding Shares, assuming the Eligible
Policyholders and the Management Group do not subscribe in the aggregate for a
substantial number of the Post Offering Outstanding Shares. In such event, such
controlling shareholders collectively would have the ability to elect all of the
members of the Board of Directors, the power to determine the management of the
business and the power to determine the outcome of corporate actions requiring
shareholder approval. As a result, potential acquirers may be discouraged from
seeking to acquire control of the Company through the purchase of Common Stock,
which could have a depressive effect on the price of Summit's securities.
DIRECTOR AND OFFICER INDEMNIFICATION AND EXCULPATION
The Florida Act authorizes a Florida corporation to indemnify such
company's directors, officers, employees and agents. Summit has adopted a Bylaw
provision mandating such indemnification for directors, and permitting the Board
of Directors to indemnify officers, employees and agents in certain
circumstances, to the fullest extent permitted by law. In addition, Summit has
entered into agreements with its directors and certain of its executive officers
that contractually obligate Summit to provide indemnification. Pursuant to
exculpation provisions in Summit's Articles of Incorporation, the personal
liability of a director shall be eliminated or limited to the fullest extent of
the Florida Act.
EFFECT OF HOLDING COMPANY STRUCTURE; DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock in the
foreseeable future. In addition, the source of funds for payment of dividends by
the Company would be dividends paid to it by its subsidiaries. The Florida
Insurance Code limits the amount of dividends which the Insurance Subsidiaries
may pay to Summit and, in any event, for the foreseeable future Summit expects
to cause its subsidiaries to retain all earnings to provide capital for their
operations and business. In addition, if any shares of Series A Preferred Stock
are outstanding, no dividends may be paid to the holders of Common Stock so long
as there are accrued but unpaid dividends on the Series A Preferred Stock. See
"DIVIDEND POLICY" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
14
<PAGE> 186
THE COMPANY
Summit was incorporated as a Florida corporation in November 1996 for the
purpose of becoming a holding company for Bridgefield and the other Company
subsidiaries. The executive offices of the Company are located at 2310 A-Z Park
Road, Lakeland, Florida 33801. The telephone number at such office is (941)
665-6060.
MARKET FOR STOCK
There is no established public trading market for the Common Stock of
Summit. Summit has applied for approval of its Common Stock to be quoted on the
Nasdaq National Market under the symbol "SHSE." Quotation through the Nasdaq
National Market requires, among other things, that there be at least two market
makers for the Common Stock. The Representatives have advised Summit that they
each intend to make a market in the Common Stock by maintaining bid and asked
quotations for the Common Stock so long as the volume of trading justifies such
an undertaking. However, there can be no assurance that an established and
liquid market for the Common Stock will develop or that quotations will remain
available on Nasdaq or otherwise.
There is no established public trading market for the Series A Preferred
Stock, and Summit does not currently intend to seek a listing of the Series A
Preferred Stock on any securities exchange or any NASDAQ trading system. Holders
of Series A Preferred Stock seeking to sell, transfer or otherwise trade in such
securities must do so in private transactions.
DIVIDEND POLICY
Summit has no intention at present to pay dividends on the Common Stock.
Any payment of dividends on the Common Stock in the future would be subject to
determination and declaration by the Board of Directors of Summit and the
availability of funds therefor. Any future dividend payments by Summit would
depend upon the Company's debt and equity structure, earnings, need for capital
in connection with future acquisitions, and other factors, including economic
conditions, regulatory restrictions and tax considerations.
Should Summit consider paying dividends on the Common Stock in the future,
the source of funds for payment of such dividends would be dividends from the
Insurance Subsidiaries and the Administrative Subsidiaries to Summit, dependent
on such subsidiaries' earnings. Summit currently expects to cause the Insurance
Subsidiaries to retain all of their earnings to provide capital for their
operations and business. In addition, under the Florida Insurance Code and the
Order, the Insurance Subsidiaries may not be permitted to pay cash dividends to
Summit generally in excess of 10% of the greater of surplus or net income,
without prior approval to the Florida DOI. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources" and "BUSINESS -- Regulation -- Financial and Investment
Restrictions."
The holders of the Series A Preferred Stock will be entitled to receive,
out of funds legally available for the payment of dividends, cash dividends at
the rate of 4% per annum. Such dividends will accrue from the date of issue,
whether or not declared by the Board of Directors and whether or not there are
funds of Summit legally available for the payment of such dividends. Such
dividends will be payable only as and when declared by the Board of Directors;
provided, however, that all accrued but unpaid dividends will be paid upon any
redemption of the Series A Preferred Stock or a liquidation of Summit. Further,
under the terms of the Series A Preferred Stock, so long as any shares of Series
A Preferred Stock are outstanding, no dividends may be paid to the holders of
Common Stock unless any accrued but unpaid dividends on the Series A Preferred
Stock have been paid or funds have been set apart for the payment thereof. See
"DESCRIPTION OF CAPITAL STOCK -- Preferred Stock -- Series A Preferred Stock."
15
<PAGE> 187
USE OF PROCEEDS
Assuming that all 5,000,000 shares of Common Stock offered are sold at the
Subscription Price, the net proceeds to the Company are expected to be
approximately $50.0 million after deducting the estimated expenses of the
Conversion, which includes estimated underwriting and sales fees of
approximately $3,670,000. In such event, Summit expects to contribute
substantially all of such proceeds to Bridgefield to increase their capital to
satisfy applicable requirements of the Florida Insurance Code, and the remainder
of such proceeds, if any, will be retained by Summit for general corporate
purposes. The Conversion is contingent upon the receipt by Summit of net
proceeds of approximately $50.0 million which is required to satisfy applicable
provisions of the Florida Insurance Code.
CAPITALIZATION
The following table presents the consolidated capitalization of ESIF and
its subsidiaries at September 30, 1996: (i) on a historical basis, and (ii) as
adjusted to reflect the Conversion and the sale of 5,000,000 shares of Common
Stock at an assumed price of $11.00 per share and the initial application of the
proceeds therefrom, after deducting the estimated expenses of the Offerings. See
"USE OF PROCEEDS," "THE CONVERSION" and "DESCRIPTION OF CAPITAL STOCK."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------
HISTORICAL AS ADJUSTED
----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long term debt......................................................... $36,500 $ 36,500
Equity:
Preferred stock, $10.00 par value, 5,000,000 shares authorized; no
shares issued and outstanding, 1,639,866 shares as adjusted....... -- 16,399
Common stock, $.01 par value, 20,000,000 shares authorized; 7 shares
issued and outstanding, 5,000,000 shares as adjusted(1)........... -- 50
Additional paid-in capital(1)(2)..................................... -- 49,950
Retained earnings.................................................... 24,045 7,646
Unrealized appreciation on available for sale securities............. 948 948
------- --------
Total equity...................................................... 24,993 74,993
------- --------
Total capitalization.............................................. $61,493 $ 111,493
======= ========
</TABLE>
- ---------------
(1) Does not reflect 500,000 shares reserved for issuance under the Incentive
Plan, or 45,000 shares reserved for issuance under the 401(k) Plan. See "THE
OFFERINGS -- Public Offering," "EXECUTIVE COMPENSATION -- Incentive Plan"
and "-- 401(k) Plan."
(2) Based upon the estimated net proceeds from the sale of the Common Stock.
16
<PAGE> 188
SELECTED FINANCIAL DATA
EMPLOYERS SELF INSURERS FUND
The following selected financial data has been taken from, or derived from,
ESIF's consolidated financial statements, including the related notes thereto.
ESIF's consolidated financial statements as of March 31, 1996, and for the year
then ended, have been audited by Ernst & Young LLP, independent auditors, whose
reports thereon appear elsewhere in this Prospectus. ESIF's consolidated
financial statements as of March 31, 1995 and for the fiscal years ended March
31, 1994 and 1995 have been audited by Brinton & Mendez, certified public
accountants, whose report thereon appears elsewhere in this Prospectus. The
selected financial data provided as of and for the fiscal years ended March 31,
1992 and 1993 and the six months ended September 30, 1995 and 1996 are
unaudited, but in the opinion of management contain all adjustments, consisting
of only normal, recurring accruals, for a fair presentation of the results of
such periods. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION> SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996(1) 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Premiums earned........... $ 132,067 $ 181,339 $148,441 $128,489 $114,893 $ 63,145 $ 49,029
Net investment income..... 11,683 10,728 10,510 12,205 13,210 7,598 6,363
Administrative fees....... -- -- -- 7,665 -- 17,432
Realized investment
gains................... -- -- -- -- 4,354 919 8
Other income.............. 121 205 90 216
-------- -------- -------- -------- -------- -------- --------
Total revenue............. 143,750 192,067 158,951 140,815 140,328 71,752 73,048
Losses and loss adjustment
expenses................ 103,657 149,177 108,411 69,116 94,844 42,365 32,135
Other underwriting,
general and
administrative
expenses................ 32,787 40,145 37,121 41,546 43,657 21,623 30,532
Interest expense.......... -- -- -- -- 847 -- 1,831
Amortization and
depreciation............ 1,103 2,499
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes..... 7,306 2,745 13,419 30,153 (123) 7,764 6,051
Loss from discontinued
operations.............. -- -- -- -- (197) -- (890)
Net income................ $ 6,844 $ 2,953 $ 8,885 $ 19,163 $ 185 $ 5,374 $ 2,386
======== ======== ======== ======== ======== ======== ========
Other Data:(2)
Net loss ratio............ 78.5% 82.3% 73.0% 53.8% 82.5% 67.1% 65.5%
Expense ratio............. 24.8% 22.1% 25.0% 32.3% 34.1% 34.2% 32.6%
Combined ratio............ 103.3% 104.4% 98.0% 86.1% 116.6% 101.3% 98.1%
</TABLE>
<TABLE>
<CAPTION> AS OF
AS OF MARCH 31, SEPTEMBER 30,
---------------------------------------------------------- -------------------------
1992 1993 1994 1995 1996 1995 1996
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested
assets.................. $ 147,056 $ 176,931 $201,688 $224,956 $223,517 $ 231,288 $ 213,829
Premiums receivable....... 42,648 69,197 71,520 50,391 38,093 78,229 67,179
Reinsurance recoverable... 104,229 105,541 95,851 110,141 111,519 107,451 99,636
Total assets.............. 307,345 373,069 354,546 425,206 492,790 456,012 498,085
Loss and loss adjustment
expenses................ 304,205 360,425 368,000 367,391 387,632 364,210 373,971
Debt...................... -- -- -- -- 44,000 -- 36,500
Total equity (deficit).... (9,458) (6,485) 2,480 20,065 23,154 31,087 24,993
</TABLE>
- ---------------
(1) Includes the Acquisition as of January 16, 1996.
(2) Ratio for Insurance Subsidiaries.
17
<PAGE> 189
SUMMIT HOLDING CORPORATION
The following selected financial data for the fiscal years ended December
31, 1992, 1993, 1994 and 1995 have been derived from the historical consolidated
financial statements of SHC and subsidiaries, including the related notes
thereto, which have been audited by Ernst & Young, LLP, independent auditors,
whose report thereon appears elsewhere in this Prospectus. The information set
forth below is not necessarily indicative of the results of future operations
and should be read in conjunction with the consolidated financial statements and
notes thereto.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
----------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Income Statement Data:
Gross service fees................................... $61,675 $70,814 $73,833 $64,090
Direct expenses...................................... 29,593 32,972 31,639 27,470
Compensation and other employee benefits............. 13,371 14,503 15,425 16,616
Other operating expenses............................. 7,517 7,707 8,218 8,204
Interest expense..................................... 843 1,610 58 42
Amortization and depreciation........................ 4,729 4,891 4,872 5,112
Income before income taxes........................... 6,239 9,763 14,555 8,821
Net income........................................... $ 3,439 $ 5,929 $ 9,001 $ 5,575
======= ======= ======= =======
Other Data:
EBITDA............................................... $11,662 $15,887 $18,747 $12,904
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,(1)
----------------------------------------
1992 1993 1994 1995
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and invested assets............................. $ 138 $ 140 $ 5,704 $ 3,998
Total assets......................................... 32,066 35,672 41,372 43,683
Current liabilities.................................. 3,625 5,590 4,706 3,666
Debt................................................. 4,510 0 0 0
Shareholders' equity................................. 7,439 12,168 20,570 25,645
</TABLE>
- ---------------
(1) SHC commenced operations on January 1, 1992; therefore, historical data for
1991 is not applicable.
18
<PAGE> 190
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1995(A)
<TABLE>
<CAPTION>
(C) (D)
EMPLOYERS SELF SUMMIT HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned......................... $128,489 $ -- $ -- $ 128,489
Net investment income................... 12,205 1,025 3,125(E) 14,011
(2,344)(G)
Administrative fees..................... -- 72,709 (26,512)(F) 46,197
Other income............................ 121 -- -- 121
-------- ------- -------- --------
Total revenue................... 140,815 73,734 (25,731) 188,818
-------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses..... 69,116 -- -- 69,116
Other underwriting, general and
administrative expenses.............. 41,546 55,476 (26,512)(F) 70,394
(116)(H)
Interest expense........................ -- 54 3,570(J) 3,624
Amortization and depreciation........... -- 4,886 432(I) 5,318
-------- ------- -------- --------
Total expenses.................. 110,661 60,416 (22,626) 148,452
-------- ------- -------- --------
Income before income taxes.............. 30,153 13,318 (3,105) 40,366
Income taxes............................ 10,990 5,032 (1,021)(M) 15,001
-------- ------- -------- --------
Net income................................ $ 19,163 $ 8,286 $ (2,084) $ 25,365
======== ======= ======== ========
Net income per common share............... $ 4.94
========
Weighted average common shares
outstanding............................. 5,000,000
</TABLE>
19
<PAGE> 191
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1996(B)
<TABLE>
<CAPTION>
(K) (L)
EMPLOYERS SELF SUMMIT HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- -------------- ----------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................. $114,893 $ -- $ -- $ 114,893
Net investment income....................... 13,210 1,026 3,125(E) 15,499
(1,855)(G)
(7)(H)
Realized investment gains................... 4,354 -- -- 4,354
Administrative fees......................... 7,665 49,040 (19,358)(F) 37,347
Other income................................ 206 921 (921)(H) 206
-------- ------- -------- --------
Total revenue....................... 140,328 50,987 (19,016) 172,299
-------- ------- -------- --------
Expenses:
Losses and loss adjustment expenses......... 94,844 -- -- 94,844
Other underwriting, general, and
administrative expenses.................. 43,657 40,489 (19,358)(F) 63,008
(1,780)(H)
Interest expense............................ 847 30 3,101(J) 3,978
Amortization and depreciation............... 1,103 4,033 341(I) 5,340
(137)(H)
-------- ------- -------- --------
Total expenses...................... 140,451 44,552 (17,833) 167,170
-------- ------- -------- --------
Income before income taxes.................... (123) 6,435 (1,183) 5,129
Income taxes (benefit)........................ (505) 2,356 (367)(M) 1,484
-------- ------- -------- --------
Net income.................................... $ 382 $ 4,079 $ (816) $ 3,645
======== ======= ======== ========
Net income per common share................... $ 0.60
========
Weighted average common shares outstanding.... 5,000,000
</TABLE>
20
<PAGE> 192
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1994.
(B) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(C) Includes historical information for ESIF and subsidiaries for the year
ended March 31, 1995 on a consolidated basis.
(D) Includes SHC for the period April 1, 1994 through March 31, 1995.
(E) Adjustment relates to investment earnings (at an assumed rate of 6.25%) on
$50 million net proceeds (minimum amount expected to be received, assuming
the issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of administrative fees paid by ESIF to
SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26 million paid by ESIF and on $11.5 million of SHC
capital distributed to SHC shareholders in connection with the Acquisition
at an assumed interest rate of 6.25%.
(H) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit Healthcare, Inc.
("CAROLINA SUMMIT") and discontinued operations of Meritec.
(I) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible.
(J) Adjustment relates to interest expense from financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(K) Includes historical data for ESIF and subsidiaries for the year ended March
31, 1996 on a consolidated basis and includes SHC for the period January
16, 1996 through March 31, 1996.
(L) Includes SHC for the period April 1, 1995 through January 15, 1996.
(M) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
21
<PAGE> 193
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1995(A)
<TABLE>
<CAPTION>
(D)
(C) SUMMIT
EMPLOYERS SELF HOLDING PRO FORMA
INSURERS FUND CORPORATION ADJUSTMENTS PRO FORMA
-------------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Premiums earned............................ $ 63,145 $ -- $ -- $ 63,145
Net investment income...................... 7,598 494 1,563(E) 8,482
(1,173)(G)
Realized investment gains.................. 919 -- -- 919
Administrative fees........................ 32,558 (12,573)(F) 19,985
Other income............................... 90 529 (361)(J) 258
------- ------- -------- -------
Total revenue...................... 71,752 33,581 (12,544) 92,789
Expenses:
Losses and loss adjustment expenses........ 42,365 -- -- 42,365
Other underwriting, general and
administrative expenses................. 21,623 25,707 (12,573)(F) 34,034
(723)(J)
Interest expense........................... -- 16 2,013(I) 2,029
Amortization and depreciation.............. -- 2,529 216(H) 2,698
(47)(J)
------- ------- -------- -------
Total expenses..................... 63,988 28,252 (11,114) 81,126
------- ------- -------- -------
Income before income taxes................. 7,764 5,329 (1,430) 11,663
Income taxes............................... 2,390 1,962 (480)(K) 3,872
------- ------- -------- -------
Net income................................... $ 5,374 $ 3,367 $ (950) $ 7,791
======= ======= ======== =======
Net income per common share.................. $ 1.49
=======
Weighted average common shares outstanding... 5,000,000
</TABLE>
22
<PAGE> 194
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996(B)
<TABLE>
<CAPTION>
(C)
EMPLOYERS SELF PRO FORMA
INSURERS FUND ADJUSTMENTS PRO FORMA
-------------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues:
Premiums earned....................................... $ 49,029 $ -- $ 49,029
Net investment income................................. 6,363 1,563(E) 7,846
(80)(J)
Realized investment gains............................. 8 -- 8
Administrative fees................................... 17,432 -- 17,432
Other income.......................................... 216 -- 216
------- ------ -------
Total revenue................................. 73,048 1,483 74,531
------- ------ -------
Expenses:
Losses and loss adjustment expenses................... 32,135 -- 32,135
Other underwriting, general, and administrative
expenses........................................... 30,532 (684)(J) 29,848
Interest expense...................................... 1,831 1,831
Amortization and depreciation......................... 2,499 (20)(J) 2,479
------- ------ -------
Total expenses................................ 66,997 (704) 66,293
------- ------ -------
Income before income taxes............................ 6,051 2,187 8,238
Income taxes.......................................... 2,400 801(K) 3,201
------- ------ -------
Net income.............................................. $ 3,651 $ 1,386 $ 5,037
======= ====== =======
Net income per common share............................. $ 0.94
=======
Weighted average common shares outstanding.............. 5,000,000
</TABLE>
23
<PAGE> 195
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTH PERIODS ENDED SEPTEMBER 30, 1995 AND 1996
(A) Assumes the Acquisition and the Conversion occurred on April 1, 1995.
(B) Assumes the Conversion occurred on April 1, 1996.
(C) Includes historical information for ESIF and subsidiaries for the six
months ended September 30, 1995 and 1996, respectively, on a consolidated
basis.
(D) Includes SHC for the period April 1, 1995 through September 30, 1995.
(E) Adjustments relate to investment earnings (at an assumed of 6.25%) on $50
million net proceeds (minimum amount expected to be received, assuming the
issuance of 5,000,000 common shares).
(F) Adjustment relates to elimination of fees paid by ESIF to SHC.
(G) Adjustment relates to the effect on investment income of foregone
investment earnings on $26 million paid by ESIF and on $11.5 million of SHC
capital distributed to SHC shareholders in connection with the Acquisition,
at an assumed interest rate of 6.25%.
(H) Adjustment represents the net of the reversal of the amortization of SHC's
historical intangible assets and the amortization of the goodwill, customer
contracts, and developed software capitalized in the Acquisition.
Amortization periods assumed are as follows: goodwill -- 25 years; customer
contracts -- 10 years; and developed software -- 5 years. Such intangible
asset amortization is not tax deductible.
(I) Adjustment relates to interest expense from financed portion of the
Acquisition assuming scheduled interest rates ranging from 7% to 9.5%.
(J) Adjustment relates to decrease in revenue and operating expenses
attributable to the disposition of Carolina Summit.
(K) Adjustment relates to the total income tax effect of adjustments (E)
through (J).
24
<PAGE> 196
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with "SELECTED
CONSOLIDATED FINANCIAL DATA," the Consolidated Financial Statements and the
accompanying Notes to the Consolidated Financial Statements included elsewhere
herein.
OVERVIEW
The Company's managed care workers' compensation insurance operations are
comprised of primarily the Administrative Subsidiaries and the Insurance
Subsidiaries. The Company's income is generated principally from three sources:
fees earned from the management of the Funds, underwriting profits derived from
premiums earned on insurance policies written by the Insurance Subsidiaries, and
investment income generated by invested assets related to insurance
underwriting.
Prior to the Acquisition, ESIF and SHC were non-affiliated and historical
results are therefor not necessarily indicative of future financial results.
Although SHC (through its wholly owned subsidiary, SCI) had provided all
administrative and management services required to operate ESIF since ESIF's
inception in 1978, the two organizations had different financial objectives and
reported historical financial results independently. ESIF used a fiscal year
ending on March 31, and SHC used a fiscal year ending on December 31. As a
result of the Acquisition, SHC became a wholly owned subsidiary of ESIF, and
management began to implement an integrated strategic plan.
All of the Company's insurance policies are written for entities located in
Florida, and a significant portion of the Company's administrative services are
provided to entities operating in Florida. See "Risk Factors -- Concentration in
a Single State." Effective January 1, 1994 (with subsequent certain amendments),
Florida enacted new legislation (the "New Florida Law") that changed the
underwriting environment for workers' compensation by, among other things: (i)
limiting certain benefits that must be provided, (ii) eliminating wage loss
benefits in favor of a system of benefits based upon a schedule of impairment
ratings plus supplemental benefits, (iii) obligating employers to rehire injured
workers, (iv) adopting new procedures for dispute resolution designed to reduce
litigation costs, and (v) redefining permanent impairment.
In addition, the New Florida Law authorized insurers and self-insured
groups to apply to the Florida DOI for permission to offer premium credits of up
to 10% from January 1, 1994 through December 31, 1996 to insured employers who
participated in approved managed care arrangements and, effective January 1,
1997, required insured employers to participate in managed care arrangements.
The New Florida Law also authorized premium credits for insured employers who
participate in safety and drug-free workplace programs. In response to the New
Florida Law, which was expected to result in savings to self-insured groups and
insurers, the Florida DOI ordered a 10.6% overall rate decrease, effective
January 1, 1994. In addition, the New Florida Law eliminated the residual market
assessment that was levied against insurance companies to support the
involuntary workers' compensation market and replaced it with a self-funded
joint underwriting association. As a result, the financial obligation of funding
deficits in the residual market mechanism was shifted from traditional insurance
entities to employers who are insured by the joint underwriting association.
While the long term impact of the New Florida Law cannot be determined, the
Company believes that it has resulted in: (i) a more competitive workers'
compensation market in Florida, (ii) conversions by some of the larger
self-insured groups to traditional insurance entities, and (iii) loss portfolio
transfers by self-insured groups to insurance companies.
Effective for insurance policies written or renewing on and after January
1, 1997, self-insured groups and insurers will no longer be authorized to offer
insured employers the 10% managed care premium credit allowed under the New
Florida Law. Based in part upon the elimination of the managed care premium
credit and upon other ratemaking factors, the Florida DOI has ordered an 11.2%
overall workers' compensation insurance rate reduction, which will apply to
policies written or renewing on and after January 1, 1997.
The Company believes that it can improve its return on invested capital
following the Conversion through growth in its core workers' compensation
business. Key aspects of the Company's business strategy following
25
<PAGE> 197
the Conversion include: (i) continued use of both self-insurance and indemnity
products; (ii) emphasis on profitable underwriting results; (iii) proactive
implementation of managed care; (iv) leveraging of administrative services
capabilities; (v) emphasis on excellent customer service; and (vi) geographic
expansion in the South.
Management intends to dispose of certain operations that were not directly
related to managed care workers' compensation insurance by December 31, 1996.
See "BUSINESS -- Disposal of Business" and notes 18 and 19 of the notes to the
consolidated financial statements.
The discussion below in "Results of Operations" is divided into three
segments: (i) a comparison of fiscal years ended March 31, 1994, 1995 and 1996
for ESIF, including SHC after the date of the Acquisition; (ii) a comparison of
the six-month periods ended September 30, 1995 and 1996 for ESIF on a
consolidated basis; and (iii) a comparison of fiscal years ended December 31,
1993, 1994 and 1995 for SHC.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEARS ENDED MARCH 31, 1994, 1995 AND 1996 FOR ESIF
REVENUE. Revenue was $159.0 million, $140.8 million and $140.3 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. Revenue
declined for the fiscal year ended March 31, 1995, primarily due to a $20.0
million decrease in premiums earned. Revenue declined by $0.5 million for the
fiscal year ended March 31, 1996, primarily due to a decrease in premiums earned
of $13.6 million, which was offset by the addition of $7.6 million in
administrative fees as a result of the Acquisition and an increase in realized
investment gains of $4.4 million. Set forth below is a discussion of the
composition of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Premiums earned................................................ $148,441 $128,489 $114,893
Net investment income.......................................... 10,510 12,205 13,210
Realized investment gains...................................... -- -- 4,354
Administrative fees............................................ -- -- 7,665
Other income................................................... -- 121 206
-------- -------- --------
Total revenue........................................ $158,951 $140,815 $140,328
======== ======== ========
</TABLE>
Premiums Earned. Premiums earned decreased by $20.0 million, or 13.4%, for
the year ended March 31, 1995, and decreased by $13.6 million, or 10.6%, for the
year ended March 31, 1996. These declines in premiums resulted in large part
from: (i) lost accounts due to the market's increasing preference for non-
assessable products; (ii) increased competition; (iii) the effects of increasing
participation in the premium credit programs; and (iv) a refinement in
estimation of accrued retrospective premiums which reduced reported premiums for
the fiscal year ended March 31, 1996 by approximately $9.3 million.
As discussed in the table below, in the fiscal years ended March 31, 1994,
1995 and 1996, the premium credit programs in the aggregate accounted for
approximately $3.9 million, $11.4 million and $14.1 million, respectively, in
credits.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Managed care credits........................................... $ -- $ 6,144 $ 8,811
All other credits.............................................. 3,908 5,279 5,250
-------- -------- --------
Total premium credits................................ $ 3,908 $ 11,423 $ 14,061
======== ======== ========
</TABLE>
The premium credits that ESIF has paid for managed care utilization have
been larger during the past two years than all other credits combined. The
percentage of ESIF's covered employers participating in the
26
<PAGE> 198
managed care credit program is currently greater than 80%. ESIF's high rate of
participation in the managed care premium credit program will help minimize the
impact of the 11.2% rate reduction in January 1997 because the 10% managed care
credit will be eliminated at that time.
Net Investment Income. Net investment income increased from $10.5 million
for the fiscal year ended March 31, 1994, to $12.2 million for the fiscal year
ended March 31, 1995, and to $13.2 million for the fiscal year ended March 31,
1996. These increases were due in part to increases in total cash and invested
assets from $201.7 million for the fiscal year ended March 31, 1994 to $223.5
million in the fiscal year ended March 31, 1996 and in part to improved yields
on ESIF's investment portfolio. The investment income generated from the
municipal bond portion of the portfolio was $3.2 million for the fiscal year
ended March 31, 1996.
Realized Investment Gains. Realized investment gains increased from zero
for the fiscal year ended March 31, 1994, to a de minimis amount for the fiscal
year ended March 31, 1995, to $4.4 million for the fiscal year ended March 31,
1996. These gains resulted from the sale of certain invested assets to finance
the Acquisition.
Administrative Fees. The Administrative Subsidiaries generate
administrative fees primarily through contracts with the Funds, pursuant to
which the Administrative Subsidiaries provide marketing, underwriting, claims
administration, loss control and policy administration services. Fees are
generally based on a percentage of each Fund's premiums. For the period
beginning on the date of the Acquisition, January 16, 1996, and ending on March
31, 1996, the administrative fees were $7.7 million.
LOSSES AND EXPENSES. ESIF's losses and expenses decreased from $145.5
million for the fiscal year ended March 31, 1994 to $110.7 million for the
fiscal year ended March 31, 1995 and increased to $140.5 million for the fiscal
year ended March 31, 1996. Set forth below is a breakdown of the total annual
expenses.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Losses and loss adjustment expenses............................ $108,411 $ 69,116 $ 94,844
Underwriting, general and administrative expenses.............. 37,121 41,546 43,657
Interest expense............................................... -- -- 847
Amortization and depreciation.................................. -- -- 1,103
-------- -------- --------
Total losses and expenses............................ $145,532 $110,662 $140,451
======== ======== ========
</TABLE>
Losses and Loss Adjustment Expenses. ESIF establishes reserves to cover
its estimated liabilities for losses from claims and for loss adjustment (claim
settlement) expenses ("LAE"). Such loss reserves are established by management
based upon, among other factors: (i) results of actuarial reviews which
incorporate the Company's experience with similar cases, estimates of future
claim trends, and historical trends such as recurring loss payment and reporting
patterns, claim closures, and product mixes, (ii) facts known to the Company and
(iii) regulatory requirements. Losses and LAE incurred for the fiscal year ended
March 31, 1994 were $108.4 million compared to $69.1 million for the fiscal year
ended March 31, 1995 and $94.8 million for the fiscal year ended March 31, 1996.
Prior to the fiscal year ended March 31, 1995, management had recorded certain
reserves in excess of reserve levels required by actuarial reports. During the
fiscal year ended March 31, 1995, partially as a result of changes in its
regulatory status, ESIF began to record reserves at levels primarily supported
by actuarial reviews. This, together with a reduction in premiums earned and a
lower actuarial loss ratio, resulted in a $39.3 million decrease in incurred
losses for the fiscal year ended March 31, 1995 as compared to fiscal year ended
March 31, 1994. The subsequent increase of $25.7 million in losses and LAE for
the fiscal year ended March 31, 1996 was primarily the result of revised
actuarial estimates for prior years. The loss ratio for the fiscal years ended
March 31, 1994, 1995 and 1996 was 73.0%, 53.8% and 82.5%, respectively, or an
average of 69.8%.
The following table shows loss and LAE ratios computed on an actuarial
basis which excludes the effects of adjustments for prior years. As a result,
these loss ratios may be more indicative of current underwriting results. The
actuarial loss and LAE ratios in the following table indicate a downward trend
for the fiscal years
27
<PAGE> 199
ended March 31, 1992 to 1996, which ESIF believes reflects the impact of managed
care and other cost containment programs.
DEVELOPMENT OF ACTUARIAL NET LOSS RATIOS(1)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------
1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Actuarial loss & loss adjustment expense ratios...... 66.8% 67.0% 64.3% 64.5% 59.8% 60.4%
One year later....................................... 67.1 69.3 60.4 53.8 58.7
Two years later...................................... 71.9 65.9 61.0 54.3
Three years later.................................... 75.6 64.2 60.7
Four years later..................................... 75.3 64.7
Five years later..................................... 76.8
</TABLE>
- ---------------
(1) Actuarial net loss ratios are from actuarial reports filed with the Florida
Department of Labor and Employment Security and the Florida DOI. Actuarial
net loss ratios are based on modified and discount manual premium.
Underwriting, General and Administrative Expenses. The increase in ESIF's
expenses from $37.1 million to $41.5 million in the fiscal year ended March 31,
1995 was primarily due to four factors: (i) higher administrative taxes; (ii)
higher SDTF assessments; (iii) the introduction and operation of state-wide
managed care programs; and (iv) the increase in commission expenses.
Underwriting, general and administrative expenses increased to $43.7 million
during the fiscal year ended March 31, 1996 primarily due to the Acquisition.
Interest Expense. For the fiscal years ended March 31, 1994 and 1995, ESIF
had no interest expense. In connection with the Acquisition, SHC borrowed $44.0
million from the Bank, and, as a result, interest expense on a consolidated
basis for the fiscal year ended March 31, 1996 was $0.8 million.
Amortization and Depreciation. For the fiscal years ended March 31, 1994
and 1995, ESIF had no amortization or depreciation expense. In connection with
the Acquisition, SHC recorded certain intangibles including software, noncompete
agreements, customer contracts and goodwill. For the fiscal year ended March 31,
1996, amortization of these intangible assets was $1.1 million. The expense
associated with amortization of these intangible assets is not deductible for
federal income tax purposes.
NET INCOME. Net income was $8.9 million, $19.2 million and $0.2 million
for the fiscal years ended March 31, 1994, 1995 and 1996, respectively. The
increase in net income of $10.3 million for the fiscal year ended March 31, 1995
resulted primarily from a reduction in ESIF's reserves partially offset by a
decrease in premiums earned. The $19.0 million decrease in net income for the
fiscal year ended March 31, 1996 resulted from decreased premiums as well as
increased losses and LAE.
28
<PAGE> 200
COMPARISON OF HISTORICAL RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1995 AND 1996 FOR ESIF
REVENUE. Revenue for the six months ended September 30, 1995 was $71.8
million as compared with $73.0 million for the six months ended September 30,
1996. SHC generated $17.4 million in administrative fees in the six months ended
September 30, 1996. The following table analyzes the composition and change in
revenues.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Premiums earned.......................................................... $63,145 $49,029
Net investment income.................................................... 7,598 6,363
Realized investment gains................................................ 919 8
Administrative fees...................................................... -- 17,432
Other income............................................................. 90 216
------- -------
Total revenue.................................................. $71,752 $73,048
======= =======
</TABLE>
Premiums Earned. Premiums earned for the six months ended September 30,
1996 decreased by $14.1 million to $49.0 million. This loss in premium was due
to the market's increased preference for non-assessable products and the
increase in participation in mandated credit programs, which totaled $9.6
million for the six months ended September 30, 1996. The high participation
level currently experienced in the managed care credit program should reduce the
impact of the 11.2% rate decrease effective January 1, 1997 on new and renewal
policies.
Net Investment Income. Net investment income decreased by $1.2 million
primarily due to the reduction in invested assets related to the Acquisition.
Administrative Fees. SCI generated $17.4 million in administrative fees
through its contracts with administrative clients for the six months ended
September 30, 1996. Administrative fees represent 23.9% of total revenue for the
six-month period and are expected to provide additional future revenues through
SCI's contracts with clients in Florida, Louisiana and Kentucky.
LOSSES AND EXPENSES. ESIF's losses and expenses increased from $64.0
million for the six months ended September 30, 1995 to $67.0 million for the six
months ended September 30, 1996. Set forth below is a discussion of the expenses
for the period.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Losses and loss adjustment expenses...................................... $42,365 $32,135
Underwriting, general and administrative expenses........................ 21,623 30,532
Interest expense......................................................... -- 1,831
Amortization and depreciation............................................ -- 2,499
------- -------
Total losses and expenses...................................... $63,988 $66,997
======= =======
</TABLE>
Losses and Loss Adjustment Expenses. Losses and LAE incurred for the six
months ended September 30, 1995 were $42.4 million compared to $32.1 for the six
months ended September 30, 1996. The loss ratio decreased from 67.1% for the six
months ended September 30, 1995 to 65.5% for the six months ended September 30,
1996. This decrease was the result of favorable loss development.
Underwriting, General and Administrative Expenses. Underwriting, general
and administrative expenses increased by $8.9 million primarily due to the
Acquisition. The SHC portion of underwriting, general and administrative
expenses was $15.1 million, which indicates a reduction of $6.2 million in
underwriting, general and administrative expenses for ESIF.
29
<PAGE> 201
The adjusted expense ratio decreased slightly from 34.2% on September 30,
1995 to 32.6% on September 30, 1996. It should be noted that the Florida
Department of Labor administrative tax has decreased retrospectively from 3.15%
to 2.50%, effective July 1996. Furthermore, the ongoing expenses related to
managed care approvals should decrease as ESIF's managed care network continues
to service more of the existing policyholder base, thereby reducing delivery
costs.
Interest Expense. Interest expense increased $1.8 million for the six
months ended September 30, 1996 from zero for the six months ended September 30,
1995. Interest expense resulted from the $44.0 million of debt incurred by SHC
to fund the Acquisition.
Amortization and Depreciation. For the six months ended September 30,
1996, amortization and depreciation expense of $2.5 million was recorded
primarily in connection with intangible assets acquired in the Acquisition. The
expense associated with amortization of the intangible assets, which is expected
to be approximately $3.9 million per year, is not deductible for federal income
tax purposes.
NET INCOME. Income from continuing operations for the six months ended
September 30, 1996 was $3.7 million compared to $5.4 million for the six months
ended September 30, 1995. ESIF had $1.3 million of non-recurring charges in
September 1996 which included the disposition of discontinued operations and
conversion costs.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 FOR SHC
REVENUE. Revenue for the fiscal years ended December 31, 1993, 1994 and
1995 was $70.8 million, $73.8 million and $64.1 million, respectively. Gross
service fee (administrative fee) revenue received from ESIF and the Funds is
computed as a percentage of ESIF's and the Funds' premiums. Such revenue is
recognized by SHC in proportion to ESIF's and the Funds' recognition of premiums
earned. SHC is required to pay certain direct expenses that are a percentage of
the premiums earned by ESIF and the Funds. Such direct expenses principally
include agents' commissions, reinsurance premium costs, association fees and
administrative taxes. Subsequent to the Acquisition, direct expenses are
included in underwriting, general and administrative expenses in ESIF's
consolidated financial statements. The changes in revenue for each of the three
years are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross service fees................................. $ 70,814 $ 73,833 $ 64,090
Direct expenses.................................... (32,972) (31,639) (27,470)
Net service fees................................... 37,842 42,194 36,620
Investment and other income........................ 632 934 2,175
------- ------- -------
Total revenue............................ $ 38,474 $ 43,128 $ 38,795
======= ======= =======
</TABLE>
Net Service Fees. Net service fees increased from $37.8 million in 1993 to
$42.2 million in 1994 and decreased by $5.6 million to $36.6 million for the
fiscal year ended December 31, 1995. The decline in net service fees for this
period is due to a proportional decrease in gross service fees and direct
expenses during 1995, principally attributable to a decrease in premiums earned
by ESIF and the Funds. In 1994, SHC's net service fee revenue included a $3.3
million one-time reimbursement.
Investment and Other Income. Investment income for the fiscal year ended
1993, 1994 and 1995 was $0.4 million, $0.7 million and $1.0 million,
respectively. Included in other income are software consulting and maintenance
fees totaling approximately $0.9 million for the fiscal year ended December 31,
1995. These fees are associated with the Company's subsidiary, Meritec, which
was purchased in July 1995. The disposition of Meritec is expected to be
completed by December 31, 1996.
30
<PAGE> 202
EXPENSES. Expenses for the fiscal years ended December 31, 1993, 1994 and
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Compensation and employee benefits.................... $14,503 $15,425 $16,616
Other operating expenses.............................. 7,707 8,218 8,204
Interest expense...................................... 1,610 58 42
Depreciation and amortization......................... 4,891 4,872 5,112
------ ------ ------
Total expenses.............................. $28,711 $28,573 $29,974
====== ====== ======
</TABLE>
Compensation and Employee Benefits. Compensation and employee benefits
increased by $0.9 million to $15.4 million for the fiscal year ended December
31, 1994 compared to $14.5 million for 1993. The increase was principally
attributable to increased payroll costs, combined with increased group life and
health insurance costs. Compensation and employee benefits increased by $1.2
million to $16.6 million for the fiscal year ended December 31, 1995 compared to
$15.4 million for 1994, primarily as a result of increased payroll costs coupled
with the addition of employees resulting from the purchase of Meritec, effective
July 1995.
Interest Expense. Interest expense decreased by $1.6 million or 96.4% to
approximately $58,000 for the fiscal year ended December 31, 1994 compared to
$1.6 million for 1993. In 1993, interest expense included $1.5 million for the
buyout of the Capital Appreciation Rights agreement related to a revolving loan
agreement.
Amortization and Depreciation. Amortization of intangibles for the fiscal
years ended 1993, 1994 and 1995 was $4.1 million, $4.1 million and $4.3 million,
respectively. Intangible assets were originally established in connection with
the acquisition of SCI from Alexander and Alexander Services, Inc. ("A & A") on
January 1, 1992.
NET INCOME. Net income for the fiscal years ended 1993, 1994 and 1995 was
$5.9 million, $9.0 million and $5.6 million, respectively. The increase in net
income for 1994 as compared to 1993 of $3.1 million or 52.5% is due primarily to
a one-time reimbursement from one of the Funds, Louisiana Employers Safety
Association Self Insurers Fund, for $3.3 million. The decrease in net income for
1995 of $3.4 million, or 37.8%, is due primarily to lower administrative fee
income which is attributable to a decrease in Fund premiums.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically met its cash requirements and financed its
growth principally through cash flows generated from operations. The Insurance
Subsidiaries' primary sources of cash flows are premiums earned, investment
income and the proceeds from the sale or maturity of invested assets. The
Administrative Subsidiaries' primary source of cash flow is service fees
generated from ESIF and the Funds. The cash requirements of the Insurance
Subsidiaries are primarily for the payment of claims, commissions, and
reinsurance premiums and management fees to SCI and the purchase of investment
securities. The cash requirements of the Administrative Subsidiaries are
primarily for the payment of salaries, employees benefits, debt obligations and
other operating expenses.
As part of the Acquisition, SHC incurred debt of which, at September 30,
1996, consisted of a term loan in the amount of $34.5 million and $2.0 million
which was outstanding under the revolving line of credit. Scheduled quarterly
payments for the term loan began on September 30, 1996 and extend through June
30, 2002, with principal payments totaling approximately $1.6 million, $3.8
million, $4.6 million, $9.0 million, $10.0 million and $4.0 million due in
calendar years 1997, 1998, 1999, 2000, 2001 and 2002, respectively.
The Company's balance sheets as of March 31, 1996 and September 30, 1996
reflect $20.1 million and $21.1 million, respectively, of recoverables from the
SDTF. The Company received $5.6 million and $4.3 million in actual recoveries
from the SDTF for the fiscal year ended March 31, 1996 and the six months ended
September 30, 1996, respectively. The SDTF has not failed to make payments on
accepted claims and the
31
<PAGE> 203
Company has no reason to believe that the SDTF will fail to meet its obligations
to pay accepted claims in the future, although there can be no assurance.
As a self-insured fund, ESIF recorded for statutory reporting an asset of
$42.9 million and $47.3 million at March 31, 1995 and 1996, respectively, for
future investment income determined by discounting loss and loss adjustment
expense reserves at a statutory prescribed rate. Upon conversion to a stock
insurance company Bridgefield will be permitted to record discounts only on
permanent disability cases. The amount of such discount is estimated at
approximately $4.9 million and $4.7 million at March 31, 1995 and March 31,
1996, respectively. Upon the Conversion, the Company expects to have a
sufficient capital and surplus to satisfy the requirements of the Florida
Insurance Code.
The NAIC has recently adopted risk-based capital standards to establish the
capital requirements of an insurance carrier based upon the risks inherent in
its operations. The standards, which have not yet been adopted in Florida,
require the computation of a risk-based capital amount which is then compared to
a carrier's actual total adjusted capital. The computation involves applying
various financial factors to address four primary risks: asset risk, insurance
underwriting risk, credit risk and off-balance sheet risk. These standards
provide for regulatory intervention when the percentage of total adjusted
capital to authorized control level risk-based capital is below certain levels.
Upon the conversion to a stock insurance company and the recapitalization, the
Company expects to exceed such risk-based capitalization levels, as recommended
by the NAIC.
The Company's Insurance Subsidiaries are subject to state insurance laws
and regulations that limit the amount of dividends or distributions that may be
paid by an insurance company to its shareholders. Pursuant to the Florida
Insurance Code, the Insurance Subsidiaries may not, without the prior approval
of the Florida DOI, pay to their shareholders dividends or other distributions
of cash or property the total fair market value of which exceeds generally the
lesser of 10% of surplus or net income not including realized capital gains. In
addition, the Order issued by the Florida DOI in connection with the Conversion
requires that all dividends or distributions by the Insurance Subsidiaries be
approved by the Florida DOI in advance, but the Order states that approval will
be given for any dividend or distribution otherwise complying with the Florida
Insurance Code. As a consequence of these legal restrictions and other business
considerations, the amount of dividends that may be paid by the Insurance
Subsidiaries to Summit may be limited, which may in turn limit the amount of
cash available to Summit for servicing its debt and other purposes.
LOSSES AND LOSS ADJUSTMENT EXPENSE
Beginning in 1994, workers' compensation insurers in Florida were permitted
to settle both the medical and indemnity portions of a claim; previously, an
insurer was not permitted to limit its exposure for lost wage expenses by
settling with the injured employee for a lump sum. ESIF undertook a claims
settlement initiative in 1994, which reduced outstanding claims amounts and
favorably impacted ESIF's losses and LAE for fiscal year ended March 31, 1994
and subsequent periods. ESIF actively continues to try to settle all aspects of
each claim.
The Company's consolidated financial statements include estimated reserves
for unpaid losses and loss adjustment expenses. The reserves for these expenses
are estimated using individual case-basis valuations and statistical analyses
and represent estimates of the ultimate gross and net costs of all unpaid losses
and loss adjustment expenses incurred through the Balance Sheet date of each
period presented. Those estimates are subject to the effects of trends in claim
severity and frequency. The Company's estimates are continually reviewed and, as
experience develops and new information becomes known, the reserves are adjusted
as necessary. Adjustments, including increases and decreases, are included in
current operations net of reinsurance, and in the estimate of reserves for
insured events of prior periods.
Since its inception and continuing through January 1989, ESIF claims were
adjusted and managed by Adjustco, Inc. ("ADJUSTCO"), an independent claims
adjusting company, under the supervision of SCI. Adjustco was responsible for
establishing, monitoring and updating case-based loss reserves used to set loss
reserves for ESIF's financial statements. In January 1989, SCI discontinued the
contract with Adjustco and performed such claims adjustment functions through
its wholly owned subsidiary, Summit Claims Manage-
32
<PAGE> 204
ment, Inc. ("SCM"). In subsequent periods, such Adjustco loss reserves have
proved deficient resulting in significant reserve increases for losses incurred
prior to 1989. Adverse loss reserve development has significantly decreased for
the years since SCM performed the claims management functions.
The following table shows changes in historical loss reserves for ESIF for
the fiscal year ended March 31, 1987 and subsequent years. The top line of the
table shows the reserves for estimated unpaid losses and loss adjustment
expenses recorded at each fiscal year end. Each amount in the top line
represents the estimated amount of losses and loss adjustment expenses for the
losses occurring in that year as well as future payments on claims occurring in
prior years. The upper (cumulative amount paid) portion of the table presents
the amounts paid as of subsequent years on those losses for which reserves were
carried as of each specific year. The lower (reserves re-estimated) portion
shows the reestimated amounts of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes known about the actual losses for which the initial reserves
were carried. An adjustment to the carrying value of unpaid losses for a prior
year will also be reflected in the adjustments for each subsequent year. For
example, an adjustment made in the fiscal year ended March 31, 1995 for loss
reserves in the fiscal year ended March 31, 1992 will be reflected in the
re-estimated ultimate net loss for each of the fiscal years ended March 31, 1992
through March 31, 1995. The cumulative redundancy (deficiency) line represents
the cumulative change in estimates since the initial reserve was established. It
is equal to the difference between the initial reserve and the latest reserves
re-estimated amount.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT -- ESIF STATUTORY BASIS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for losses
and LAE at end of
period........... $ 37,297 $ 57,300 $124,425 $168,608 $207,353 $164,399 $251,748 $260,531 $238,985 $250,363
Cumulative paid as
of
One year later... $ 23,190 $ 40,028 $ 57,482 $ 74,481 $ 88,815 $ 71,364 $ 73,839 $ 71,915 $ 64,882
Two years
later.......... 42,031 70,077 100,883 133,064 138,546 118,326 122,411 114,097
Three years
later.......... 54,469 92,466 135,490 160,896 170,259 149,424 149,175
Four years
later.......... 63,986 110,856 146,825 176,483 190,179 165,628
Five years
later.......... 70,433 119,024 151,683 185,759 199,556
Six years
later.......... 72,985 123,810 154,668 189,948
Seven years
later.......... 75,390 126,776 158,802
Eight years
later.......... 76,457 130,904
Nine years
later.......... 78,730
Reserves re-estimated as of end of year
One year later... $ 47,627 $101,405 $140,492 $183,938 $200,237 $228,556 $231,759 $234,166 $247,785
Two years
later.......... 68,549 112,475 155,440 178,390 235,515 209,306 232,455 243,431
Three years
later.......... 70,736 126,109 161,012 214,234 229,571 220,163 241,769
Four years
later.......... 76,275 131,975 181,370 209,498 236,861 230,088
Five years
later.......... 78,412 148,033 178,170 208,800 246,100
Six years
later.......... 86,978 145,749 177,402 215,588
Seven years
later.......... 85,771 143,717 184,346
Eight years
later.......... 83,725 148,595
Nine years
later.......... 87,695
Cumulative redundancy (deficiency)
Dollars.......... $(50,398) $(91,295) $(59,921) $(46,980) $(38,747) $(65,689) $ 9,979 $ 17,100 $ (8,800)
Percentage....... -135.13% -159.33% -48.16% -27.86% -18.69% -39.96% 3.96% 6.56% -3.68%
</TABLE>
33
<PAGE> 205
The following table contains summary reconciliations of the beginning and
ending insurance reserves, displayed individually for each of the three most
recent fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net reserves for losses and LAE at beginning of year... $251,751 $260,520 $238,990
Add provision for claims occurring in:
The current year..................................... 118,889 94,520 84,058
Prior years.......................................... (10,478) (25,404) 10,786
-------- -------- --------
Incurred losses during the current year................ 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year..................................... 17,704 16,857 15,432
Prior years.......................................... 81,938 73,789 67,968
-------- -------- --------
Claim payments during the current year................. 99,642 90,646 83,400
Net reserves for losses and LAE at end of year......... 260,520 238,990 250,434
Add: Impact of reinsurance for FASB 113................ 121,463 108,440 107,092
Impact of implied special disability trust fund
recoverables................................... 15,531 24,836 31,376
Unallocated LAE assumed through the Acquisition
of Summit...................................... -- -- 3,398
Less: Discount on reserves............................. (4,730) (4,875) (4,668)
-------- -------- --------
Gross reserves for losses and LAE at end of year (GAAP
basis)............................................... $392,784 $367,391 $387,632
======== ======== ========
</TABLE>
The March 31, 1996 reserves of $387.6 million for losses and LAE as
determined under GAAP were $133.8 million more than the reserves of $253.8
million as recorded on the statutory financial statements provided to state
regulatory authorities. The difference is an increase of $107.1 million for
reserves recoverable from third-party reinsurance carriers, a decrease for
discounting of the indemnity portion of permanent disability claims of $4.7
million, and an increase of $31.4 million for the impact of implied disability
trust fund recoverables that reduce reserves for statutory reporting. An asset
of $20.1 million has been recorded as of March 31, 1996 based on the Company's
historical collection experience and the amount of claims identified as subject
to SDTF recovery. Furthermore, reinsurance recoverables included in the Balance
Sheet are increased by $11.8 million as the result of calculating such
recoverables using loss and LAE reserves gross of SDTF.
The Company has recorded $17.8 million in accrued recoverables from SDTF
for the six months ended September 30, 1995 and $21.1 million as September 30,
1996. The Company received $2.2 million for the six months ended September 30,
1995 and $4.3 million for the six months ended September 30, 1996. The Company
believes it will be reimbursed over a number of years. A description of the SDTF
is in the section "RISK FACTORS." During the 40 year history of the SDTF, it has
historically paid reimbursements it has determined were eligible for
reimbursement, there can be no assurance in this regard. If the SDTF were to
discontinue, the Company believes the most likely run-off procedure would be for
it not to accept new claims after some date certain. If this should occur, the
Company believes that because of the backlog of filed and accepted claims
already in the system, the impact on the Balance Sheet would be manageable.
34
<PAGE> 206
BUSINESS
OVERVIEW
The Company provides a variety of managed care workers' compensation
products and services to employers and self-insured employer groups primarily in
Florida, as well as in Louisiana and Kentucky. Through the Company's
Administrative Subsidiaries, the Company provides administrative services for
the Funds, for the Insurance Subsidiaries and for certain municipalities. These
administrative services include most aspects of daily operations of the Funds
and the Insurance Subsidiaries, including sales and marketing, underwriting,
claims administration, loss control and policy administration. These services
are provided for a fee, with the Company generally receiving a percentage of
premiums. The Administrative Subsidiaries do not assume any underwriting risk of
the Funds, entities formed to provide workers' compensation coverage for self-
insured employer groups on a pooled basis.
The Insurance Subsidiaries, which include Bridgefield and Bridgefield
Casualty, underwrite and assume the underwriting risk with respect to workers'
compensation insurance policies for Florida employers of all sizes, primarily in
the construction, manufacturing, wholesale and retail, and service industries.
As of September 30, 1996, the Company's insurance products and administrative
services are provided to approximately 15,500 employers representing
approximately $219.0 million in premiums, including approximately $102.0 million
in premiums attributable to the Funds and $117.0 million in premiums
attributable to the Insurance Subsidiaries. See "BUSINESS."
The Company's approach to managed care workers' compensation is to select
responsible employers for coverage, assist such employers in creating a safe
work place, and proactively manage claims, thereby returning employees to work
promptly and minimizing losses. Employers' safety programs are monitored by the
Company's staff of approximately 25 loss control field representatives who visit
an employer's work place on at least an annual basis. Reported claims are
proactively managed by the Company so that employees receive prompt care by
healthcare professionals which are part of the Company's provider network. The
Company's claims management professionals direct care through the provider
network, monitor employee treatment and progress toward returning to work and
perform utilization and peer review to control costs. The Company's approach to
managed care workers' compensation has produced an average net ultimate loss
ratio for ESIF during the three fiscal years ended March 31, 1996 of 69.8%,
which is better than the national average of 75.0% during the period 1993
through 1995, based on information published by A.M. Best. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"-- STRATEGY" AND "-- MANAGED CARE."
INDUSTRY
Workers' compensation benefits are state-mandated and regulated programs
that generally require employers to provide medical benefits and wage
replacement to employees injured at work, regardless of fault. In the event an
employee suffers a work-related injury, workers' compensation coverage will pay
the medical benefits associated with such injury, regardless of whether the
injured employee participates in any other health or medical benefits program.
Each individual state has a regulatory and adjudicatory system that quantifies
the level of wage replacement to be paid, determines the level of medical care
required to be provided and the cost of permanent impairment, and provides
whether the injured employee or the employer has certain options in selecting
healthcare providers. State laws generally require two types of benefits for
injured employees: (i) medical benefits that include expenses related to
diagnosis and treatment of the injury, as well as rehabilitation, if necessary,
and (ii) indemnity payments that consist of temporary wage replacement,
permanent disability payments or death benefits to surviving family members. To
fulfill this mandated financial obligation, virtually all employers are required
to either purchase workers' compensation insurance from a private insurance
carrier, a state-sanctioned assigned risk pool or a self-insurance fund (an
entity that allows employers to obtain workers' compensation coverage on a
pooled basis, typically subjecting each employer to joint and several liability
for the entire fund) or, if permitted by their state, to self-insure.
35
<PAGE> 207
The Florida workers' compensation market accounted for more than 90% of the
Company's total revenue for the fiscal year ended March 31, 1996 (on a pro forma
basis after giving effect to the Conversion). Florida is the fourth largest
state in terms of population behind California, New York and Texas and,
according to the Florida DOI, the Florida workers' compensation market
approximated $3.2 billion in premiums in 1995. Approximately 63% of Florida's
population is between the ages of 15 and 64, generally considered the employment
pool subject to workers' compensation requirements. Over half of Florida's
employment is in the service and wholesale/retail trade sectors, with
manufacturing, construction and agriculture following (in order of size) to make
up the bulk of the remainder of the state's employment base. Based upon data
reported by the NAIC, had ESIF been a stock insurance company on December 31,
1995, it would have been one of the five largest workers' compensation insurers
in Florida, based on the amount of direct premiums earned. See "RISK
FACTORS -- Concentration in a Single State."
STRATEGY
The Company believes that the Conversion provides new opportunities for
improving its return on invested capital through growth in its core workers'
compensation business. Key aspects of the Company's business strategy following
the Conversion include:
Continued Use of Both Self-Insurance and Indemnity Products. The Company
will continue to offer workers' compensation products and services to its
employer customers through both management of self-insured employer groups and
issuance of traditional indemnity insurance policies. The Company believes that
its ability to offer both self-insurance and indemnity services and products
will enable it to compete more effectively in its current markets, and will
provide it with flexibility for responding to changes in its current markets and
expanding into additional markets.
Emphasis on Profitable Underwriting Results. The Company has historically
focused on underwriting results, achieving what it believes are excellent loss
results due to its integrated system of coordinating major aspects of workers'
compensation product management. The Company intends to continue to emphasize
maintaining strong underwriting results in an effort to provide a competitive
workers' compensation coverage package, to control costs and to maximize return
on invested capital.
Proactive Implementation of Managed Care. Managed care will continue to be
a key part of the Company's overall approach to effective management of workers'
compensation claims. The Company believes that its use of managed care
techniques in combination with selective underwriting enables the Company to
provide high quality and cost-effective care to injured employees, while at the
same time lowering overall insurance costs.
Leveraging of Administrative Services Capabilities. The Company's systems,
procedures and organizational structure are designed to provide effective, high
quality administrative services effectively to multiple workers' compensation
entities. The Company intends to continue pursuing opportunities to further
leverage its administrative services through management of additional
self-insurance funds, indemnity insurance carriers and self-insured governmental
entities located throughout the South.
Emphasis on Excellent Customer Service. The Company believes that the
offering of workers' compensation insurance products and services is best
implemented and managed through emphasis on customer service and frequent
contact with both employer customers and independent sales agents. The Company
intends to continue emphasizing excellent customer and sales support services.
Geographic Expansion in the South. Through the Conversion of ESIF to a
stock insurance entity, the Company will be positioned to expand into new
geographic territories with a broader insurance product offering. The Company
currently intends to grow through greater penetration of existing markets,
including Florida, Louisiana and Kentucky, and expansion into new markets,
primarily targeting employers in the South. The completion of the Offerings is
intended to provide the Company with additional capital that will assist it in
more rapidly expanding its business.
36
<PAGE> 208
MANAGED CARE
Over the past eight years, the Company has implemented a managed care
approach to workers' compensation. The Company's managed care strategy reduces
costs through loss prevention, early intervention and proactive management of
claims. The Company's focus on loss prevention includes helping employers
establish workplace safety programs, making on-site visits to the workplace and
coordinating among the Company's underwriting, loss control, claims management
and sales and marketing groups. Once a claim occurs, the Company's early
intervention procedures enable the Company to identify injuries that have the
potential of resulting in significant expenses and controlling these expenses
from the outset. The Company generally uses a three-point contact system with
the goal of contacting each of the injured employee, the employer and the health
care provider within 24 hours after notification of an initial claim. The
Company's SMART(TM) (Summit Medical Alert Reaction Team) coordinates a medical
claim from inception to completion in order to provide quality health care to
the injured employee so that he or she may return to work as quickly as
possible. The Company believes returning an employee to the job quickly is an
effective means of controlling indemnity payments for lost wages, typically the
largest component of workers' compensation costs as well as medical expenses.
The Company directs claimants to healthcare providers that are part of the
Company's managed care networks. These networks currently include healthcare
providers who have contracted with Heritage/Summit Healthcare of Florida, Inc.,
the Company's wholly owned provider network subsidiary, or with Vincam
Occupational Health Systems, Inc., an unaffiliated provider network. These
arrangements currently give the Company access to healthcare providers in every
county in Florida, including approximately 2,000 total practitioners and
hospitals. The Company is currently one of four workers' compensation companies
with approved managed care provider networks in every Florida county. With such
networks, the Company emphasizes the use of cost control measures such as
utilization review. The Company's total managed care approach, including early
intervention, proactive claims management and use of provider networks, in
combination with state-mandated fee schedules, has resulted in the Company
reducing the amount it pays for medical bills submitted by an average of 44%.
PRODUCTS AND SERVICES
The Company's operations are comprised of two general types: (i)
administrative services provided by the Administrative Subsidiaries, and (ii)
insurance coverage underwritten by the Insurance Subsidiaries.
Administrative Services. The Company provides a full range of management
and administrative services for the Funds and for certain municipalities. The
Company's Administrative Subsidiaries also provide these services for the
Insurance Subsidiaries. The services include those needed to manage an
integrated workers' compensation program, including sales and marketing,
underwriting, claims management, loss control and policy administration.
Claims Management. The Company's claims management group consists of
approximately 170 claims adjusters based at the Company's headquarters and 12
field claims adjusters. The Company believes that it has developed a
sophisticated, efficient claims management system which facilitates the prompt
resolution of claims. On average, each claims adjuster has a case load of 125
outstanding claims, which the Company believes is a contributing factor in
reducing and controlling claims costs. Claims adjusters electronically track the
progress of claims filed and issue regular reviews on the status of cases. On a
bi-monthly basis, claims personnel review selected cases for changes in status
and adjustments to case-specific reserves. In order to provide consistent
service and build customer relationships, the Company assigns claims adjusters
by geographic territory. However, given the special considerations related to
medical claims, the Company has established a designated medical claims
management group which is utilized for medical related claims in all
territories.
Underwriting and Loss Control. The Company's services include
assisting the Funds, the Insurance Subsidiaries and other clients with
formulating their underwriting guidelines and then implementing those guidelines
on behalf of the client. Management believes that one of the Company's most
valuable services for its clients, and one of the ways that the Company is able
to minimize its own insurance risks, is the
37
<PAGE> 209
Company's general practice of recommending for membership in a Fund, or for
issuance of a policy, those employers who fit the Company's underwriting
criteria. Prior to recommending that the client or the Insurance Subsidiaries
accept a risk, the Company's underwriters review the employer's prior loss
experience and safety record, premium payment and credit history, employment
classifications and physical operation. As part of the Company's ongoing loss
control efforts, each employer undergoes a semi-annual review of its coverage.
After accepting an employer for workers' compensation coverage, the second
phase is to help the employer manage its safety risks. The Company employs a
staff of approximately 25 loss control field representatives whose goals include
visiting new employees within 90 days of coverage. Loss control professionals
complete training programs upon joining the Company, and many come with
certifications and professional designations for loss control and safety. Loss
control representatives assist employers in developing and monitoring safety
programs to reduce work related injuries and health hazards. After evaluating an
employer's loss profile, a loss control field representative will help develop a
loss control program and establish accident reporting and claims investigation
protocol. A primary objective for field representatives is to educate employers
on necessary safety systems and health issues which will enable the employers to
manage their own risk.
In an effort to evaluate the underwriting process and provide an early
warning system, the underwriting department, in cooperation with the loss
control department, produces a monthly computer-generated report identifying
specific employers where excessive losses have occurred. Triggered by these
reports, loss control representatives inspect the employer's operations and
issue recommendations based on their findings. Further, loss control
representatives conduct periodic spot checks to determine the effectiveness of
specific recommendations.
Sales and Marketing. All of the Company's products and the Fund
memberships are sold through independent insurance agents. The Company's sales
and agency relations department and telemarketing department work with more than
1,000 independent insurance agencies. The Company's agency executives are sales
professionals who work closely with the larger agencies, maintaining regular
communications with the agencies and keeping them up to date on the Company's
products and services, as well as developments and trends in workers'
compensation insurance. The Company's telemarketing representatives maintain
contact with the smaller agencies by telephone, keeping those agencies informed
about products, services and trends. Often, the Company's agency executives work
with the independent agents in making presentations to potential clients. The
sales department is responsible for maintaining the record of accounts for each
agent and ensuring that proper commissions are paid in a timely manner. Sales
conferences and seminars are held regularly for agents and their staffs.
The Company's creative services department supports the sales and agency
relations functions. This seven-person department functions as an in-house
advertising agency to produce brochures, newsletters, posters, videos and other
visual presentations to assist the independent agents, and in turn their
clients, in understanding how the Company's products and services can satisfy an
employer's workers' compensation insurance needs. The creative services
department also provides a service to members of the Funds by informing them
about developments in safety, claims and other areas of workers' compensation
through internally generated newsletters and articles in trade publications.
Policy Administration. It is an objective of the Company to provide
every insured and Fund member and their employees with timely and quality
service. The Company maintains a group of approximately 30 client service
personnel who answer all incoming client telephone calls and handle other
requests for customer support. These personnel coordinate with the sales force
and field personnel, and they are responsible for maintaining a client database.
In addition, the Company has a group of approximately 20 persons who perform
premium audits, working both internally at the Company's headquarters and in the
field at client sites. These auditors are responsible for making certain that
the payrolls and job classifications for each insured and Fund member are
accurately reflected in the premium amounts charged for coverage. The field
auditors generally conduct a premium audit for every insured and Fund member on
an annual basis. Separately, the Company has a team of approximately 15
individuals who handle collections and disputes related to premiums.
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<PAGE> 210
Primary Customers. The Company's primary customers for its
administrative services are its own Insurance Subsidiaries and the four Funds,
including the Florida Retail Federation Self Insurers Fund ("FRF"), the
Louisiana Employers Safety Association Self Insurers Fund ("LESA"), the
Louisiana Retailers Association Self Insurers Fund ("LRA"), and the Kentucky
Retail Federation Self Insurers Fund ("KRF"). Each of the Funds has an
administrative contract with the Company which defines the services to be
provided and establishes an administrative fee. These contracts are intended to
be long-term in nature and provide the Company broad rights, aimed at helping
ensure the continuity of the relationship. Because the Funds have no employees
and the Company manages all aspects of their relationships with agents and
members, it would be difficult for the Funds to cancel their contracts with the
Company or move the business to a new administrator.
The following table presents the Company's annual administrative fee
revenues received from each Fund:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
FRF....................................................... $32,196 $31,104 $28,990
LESA...................................................... 8,708 8,000 6,035
LRA....................................................... 4,573 4,595 3,904
KRF....................................................... -- -- 294
------- ------- -------
Total........................................... $45,477 $43,699 $39,223
======= ======= =======
</TABLE>
Such annual administrative fee revenues are generally a contractually
agreed upon percentage of each Fund's premiums. Out of such annual
administrative fees, the Company is required to pay certain direct expenses,
including agents commissions, premium taxes and reinsurance premiums.
The following describes certain information about each of the four Funds:
Florida Retail Federation Self Insurers Fund. FRF was established in
1979 as a workers' compensation self-insurance fund targeted specifically
to retailers, service providers, wholesalers and retail-related businesses
in Florida. As of September 30, 1996, FRF had approximately 7,300 member
employers and annual premiums in excess of $80 million. FRF memberships
renew each year on January 1.
Louisiana Employers Safety Association Self Insurers Fund. LESA was
established in 1982 and currently provides coverage to over 800 member
employers in Louisiana. As of September 30, 1996, LESA had annual premiums
of approximately $12 million. LESA memberships renew each year on April 1.
Louisiana Retailers Association Self Insurers Fund. LRA was
established in 1980 as a workers' compensation self-insurance fund
targeting specifically wholesalers and retail-related businesses in
Louisiana. As of September 30, 1996, LRA had over 1,250 retail member
employers and annual premiums of approximately $9 million. LRA memberships
renew each year on July 1.
Kentucky Retail Federation Self Insurers Fund. KRF is a workers'
compensation self-insurance fund for selected Kentucky retail businesses
and SCI assumed administration of KRF in July 1995. As of September 30,
1996, KRF had over 1,100 members and annual premiums of approximately $3
million. KRF memberships renew each year on January 1.
Insurance Operations. Prior to the Conversion, ESIF was one of the largest
workers' compensation self-insurance funds in Florida, with approximately 5,000
member employers and approximately $110 million in annual premiums as of
September 30, 1996. ESIF's policies renew each year on April 1.
39
<PAGE> 211
ESIF has maintained a relatively steady risk distribution of business
groups. A breakdown of all business segments is shown below:
ESIF'S RISK DISTRIBUTION
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
APPROXIMATE % OF TOTAL
INDUSTRY PREMIUMS WRITTEN
------------------------------------------------------ ---------------------------
<S> <C>
Construction.......................................... 41%
Manufacturing......................................... 18%
Wholesale and retail.................................. 15%
Service............................................... 14%
Transportation........................................ 7%
Agriculture........................................... 5%
---
Total....................................... 100%
===
</TABLE>
During 1995, in an effort to compete with those workers' compensation
insurers who issue non-assessable policies, the Company formed Bridgefield
Casualty, which is licensed to underwrite property/casualty insurance in Florida
and is capitalized with $5.7 million of cash and invested assets. Bridgefield
Casualty began offering a non-assessable workers' compensation policy in Florida
effective January 1, 1996, and as of September 30, 1996 had written
approximately 400 such policies representing approximately $6.7 million of
annual premiums. Subject to receipt of licensing approvals, Bridgefield Casualty
intends to begin selling non-assessable workers' compensation policies in
Louisiana. Future plans also include possible workers' compensation offerings in
other states as well as other property/casualty products offered to members of
the Funds.
The Company's products and rating plans encompass a continuum of options
designed to fit the needs of its insured employers and employer groups. The
basic product, accounting for approximately 70% of the Insurance Subsidiaries'
premiums in force at March 31, 1996, is a guaranteed cost contract, in which the
premium for each employer is set in advance and varies only based upon changes
in the client's operations or payroll. In return, the Company agrees to assume
statutorily imposed obligations of the employer to provide workers' compensation
benefits to its employees. The premium for such a policy depends upon the type
of work performed by the employees and the general business of the insured. An
employer large enough to qualify, typically those paying more than $25,000 in
annual premiums, may choose a different product, having its premium based on its
loss experience relative to its peers as determined over a one-year period. A
client who desires to assume a certain amount of financial risk may elect a
deductible which makes the client responsible for the first portion of any
claim. In exchange for the deductible election, the employer receives a premium
reduction. The Company also offers a loss sensitive plan (retrospective rating
plan) to employers paying more than $25,000 in annual premiums. Under this plan,
final premium for a period is determined on the basis of the insured's actual
losses during that period. The Company secures substantially all of its
retrospective liability through a combination of letters of credit, cash
deposits and other instruments.
REINSURANCE
The Company obtains reinsurance principally to reduce its net liability on
individual risks, to provide protection for catastrophic losses, and to
stabilize its underwriting results. In exchange for reinsurance, the Company
pays to its reinsurers a portion of the premiums that the Company receives.
Under the terms of its administrative services contracts, the Company
advises the Funds regarding their reinsurance needs and places such reinsurance.
The Company currently has placed specific Excess Reinsurance on behalf of each
Fund. The Company pays the Funds' reinsurance premiums out of the Company's
service fee revenues, and the cost per Fund is generally in the range of
approximately 5.5% to 7.0% of premiums earned.
With respect to the Insurance Subsidiaries, the Company currently maintains
specific Excess Reinsurance with several reinsurers, under which the reinsurers
have agreed to pay claims and claims expenses over a
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<PAGE> 212
specific dollar amount per occurrence. Specifically, Bridgefield has an
agreement with Lloyd's of London under which Lloyd's of London has agreed to pay
claims and claims expenses up to $1.5 million per claim, to the extent each
claim exceeds $0.5 million, and an agreement with National Union Insurance
Company under which that reinsurer has agreed to pay claims and claims expenses
to the extent each claim exceeds $2.0 million.
Bridgefield Casualty has an Excess Reinsurance agreement with Continental
Casualty Company under which that reinsurer has agreed to pay claims and claims
expenses up to $1.0 million per claim, to the extent each claim exceeds $0.5
million. In addition, Bridgefield Casualty has a Quota-Share Reinsurance
agreement in effect with Am Re under which Bridgefield Casualty cedes to Am Re a
percentage (currently 80%) of all written workers' compensation premiums and Am
Re assumes that same percentage of risks. This Quota Share Reinsurance allows
Bridgefield Casualty to write, within regulatory guidelines, a larger number of
policies than it could otherwise. In the event that the Quota Share Reinsurance
agreement with Am Re is terminated for any reason, Bridgefield Casualty could be
required to increase its capital substantially or reduce its level of workers'
compensation premiums, unless it is able to establish another Quota Share
Reinsurance arrangement.
Reinsurance does not legally relieve an insurer from its liability under
the workers' compensation policies it issues, but it does make the assuming
reinsurer liable to the insurer for the reinsurance ceded. Therefore, the
Company is subject to credit risk with respect to the obligations of its
reinsurers. The Company regularly performs internal reviews of the financial
strength of its reinsurers. However, if a reinsurer is unable to meet any of its
obligations to the Company under the reinsurance agreements, the Company would
be responsible for the payment of all claims and claims expenses which the
Company has ceded to such reinsurer. Pursuant to the Order, Bridgefield is
permitted to cede reinsurance only to authorized reinsurers, unless it obtains
the prior approval of the Florida DOI. See "RISK FACTORS" -- Dependence on
Reinsurance."
The Company brokers all of its reinsurance and the reinsurance purchased
for the Funds through a wholly owned reinsurance agency, which employs one
agent. The Company receives a brokerage fee from the Funds.
INVESTMENT PORTFOLIO
The Company's investment policy focuses on safety of principal, timing of
maturities to match assets and liabilities, and diversification. The Company's
investment portfolio is managed by First Union Capital Management, Smith Barney
Capital Management and Invesco Capital Management. These managers have certain
discretion to make investments on behalf of the Company, subject to regulatory
restrictions and the Company's investment policy and guidelines.
As of September 30, 1996, approximately 74% of the assets in the Company's
investment portfolio were rated AA or above by Standard & Poor's ("S&P") and
approximately 99% were either rated AA- or better by S&P or are considered Class
I under the NAIC's classification system. The average fixed-income duration of
the portfolio is approximately four years.
The composition of the portfolio as of September 30, 1995 and 1996 is
depicted in the following table.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------------
1995 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Government bonds................................... $ 94,884 41.0% $ 62,165 29.1%
Municipal bonds.................................... 67,218 29.1% 68,349 32.0%
Corporate bonds.................................... 29,162 12.6% 42,906 20.1%
Preferred stock.................................... 2,956 1.3% 3,787 1.8%
Common stock....................................... 15,228 6.6% 12,298 5.7%
Short-term investments............................. 17,176 7.4% 16,713 7.8%
Cash and cash equivalents.......................... 4,664 2.0% 7,611 3.5%
-------- ----- -------- -----
Total cash and invested assets........... $231,288 100.0% $213,829 100.0%
======== ===== ======== =====
</TABLE>
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COMPETITION
The markets for workers' compensation insurance products and services are
highly competitive. The Company's competitors include, among others, insurance
companies, specialized provider groups, in-house benefits administrators, state
insurance pools and other significant providers of workers' compensation,
administration and insurance services. A number of the Company's current and
potential competitors are significantly larger, with greater financial and
operating resources than those of the Company, and can offer their services
nationwide. After a period of absence from the market in Florida, traditional
national insurance companies have re-entered that market, thereby increasing
competition. Their presence in the Company's current market, and in markets into
which the Company might consider for expansion, will likely create greater
competition for acquisitions of workers' compensation businesses, making it more
difficult for the Company to grow by acquisition.
Competitive factors in the workers' compensation insurance field include
premium rates (in some states), levels of service, A.M. Best ratings, levels of
capitalization, quality of managed care services, the ability to reduce loss
ratios and the ability to reduce claims expenses. The Company believes that its
products and services are competitively priced. In addition, the Company
believes its premium rates are typically lower than those for clients assigned
to the state-sponsored risk pools, allowing the Company to provide a viable
alternative for employers in such pools. The Company also believes that its
level of service and its ability to reduce claims are strong competitive factors
that have enabled it to retain existing clients and attract new clients.
Competitive factors relating to the Company's administrative service products
are primarily based upon pricing, service and reputation. See "RISK
FACTORS -- Competition."
A.M. BEST RATING
A.M. Best is a rating agency that reports on the financial condition of
insurance companies. Neither of the Insurance Subsidiaries has been assigned a
rating by A.M. Best because neither company has accumulated the required five
consecutive years of operating experience. Management has met with
representatives of A.M. Best to discuss whether ESIF's prior operations might be
considered in assigning a rating to Bridgefield, but there can be no assurance
that any rating will be assigned to either Insurance Subsidiary in the near
future. See "RISK FACTORS -- Competition."
REGULATION
General. Workers' compensation and managed healthcare programs are subject
to various laws and regulations. Both the nature and degree of applicable
government regulation vary greatly depending upon the specific activities
involved. Generally, parties that actually provide or arrange for the provision
of managed care workers' compensation programs, assume financial risk related to
the provision of those programs, or undertake direct responsibility for making
payment or payment decisions for those services, are subject to a number of
complex regulatory schemes that govern many aspects of their conduct and
operations. The managed healthcare field is a rapidly expanding and changing
industry; it is possible that the applicable regulatory frameworks will expand
to have an even greater impact upon the conduct and operation of the Company's
business.
The Company's business is subject to state-by-state regulation of workers'
compensation insurance and workers' compensation insurance management services.
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. Such regulation is primarily for the benefit and
protection of covered employees and policyholders and not for the benefit of
investors. Changes in individual state regulation of workers' compensation or
managed healthcare may create a greater or lesser demand for some or all of the
Company's products and 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. In addition, many states limit the maximum
amount of dividends and other distributions that may be paid in any year by
insurance companies. This may limit the amount of distributions that may be made
by the Company's Insurance Subsidiaries. See "RISK FACTORS -- Government
Regulation."
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Premium Rate Restrictions. In general state regulations governing the
workers' compensation systems and insurance business impose restrictions and
limitations on the Company's business operations that are not imposed on
unregulated businesses. Among other matters, state laws regulate not only the
amounts and types of workers' compensation benefits that must be paid to injured
workers, but also the premium rates that may be charged by the Company to insure
employers for those liabilities. As a consequence, the Company's ability to pay
insured workers' compensation claims out of the premium revenue generated from
the Company's sale of such insurance is dependent upon the level of premium
rates permitted by state laws. In this regard, it is significant that the state
regulatory agency that regulates workers' compensation may not be the same
agency that regulates workers' compensation insurance premium rates.
In Florida, the Florida DOI approves "manual" rates for each of the
approximately 650 employment classification codes prepared and filed by the
National Council on Compensation Insurance ("NCCI"). The carriers operating in
Florida are not permitted to deviate from these approved rates, and competition
is, therefore, primarily related to service and the ability to improve insureds'
experience ratings through loss prevention and effective claims management.
Levels of benefit payments, however, are regulated by the Florida Department of
Labor and Employment Security. Sometimes, mandated benefit changes will be
coupled with permission for appropriate rate changes, but not always.
Taking a different approach, Louisiana is not an NCCI-rated state, but
instead is "open rated," meaning that carriers can apply for, and may receive,
approval to sell workers' compensation coverages at varying rates. However,
since Louisiana established a competitive state-run fund, rates have generally
followed those of the state-run fund.
In both Florida and Louisiana, the legislatures have recently abolished
systems that required carriers doing business in those states to pay residual
market assessments to the states to support the involuntary workers'
compensation markets. The Company believes that such action will have the effect
of increasing competition in both states.
Statutory Accounting and Solvency Regulations. State regulation of
insurance company financial transactions and financial condition are based on
statutory accounting principles ("SAP"). Such statutory accounting principles
differ in a number of ways from GAAP, which govern the financial reporting of
most other businesses. In general, SAP financial reports are more conservative
than GAAP financial reports, reflecting lower asset values, higher liability
values and lower equity.
State insurance regulators closely monitor the financial condition of
insurance companies reflected in SAP financial statements and can impose
significant financial and operating restrictions on an insurance company that
becomes financially impaired. Regulators generally have the power to impose
restrictions or conditions on the following kinds of activities of a financially
impaired insurance company: transfer or disposition of assets; withdrawal of
funds from bank accounts; extension of credit or making loans; and investment of
funds.
Financial and Investment Restrictions. Insurance company operations are
subject to financial restrictions that are not imposed on other businesses.
State laws require insurance companies to maintain minimum surplus balances and
place limits on the amount of insurance a company may write based on the amount
of the company's surplus. These limitations may restrict the rate at which the
Company's insurance operations can grow. Immediately following the Conversion,
the Company will meet relevant state minimum capital and surplus requirements.
State laws also require insurance companies to establish reserves for
payment of policyholder liabilities and impose restrictions on the kinds of
assets in which insurance companies may invest. These restrictions may require
the Company to invest its assets more conservatively than it would if it were
not subject to the state law restrictions and may prevent the Company from
obtaining as high a return on its assets as it might otherwise be able to
realize. See "-- Investment Portfolio" and "RISK FACTORS -- Government
Regulation." In addition, pursuant to the Order, Bridgefield is required to
maintain a deposit with the Florida DOI of $5.0 million. All net investment
income on such deposit is for the account of Bridgefield.
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In addition, under Florida law, an insurance company may not, without
regulatory approval, pay to its shareholders within a 12-month period dividends
or other distributions of cash or property, the total fair market value of which
exceeds generally the lesser of 10% of surplus or net income not including
realized capital gains. The Order requires that all dividends proposed to be
paid by the Insurance Subsidiaries be approved in advance by the Florida DOI.
However, pursuant to the Order, the Florida DOI has agreed to approve a request
for any dividend that complies with the Florida Insurance Code. This may limit
the amount of dividends that may be paid by the Insurance Subsidiaries to
Summit, which in turn may limit the amount of capital available to Summit for
debt service, expansion, dividend payments to shareholders and other purposes.
The NAIC has recently adopted risk-based capital standards to determine the
capital requirements of an insurance carrier based upon the risks inherent in
its operations. These standards require the computation of a risk-based capital
amount which is then compared to a carrier's actual total adjusted capital. The
computation involves applying factors to various financial factors to address
four primary risks: asset risk, insurance underwriting risk, credit risk and
off-balance sheet risk. These standards provide for regulatory intervention when
the percentage of total adjusted capital to authorized control level risk-based
capital is below certain levels. These standards have not yet been adopted in
Florida; however, upon the conversion to a stock insurance company and the
recapitalization, the Company expects to exceed such risk-based capitalization
levels, as recommended by the NAIC.
Special Disability Trust Fund. Florida operates a special disability trust
fund that reimburses Florida insurance carriers, self-insurance funds and
self-insured employers for certain workers' compensation benefits paid to an
employee when he or she is injured on the job and the injury merges with,
aggravates, or accelerates a preexisting injury or physical condition of that
employee. The SDTF is managed by the State of Florida and is funded through
assessments against insurance carriers, self-insurance funds and self-insured
employers providing workers' compensation coverage in Florida. The Company's
SDTF recoveries, recorded as a reduction to losses and LAE incurred, were
approximately $4.5 million, $5.7 million and $5.6 million or the fiscal years
ended March 31, 1994, 1995 and 1996, respectively. The Company's SDTF
assessments were approximately $5.6 million, $4.7 million and $5.6 million for
the fiscal years ended March 31, 1994, 1995 and 1996, respectively. In addition,
the Company's consolidated balance sheet as of September 30, 1996 included an
asset of approximately $21.1 million representing SDTF recoveries that the
Company estimated at that time it would be entitled to receive, based on claims
identified as subject to SDTF recovery and considering the Company's recovery
experience. The SDTF's assessment formula has historically yielded sufficient
revenues for annual reimbursement payments and for costs associated with
administering the SDTF, however, the SDTF has not actuarially funded its claims
liability and no reserves currently exist. A study commissioned by the State of
Florida estimated the total dollar liability of the SDTF for all future payments
required on accidents occurring on or before June 30, 1995 to be approximately
$4.7 billion on an undiscounted basis. There is no assurance that the SDTF will
have funds available in the future for the payment of claimed recoveries.
The SDTF is scheduled for further review under Florida sunset laws in the
year 2000. The Florida legislature may, however, review the SDTF earlier and no
assurance can be made with regard to the legislature's possible actions or with
regard to operations of the SDTF if any legislative changes are made. Apart from
this potential for legislative review of the viability of the SDTF, the Florida
DOI is currently reviewing its regulations with respect to how insurers and
self-insurers may account for future recoveries. There is no assurance that the
Florida DOI will continue to permit such entities to include estimated future
recoveries on their financial statements. Discontinuation of the SDTF, or
changes in its operations which decrease the availability of recoveries from the
SDTF, increase the SDTF assessments payable by the Company, or prohibit the
Company from including estimated future recoveries on its financial statements,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "RISK FACTORS -- Florida Special
Disability Trust Fund."
Participation in State Guaranty Funds. Every state has established one or
more insurance guaranty funds or associations that are charged by state law to
pay claims of policyholders insured by a company that becomes insolvent. All
insurance companies must participate in the guaranty associations in the states
where they do business and are assessable for the associations' operating costs,
including the cost of paying
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policyholder claims against an insolvent insurer. The Company's financial
performance could be adversely affected by guaranty association assessments as a
consequence of the insolvency of other insurers over which the Company has no
control.
Holding Company Act. In addition to the regulatory oversight of the
Insurance Subsidiaries, Summit will also be subject to regulation under the
provisions of the Florida Insurance Code relating to insurance holding company
systems, defined as two or more companies, one or more of which is an insurance
company. Such provisions contain certain reporting requirements, including those
requiring the ultimate parent of a Florida insurance company to file information
relating to its capital structure, ownership and financial condition and the
general business operations of its insurance subsidiary. Such holding company
laws contain special reporting and prior approval requirements with respect to
transactions among affiliates.
Possible Future Regulation. State legislatures and the federal government
have considered and are considering a number of cost containment and healthcare
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 healthcare reforms that would
adversely affect the Company.
In recent years, the state insurance regulatory framework has come under
increased federal scrutiny, and certain state legislatures have considered or
have enacted laws that altered and, in many cases, increased state authority to
regulate insurance companies and insurance holding companies. Further, the NAIC
and state insurance regulators are re-examining laws and regulations,
specifically focusing on investment laws for insurers, modifications to holding
company regulations, codification of statutory accounting practices, risk-based
capital guidelines, interpretations of existing laws and the development of new
laws. In addition, Congress and certain federal agencies are investigating the
current condition of the insurance industry in the United States to determine
whether to impose federal regulation. The Company cannot predict with certainty
the effect any proposed or future legislation or NAIC initiatives may have on
the conduct of the Company's business or the financial condition or results of
operations of the Company. See "RISK FACTORS -- Government."
DISPOSAL OF BUSINESS
The Company currently has two subsidiaries whose operations no longer fit
into the Company's overall strategic growth plan. The Company is in the process
of divesting these two subsidiaries by selling the businesses and/or their
assets, or by liquidating the subsidiaries if no acceptable buyers are found.
These two businesses are briefly described below:
Meritec Solutions, Inc. In August 1995, the Company purchased Meritec, a
software company which was previously owned by New York Life Insurance Company.
The Company paid $1.0 million for the business, which had approximately $0.3
million in cash at the time of the purchase.
Carolina Summit Healthcare, Inc. Beginning in 1995, the Company formed a
health maintenance organization in North Carolina designed to provide managed
care for Medicaid recipients and, eventually, employer groups. The Company
capitalized Carolina Summit with $3 million, and the North Carolina Department
of Insurance has granted Carolina Summit an HMO license. Other than its minimum
capital, Carolina Summit has no material assets and it has never conducted
business.
See notes 18 and 19 of the notes to ESIF's consolidated financial
statements contained elsewhere in this Prospectus.
INFORMATION TECHNOLOGY SYSTEMS
The Company's centralized information technology systems department
provides, maintains and manages the information resources for all of the
Company. The department currently has four IBM AS/400 mainframe computers
supporting approximately 430 terminals in the Company's Lakeland, Florida
headquarters and remote locations. Some 100 personal computers are used in
networks, as stand-alone units or as host-connected PCs. The Company also
maintains a number of laptop computers for field personnel. More than
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80% of the department's approximately 26 employees have been with the Company
five or more years. The department's programming staff averages 10 years of
experience. The department's personnel include full-time programmers,
quality-control engineers and operational support specialists.
EMPLOYEES
The Company employs approximately 430 full-time employees. Approximately
395 employees are based in Florida, while 35 are based in Louisiana and
Kentucky.
PROPERTIES
The Company is headquartered in Lakeland, Florida, where it leases
approximately 80,000 square feet of space in a campus of nine buildings. The
Company also leases office space including approximately 7,000 square feet in
Atlanta, Georgia (Meritec); approximately 6,000 square feet in Raleigh, North
Carolina (Carolina Summit); approximately 5,000 square feet in Baton Rouge,
Louisiana; approximately 2,000 square feet in Lexington, Kentucky; and
approximately 1,000 square feet in Ft. Lauderdale, Florida.
LEGAL PROCEEDINGS
The Company is periodically involved as plaintiff or defendant in various
legal actions incident to its business. Based upon information presently
available to it, management is not aware of any threatened or pending litigation
that is expected to have a material adverse effect on the Company or its
business.
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MANAGEMENT OF THE COMPANY
GENERAL
The Board of Directors of Summit and the Board of Trustees of ESIF are
composed of seven and six members, respectively. Listed below is certain
information about the directors, executive officers and certain key managers of
Summit and the Trustees of ESIF.
<TABLE>
<CAPTION>
YEAR OF
YEAR FIRST EXPIRATION OF
ELECTED AS TERM AS
TRUSTEE OF DIRECTOR
NAME AGE POSITION WITH SUMMIT AND ESIF ESIF OF SUMMIT
- ----------------------------------- --- ------------------------------- ---------- -------------
<S> <C> <C> <C> <C>
Directors and Executive Officers:
William B. Bull.................... 48 President, Chief Executive -- 1997
Officer and Director of Summit
Russell L. Wall.................... 53 Vice President of Finance of -- --
Summit
Greg C. Branch..................... 49 Chairman of the Board of 1980 1998
Directors of Summit and of the
Board of Trustees of ESIF
C. C. Dockery...................... 63 Director of Summit and Trustee 1987 1999
of ESIF
John A. Gray....................... 51 Director of Summit and Trustee 1979 1997
of ESIF
Robert L. Noojin, Sr............... 62 Director of Summit and Trustee 1979 1998
of ESIF
Thomas S. Petcoff.................. 48 Director of Summit and Trustee 1987 1997
of ESIF
Robert Siegel...................... 65 Director of Summit and Trustee 1978 1999
of ESIF
Other Key Managers:
Allen C. Bennett................... 47 Vice President of Summit Loss -- --
Control Services, Inc.
David T. Cederholm................. 51 Vice President, Operations of -- --
Bridgefield Casualty
Timothy J. Ermatinger.............. 47 Vice President of Operations of -- --
SHC
Ricky T. Hodges.................... 42 Vice President of Claims of -- --
Summit Claims Management, Inc.
</TABLE>
William B. Bull has served as President and Chief Executive Officer of SHC
and its predecessors since 1987 and as President, Chief Executive Officer and a
director of Summit since November 1996. Mr. Bull joined SCI in 1984 as special
assistant to the President and subsequently became Executive Vice President in
1985 with operating responsibilities for such company. Mr. Bull is a member of
various insurance associations and serves on numerous boards including: the
Florida Association of Self-Insurance, Florida Retail Federation, Florida Group
Risk Administrators Association and First Union National Bank of Polk County.
Russell L. Wall has served as Vice President of Finance of SHC since 1988
and has served Summit in the same capacity since November 1996. Mr. Wall is
responsible for the Company's accounting, data processing and client service
operations. Before joining SHC, Mr. Wall worked for three years as a Portfolio
Manager for Eickhoff & Pieper, Inc. Mr. Wall is a Chartered Financial Analyst
and holds an M.B.A. in Finance from the University of Santa Clara.
Greg C. Branch has served as Chairman of the Board and a Trustee of ESIF
and its predecessors since 1980 and has served as Chairman of the Board and a
director of Summit since November 1996. Mr. Branch
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has served as President of Branch Properties, Inc., a manufacturer, wholesaler
and retailer of animal feeds and fertilizer located in Ocala, Florida since
1973. Mr. Branch is Vice Chairman and a founding director of American Feed
Industry Insurance Company, a property and casualty insurer domciled in Iowa.
C.C. Dockery founded and remained involved with SCI from 1977 until A&A
purchased SCI in 1984. Mr. Dockery was first elected as a Trustee of ESIF and
its predecessors in 1987 and was elected as a director of Summit in November
1996. Since 1982, Mr. Dockery has been the President, Chief Executive Officer
and majority shareholder of Crossroads Insurance Company, Ltd., a reinsurance
company located in Bermuda. For 21 years, Mr. Dockery served as a director for
Cotton States Mutual Insurance Company, and its affiliate Cotton States Life
Insurance Company, a publicly traded life insurance provider located in Atlanta,
Georgia.
John A. Gray has served as a Trustee of ESIF and its predecessors since
1979 and as a director of Summit since November 1996. Since 1992, Mr. Gray has
served as President of B.F. Deal, Inc., a yacht brokerage and charter company,
and since 1993 has served as Vice President of Marine Resources Management,
Inc., a supplier of marine equipment. From 1975 until his retirement in 1992,
Mr. Gray was President of Dura-Stress, Inc., a manufacturer of pre-stressed and
precast concrete products, located in Leesburg, Florida.
Robert L. Noojin, Sr. has served as a Trustee of ESIF and its predecessors
since 1979 and as a director of Summit since November 1996. Prior to his
retirement in 1994, Mr. Noojin was President of Eagle Supply, Inc., a roofing
supply company headquartered in Tampa, Florida, and a subsidiary of TDA
Industries, Inc. Mr. Noojin currently serves as Chairman Emeritus of Eagle
Supply, Inc.
Thomas S. Petcoff was employed by and involved with SCI from 1977 until A&A
purchased SCI in 1984. Mr. Petcoff was first elected as a Trustee of ESIF and
its predecessors in 1987 and was elected as a director of Summit in November
1996. Mr. Petcoff also serves on the Board of Trustees of FRF and the Board of
Directors of the Florida Retail Federation Association. Since 1984, Mr. Petcoff
has served as President of Centurion Insurance Services, Inc., an insurance
consulting firm and sales agency.
Robert Siegel has served as a Trustee of ESIF and its predecessors since
1978 and as a director of Summit since November 1996. Mr. Siegel is President of
Siegel Gas & Oil Products, which he founded in 1957 and which is located in
Miami, Florida.
Following is certain information about other key employees of the Company:
Allen C. Bennett has served as Vice President of Summit Loss Control
Services, Inc., ("SLCS") a wholly owned subsidiary of SCI, since 1987. Mr.
Bennett is responsible for overseeing the daily operations and staff of such
entity. For two years prior thereto, Mr. Bennett worked at SLCS as a director
and a field loss control consultant.
David T. Cederholm has served as Vice President, Operations of Bridgefield
Casualty since January 1996. Since September 1996, Mr. Cederholm has also served
as a director and Vice Chairman of Bridgefield Casualty. From May 1995 until
January 1996, Mr. Cederholm worked as the Assistant to the President of SCI.
From December 1993 until April 1995, Mr. Cederholm served as Vice President,
Atlantic Region of TIG Insurance Company in New York, New York with
responsibility for overseeing and managing the underwriting facilities in the
eastern United States. Form December 1992 through December 1993, Mr. Cederholm
served as President, Production Group of Continental Risk Management Services, a
property and casualty insurance company located in New York, New York, were he
was responsible for underwriting and production. For approximately six years
prior thereto, Mr. Cederholm served as President of Continental Special Risk
Underwriters, in New York, New York, overseeing the large account casualty
underwriting unit of Continental Insurance.
Timothy J. Ermatinger has served as Vice President of Operations of SCI
since January 1996. From August 1995 through December 1995, Mr. Ermatinger
worked as the Assistant to the President of SHC. Between February 1993 and
January 1995, Mr. Ermatinger served as Vice President and Chief Financial
Officer of Independence One Mortgage Corp., a wholly owned subsidiary of
Michigan National Bank. From
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<PAGE> 220
May 1986 to February 1993, Mr. Ermatinger was the Executive Vice President of
Alexsis, Inc., a third-party insurance administrator concentrating in property
and casualty claims.
Ricky T. Hodges has served as Vice President of Claims of Summit Claims
Management, Inc.("SCMI") since September 1991. Mr. Hodges has worked as SCMI in
various capacities since January 1984. Mr. Hodges is the current chairman of the
Florida Workers' Compensation Advisory Council, President of the Workers'
Compensation Claims Professionals and chairman for the Adjustor Board
Certification Program in Florida.
The Articles of Incorporation of Summit provide for staggered terms of the
members of the Board of Directors. Summit's Board of Directors is divided into
three classes designated as Class I, Class II and Class III. The current terms
of office of the Class I directors will expire at the first annual meeting of
shareholders in 1997; the current terms of office for the Class II directors
will expire at the annual meeting of shareholders in 1998; and the current terms
of office for the Class III directors will expire at the annual meeting of
shareholders in 1999, and in each case upon the election and qualification of a
successor. At each annual meeting of shareholders commencing with the meeting
held in 1997, the successors to the directors whose terms are expiring will be
elected to terms expiring at the third succeeding annual meeting of
shareholders. The division of directors into three classes is to be nearly as
equal as possible, with the Class I, Class II and Class III directors currently
consisting of three, two and two directors, respectively.
The Bylaws of Summit require the Board of Directors to designate from among
its members an Audit Committee and a Compensation Committee. The Audit Committee
has the responsibility to oversee the auditing procedures of the Company,
receive and accept the reports of the Company's internal systems of accounting
and management controls and make recommendations to the full Board of Directors
as to the selection and appointment of auditors for the Company. The
Compensation Committee has the responsibility to make relevant compensation
decisions of the Company.
Director Compensation. Each non-employee member of the Board of Directors
of Summit receives a fee of $10,000 per year and an additional $2,500 for
attendance at each meeting of the Board of Directors of Summit. In addition,
members of committees of the Board of Directors receive a fee of $2,500 for
attendance at each committee meeting. All meetings of the Board of Directors of
the Insurance Subsidiaries and the Administrative Subsidiaries are to be held in
conjunction with meetings of the Board of Directors of Summit, and no additional
compensation is received for being a member of the Board of Directors of any
such subsidiaries.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Greg C. Branch, C.C. Dockery
and Thomas S. Petcoff, each of whom was elected to such position upon the
formation of the Compensation Committee on November 20, 1996. Mr. Branch has
served as a Trustee of ESIF and its predecessors since 1980 and Chairman of the
Board of ESIF since 1994, and has served as Chairman of the Board and a director
of Summit since November 15, 1996. Mr. Dockery founded SCI in 1977, was first
elected as a Trustee of ESIF and its predecessors in 1987 and was first elected
as a director of Summit on November 15, 1996. Mr. Petcoff was an employee of,
and involved with, SCI from 1977 to 1989; he had been a Trustee of ESIF and its
predecessors since 1987, and he had been a director of Summit since November 15,
1996.
C.C. Dockery and Thomas S. Petcoff, directors of Summit, own 80,000 square
feet of office space in Lakeland, Florida and lease such space to SCI. The
property is currently rented by SCI for approximately $90,000 per month under a
lease which runs through March 2000. During the fiscal years ended March 31,
1994, 1995 and 1996, SCI made rental payments of approximately $1.1 million,
$1.2 million and $1.1 million, respectively, for such property.
Mr. Dockery is also the President, Chief Executive Officer and majority
shareholder of Crossroads Insurance Company, Ltd. ("CROSSROADS"), which provides
Excess Reinsurance to ESIF and the Funds. During the fiscal years ended March
31, 1994, 1995 and 1996, the Company paid Crossroads approximately
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$16.4 million, $12.1 million and $9.6 million, respectively, in premiums for
reinsurance relating to ESIF and the Funds. In addition, in each of the years
1988 through 1995, Crossroads ceded 50% of its underwriting risk to U.S.
Employers Insurance Company, a wholly owned subsidiary of ESIF.
Mr. Dockery is the Chairman of the Board of Dockery Management Corporation,
which subleases approximately 2,600 square feet of office space from the
Company, pursuant to a sublease agreement which expires in March 2000 and
provides for rent of approximately $2,800 per month. During the fiscal years
ended March 31, 1994, 1995 and 1996, the Company received approximately $34,000,
$36,000 and $36,000, respectively, in rental payments from such entity.
Mr. Dockery is the President and owner of Dockery Leasing Corporation
("DOCKERY LEASING") which provides aviation services for the Company. During the
fiscal years ended March 31, 1994, 1995 and 1996, the Company paid Dockery
Leasing approximately $32,000, $43,000 and $32,000, respectively, for such
services.
Mr. Dockery was an underwriting member (name) of Lloyds of London from 1984
to 1996. Grey C. Branch has been an underwriting member (name) of Lloyds of
London since 1986. ESIF and the Funds have Excess Reinsurance agreements with
Lloyds of London from time to time.
Mr. Petcoff is President of Centurion Insurance Services, Inc.
("CENTURION"). Pursuant to an agreement between SCI and Centurion dated November
1995, and in connection with Centurion's involvement in the formation of KRF,
SCI pays Centurion an annual fee equal to 1% of KRF's premiums earned in each
year. During the fiscal year ended March 31, 1996, SCI paid fees of
approximately $13,000 to Centurion.
In addition, for reinsurance policies placed by SCI on behalf of KRF which
are brokered by Centurion, Centurion is entitled to brokerage commissions.
Through the end of the fiscal year ended March 31, 1996, the first year
Centurion brokered a policy for KRF, the Company paid approximately $13,000 to
Centurion for brokerage commissions and SCI also pays Centurion agency
commissions for policies placed with the Funds through the end of the fiscal
years ended March 31, 1994, 1995 and 1996, the Company paid approximately
$2,000, $6,000 and $2,000, respectively to Centurion for such agency
commissions.
Mr. Petcoff is on the Board of one of the Funds, FRF, and, is on the Board
of Directors of the Florida Retail Federation (the "ASSOCIATION"). Pursuant to a
written arrangement between SCI and the Association, the Association, as the
sponsoring party of FRF, is entitled to 1% of such Fund's premiums earned in
each year. During the fiscal years ended March 31, 1994, 1995 and 1996, the
Company paid approximately $1.0 million, $1.0 million and $0.9 million to the
Association for such fees. In addition, during the years ended March 31, 1994,
1995 and 1996, FRF paid SCI fees for administrative services of approximately
$32.7 million, $30.5 million and $27.7 million, respectively.
EXECUTIVE COMPENSATION
Summit was incorporated on November 13, 1996 and, therefore, no executive
officer of Summit received compensation in excess of $100,000 during the fiscal
period from such date of incorporation to the date of this Prospectus (the
"Fiscal Period"). Pursuant to the terms of their respective employment
agreements with Summit, William B. Bull, the President and Chief Executive
Officer, and Russell L. Wall, the Vice President of Finance, are to receive an
annual salary of $250,000 and $230,000, respectively. See "-- Employment
Agreements."
EMPLOYMENT AGREEMENTS
In November 1996, Summit entered into an employment agreement with Mr. Bull
pursuant to which he is employed full-time as the Summit's President and Chief
Executive Officer. The agreement, which expires on the fifth anniversary of the
date thereof, provides for an annual base salary of $250,000 and the right for
Mr. Bull to receive a bonus in each year of the agreement equal to 5% of the
amount, if any, by which the Company's consolidated net income after taxes
exceeds $6,000,000. In addition to his cash compensation, Mr. Bull receives
additional benefits, including those generally provided to other employees of
the Company. The agreement also provides, in the event of its expiration or
termination, that: (i) Mr. Bull is to be subject to
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a two-year confidentiality period and limitation on the use of trade secrets,
and (ii) Mr. Bull is subject to up to a one-year non-competition and
non-solicitation arrangement with the Company for which he would receive
$8,333.33 per month as consideration for such non-competition and
non-solicitation arrangement.
Summit also entered into an employment agreement with Russell L. Wall in
November 1996, pursuant to which he is employed full-time as Summit's Vice
President and Chief Financial Officer. The agreement, which expires on the third
anniversary of the date thereof, provides for an annual base salary of $230,000
and the right for Mr. Wall to receive a bonus in each year of the agreement
equal to 1.67% of the amount, if any, by which the Company's consolidated net
income after taxes exceeds $8.25 million in calendar year 1997 and $12.16
million in each of calendar years 1998 and 1999. In addition to his cash
compensation, Mr. Wall receives additional benefits, including those generally
provided to other employees of the Company. The agreement also provides, in the
event of its expiration or termination, that: (i) Mr. Wall is to be subject to a
two-year confidentiality period and limitation on the use of trade secrets, as
such term is defined therein, and (ii) Mr. Wall is subject to up to a one year
non-competition and non-solicitation arrangement with the Company. The agreement
further provides for a payment of $8,333.33 per month as consideration for such
non-competition and non-solicitation arrangement.
401(K) PLAN
The Company has adopted the 401(k) Plan, which is intended to qualify under
Section 401(a) of the Tax Code, so that contributions thereto by employees or
the Company and income earned on such contributions would not be taxable to
employees until withdrawn from the 401(k) Plan. All employees of the Company who
have attained the age of 21 and who have completed at least 90 days of service
with the Company are eligible to participate in the 401(k) Plan. The 401(k) Plan
provides that each participant may make elective contributions of up to 16% of
his or her compensation, subject to statutory limits. The Company currently
intends to make matching contributions to the 401(k) Plan on behalf of each
eligible employee is an amount equal to approximately 75% of the employee's
contributions, up to 6% of such employees compensation. In addition, in
connection with the Conversion, the Company intends to make a contribution on
behalf of all persons who are otherwise eligible for the 401(k) Plan on the
Effective Date, of 100 shares of Common Stock (the "CONVERSION CONTRIBUTION"),
subject to IRS limitations. All contributions by employees are fully vested and
are not subject to forfeiture. A participant would vest in contributions made by
the Company to the 401(k) Plan, including the Conversion Contribution, at the
following rates: (i) for less than three "years of service" (as defined in the
401(k) Plan) with the Company, 0%; (ii) for three years of service with the
Company, 33 1/3%; (iii) for four years of service with the Company, 66 2/3%; and
(iv) for five or more years of service with the Company, 100%. Contributions to
the 401(k) Plan may be invested in various available investment alternatives at
the discretion of the participant. Distributions may be made from a
participant's account in the form of a lump sum upon termination of employment,
retirement, disability, death or in the event of financial hardship, subject to
certain limitations as set forth in the 401(k) Plan.
INCENTIVE PLAN
The Board of Directors and shareholders of Summit have adopted the
Incentive Plan. Under such Incentive Plan, certain directors, officers and other
employees of Summit and its subsidiaries can be granted a variety of long-term
incentives, including non-qualified stock options, incentive stock options,
grants of restricted and unrestricted stock, performance share awards, stock
appreciation rights, dividend equivalents and other stock-based awards. The
purpose of the Incentive Plan is to promote the success, and enhance the value,
of Summit and its subsidiaries by linking the personal interests of their
directors, officers and key employees to those of Summit shareholders and by
providing their directors, officers and key employees with an incentive for
outstanding performance.
The Incentive Plan will be administered by the Compensation Committee of
Summit, consisting of three non-employee directors. Such Committee which will
determine, in its discretion, among other things, which directors, officers and
employees will receive awards under the Incentive Plan, when the awards will be
granted, the type of awards to be granted, the number of shares or cash involved
in each award, the time or times when any options granted will become
exercisable and, subject to certain conditions, the price and
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duration of such options. A total of 500,000 shares of Common Stock have been
reserved for issuance under the Incentive Plan.
The Board of Directors or the Compensation Committee has the right at any
time to amend or discontinue the Incentive Plan without the consent of Summit's
shareholders or optionees, provided that no such action may adversely affect
awards previously granted without the recipient's consent.
The Incentive Plan provides that in the event of a "change of control" (as
defined in the Incentive Plan) of Summit, all awards granted under the Incentive
Plan that are in the nature of rights that may be exercised shall automatically
become fully exercisable. In addition, at any time prior to or after a change of
control, the Compensation Committee may accelerate awards and waive conditions
and restrictions on any other awards under the Incentive Plan to the extent it
may determine appropriate.
Stock Options. Options granted under the Incentive Plan may be either: (i)
options intended to qualify as incentive stock options under Section 422 of the
Tax Code, or (ii) non-qualified stock options. Incentive stock options may be
granted under the Incentive Plan to employees of Summit and its subsidiaries.
Non-qualified stock options may be granted to directors, officers or employees
of Summit and its subsidiaries. Options may be made exercisable in specified
installments.
The exercise price of incentive stock options, as determined by the
Compensation Committee, may not be less than the fair market value of the Common
Stock on the date of grant and the term of any such option may not exceed ten
years from the date of grant. With respect to any participant in the Incentive
Plan who owns shares representing more than 10% of the voting power of the
outstanding capital shares of Summit, the exercise price of any incentive stock
option may not be less than 110% of the fair market value of such shares on the
date of grant and the term of such option may not exceed five years from the
date of grant. The exercise price of non-qualified stock options is determined
by the Compensation Committee on the date of grant, and the term of such option
may not exceed ten years from the date of grant.
To date, Summit has not granted any awards under the Incentive Plan. In
connection with the Conversion, Summit plans to grant stock options on the
Effective Date to the following directors and executive officers of Summit to
purchase the following number of shares of Common Stock at the same price as the
shares offered hereby: William B. Bull -- 90,000; Russell L. Wall -- 45,000;
Greg C. Branch -- 60,000; C.C. Dockery -- 60,000; John A. Gray -- 33,000; Robert
L. Noojin, Sr. -- 33,000; Thomas S. Petcoff -- 36,000; and Robert
Siegel -- 33,000. The options to be granted to Mr. Bull and Mr. Wall will be
incentive stock options and will vest 50% in 1997 and 50% in 1998, provided that
such officer remains employed by Summit. The options to be granted to the other
named persons will be non-qualified stock options and will vest 180 days after
the Effective Date, provided that each such person remains a director of Summit.
Performance Awards. The Compensation Committee may grant performance
awards entitling the participant to receive Common Stock based upon the
achievement of individual or Company performance goals and upon such other
conditions as the Compensation Committee may determine.
Restricted Stock. A specified number of shares of Common Stock may be
awarded contingently subject to a substantial risk of forfeiture to Summit under
such conditions, and during such periods of time, as the Compensation Committee
may determine ("RESTRICTED STOCK"). A participant who has been awarded
Restricted Stock may, if the award so provides, vote and receive dividends on
such shares, but, generally, may not sell, assign, transfer, pledge or otherwise
encumber the shares during the restricted period. An award of Restricted Stock
may provide that if a participant's employment ceases prior to the end of the
restricted period, all of the participant's Restricted Stock will be forfeited.
Grants may be made without consideration or in consideration of a payment by the
participant that is less than the fair market value of the shares on the grant
date.
Unrestricted Stock. The Compensation Committee may also grant shares (at
no cost or for a purchase price determined by the Compensation Committee) which
are free from any restrictions ("UNRESTRICTED STOCK"). Unrestricted Stock may be
issued in recognition of past services or other valid consideration, and may be
issued in lieu of cash compensation due to the recipient.
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Stock Appreciation Rights. Stock appreciation rights ("SARS") may be
granted to employees which, upon the exercise thereof, entitle the employee to
receive an amount equal to the excess of the market price of the Common Stock
over the grant price of the SAR, as determined by the Compensation Committee.
Such grant price may not be less than the fair market value of a share of Common
Stock on the date of grant in the case of any SAR related to an incentive stock
option.
Dividend Equivalents. The Compensation Committee may grant to a
participant who has received incentive stock options or SARs the right to
receive payments equal to dividends with respect to all or a portion of the
number of shares subject to such incentive stock options or SARs.
As soon as practicable after the Effective Date, Summit intends to file
with the Commission a registration statement on Form S-8 covering the Common
Stock that may be issued upon exercise of options granted under the Incentive
Plan as well as shares that may be granted under such plan and shares that may
be granted pursuant to the Conversion Contribution, thus permitting the resale
of such Common Stock by non-affiliates in the public market without restriction
under the Securities Act.
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CERTAIN TRANSACTIONS
Aeromech, Inc. ("AEROMECH"), an entity in which Mr. Bull currently owns
approximately 10% of the outstanding shares, has provided services to SCI in the
form of airplane maintenance, hangar leasing and office space for the crew since
October 1994. During the fiscal years ended March 31, 1995 and 1996, SCI paid
Aeromech $62,000 and $420,000, respectively, for such services.
SCI had an arrangement with BJ Limo Services, Inc. ("BJ"), a Company in
which Mr. Bull owns 50% of the outstanding stock, pursuant to which BJ provided
the employees of the Company limousine services and, on occasion, the use of a
private airplane and charter boat. This agreement was terminated by the Company
in February 1996. During the fiscal years ended March 31, 1994, 1995 and 1996,
the Company paid approximately $38,000, $17,000 and $9,000, respectively, for
such services.
Mr. Bull is on the Board of Directors of the Florida Retail Federation (the
"ASSOCIATION"). Pursuant to a written arrangement between SCI and the
Association, the Association, as the sponsoring party of FRF, is entitled to 1%
of such Fund's premiums earned in each year. During the fiscal years ended March
31, 1994, 1995 and 1996, the Company paid approximately $1.0 million, $1.0
million and $0.9 million to the Association for such fees. In addition, during
the years ended March 31, 1994, 1995 and 1996, FRF paid SCI fees for
administrative services of approximately $32.7 million, $30.5 million and $27.7
million, respectively.
Any future transactions between the Company and any director, officer or
principal shareholder of the Company, or any affiliate of such a person, will be
on terms no less favorable to the Company than can be obtained from unaffiliated
third parties.
William B. Bull, President, Chief Executive Officer and a director of the
Company, may be relieved of certain personal indemnification obligations if the
Conversion becomes effective. In connection with the Acquisition, the Florida
DOI issued the January Consent Order requiring that Mr. Bull, who was at that
time President and Chief Executive Officer and a shareholder of SHC, personally
indemnify ESIF up to a maximum of $5 million for loss, injury or damage to ESIF
that may result from the parties' execution of the merger agreement pursuant to
which ESIF acquired SHC, or resulting from SHC's execution of a certain credit
agreement with the Bank. According to the January Consent Order, Mr. Bull's
indemnification obligations will decrease by $1 million for every $4 million
increase in the statutory net worth of SHC, once SHC's statutory net worth
reaches zero or greater, and such obligations will expire fully on the earlier
of January 11, 2001 or the date upon which the loans from the Bank are paid in
full. Pursuant to the Order issued by the Florida DOI, if the Conversion is not
consummated for any reason, all provisions of the January Consent Order shall be
enforceable by the parties thereto. See "RISK FACTORS -- Benefits of Conversion
to an Officer and Director," and "THE OFFERINGS -- Subscription
Offering -- Interests of Certain Persons."
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
anticipated beneficial ownership of Common Stock as of the Effective Date by:
(i) each of Summit's directors; (ii) each executive officer of Summit; and (iii)
all of Summit's executive officers and directors as a group. The Company does
not believe that any person will beneficially own more than 4.99% of the shares
of Common Stock as of the Effective Date. The number of shares of Common Stock
anticipated to be beneficially owned by each person listed below includes the
number of shares offered in the Subscription Offering to any Eligible
Policyholder with which such person is affiliated. Except as noted below, each
person listed in the table will have sole investment and voting power with
respect to the shares held by such person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OWNED OWNED
- ------------------------------------------------------------------------- ------------ -------
<S> <C> <C>
William B. Bull.......................................................... 100,000 2.0%
Russell L. Wall.......................................................... 22,727 *
Greg C. Branch........................................................... 45,455 *
C. C. Dockery............................................................ 45,455 *
John A. Gray............................................................. 4,545 *
Robert L. Noojin, Sr..................................................... 4,545 *
Thomas S. Petcoff........................................................ 9,091 *
Robert Siegel............................................................ 4,545 *
All directors and executive officers as a group (8 persons).............. 236,363 4.7%
</TABLE>
- ---------------
* Less than one percent.
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THE CONVERSION
The following summary description of the Conversion, including the Plan of
Conversion, is qualified in its entirety by reference to the Plan of Conversion,
a copy of which is filed as an exhibit to the Registration Statement at which
the Prospectus forms a part.
GENERAL
Pursuant to the Plan of Conversion, ESIF will convert from a Florida group
self-insurance fund to a Florida stock insurance company and become a wholly
owned subsidiary of Summit. Such Conversion will involve principally the
following actions, all of which will occur contemporaneously on the Effective
Date: (i) ESIF will convert from a group self-insurance fund to an assessable
mutual insurance company, an interim step required to satisfy the Florida
Insurance Code; (ii) the assessable mutual insurance company will convert to a
stock insurance company with the name Bridgefield Employers Insurance Company;
(iii) all Membership Interests will be extinguished, and the members of ESIF
will no longer be subject to any assessment for the liabilities of ESIF arising
before or after the Effective Date; (iv) Eligible Members will receive rights to
the common stock of Bridgefield, which will be exchanged for the rights to
receive the Series A Preferred Stock and the rights to subscribe for shares of
the Common Stock; (v) such Series A Preferred Stock and Common Stock
subscription rights will be issued by Summit; (vi) Bridgefield will issue all of
its common stock to Summit; and (vii) ESIF's current Constitution and Bylaws
will be replaced with the Amended Articles of Incorporation of Bridgefield and
the Amended Bylaws of Bridgefield, containing provisions appropriate for a stock
insurance company. The Conversion will not affect the insurance coverage under
ESIF's policies. On November 15, 1996, the Florida DOI approved the Plan of
Conversion, finding that the Conversion is in compliance with the Florida
Insurance Code and is equitable to ESIF's members.
REASONS FOR THE CONVERSION
The Conversion offers a number of advantages that could be important to the
future growth and performance of the Company and, therefore, beneficial to the
members of ESIF. The conversion of ESIF to a stock insurance company that is
wholly owned by a publicly traded holding company is expected to provide
improved access to the capital markets and increased flexibility for raising
additional capital and expanding through acquisitions. After completion of the
Conversion, Summit will have authority to issue capital stock that may permit
it, subject to market conditions and Florida DOI approval, to raise additional
equity capital through future sales of equity securities. Summit may also be
able to issue capital stock as payment in connection with acquisitions, subject
to Florida DOI approval. In addition, the holding company structure is expected
to provide greater flexibility for the diversification of business activities
through existing or newly formed subsidiaries of Summit or through strategic
partnerships, subject to Florida DOI approval. At the present time, the Company
has no plans with respect to additional offerings of securities or specific
acquisitions and has no specific plans for diversification. Following the
Conversion, Summit also will be able to use stock-related incentive programs to
reward and attempt to attract executives and other personnel for itself and its
subsidiaries.
Additionally, pursuant to the Conversion, the policies held by members of
ESIF will be converted from assessable policies to non-assessable policies. As a
consequence, members will no longer be subject to any assessment for the
liabilities of ESIF arising either before or after the Effective Date.
CONSIDERATION TO BE PAID TO POLICYHOLDERS
Each person who held an In-Force Policy prior to the Conversion is also a
member of ESIF and has certain Membership Interests that provide, among other
things, rights to vote for the election of trustees and rights to participate in
any distribution, of the surplus of ESIF in the event of its liquidation.
Pursuant to the Conversion, each member of ESIF will automatically relinquish
such Membership Interests but will retain all ownership rights and coverage with
respect to its In-Force Policy.
The Plan of Conversion provides that, upon the Conversion of ESIF to a
stock insurance company, each member of ESIF will no longer be subject to any
assessment for the liabilities of ESIF arising either before or
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after the Effective Date. No such assessment has been, or will be made. The Plan
of Conversion also provides that ESIF will pay each Eligible Policyholder the
following consideration (the "POLICYHOLDER CONSIDERATION"): (i) that number of
shares of Series A Preferred Stock of Summit determined in accordance with a
formula set forth in the Plan of Conversion; and (ii) subscription rights to
purchase up to 249,999 shares of Common Stock (4.99% of the Post Offering
Outstanding Shares). Eligible Policyholders will not be required to pay cash for
Series A Preferred Stock distributed to them in the Conversion, but only for
shares of Common Stock that they may purchase in the Subscription Offering.
On the Effective Date, Summit will issue the Series A Preferred Stock to
the Eligible Policyholders in exchange for their Membership Interests which,
pursuant to the Conversion, become rights to receive the common stock of
Bridgefield. Summit will then receive all of Bridgefield's common stock, and
Bridgefield will become a wholly-owned subsidiary of Summit. No shares of Series
A Preferred Stock will be issued to any person other than an Eligible
Policyholder. An aggregate of 1,639,866 shares of Series A Preferred Stock has
been allocated to the Eligible Policyholders. In approving the Plan of
Conversion, the Florida DOI determined that all of the terms thereof, including
the value of the Series A Preferred Stock proposed to be issued to the Eligible
Policyholders, are equitable to the members of ESIF.
SUBSCRIPTION OFFERING
In addition to shares of Series A Preferred Stock that will be issued to
Eligible Policyholders in the Conversion, up to 5,000,000 shares of Common Stock
are being offered pursuant to the Subscription Offering. Each Eligible
Policyholder has the right to subscribe for up to 249,999 shares of common
Stock, which is 4.99% of the Post Offering Outstanding Shares. No fewer than 100
shares of Common Stock may purchased by any person in the Subscription Offering.
Eligible Policyholders as a group may purchase in the aggregate up to 90% of the
Post Offering Outstanding Shares.
In addition to the shares of Common Stock which may be subscribed for by
Eligible Policyholders, the Management Group has subscribed to purchase up to an
aggregate of 10% of the Post Offering Outstanding Shares. However, no person,
either individually or in conjunction with any affiliated person and whether
subscribing as an Eligible Policyholder or a member of the Management Group or
purchasing shares in the Public Offering or otherwise, shall be permitted to
acquire directly or indirectly more than 249,999 shares (4.99% of the Post
Offering Outstanding Shares).
The Subscription Offering will expire at 4:00 p.m. Eastern Time on January
, 1997. The Board of Directors of Summit may, at any time prior thereto, elect
to cancel or rescind the Subscription Offering and consequently, not consummate
the Public Offering. The Subscription Offering will not be consummated in the
event that: (i) the Plan of Conversion is not approved at the Special Meeting or
(ii) the Plan of Conversion is withdrawn by the Board of Trustees of ESIF.
The Subscription Price is $11.00 per share, which was set by Summit after
consultation with Raymond James & Associates, Inc. and The Chicago Corp., and
was not based on an appraisal or any other objective factors. If the Public
Offering closes on the Effective Date, and the Public Offering Price is
different from the Subscription Price, then the effective price per share paid
by subscribers shall be adjusted to the Public Offering Price and additional
whole shares of Common Stock will be issued to subscribers or the number of
Shares of Common Stock issued to subscribers will be reduced to offset the
effect of such price difference and to assure that the price per share paid by
Eligible Policyholders and the Management Group is the Public Offering Price. No
fractional shares will be issued, but in lieu thereof, the value of such
fractional shares will be refunded to subscribers in cash within 60 days after
the Effective Date. The Public Offering Price will be determined by negotiation
between the Representatives and Summit.
While it is currently the intention of Summit to offer all or a portion of
the shares of Common Stock not subscribed for in the Subscription Offering to
the public in the Public Offering, Summit may close the Subscription Offering
without commencing or closing the Public Offering.
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PUBLIC OFFERING
If all of the shares of Common Stock offered are sold in the Subscription
Offering, there will be no Public Offering. If less than all of the shares of
Common Stock offered are sold in the Subscription Offering, the Company may, in
its sole discretion, offer all or a portion of such remaining shares in the
Public Offering. The Public Offering may, at the discretion of Summit, close on
or at any time after the Effective Date. It is anticipated that the
Representatives will act as representatives of the underwriters of the Public
Offering. Purchasers in the Public Offering are subject to the Purchase Limit,
but purchasers in the Public Offering will not be required to purchase any
minimum number of shares.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary description of Summit's capital stock. This
summary does not purport to be complete and is subject to and qualified in its
entirety by the provisions of Summit's Articles of Incorporation (the "SUMMIT
ARTICLES") and Bylaws (the "SUMMIT BYLAWS"), copies of which are included as
exhibits to the Registration Statement of which this Prospectus is a part, and
by the provisions of applicable law.
PREFERRED STOCK
Summit is authorized to issue an aggregate of 5,000,000 shares of preferred
stock, par value $10 per share. The preferred stock may be issued in one or more
series, from time to time, with such designations, rights, preferences and
limitations, including but not limited to dividend rates and conversion
features, as the Board of Directors may determine. Accordingly, preferred stock
may be issued having dividend and liquidation preferences over the Common Stock
without the consent of the holders of Common Stock. In addition, the ability of
the Board to issue preferred stock could also be used by Summit as a means of
resisting a change of control of Summit and, therefore, could be considered an
"anti-takeover" device.
Series A Preferred Stock. In connection with the Conversion, Summit will
issue 1,639,866 shares of Series A Preferred Stock. Holders of the Series A
Preferred Stock have no voting rights, except as are required by the Florida
Act, or on a matter which would adversely affect the preferences, rights or
powers of the holders of Series A Preferred Stock.
Holders of Series A Preferred Stock have no preemptive or preferential
right to purchase or subscribe for any unissued or additional authorized stock
or any securities of Summit and have no rights to convert their Series A
Preferred Stock into Common Stock or any other securities.
The rights, preferences, limitations and restrictions of the Series A
Preferred Stock are set forth in the Certificate of Designation, Preferences and
Rights of Series A Preferred Stock of Summit, a copy of which is filed as an
exhibit to the Registration Statement of which this Prospectus forms a part (the
"SERIES A DESIGNATION") and which should be read in its entirety. In summary:
(i) The Series A Preferred Stock shall, with respect to dividend
rights and rights on liquidation, dissolution and winding up of Summit,
rank prior to all classes or series of equity securities of Summit,
including the Common Stock.
(ii) The holders of Series A Preferred Stock shall be entitled to
receive, out of funds legally available for the payment of dividends, cash
dividends at the rate of 4% per annum. Such dividends shall accrue whether
or not declared by the Board of Directors, but shall be payable only as and
when declared by the Board; provided, however, that all accrued but unpaid
dividends shall be paid upon any redemption of the Series A Preferred Stock
or any Liquidation (as defined in the Series A Designation).
(iii) In the event of any Liquidation of Summit, after payment or
provision for payment of the debts and other liabilities of Summit, and
before any payment or distribution of Summit's assets shall be made or set
apart for the holders of any securities ranking junior to the Series A
Preferred Stock, the holders of the Series A Preferred Stock shall be
entitled to receive $10 per share of Series A Preferred Stock plus an
amount equal to all accrued but unpaid dividends thereon.
(iv) The Series A Preferred Stock shall be redeemable by Summit at any
time and from time to time, in whole or in part. Summit shall be required
to redeem all of the Series A Preferred Stock then outstanding within
thirty days following the tenth anniversary of the date upon which the
Series A Preferred Stock is issued; provided, however, that the Board of
Directors may elect to defer such mandatory redemption until the thirty
days following the twelfth anniversary date of the date upon which the
Series A Preferred Stock is issued if the Board causes Summit to pay,
within the thirty-day period following the tenth anniversary date, all then
accrued but unpaid dividends.
(v) The redemption price shall be $10 per share, together with an
amount equal to all accrued but unpaid dividends thereon to the date of
redemption.
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(vi) In the event that Summit enters into any Business Combination (as
defined in the Series A Designation), Summit or some other person shall
make an offer to purchase the then outstanding Series A Preferred Stock for
$10 per share plus an amount equal to all accrued but unpaid dividends.
COMMON STOCK
Summit is authorized to issue up to 20,000,000 shares of Common Stock, par
value $.01 per share. As of the date of this Prospectus, Summit had seven
shareholders of record and seven shares of Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of
record at all shareholder meetings for any purpose, including the election of
directors. There is no cumulative voting for election of directors. The Summit
Bylaws require that a majority of the issued and outstanding shares of Summit be
represented to constitute a quorum and transact business at a shareholders'
meeting.
Holders of Common Stock have no preemptive or preferential right to
purchase or subscribe for any unissued or additional authorized stock or any
securities of Summit and have no rights to convert their Common Stock into any
other securities.
Subject to the prior rights of any series of preferred stock which may from
time to time be outstanding, if any, holders of Common Stock are entitled to
receive ratably dividends when, as, and if declared by the Board of Directors
out of funds legally available therefor and, upon the liquidation, dissolution
or winding up of Summit, are entitled to share ratably in all assets remaining
after payment of liabilities and payment of accumulated dividends and
liquidation preferences on the preferred stock, if any.
OTHER CHARACTERISTICS OF CAPITAL STOCK
See "DIVIDEND POLICY" with respect to restrictions on the payment of cash
dividends and "THE OFFERINGS -- Subscription Offering -- Limitations on Common
Stock Purchases" with respect to restrictions on the purchase of securities by
any person.
ANTI-TAKEOVER PROVISIONS
Regulatory Restrictions. Section 628.461 of the Florida Insurance Code
prohibits any person, individually or in conjunction with any affiliated person
of such person, from acquiring, directly or indirectly, 5% or more of the
outstanding voting securities of a Florida-domiciled insurance company or any
controlling company thereof without prior approval of the Florida DOI. However,
a person acquiring less than 10% of such outstanding voting securities may file
with the Florida DOI a disclaimer of affiliation and control and, unless such
disclaimer is disallowed by the Florida DOI, such person will not be required to
seek prior approval of the Florida DOI for the acquisition.
Restrictions in Summit's Articles of Incorporation and Bylaws. A number of
provisions of the Summit Articles and Summit Bylaws concern matters of corporate
governance and certain rights of shareholders. The following discussion is a
general summary of certain provisions of the Summit Articles and Summit Bylaws
relating to stock ownership and transfers, the Board of Directors and business
combinations, which might be deemed to have a potential "anti-takeover" effect.
These provisions may have the effect of discouraging a future takeover attempt
which is not approved by the Board of Directors but which individual
shareholders of Summit may deem to be in their best interests or in which
shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who might desire to participate
in such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors and management more
difficult. The following description is necessarily general and reference should
be made in each case to such Summit Articles and Summit Bylaws, which are filed
as exhibits to the Registration Statement of which this Prospectus forms a part.
Board of Directors. The Board of Directors of Summit is divided into
three classes, each of which contains approximately one-third of the whole
number of the members of the Board. Each class serves a
59
<PAGE> 232
staggered term, with approximately one-third of the total number of directors
being elected each year. The Summit Articles and Summit Bylaws prohibit
cumulative voting for the election of directors.
A classified board of directors could make it more difficult for
shareholders, including those holding a majority of the outstanding shares, to
force an immediate change in the composition of a majority of the board of
directors. Because the terms of only one-third of the incumbent directors expire
each year, it requires at least two annual elections for the shareholders to
change a majority of the board of directors, whereas a majority of a
non-classified board may be changed in one year. In the absence of the
provisions of the Summit Articles and Summit Bylaws classifying the Board, all
of the directors would be elected each year.
Authorized Shares. The Summit Articles authorize the issuance of
20,000,000 shares of Common Stock and 5,000,000 shares of preferred stock. The
shares of Common Stock and preferred stock were authorized to provide Summit's
Board of Directors with as much flexibility as possible in using such shares for
financings, acquisitions, stock dividends, stock splits, employee stock options
and other similar purposes. However, these additional authorized shares may also
be used by the Board of Directors to deter future attempts to gain control of
Summit. The Board of Directors has sole authority to determine the terms of any
one or more series of the preferred stock, including voting rights, conversion
rates and liquidation preferences. As a result of the ability to fix voting
rights for a series of preferred stock, the Board has the power to issue a
series of preferred stock to persons friendly to management in order to attempt
to block a post-tender offer merger or other transaction by which a third party
seeks control, and thereby assist management to retain its position. There are
currently no plans for the issuance of preferred stock other than the Series A
Preferred Stock being offered hereby. See "DESCRIPTION OF CAPITAL
STOCK -- Preferred Stock."
Anti-Takeover Effects of Incentive Plan. The Incentive Plan provides that
in the event of a "change of control" (as defined in the Incentive Plan) of
Summit, all awards granted under the Incentive Plan that are in the nature of
rights that may be exercised shall automatically become fully exercisable. In
addition, at any time prior to or after a change of control, the Compensation
Committee may accelerate awards and waive conditions and restrictions on any
other awards under the Incentive Plan to the extent it may determine
appropriate.
Florida Corporate Law. Summit will be subject to several anti-takeover
provisions under the Florida Act that apply to a public corporation under
Florida law unless the corporation has elected to opt out of such provisions in
its articles of incorporation or bylaws. Such provisions also serve to limit
certain related party transactions otherwise permissible under the Florida Act.
Summit has not elected to opt out of such provisions.
The Florida Act contains a provision that generally provides that shares
acquired in a "control share acquisition" will not possess any voting rights
unless voting rights are approved by a majority vote of a corporation's
disinterested shareholders. A "control share acquisition" is an acquisition that
immediately thereafter entitles the acquiring party to vote in the election of
directors within any of the following ranges of voting power: (i) one-fifth or
more but less than one-third of all voting power; (ii) one-third or more but
less than a majority of all voting power; and (iii) a majority or more of all
voting power. Approval of voting rights for control shares requires: (i)
approval by each class or series entitled to vote separately, by majority of all
votes entitled to be cast by the class or series being entitled to vote as a
separate class and (ii) approval by each class or series entitled to vote
separately, by a majority of all votes entitled to be cast by that group
excluding all "control shares."
The Florida Act also contains an "affiliated transactions" provision that
generally requires two-thirds approval of holders of disinterested shares of a
Florida corporation in order to engage in a broad range of transactions with an
"interested shareholder." An "interested shareholder" is defined as a person who
together with affiliates and associates beneficially owns more than 10% of the
outstanding voting shares of the corporation. Transactions that require the
approval of two-thirds of the voting shares beneficially owned by disinterested
shareholders include: (i) mergers or consolidations with the interested
shareholder; (ii) the sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with the interested shareholders of 5% or more of either the
corporation's total assets or total outstanding shares, or representing 5% or
more of the earning power or net income of the corporation; (iii) issuance or
transfers of shares to the interested
60
<PAGE> 233
shareholder having a market value of 5% or more of the total market value of the
corporation's outstanding shares (except pursuant to the exercise of stock
warrants or rights, or a dividend or distribution made pro-rata to all
shareholders); (iv) a liquidation or dissolution of the corporation proposed by
or pursuant to in a written or unwritten agreement or understanding with the
interested shareholder; (v) a reclassification of securities or the corporate
reorganization with the interested shareholder that has the effect of increasing
the percentage voting ownership of the interested shareholder by more than 5%;
and (vi) any receipt by the interested shareholder of a benefit, directly or
indirectly, of any loans, advances, guarantees, pledges, other financial
assistance, or tax credits or advantages provided by or through the corporation.
TRANSFER AGENT
The Transfer Agent and registrar for Summit's Series A Preferred Stock and
Common Stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Conversion, Summit will have outstanding 5,000,000
shares of Common Stock and 1,639,866 shares of Series A Preferred Stock, all of
which shares will have been registered under the Securities Act and will be
freely tradable without restriction or further registration under the Securities
Act, except that: (i) those shares held by "affiliates" (as defined in Rule 144
promulgated under the Securities Act) of Summit will not be freely tradable and
(ii) shares that are sold in one or more private placements will not have been
registered under the Securities Act. Based on information provided to Summit by
its affiliates, Summit believes that approximately shares of Common
Stock, equal to % of the Post-Offering Outstanding Shares, and 2,118 shares
of Series A Preferred Stock, equal to 0.1% of the Preferred Stock to be
outstanding after the Effective Date, will be beneficially owned by affiliates
of Summit. Shares beneficially owned by affiliates of Summit and shares that are
sold in any private placements may not be sold except in compliance with the
registration requirements of the Securities Act or pursuant to an exemption from
registration, such as, in the case of the Common Stock, the exemption provided
by Rule 144 under the Securities Act. Additionally, all shares of Common Stock
held by affiliates of Summit are subject to a lock-up agreement with Raymond
James & Associates, Inc. and The Chicago Corporation that prohibits their resale
prior to 180 days after the Effective Date without the prior consent of Raymond
James & Associates, Inc.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who owns shares of Common Stock which have not been
registered under the Securities Act and as to which a minimum of two years has
elapsed since the later of the date of acquisition from and full payment to
Summit or an affiliate of Summit, and any affiliate of Summit who owns Common
Stock, will be entitled to sell, within any three-month period beginning 90 days
after the date of this Prospectus (but subject to the 180 day lock-up described
above), a number of shares of Common Stock (50,000 shares of Common Stock upon
the completion of the Conversion) that does not exceed the greater of: (i) 1% of
the then outstanding shares of Common Stock (50,000 shares of Common Stock upon
the completion of the Conversion), or (ii) the average weekly trading volume in
the Common Stock in the public market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Commission. Sales of
Common Stock pursuant to Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about Summit. Additionally, under Rule 144, any person who holds
shares of Common Stock which have not been registered under the Securities Act
(such as shares that are issued in any private placement) as to which a minimum
of three years has elapsed since the later of the date of acquisition from and
full payment to Summit or an affiliate of Summit and who is not, and for a
period of three months prior to the sale of such shares has not been, an
affiliate of Summit is free to sell such shares without regard to the volume,
manner of sale, notice and other provisions of Rule 144.
Because there is expected to be no public trading market for the Series A
Preferred Stock, shares of Series A Preferred Stock held by affiliates of Summit
are not eligible for sale pursuant to Rule 144. Affiliates who sell shares of
Series A Preferred Stock may do so only in compliance with the registration
requirements of the Securities Act or in private transactions or otherwise
pursuant to an exemption from registration.
In addition, 500,000 shares of Common Stock are reserved for issuance under
Summit's Incentive Plan and 45,000 shares of Common Stock are reserved for
issuance in connection with the 401(k) Plan. Summit
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<PAGE> 234
intends to file a registration statement on Form S-8 under the Securities Act to
register the shares of Common Stock reserved for issuance under the Incentive
Plan and the 401(k) plan within 30 days after the Effective
62
<PAGE> 235
Date. Shares of Common Stock issued under the Incentive Plan and the 401(k)
Plan. Summit intends to file a registration statement on Form S-8 under the
Securities Act to register the shares of Common Stock reserved for issuance
under the Incentive Plan and the 401(k) Plan. Shares of Common Stock issued
under the Incentive Plan and the 401(k) Plan to non-affiliates of Summit after
the effective date of such registration statement will be freely tradable in the
public market. Shares issued under the Incentive Plan and the 401(k) Plan to
affiliates of Summit after the effective date of such registration statement
will be eligible for sale pursuant to Rule 144.
Prior to the Conversion, there has been no public trading market for
Summit's securities. Summit cannot predict the effect, if any, that sales of
Common Stock or Series A Preferred Stock following the Conversion, pursuant to a
registration statement, Rule 144, or otherwise, or the availability of such
shares for sale, will have on the market price prevailing from time to time.
Sales, or the availability for sale, of a substantial amount of Common Stock or
Series A Preferred Stock could adversely affect prevailing market prices for
such stock.
63
<PAGE> 236
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters listed below, and the
Underwriters, for whom Raymond James & Associates, Inc. and The Chicago
Corporation are acting as representatives (the "REPRESENTATIVES"), have
severally agreed to purchase the respective number of shares of Common stock set
forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------------------------------------------------- ---------
<S> <C>
Raymond James & Associates, Inc. .................................................
The Chicago Corporation...........................................................
Total...................................................................
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
their counsel and to various other conditions. The Underwriters are obligated to
purchase all shares of the Common Stock offered hereby, excluding shares covered
by the over-allotment option granted to the Underwriters, if any of such shares
are purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public at the initial public offering
price per share set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession not in excess of $ . per share and
that the Underwriters and such dealers may reallow a concession not in excess of
$ per share to other dealers. The public offering price and concessions
and reallowances to dealers may be changed by the Representatives after the
initial public offering.
Summit has granted to the Underwriters an option, exercisable within 30
days after the date of the Public Offering, to purchase up to an additional
750,000 shares of Common Stock to cover over-allotments at the same price per
share to be paid by the Underwriters for the other shares offered hereby. If the
Underwriters purchase any additional shares pursuant to this option, each of the
Underwriters will be committed to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such option only to cover over-allotments ,if any, in
connection with the offering.
Summit has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Summit and its executive officers have agreed not to sell, contract to sell
or otherwise dispose of any shares of Common Stock for a period of 180 days
after the effective date of the conversion without the prior written consent of
the Representatives. See "SHARES ELIGIBLE FOR FUTURE SALE."
The Underwriters have advised Summit that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of Summit. Consequently, the Public Offering Price for the Common Stock
has been determined by negotiation between Summit and the Representatives. Among
the factors considered in such negotiations were the prevailing market
conditions, the results of operations of the Company in recent periods, the
market capitalizations and stages of development of other companies which the
Company and the Representative believed to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
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<PAGE> 237
LEGAL MATTERS
Certain legal matters with respect to the shares of the Common Stock
offered hereby will be passed upon for the Company by Alston & Bird, Atlanta,
Georgia, and McConnaughhay, Roland, Maida & Cherr, P.A., Tallahassee, Florida,
and for the Underwriters by Holland & Knight, Tampa, Florida.
EXPERTS
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1996 and for the year then ended and the consolidated financial statements
of SHC and subsidiaries for the year ended December 31, 1993, 1994, and 1995
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young, LLP, independent auditors, as set forth in their reports therein
appearing elsewhere herein and in the Registration Statement and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements of ESIF and subsidiaries as of March
31, 1994 and 1995 and for the years then ended appearing in this Prospectus and
Registration Statement have been audited by Brinton & Mendez, certified public
accountants, as set forth in their reports therein appearing elsewhere herein
and in the Registration Statement and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
In June 1996, ESIF changed principal accountants from Brinton & Mendez to
Ernst & Young, LLP to audit its financial statements. Prior thereto, Brinton &
Mendez had served as ESIF's principal accountants. Prior to the Acquisition,
Ernst & Young, LLP had served as SHC's principal accountants. The decision by
ESIF to change principal accountants was made with the approval of the Board of
Trustees as a result of the decision to pursue the Conversion.
The Company believes, and has been advised by Brinton & Mendez that it
concurs in such belief, that, during the fiscal years ended March 31, 1995 and
1994 and subsequent thereto, the Company and Brinton & Mendez did not have any
disagreement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of Brinton & Mendez, would have caused it to make
reference in connection with its report on the Company's financial statements to
the subject matter of the disagreement.
No report of Brinton & Mendez on the Company's financial statements for
either of the fiscal years ended March 31, 1995 and 1994 contained an adverse
opinion, a disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope or accounting principles. During such fiscal periods,
there were no "reportable events" within the meaning of Item 304(a)(1) of
Regulation S-K promulgated under the Securities Act.
ADDITIONAL INFORMATION
Summit has filed with the Commission, 450 Fifth Street, N.W. , Washington,
D.C. 20549, a Registration Statement on Form S-1 (the "REGISTRATION STATEMENT")
under the Securities Act. This Prospectus does not contain all the information
set forth in the Registration Statement and the exhibits thereto, as permitted
by the rules and regulations of the Commission. For further information,
reference is made to the Registration Statement and to the exhibits filed
therewith. Statements contained in this Prospectus as to the contents of any
contract or other document which has been filed as an exhibit to the
Registration Statement are qualified in their entirety by reference to such
exhibits for a complete statement of their terms and conditions. The
Registration Statement and the exhibits thereto may be inspected without charge
at the offices of the Commission, and copies or all or any part thereof may be
obtained from the Commission's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at certain of the regional offices of the Commission
located at 7 World Trade Center, New York, New York 10048, and Citicorp Center,
500 West Madison
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<PAGE> 238
Street, Suite 1400, Chicago, Illinois 60661, upon payment of the fees prescribed
by the Commission. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. Such reports, proxy
and information statements and other information may be found on the
Commission's site address, http://www.sec.gov.
Summit is not currently subject to the information reporting requirements
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). As a
result of the Conversion, Summit will become subject to the information
reporting requirements of the Exchange Act. Summit intends to furnish its
shareholders with annual reports, which will include consolidated financial
statements audited by its independent certified public accountants, and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
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<PAGE> 239
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of March 31, 1995 and 1996........................... F-4
Consolidated Statements of Income for the years ended March 31, 1994, 1995 and
1996............................................................................. F-5
Consolidated Statements of Changes in Equity for the years ended March 31, 1994,
1995 and 1996.................................................................... F-6
Consolidated Statements of Cash Flows for the years ended March 31, 1994, 1995 and
1996............................................................................. F-7
Notes to Consolidated Financial Statements.......................................... F-8
Consolidated Balance Sheets as of September 30, 1995 and 1996 (unaudited)........... F-24
Consolidated Statements of Income for the six months ended September 30, 1995 and
1996 (unaudited)................................................................. F-25
Consolidated Statements of Cash Flows for the six months ended September 30, 1995
and 1996 (unaudited)............................................................. F-26
Note to Consolidated Financial Statements........................................... F-27
SUMMIT HOLDING CORPORATION AND SUBSIDIARIES
Report of Independent Auditor....................................................... F-28
Consolidated Statements of Income for the years ended December 31, 1993, 1994 and
1995............................................................................. F-29
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1993, 1994 and 1995.............................................................. F-30
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994
and 1995......................................................................... F-31
Notes to Consolidated Financial Statements.......................................... F-32
FINANCIAL STATEMENT SCHEDULES
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
Reports of Independent Auditor on Financial Statement Schedules..................... F-36
Schedule I -- Summary of Investments as of March 31, 1996........................... F-38
Schedule IV -- Reinsurance for the years ended March 31, 1994, 1995 and 1996........ F-39
Schedule VI -- Supplemental Information Concerning Insurance Operations for the
years ended March 31, 1994, 1995 and 1996........................................ F-40
</TABLE>
Schedule II -- Condensed Financial Statements of the Registrant is omitted
due to minimal capitalization and a lack of operations to date of Summit Holding
Southeast, Inc.
All other schedules are omitted because of the absence of conditions under
which they are required or because the required information is included
elsewhere herein.
F-1
<PAGE> 240
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Employers Self Insurers Fund
We have audited the accompanying consolidated balance sheet of Employers
Self Insurers Fund (the "Company") and its subsidiaries as of March 31, 1996,
and the related consolidated statements of income, changes in equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit 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 audit provides 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 the Company
and its subsidiaries at March 31, 1996, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Jacksonville, Florida
July 31, 1996
F-2
<PAGE> 241
INDEPENDENT AUDITORS' REPORT
Board of Trustees
Employers Self Insurers Fund
Lakeland, Florida
We have audited the accompanying consolidated balance sheets of Employers
Self Insurers Fund and its subsidiaries as of March 31, 1995, and the related
consolidated statements of income, equity, and cash flows for each of the two
years in the period ended March 31, 1995. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1995 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended March 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Fund's
financial statements have been prepared in conformity with generally accepted
accounting principles applicable to stock property and casualty insurance
companies.
/s/ Brinton & Mendez
BRINTON & MENDEZ
Certified Public Accountants
Lakeland, Florida
July 26, 1996
F-3
<PAGE> 242
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1995 1996
(IN THOUSANDS) -------- --------
<S> <C> <C>
ASSETS
Cash and invested assets:
Fixed maturities, available-for-sale............................... $204,097 $178,818
Preferred stock.................................................... 1,914 3,156
Common stock....................................................... 8,978 11,095
Short-term investments............................................. 6,983 19,770
Cash and cash equivalents.......................................... 2,984 10,678
-------- --------
Total cash and invested assets............................. 224,956 223,517
Premiums receivable (net of $2,100 and $1,500 allowance for doubtful
accounts, respectively)............................................ 50,391 38,093
Accounts receivable.................................................. -- 3,157
Reinsurance recoverable.............................................. 110,141 111,519
Recoverable from Florida Special Disability Trust Fund............... 15,879 20,060
Accrued investment income............................................ 3,409 2,936
Income taxes recoverable............................................. -- 9,690
Equipment and software............................................... -- 2,529
Capitalized computer software costs.................................. -- 6,038
Value assigned to future administration of insurance contracts....... -- 6,470
Unamortized debt acquisition cost.................................... -- 709
Excess of cost over net assets of business acquired.................. -- 49,198
Deferred income taxes................................................ 19,100 16,355
Other assets......................................................... 1,330 1,907
Net assets of discontinued operations................................ -- 612
-------- --------
Total assets............................................... $425,206 $492,790
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $367,391 $387,632
Debt............................................................... -- 44,000
Unallocated policyholder remittances............................... 18,234 14,635
Accounts payable and accrued expenses.............................. 12,690 14,492
Taxes, licenses and fees........................................... 1,861 1,493
Deferred revenue................................................... 87 7,384
Federal income taxes payable....................................... 4,878 --
-------- --------
Total liabilities.......................................... 405,141 469,636
Equity:
Retained earnings.................................................. 21,474 21,659
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... (1,409) 1,495
-------- --------
Total equity............................................... 20,065 23,154
-------- --------
Total liabilities and equity............................... $425,206 $492,790
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 243
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Revenue:
Premiums earned.............................................. $148,441 $128,489 $114,893
Net investment income........................................ 10,510 12,205 13,210
Net realized investment gains................................ -- -- 4,354
Administrative fees.......................................... -- -- 7,665
Other income................................................. -- 121 206
-------- -------- --------
Total revenue........................................ 158,951 140,815 140,328
Losses and expenses:
Losses and loss adjustment expenses.......................... 108,411 69,116 94,844
Other underwriting, general and administrative expenses...... 37,121 41,546 43,657
Amortization and depreciation................................ -- -- 1,103
Interest expense............................................. -- -- 847
-------- -------- --------
Total losses and expenses............................ 145,532 110,662 140,451
-------- -------- --------
Income (loss) from continuing operations before income taxes... 13,419 30,153 (123)
Income tax expense (benefit)................................... 4,534 10,990 (505)
-------- -------- --------
Income from continuing operations.............................. 8,885 19,163 382
-------- -------- --------
Discontinued operations:
Loss from discontinued operations (net of income tax benefit
of $121).................................................. -- -- (197)
-------- -------- --------
Loss from discontinued operations.............................. -- -- (197)
-------- -------- --------
Net income........................................... $ 8,885 $ 19,163 $ 185
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 244
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION) OF
RETAINED AVAILABLE-FOR-SALE
EARNINGS SECURITY INVESTMENTS TOTAL
(IN THOUSANDS) -------- -------------------- -------
<S> <C> <C> <C>
Balance at March 31, 1993.................................. $ (6,574) $ 88 $(6,486)
Net income................................................. 8,885 -- 8,885
Change in net unrealized investment gains.................. -- (126) (126)
------- ------- -------
Balance at March 31, 1994.................................. 2,311 (38) 2,273
Net income................................................. 19,163 -- 19,163
Change in net unrealized investment gains.................. -- (1,371) (1,371)
------- ------- -------
Balance at March 31, 1995.................................. 21,474 (1,409) 20,065
Net income................................................. 185 -- 185
Change in net unrealized investment gains.................. -- 2,904 2,904
------- ------- -------
Balance at March 31, 1996.................................. $ 21,659 $ 1,495 $23,154
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 245
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------
1994 1995 1996
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................... $ 8,885 $ 19,163 185
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization and depreciation................................ 485 372 1,103
Net realized gains........................................... (14) -- (4,354)
Bad debt allowance........................................... (146) (216) (600)
(Increase) decrease in premiums receivable................... (6,964) 8,880 12,898
(Increase) decrease in accounts receivable................... (4) 14 (3,157)
Increase in reinsurance recoverable.......................... (26,563) (20,424) (1,377)
Increase in Special Disability Trust Fund recoverable........ (3,184) (5,950) (4,181)
(Increase) decrease in accrued investment income............. (398) (1,184) 473
Increase in federal income tax recoverable................... -- -- (9,690)
(Increase) decrease in deferred income taxes................. (7,535) 513 2,745
Increase in other assets..................................... -- -- (665)
Discontinued operations...................................... -- -- (612)
Increase in loss and loss adjustment expense................. 39,754 9,677 20,240
Increase (decrease) in unallocated policyholder
remittances............................................... 16,115 (2,155) (3,600)
Increase in accounts payable and accrued expenses............ 39 2,291 1,802
Increase (decrease) in taxes, licenses and fees.............. -- 1,201 (368)
Increase in deferred revenue................................. -- 86 7,298
Increase (decrease) in federal income tax payable............ -- 1,043 (4,878)
-------- -------- --------
Net cash provided (used) in operating activities............... 20,470 13,311 13,262
INVESTING ACTIVITIES
Purchase of investment securities.............................. (760,811) (859,038) (982,289)
Disposal and maturity of investment securities................. 685,168 846,575 972,918
Purchase of equipment and software............................. -- -- (2,697)
Purchase of Summit Holding Corporation......................... -- -- (37,500)
Other investing activities..................................... 68 152 --
-------- -------- --------
Net cash provided by investing activities...................... (75,575) (12,311) (49,568)
FINANCING ACTIVITIES
Increase in notes payable...................................... -- -- 44,000
-------- -------- --------
Net cash provided by financing activities...................... -- -- 44,000
-------- -------- --------
Net increase in cash and cash equivalents...................... (55,105) 1,000 7,694
Beginning cash and cash equivalents............................ 57,089 1,984 2,984
-------- -------- --------
Ending cash and cash equivalents............................... $ 1,984 $ 2,984 $ 10,678
======== ======== ========
</TABLE>
F-7
<PAGE> 246
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Employers Self Insurers Fund (the "ESIF") is domiciled in Florida as a
group self-insurance workers' compensation fund defined by section 624.4621,
Florida Statutes. ESIF is regulated by the Bureau of Self Insurance under the
Department of Insurance of the State of Florida (the "Florida DOI").
ESIF was designed to provide statutory workers' compensation coverage for
members of its wholly owned subsidiary Employers Safety Group Association, Inc.
("ESGA"). In addition to ESGA, ESIF has a wholly owned reinsurance subsidiary,
U.S. Employers Insurance, Inc. ("USEI").
ESIF is administered by Summit Consulting, Inc. ("SCI") which is wholly
owned by Summit Holding Corporation ("SHC"). Under an administrative agreement,
SCI and subsidiaries provide premium processing functions and claim processing
functions for ESIF, four other self-insurance funds and a property and casualty
insurance company. Effective January 16, 1996, ESIF and a subsidiary purchased
all of the outstanding stock of SHC (see Note 14 for further discussion of the
acquisition).
Pursuant to an Amended Plan of Conversion and Recapitalization, and subject
to certain conditions stated therein, ESIF intends to convert to a stock
property and casualty insurance company.
Consolidation and Presentation
The accompanying consolidated financial statements include the accounts,
after intercompany eliminations, of ESIF and its wholly owned subsidiaries and
have been prepared in conformity with generally accepted accounting principles
("GAAP") applicable to stock property and casualty insurance companies, which
differ from statutory accounting practices prescribed or permitted by the
Florida DOI.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Recognition of Revenues
Workers' compensation insurance premiums are based on rates established by
the National Council on Compensation Insurance ("NCCI"). Premium revenues
generally are recognized over the life of the related policies on the daily pro
rata method with a reserve for premiums earned established for the unexpired
portion of the premiums applicable to those policies. All indemnity contracts
issued by ESIF prior to March 31, 1996 have a common anniversary date of April
1, thus there was no liability for unearned premium or deferred policy
acquisition costs at March 31, 1995 or March 31, 1996.
Administrative fee revenue is recognized in proportion to the premiums
earned by the self-insurance funds at the contractual administrative fee
percentage of premiums. Adjustments to revenue for premium audits are recorded
in the period they occur. Fee for services provided to ESIF subsequent to the
date of ESIF's acquisition of SHC have been eliminated in the consolidated
statement of operations.
Reinsurance premiums ceded are recorded and recognized on a pro rata basis
of earned premium of the contract.
F-8
<PAGE> 247
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes have been provided using the liability method in accordance
with Financial Accounting Standards Board ("FASB") Statement 109, Accounting for
Income Taxes. Under that method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates.
Investments
In 1993, the FASB issued Statement 115, Accounting for Certain Investments
in Debt and Equity Securities. Statement 115 requires that debt securities are
to be classified as either held-to-maturity (carried at amortized cost),
available-for-sale (carried at market with unrealized gains or losses reported
in equity), or trading (carried at market with unrealized gains or losses
reported in net income).
ESIF believes that it has the ability and intent to hold to maturity its
debt security investments. However, ESIF also recognizes there may be
circumstances where it may be appropriate to sell a security prior to maturity
in response to unforeseen changes in circumstances. Recognizing the need for the
ability to respond to changes in tax position and in market conditions, ESIF has
designated its entire investment portfolio as available-for-sale.
Investments are reported in the accompanying balance sheets on the
following basis:
- Available-for-sale securities are reported at current market value.
Changes in market value of available-for-sale securities, after applicable
deferred income taxes, are reported as unrealized appreciation or
depreciation directly in equity and, accordingly, have no effect on net
income.
- Equity security investments, consisting of common and nonredeemable
preferred stocks, are carried at current market value with changes in such
value reported as unrealized appreciation or depreciation directly in
equity, after applicable income taxes, having no effect on net income.
- Short-term investments are reported at cost.
The cost of securities sold is based on specific identification and the
resulting realized gains and losses are included in the determination of net
income.
In the normal course of business, ESIF is party to financial instruments,
none of which have significant off-balance-sheet risk.
Loss and Loss Adjustment Expenses
The reserve for unpaid loss and loss adjustment expenses ("LAE") is based
on an independent actuarial determination and represents management's best
estimate of the ultimate cost of the loss and LAE that are unpaid at the balance
sheet date including incurred but not reported claims. The reserve for unpaid
loss and LAE is continually reviewed and as adjustments become necessary, such
adjustments are included in current operations.
The reserve for permanent indemnity disability claims has been discounted
at 4% as permitted under Florida law. For GAAP purposes, discounting is computed
based on the ESIF's anticipated payout patterns and a discount rate consistent
with that permitted by section 625.091, Florida Statutes. The amount of such
discount was $4.8 million, $4.9 million and $4.7 million at March 31, 1994, 1995
and 1996, respectively.
F-9
<PAGE> 248
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reinsurance
Under FASB Statement No. 113, Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts, all assets and liabilities related
to reinsurance ceded contracts are reported on a gross basis rather than the
previous practice of reporting such assets and liabilities net of reinsurance.
The amounts recoverable from reinsurers are classified separately on the balance
sheet.
The accompanying statements of operations reflect premiums and losses
incurred, net of reinsurance ceded (see Note 6). Reinsurance arrangements allow
management to control exposure to potential losses arising from large risks. A
significant portion of the reinsurance is effected under excess of loss
reinsurance contracts. Amounts recoverable from reinsurers are estimated in a
manner consistent with the loss and loss expense reserves associated with the
reinsured policies. Similarly, reinsurance premiums, losses and loss adjustment
expenses are accounted for on bases consistent with those used in accounting for
the related original policies issued and the terms of the reinsurance contracts.
Guaranty Fund Assessments
As a self-insurance fund, ESIF has periodically been assessed by a state
guaranty fund as part of that fund's activities to collect money from solvent
self-insurance funds to cover certain losses to policyholders of insolvent
self-insurance funds, after assessment of the policyholders of the insolvent
funds. Florida statutes limit the assessment to a maximum of 2% of direct
written premiums annually.
Because there are many uncertainties regarding the ultimate amount of
assessments, ESIF's policy has been to recognize its obligation for guaranty
fund assessments when it receives notice that an amount is payable to the
guaranty fund. At March 31, 1996, ESIF was not able to estimate reasonably the
potential effects of any future assessments and, accordingly, the accompanying
financial statements do not include any provision for such future assessments.
Assessments charged to expense during the fiscal years ended March 31, 1994,
1995 and 1996 were $-0- million, $1.5 million and $1.6, respectively. Such
assessments are credited against the Company's administrative tax.
Upon conversion to a stock property and casualty insurer, ESIF will be
subject to assessment by a separate guaranty fund. Such assessments will not be
credited against ESIF's administrative tax.
Concentrations of Credit or Financial Risk
Florida law allowed ESIF to write policies only in the State of Florida.
Therefore, all ESIF's premium revenues for the fiscal years ended March 31,
1994, 1995 and 1996 were derived from policies offered to customers located in
Florida. Accordingly, ESIF could be adversely affected by economic downturns,
significant unemployment, and other conditions that may occur from time-to-time
in Florida, which may not as significantly affect its more geographically
diversified competition.
SHC has significant amounts of revenue associated with its third-party
processing as a result of its contracts with several self-insurance funds.
Changes with respect to these contracts could adversely affect ESIF.
Intangible Assets
Cost in excess of net assets of businesses acquired totaling approximately
$49 million was recorded in conjunction with the January 1996 acquisition of
SHC. This intangible asset is being amortized on a straight-line basis over 25
years. At the balance sheet date, ESIF evaluates the recoverability of this
asset through a comparison of the forecasted operating income of the subsidiary
and the remaining asset balance.
F-10
<PAGE> 249
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESIF's cost associated with the purchase of customer listings recorded in
conjunction with the January 1996 acquisition of SHC totals approximately $6.5
million. This intangible asset is being amortized on a straight-line basis over
10 years.
Equipment and Software
Equipment and software are recorded at cost. Depreciation is computed using
the straight-line method over the useful lives of the related assets.
Cash and Cash Equivalents
ESIF considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Bad Debt Allowance
The bad debt allowance is based on ESIF's experience with uncollectible
premiums receivable and represents ESIF's best estimate of the ultimate
uncollectible amounts incurred through the balance sheet date.
2. INVESTMENTS
The amortized cost and the fair value of debt security investments are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
AT MARCH 31, 1995
U.S. Treasury and government agencies....... $ 132,116 $ 671 $2,545 $130,242
States and political subdivisions........... 60,404 324 1,023 59,705
Other debt securities....................... 14,087 72 9 14,150
-------- ------ ------ --------
Total debt securities available-for-sale...... $ 206,607 $1,067 $3,577 $204,097
======== ====== ====== ========
AT MARCH 31, 1996
U.S. Treasury and government agencies....... 57,655 487 909 57,233
States and political subdivisions........... 68,697 934 270 69,361
Industrial and miscellaneous................ 37,258 850 284 37,824
Mortgage-backed securities:
U.S. government agencies................. 14,320 240 160 14,400
-------- ------ ------ --------
Total debt securities available for sale...... $ 177,930 $2,511 $1,623 $178,818
======== ====== ====== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at March 31,
1996, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because certain borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
F-11
<PAGE> 250
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Years to maturity:
One or less............................................................ $ 2,366 $ 2,394
After one through five................................................. 58,621 58,743
After five through ten................................................. 89,727 90,094
After ten.............................................................. 12,896 13,187
-------- --------
$ 163,610 $164,418
Mortgage-backed securities............................................. 14,320 14,400
-------- --------
Total.................................................................... $ 177,930 $178,818
======== ========
</TABLE>
Proceeds from the sales of investments in debt securities during fiscal
year ending March 31, 1994 were $26.3 million. No gains or losses were realized
on those sales. Proceeds from the sales of investments in debt securities during
fiscal year ending March 31, 1995 were $21.8 million. No gains or losses were
realized on those sales. Proceeds from the sales of investments in debt
securities during fiscal year ending March 31, 1996 were $195.5 million. Gross
gains of $3.1 million and gross losses of $1.0 million were realized on those
sales.
Unrealized gains and losses on investments in preferred and common stocks
are reported directly in equity and do not affect operations. The gross
unrealized gains and losses on, and the cost and fair value of, those
investments are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
AT MARCH 31, 1995
Preferred stocks.............................. $ 1,924 $ 6 $ 16 $ 1,914
Common stocks................................. 8,717 353 92 8,978
------- ------ ---- -------
Total........................................... $10,641 $ 359 $108 $10,892
======= ====== ==== =======
AT MARCH 31, 1996
Preferred stocks.............................. $ 3,167 $ 18 $ 29 $ 3,156
Common stocks................................. 9,576 1,640 121 11,095
------- ------ ---- -------
Total........................................... $12,743 $1,658 $150 $14,251
======= ====== ==== =======
</TABLE>
Major categories of ESIF's investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from:
Bonds............................................... $ 6,829 $ 9,788 $10,923
Preferred stocks.................................... -- -- 215
Common stocks....................................... 6 16 319
Short-term investments and cash..................... 3,675 2,401 1,753
------- ------- -------
Net investment income................................. $10,510 $12,205 $13,210
======= ======= =======
</TABLE>
The Florida DOI requires cash and investments to be held in trust for the
Florida DOI for 10% of loss reserves and the 1986-1995 fund years aggregate
reserve plans. The aggregate plans approved by the Florida
F-12
<PAGE> 251
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DOI require the interest earned on the related reserves to accumulate with the
restricted principal. The reserves are reviewed annually and a revised funding
plan is submitted to the Florida DOI. At March 31, 1995 and 1996, the amount in
trust is approximately $59.1 million and $62.9 million, respectively. Subsequent
to March 31, 1996, the amount in trust was reduced to $50.9 million.
3. PROPERTY AND EQUIPMENT
The major components of equipment and software at March 31, 1996 are as
follows (in thousands):
<TABLE>
<S> <C>
Furniture, fixtures and equipment................................... $ 786
Data processing equipment........................................... 665
Airplane............................................................ 968
Leasehold improvements.............................................. 103
Software............................................................ 176
Automobiles......................................................... 17
------
2,715
Less accumulated depreciation....................................... 186
------
$2,529
======
</TABLE>
Depreciation expense for the fiscal year ended March 31, 1996 was
approximately $0.2 million. Substantially all equipment and software was
acquired in the January 1996 acquisition of SHC.
4. INTANGIBLES
The majority of ESIF's intangible assets were recorded in connection with
the acquisition of SHC and are stated at cost, which represents fair value as of
the acquisition date, less accumulated amortization, and include purchased
software, customer accounts and contracts, and the excess of the purchase price
over the fair value of identifiable net assets acquired. Purchased software,
customer accounts and contracts are being amortized on a straight-line basis
over the estimated useful lives and contract period which range from three to
ten years. The excess of cost over the fair value of identifiable net assets
acquired is being amortized on a straight-line basis over 25 years.
Intangible assets consist of the following as of March 31, 1996 (in
thousands):
<TABLE>
<S> <C>
Unamortized debt acquisition costs................................. $ 757
Purchased software................................................. 6,300
Goodwill........................................................... 49,645
Customer accounts and contracts.................................... 6,608
------
63,310
Less accumulated amortization...................................... 896
------
$62,414
======
</TABLE>
5. LEASES
SHC leases office premises and automobiles under noncancellable operating
leases which expire at various dates through the year 2001. These leases
generally contain renewal options and escalation clauses based on increases in
lessors' operating expenses and other charges. ESIF anticipates that most leases
will be renewed or replaced upon expiration.
F-13
<PAGE> 252
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum annual payments at March 31, 1996 for all noncancellable
leases are (in thousands):
<TABLE>
<S> <C>
Years ending March 31:
1997...................................................... $1,221
1998...................................................... 1,322
1999...................................................... 1,243
2000...................................................... 1,176
2001...................................................... 101
------
Total minimum future lease payments......................... 5,063
Income from subleases....................................... (124)
------
Net minimum future lease payments........................... $4,939
======
</TABLE>
In excess of 80% of the future lease commitments relates to rented office
premises from certain trustees of ESIF.
Rental expense for the fiscal year ended March 31, 1996 for operating
leases totaled approximately $0.4 million.
6. REINSURANCE
In accordance with general practice in the insurance industry, ESIF's
insurance subsidiaries are engaged in reinsurance transactions with other
companies. Reinsurance ceded contracts do not relieve ESIF and its insurance
subsidiaries from their obligation to policyholders, as they remain liable to
their policyholders to the extent that any reinsurer does not meet its
obligations for reinsurance ceded to it under reinsurance contracts. The largest
net amount insured on any one risk is $500,000 with a $750,000 deductible for
each of the fiscal years ended 1995 and 1996. Automatic reinsurance agreements
are in force with certain maximum limits, as well as excess of loss reinsurance
agreements.
Insurance premiums for the fiscal years ended March 31, 1994, 1995 and 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Direct premiums earned................................. $155,559 $135,033 $119,028
Reinsurance ceded...................................... 7,118 6,544 4,135
-------- -------- --------
Net premiums earned.................................... $148,441 $128,489 $114,893
======== ======== ========
</TABLE>
Losses and LAE incurred for the fiscal years ended March 31, 1994, 1995 and
1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Direct losses and LAE.................................. $113,321 $ 74,368 $102,832
Reinsurance ceded...................................... 4,910 5,252 7,988
-------- -------- --------
Net losses and loss adjustment expenses incurred....... $108,411 $ 69,116 $ 94,844
======== ======== ========
</TABLE>
Reinsurance ceded premiums and losses included in the preceding table
reflect the elimination of amounts assumed by USEI through retrocession by
Crossroads Insurance Company, Limited ("Crossroads") of amounts ceded by ESIF to
Crossroads as described in the following paragraph.
Of the reinsurance ceded amounts above for fiscal year ended March 31,
1996, premiums of $5.2 million, and losses and loss adjustment expenses of $0.9
million, are attributable to reinsurance agreements with
F-14
<PAGE> 253
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Crossroads, a Bermuda domiciled insurance company, in which a Trustee of ESIF
has an ownership interest. Crossroads is licensed to do business in Florida and
is a member of the Florida Insurance Guaranty Association. Fifty percent of
business ceded to Crossroads has been retroceded by Crossroads to USEI. All of
ESIF's aggregate excess reinsurance coverage for fiscal years ended March 31,
1989 through March 31, 1995 is also ceded to Crossroads. For certain fiscal
years, there is no effective aggregate excess reinsurance coverage currently in
place. At March 31, 1995 and 1996, loss and LAE reserves recoverable of $21.6
and $18.5 million, respectively, are attributable to excess reinsurance
agreements with Crossroads.
In fiscal years ended March 31, 1995 and 1996, ESIF did not commute any
ceded reinsurance nor did it enter into or engage in any loss portfolio
transfers. ESIF has no reinsurance recoverable balances with individual
reinsurers that exceed five percent of total assets.
7. FEDERAL INCOME TAXES
ESIF and its subsidiaries file a consolidated federal income tax return.
ESIF does not have a tax sharing agreement with two of its subsidiaries, ESGA
and USEI. ESIF does not collect from or refund to these subsidiaries the amount
of income taxes or benefits which would result if the entities filed separate
returns. An informal tax sharing agreement exists between ESIF and SHC such that
the amount of taxes or tax benefits are shared as if separate returns were
filed.
Income before federal income taxes differs from taxable income principally
due to tax-exempt investment income, dividends-received tax deductions, and
differences in loss and LAE discounting and unearned premium reserves for tax
and financial reporting purposes.
After carryback of the fiscal year ended March 31, 1996 operations loss to
prior years, federal income taxes of $6.9 million and $12.2 million for fiscal
years ended March 31, 1994 and 1995, respectively, would be subject to recovery
in the event that ESIF incurs net operating losses within three years of the
years for which such taxes were paid. State taxes paid were approximately $0.8
million for both fiscal years ended March 31, 1995 and 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-15
<PAGE> 254
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of ESIF's deferred tax liabilities and assets as of
March 31, as calculated in accordance with FASB 109, are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized investment gains...................................... $ -- $ 902
Reinsurance recoverables......................................... -- --
Special Disability Trust Fund recoverables....................... 511 175
Intangible assets................................................ -- 3,684
------- -------
Total deferred tax liabilities..................................... 511 4,761
Deferred tax assets:
Discount on loss and LAE reserves................................ 16,601 18,936
Unallocated remittances.......................................... 1,372 1,161
Uncollectible premiums........................................... 788 564
Other............................................................ -- 455
Unrealized investment losses..................................... 850 --
------- -------
19,611 21,116
Valuation allowance for deferred tax assets...................... -- --
------- -------
Total deferred tax assets.......................................... 19,611 21,116
------- -------
Net deferred tax assets............................................ $19,100 $16,355
======= =======
</TABLE>
ESIF has made an election under the Internal Revenue Code of 1986 to treat
income tax payments attributable to loss reserve discounting as special
estimated tax payments which are specifically recoverable upon reversal of the
discounting effects. Accordingly, the deferred tax assets attributable to loss
reserve discounting are considered to be fully recoverable. ESIF also has
significant tax loss carryback potential for the fiscal years ended March 31,
1994 and 1995. For those reasons, a deferred tax valuation allowance is not
considered necessary.
ESIF's consolidated federal income tax liability (asset) at March 31 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current.......................................................... $ 4,878 $ (9,690)
Deferred......................................................... (19,100) (16,355)
-------- --------
Total net asset.................................................. $(14,222) $(26,045)
======== ========
</TABLE>
Significant components of the provision for income taxes for the fiscal
years ended March 31, attributable to continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current tax expense (benefit)...................................... $11,388 $ 1,424
Deferred taxes..................................................... (397) (1,930)
------ ------
Total income tax expense (benefit) on income....................... $10,991 $ (506)
====== ======
</TABLE>
Income taxes paid by ESIF totaled $10.5 million, $12.2 million and $11.2
million in 1994, 1995 and 1996, respectively.
F-16
<PAGE> 255
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax expense (benefit) for the fiscal years
ended March 31, attributable to continuing operations computed at the U.S.
federal statutory tax rate of 35%, to income tax expense (benefit) is as follows
(in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Income tax (at 35% of pretax income or loss)............... $4,697 $10,554 $ (43)
Tax-exempt investment income............................... -- (673) (1,067)
Non taxable/deductible (income) expenses................... 51 579 32
Goodwill amortization...................................... -- -- 177
State income taxes......................................... (65) (600) 495
Other items, net........................................... (149) 1,130 (99)
------ ------- -----
Provision (credit) for federal income tax expense
(benefit)................................................ $4,534 $10,990 $ (505)
====== ======= =====
</TABLE>
8. LOSSES AND LAE
The reserves for unpaid losses and LAE are estimated using individual
case-basis valuations and statistical analyses. These estimates are subject to
the effects of trends in loss severity and frequency. Although some variability
is inherent in such estimates, management believes that the reserves for losses
and LAE are adequate. The estimates are reviewed annually by independent
consulting actuaries and adjusted as necessary as experience develops or new
information becomes known; such adjustments are included in current operations.
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE for fiscal years ended March 31, 1994, 1995
and 1996:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross reserve for losses and LAE, at beginning of
year.............................................. $ 361,095 $ 392,784 $ 367,391
Add: Discount on reserves........................... 4,324 4,730 4,875
Less: Impact of reinsurance for FASB 113............ (103,118) (121,463) (108,440)
Impact of implied Special Disability Trust
Fund recoverables............................. (10,550) (15,531) (24,836)
--------- --------- ---------
Net reserves for losses and LAE, at beginning of
year.............................................. 251,751 260,520 238,990
Add provision for claims occurring in:
The current year.................................. 118,889 94,520 84,058
Prior years....................................... (10,478) (25,404) 10,786
--------- --------- ---------
Incurred losses during the current year............. 108,411 69,116 94,844
Deduct payments for claims occurring in:
The current year.................................. 17,704 16,857 15,432
Prior years....................................... 81,938 73,789 67,968
--------- --------- ---------
Claim payments during the current year.............. 99,642 90,646 83,400
Net reserves for losses and LAE, at end of year..... 260,520 238,990 250,434
Add: Impact of implied Special Disability Trust Fund
recoverables................................... 15,531 24,836 31,376
Impact of reinsurance for FASB 113............ 121,463 108,440 107,092
LAE assumed through acquisition of Summit..... -- -- 3,398
Less: Discount on reserves.......................... (4,730) (4,875) (4,668)
--------- --------- ---------
Gross reserve for losses and LAE, at end of year.... $ 392,784 $ 367,391 $ 387,632
========= ========= =========
</TABLE>
F-17
<PAGE> 256
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The foregoing reconciliation also shows that a $25.4 million reserve
redundancy emerged during the fiscal year ended March 31, 1995. This amount
represents the release of certain loss reserves previously carried which were
determined, based on comparisons to actuarially projected amounts, to be
redundant. The foregoing reconciliation shows that a $10.8 million reserve
strengthening in the March 31, 1995 reserve emerged during the fiscal year ended
March 31, 1996. The increased losses and LAE expense resulted principally from
settling case reserves established in prior years for more than previously
anticipated.
Estimated future Special Disability Trust Fund ("SDTF") recoveries
implicitly netted from loss reserves on a statutory basis were grossed up for
GAAP purposes. This increased loss reserves by approximately $15.5 million,
$24.8 million and $31.4 million at March 31, 1994, 1995 and 1996, respectively,
and increased reinsurance recoverables by approximately $7.2 million, $10.3
million and $11.8 million at March 31, 1994, 1995 and 1996, respectively. In
addition ESIF has recorded, as an asset, amounts recoverable from the SDTF based
upon the ESIF's historical collection experience and the amount of claims
identified as subject to SDTF recovery. The recoverable amount recorded at March
31, 1994, 1995 and 1996 was approximately $9.9 million, $15.9 million and $20.1
million, respectively.
9. ACCRUED RETROSPECTIVE PREMIUMS
Certain workers' compensation insurance policies issued by ESIF are
retrospectively rated, and premiums are based on loss experience incurred under
these contracts to date. Accrued retrospectively rated premiums, including those
relating to bulk incurred but not reported, have been determined by or allocated
to individual policyholder accounts. These amounts are summarized as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued retrospective premium...................................... $44,837 $33,278
</TABLE>
10. EQUITY
ESIF and its insurance subsidiaries, subsequent to the conversion to a
stock property and casualty company, will have legal restrictions as to the
transfer of funds in the form of dividends, loans, and advances. These
restrictions, determined in accordance with statutory reporting practices,
generally limit the payment of dividends to amounts based upon statutory equity
or profits and limit the amount of certain investments to specified percentages
of statutory admitted assets. At March 31, 1996, under regulations applicable to
stock property and casualty insurance companies, approximately $1.6 million of
ESIF's statutory net assets of $16.3 million could be transferred from the
insurance entities subject to regulatory approval.
Net income and equity as determined in accordance with statutory accounting
practices for self-insurance funds for the three fiscal years ended March 31,
1994, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
NET INCOME
MARCH 31, SURPLUS (LOSS)
----------------------------------------------------------------- ------- ----------
(IN THOUSANDS)
<S> <C> <C>
1994............................................................. 22,311 2,511
1995............................................................. 43,046 22,286
1996............................................................. $16,373 $ (4,660)
</TABLE>
As a self-insurance fund, ESIF recorded for statutory reporting an asset of
$42.9 million and $47.3 million at March 31, 1995 and 1996, respectively, for
future investment income determined by discounting loss and LAE reserves at a
statutory prescribed rate. Upon conversion to a stock property and casualty
insurer, ESIF will be permitted to record discounts only on the indemnity
portion of permanent disability cases. The amount of such discount is estimated
at approximately $4.9 million and $4.7 million at March 31, 1995 and
F-18
<PAGE> 257
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
March 31, 1996, respectively. It is ESIF's intention to utilize proceeds of a
public offering to meet statutory basis capital and equity requirements for a
stock property and casualty company.
In order to improve the regulation of insurer solvency, the National
Association of Insurance Commissioners ("NAIC") issued a model law to implement
risk-based capital ("RBC") requirements for property and casualty insurance
companies, which are designed to assess capital adequacy and to raise the level
of protection that statutory equity provides for policyholder obligations. The
RBC formula for property and casualty insurance companies measures these major
areas of risk facing property and casualty insurers: (i) underwriting, which
encompasses the risk of adverse loss development and inadequate pricing; (ii)
declines in asset values arising from credit risk; and (iii) declines in asset
values arising from investment risks. Pursuant to the model law, insurers having
less statutory equity than required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy. Florida, ESIF's state of domicile, has yet to adopt the provisions
of the RBC model law. Upon completion of the conversion and recapitalization,
ESIF's insurance subsidiaries intend to maintain statutory basis equity in
excess of the amount required by RBC.
11. COMMITMENTS AND CONTINGENCIES
ESIF, in the normal course of business, is named as a defendant in various
legal actions arising principally from claims made under insurance policies and
contracts. Those actions are considered by ESIF in estimating the loss and LAE
reserves. ESIF's management believes that the resolution of those actions will
not have a material effect on ESIF's financial position or results of
operations.
12. CHANGE IN ACCOUNTING ESTIMATES
During the fiscal year ended March 31, 1996, ESIF refined its method of
estimating accrued retrospective premiums. This change decreased the accrued
retrospective premium asset and equity at March 31, 1996 by approximately $9.3
million and $6.0 million, respectively, and decreased operations results for the
fiscal year ended March 31, 1996 by approximately $6.0 million.
13. SPECIAL DISABILITY TRUST FUND
The State of Florida maintains the SDTF for the purpose of providing
benefits to workers who have a pre-existing condition and incur a second or
subsequent injury. The SDTF is funded through annual assessments against
workers' compensation insurers which are based on a percentage of gross workers'
compensation premiums written.
The SDTF has not charged adequate assessments to actuarially fund its
claims liability. In 1996, the Florida legislature reauthorized the SDTF for
four years, however, in the future the Florida legislature may impose greater
assessments on insurance carriers, such as ESIF, to satisfy pending claims.
Moreover, it is not possible to predict how the SDTF will operate, if at all, in
the future after the reauthorized period. Changes in the SDTF's operations which
decrease the availability of recoveries from the SDTF, or increase the SDTF
assessments payable by ESIF, or changes in regulations which further limit
ESIF's ability to reduce statutory basis loss reserves for a portion of SDTF
future recoverable amounts, may have a material adverse effect on ESIF's
business, financial condition or results of operations. Discontinuance of the
SDTF could have either a favorable or unfavorable effect on ESIF depending on
the relation of the amount of assessments by SDTF to the amount of recoveries
from SDTF.
Loss and LAE reserves included in the accompanying financial statements are
presented gross of future SDTF recoveries and have been determined using
historical loss data which excludes SDTF recoveries.
F-19
<PAGE> 258
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESIF has recorded an SDTF recoverable of $15.8 and $20.1 million at March
31, 1995 and 1996, respectively, for the estimated amounts expected to be
received from the SDTF. The estimated amount of recoveries was based on claims
identified as subject to SDTF recovery as well as ESIF's recovery experience.
Amounts recovered from SDTF for the fiscal years ended March 31, 1994, 1995
and 1996 were $4.5 million, $5.6 million and $5.6 million, respectively.
Assessments paid by ESIF to the SDTF were $5.6 million, $4.7 million and $5.6
million for the fiscal years ended March 31, 1994, 1995 and 1996, respectively.
ESIF records assessments from SDTF as premiums are written.
14. ACQUISITION OF SUMMIT HOLDING CORPORATION
On January 16, 1996, ESIF purchased all of the outstanding capital stock of
SHC. The purchase price consisted of $26.0 million paid in cash by ESIF, $11.5
million in cash distributed by SHC, and $44.0 million of debt incurred by SHC
(see Note 15). SHC is a third party administrator which provides insurance
related services (including marketing, policy issuance and servicing, claims
processing and administration, loss control, brokerage, audits, financial and
data processing services and risk management services) to ESIF, four other
self-insurance funds and a property and casualty insurance company. The
acquisition was accounted for using the purchase method, and the results of
operations of SHC are included in the consolidated statement of operations from
the date of acquisition.
The following unaudited proforma information presents the consolidated
results of operations of ESIF and SHC as if the acquisition had been effective
at April 1, 1994 and April 1, 1995, respectively, after giving effect to
adjustments to reflect the acquisition. This information is intended for
informational purposes only and may not be indicative of ESIF's future results
of operations:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Total revenues................................................. $185,693 $169,178
Income (loss) before income tax expense........................ 37,126 1,274
Net income (loss).............................................. 23,345 1,214
</TABLE>
To comply with requirements of the Florida DOI, SHC's chairman has
personally indemnified ESIF up to a maximum of $5 million for certain loss,
injury or damage to ESIF which may result from the acquisition of SHC. Such
indemnification will expire on the earlier of January 11, 2001 or on the date
upon which the bank debt, incurred in the acquisition, is retired.
15. NOTES PAYABLE
In connection with the purchase of SHC by ESIF, SHC utilized a term loan
negotiated with rates based on LIBOR plus 3%. The balance as of March 31, 1996
for SHC was $36.0 million. Also, a revolving credit facility with rates
approximating the prime rate was entered into as part of the agreement. The
balance as of March 31, 1996 for SHC for this agreement was $8.0 million.
Interest expense incurred as of March 31, 1996 was $0.8 million.
F-20
<PAGE> 259
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities for the term loan and reductions in the availability of the
revolving credit facility are as follows (in thousands):
<TABLE>
<CAPTION>
REDUCTION IN THE
AVAILABILITY OF
TERM THE REVOLVING
LOAN CREDIT FACILITY
------- ----------------
<S> <C> <C>
Years ending March 31:
1997................................................ $ 4,650 970
1998................................................ 6,600 1,480
1999................................................ 6,600 1,480
2000................................................ 6,600 1,480
2001................................................ 6,000 1,480
Thereafter.......................................... 4,950 1,110
------- ------
$36,000 8,000
======= ======
</TABLE>
As collateral for the debt, SHC pledged the issued and outstanding stock of
SCI and three other wholly owned subsidiaries, Bridgefield Casualty Insurance
Company, Meritec Solutions, Inc. and Carolina Summit Healthcare, Inc. The credit
agreement contains certain covenants which require that certain financial ratios
and/or levels be maintained by SHC and its insurance subsidiary, Bridgefield
Casualty. Among these covenants are the following: Operating leverage, fixed
charge coverage ratio, minimum stockholder equity and risk based capital for the
insurance subsidiary:
In addition, the credit agreement places certain operational restrictions
on SHC.
16. EMPLOYEE BENEFIT PLANS
ESIF's subsidiary, SCI, has a deferred savings and profit-sharing plan
(401(k)) covering substantially all employees of SHC. Under the plan, SCI makes
contributions equal to 75% of the participant's contributions, not to exceed 6%
of the participant's annual compensation. SCI's contributions to the plan
totaled $0.1 million for the period January 16, 1996 to March 31, 1996.
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by ESIF in estimating its
fair value disclosures for financial instruments:
- Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate fair
values.
- Investment securities: Fair values for debt security investments are
based on quoted market prices.
- Premiums and accounts receivable: The carrying amounts of ESIF's
receivables approximate fair values.
- Notes payable: ESIF's subsidiary has $44.0 million of notes payable at
March 31, 1996 that approximates its fair value.
ESIF's fair value of reinsurance recoverable approximates its carrying
value for March 31, 1995 and 1996, respectively, as summarized below (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, 1995 MARCH 31, 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Reinsurance recoverable....................... $110,141 $110,141 $111,519 $111,519
</TABLE>
F-21
<PAGE> 260
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. DISCONTINUED OPERATIONS
Effective July 31, 1996, ESIF decided to discontinue its computer software
development operation. This business was acquired in the January 1996
acquisition of SHC. The disposition is expected to occur during the three months
ending December 31, 1996 by abandonment of the operation. ESIF expects to
recognize an after tax loss of approximately $0.2 million on the disposition of
this operation.
The financial statements reflect the operating results and the assets and
liabilities of the discontinued operations separately from continuing
operations. The net assets of the computer software development operation at
March 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents........................................... $ 24
Equipment...................................................... 431
Other assets................................................... 468
Software....................................................... 477
------
Total assets..................................................... 1,400
Liabilities:
Accounts payable and operating liabilities..................... 789
------
Net assets....................................................... $ 611
======
</TABLE>
The operating results of the computer software development subsidiary for
the period January 16, 1996 to March 31, 1996 were as follows:
<TABLE>
<S> <C>
Revenue.......................................................... $ 305
Expenses......................................................... 622
-----
Loss before income taxes......................................... $(317)
Income tax (benefit)............................................. (120)
-----
Net loss......................................................... $(197)
=====
</TABLE>
19. DISPOSITION
Effective July 31, 1996, ESIF decided to terminate its efforts to develop a
healthcare subsidiary in North Carolina. This start up effort was initiated by
SHC prior to the acquisition of SHC by ESIF. The disposition of this subsidiary
is expected to be completed by December 31, 1996. ESIF expects to recognize an
after tax loss of approximately $0.1 million on the disposition of this
subsidiary. The consolidated financial statements include the operating results
and assets and liabilities of this subsidiary. The net assets of the healthcare
subsidiary were as follows at March 31, 1996 (in thousands):
<TABLE>
<S> <C>
Assets:
Cash and equivalents........................................... $3,251
Equipment...................................................... 81
Other assets................................................... 70
------
Total assets..................................................... $3,402
Liabilities:
Accounts payable and operating liabilities..................... 946
------
Net assets....................................................... $2,456
======
</TABLE>
F-22
<PAGE> 261
EMPLOYERS SELF INSURERS FUND
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The operating results for the healthcare subsidiary for the period January
16, 1996 to March 31, 1996 were as follows (in thousands):
<TABLE>
<S> <C>
Revenue.......................................................... $ 3
Expenses......................................................... 192
-----
Income (loss) before income taxes................................ (189)
Income tax (benefit)............................................. (71)
-----
Net income (loss)................................................ $(118)
=====
</TABLE>
20. SEGMENT INFORMATION
The operations of ESIF, prior to the January 1996 acquisition of SHC, were
solely in the workers' compensation insurance industry segment. Subsequent to
the acquisition of SHC, ESIF also operates in the insurance administration
segment. Financial information by industry segment for revenues, income before
income taxes, and identifiable assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
WORKERS'
COMPENSATION INSURANCE INTERCOMPANY
TOTAL INSURANCE ADMINISTRATION ELIMINATION
-------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Year Ended March 31, 1994
Revenues............................. $158,591 $158,591 -- --
Income before income taxes........... $ 13,419 $ 13,419 -- --
Identifiable assets.................. $405,765 $405,765 -- --
Year Ended March 31, 1995
Revenues............................. $140,815 $140,815 -- --
Income before income taxes........... $ 30,154 $ 30,154 -- --
Identifiable assets.................. $425,206 $425,206 -- --
Year Ended March 31, 1996
Revenues............................. $140,328 $132,393 $ 15,051 $ (7,116)
Income before from continuing
operations before income taxes.... $ (123) $ (1,559) $ 1,436 --
Identifiable assets.................. $492,178 $401,679 $ 90,499 --
</TABLE>
Depreciation expense and capital expenditures are not considered material.
The preceding financial information does not include the computer software
operations which are presented as discontinued operations in the accompanying
financial statements.
F-23
<PAGE> 262
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1995 1996
(IN THOUSANDS) -------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and invested assets:
Fixed maturities, available-for-sale............................... $191,263 $173,420
Preferred stock.................................................... 2,956 3,787
Common stock....................................................... 15,228 12,298
Short-term investments............................................. 17,176 16,713
Cash and cash equivalents.......................................... 4,665 7,611
-------- --------
Total cash and invested assets............................. 231,288 213,829
Premiums receivable (net of $2,000 and $2,000 allowance for doubtful
accounts, respectively)............................................ 78,229 67,179
Accounts receivable.................................................. -- 3,102
Reinsurance recoverable.............................................. 107,451 99,636
Recoverable from Florida Special Disability Trust Fund............... 17,775 21,138
Accrued investment income............................................ 3,646 2,810
Income taxes recoverable............................................. -- 6,234
Equipment and software............................................... -- 2,358
Non-compete agreement................................................ -- 100
Capitalized computer software costs.................................. -- 5,408
Value assigned to future administration of insurance contracts....... -- 6,140
Unamortized debt acquisition cost.................................... -- 596
Excess of cost over net assets of business acquired.................. -- 47,925
Deferred income taxes................................................ 17,514 17,446
Other assets......................................................... 109 3,506
Net assets of discontinued operations................................ -- 678
-------- --------
Total assets............................................... $456,012 $498,085
======== ========
LIABILITIES AND EQUITY
Liabilities:
Loss and loss adjustment expenses.................................. $364,210 $373,971
Debt............................................................... -- 36,500
Unallocated policyholder remittances............................... 51,208 46,000
Accounts payable and accrued expenses.............................. 7,100 10,532
Taxes, licenses and fees........................................... 2,076 1,471
Deferred revenue................................................... 34 4,618
Federal income taxes payable....................................... 297 --
-------- --------
Total liabilities.......................................... 424,925 473,092
Equity:
Retained earnings.................................................. 26,848 24,045
Unrealized appreciation (depreciation) on available-for-sale
securities...................................................... 4,239 948
-------- --------
Total equity............................................... 31,087 24,993
-------- --------
Total liability and equity................................. $456,012 $498,085
======== ========
</TABLE>
See accompanying note.
F-24
<PAGE> 263
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
(IN THOUSANDS) ------- -------
(UNAUDITED)
<S> <C> <C>
Revenue:
Premiums earned........................................................ $63,145 $49,029
Net investment income.................................................. 7,598 6,363
Realized investment gains.............................................. 919 8
Administrative fees.................................................... -- 17,432
Other income........................................................... 90 216
------- -------
Total revenue.................................................. 71,752 73,048
Losses and expenses:
Losses and loss adjustment expenses.................................... 42,365 32,135
Other underwriting, general and administrative expenses................ 21,623 30,532
Amortization and depreciation.......................................... -- 2,499
Interest expense....................................................... -- 1,831
------- -------
Total losses and expenses...................................... 63,988 66,997
------- -------
Income from continuing operations before income taxes.................... 7,764 6,051
Income tax expense....................................................... 2,390 2,400
------- -------
Income from continuing operations........................................ 5,374 3,651
------- -------
Discontinued operations:
Loss from operation (net of income tax benefit of $212)................ -- (412)
Loss from disposition (net of income tax benefit of $289).............. -- (478)
------- -------
Loss from discontinued operations...................................... -- (890)
------- -------
Income before extraordinary charge....................................... 5,374 2,761
Extraordinary charge for conversion costs (net of income tax benefit of
$226).................................................................. -- (375)
------- -------
Net income............................................................... $ 5,374 $ 2,386
======= =======
</TABLE>
See accompanying note.
F-25
<PAGE> 264
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
-----------------------
1995 1996
(IN THOUSANDS) --------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................................... $ 5,374 $ 2,386
Adjustments to reconcile net income to net cash provided by operating
activities
Amortization and depreciation...................................... -- 2,499
Net realized gains................................................. (429) (8)
Bad debt allowance................................................. -- 500
Increase in premiums receivable.................................... (27,838) (29,586)
Decrease in accounts receivable.................................... -- 56
Decrease in reinsurance recoverable................................ 2,690 11,883
Increase in special disability trust fund recoverable.............. (1,896) (1,078)
(Increase) decrease in accrued investment income................... (236) 127
Decrease in federal income tax recoverable......................... -- 3,456
(Increase) decrease in deferred income taxes....................... 1,586 (1,090)
(Increase) decrease in other assets................................ 1,220 (1,905)
Discontinued operations............................................ -- (67)
Decrease in loss and loss adjustment expense....................... (3,182) (13,661)
Increase in unallocated policyholder remittances................... 32,973 31,365
Decrease in accounts payable and accrued expenses.................. (5,589) (3,960)
(Increase) decrease in taxes, license, and fees.................... 214 (22)
Decrease in deferred revenue....................................... -- (2,767)
Decrease in federal income tax payable............................. (4,580) --
--------- ---------
Net cash provided (used) in operating activities..................... 307 (1,872)
INVESTING ACTIVITIES
Purchase of investments securities................................... (410,101) (816,626)
Disposal and maturity of investment securities....................... 411,475 823,189
Purchase of equipment and software................................... -- (258)
--------- ---------
Net cash provided by investing activities............................ 1,374 6,305
FINANCING ACTIVITIES
Decrease in notes payable............................................ -- (7,500)
--------- ---------
Net cash provided by financing activities............................ -- (7,500)
--------- ---------
Net increase (decrease) in cash and cash equivalents................. 1,681 (3,067)
Beginning cash and cash equivalents.................................. 2,984 10,678
--------- ---------
Ending cash and cash equivalents..................................... $ 4,665 $ 7,611
========= =========
</TABLE>
See accompanying note.
F-26
<PAGE> 265
EMPLOYERS SELF INSURERS FUND
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and Rule 10-1 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principle for complete financial statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation have been included. Operating results for the six months
ended September 30, 1996 are not necessarily indicative of the results that may
be expected for the year ended March 31, 1997. For further information, refer to
the financial statements and footnotes thereto for the year ended March 31, 1996
included elsewhere herein.
F-27
<PAGE> 266
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Summit Holding Corporation
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995 of Summit Holding Corporation. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Summit Holding Corporation for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Tampa, Florida
February 9, 1996
F-28
<PAGE> 267
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Gross service fees................................ $70,813,669 $73,832,809 $64,089,709
Direct expenses................................... 32,971,912 31,638,931 27,469,989
----------- ----------- -----------
Net service fees............................... 37,841,757 42,193,878 36,619,720
Software consulting and maintenance fees.......... -- -- 899,629
Investment and other income....................... 631,924 934,178 1,275,712
----------- ----------- -----------
38,473,681 43,128,056 38,795,061
Expenses:
Compensation and other employee benefits.......... 14,503,311 15,425,560 16,616,339
Other operating expenses.......................... 7,707,071 8,217,870 8,203,572
Depreciation and amortization..................... 4,890,675 4,872,134 5,112,228
Interest expense.................................. 1,609,720 57,563 41,943
----------- ----------- -----------
28,710,777 28,573,127 29,974,082
----------- ----------- -----------
Income before income taxes.......................... 9,762,904 14,554,929 8,820,979
Income taxes........................................ 3,833,288 5,553,646 3,245,848
----------- ----------- -----------
Net income................................ $ 5,929,616 $ 9,001,283 $ 5,575,131
=========== =========== ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 268
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------- ---------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
--------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992.................... 1,000,000 $3,000,000 1,000,000 $1,000,000 $ 3,438,973 $ 7,438,973
Dividends payable to
preferred
stockholders......... -- -- -- -- (1,200,000) (1,200,000)
Net income.............. -- -- -- -- 5,929,616 5,929,616
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1993.................... 1,000,000 3,000,000 1,000,000 1,000,000 8,168,589 12,168,589
Dividends payable to
preferred
stockholders......... -- -- -- -- (600,000) (600,000)
Net income.............. -- -- -- -- 9,001,283 9,001,283
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1994.................... 1,000,000 3,000,000 1,000,000 1,000,000 16,569,872 20,569,872
Dividends payable to
preferred
stockholders......... -- -- -- -- (500,000) (500,000)
Net income.............. -- -- -- -- 5,575,131 5,575,131
--------- ---------- --------- ---------- ----------- -----------
Balance, December 31,
1995.................... 1,000,000 $3,000,000 1,000,000 $1,000,000 $21,645,003 $25,645,003
======== ========= ======== ========= ========== ==========
</TABLE>
See accompanying notes.
F-30
<PAGE> 269
SUMMIT HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 5,929,616 $ 9,001,283 $ 5,575,131
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 4,890,675 4,872,134 5,112,228
Loss on sale of equipment............................. -- -- 10,101
Deferred income taxes................................. 221,844 (439,245) (759,852)
Decrease (increase) in accounts receivable............ (520,004) 505,264 893,999
Decrease (increase) in prepaid expenses and other
current assets..................................... (817,547) 1,129,772 22,205
(Increase) decrease in other assets................... 100,928 (376,696) (93,311)
(Decrease) increase in accrued expenses and other
current liabilities................................ 1,124,372 (643,533) (1,005,124)
Decrease in aggregate reserve......................... (599,228) (1,786,309) (869,568)
(Decrease) increase in deferred income................ 1,660,583 328,263 (1,172,511)
----------- ----------- -----------
Net cash provided by operating activities............... 11,991,239 12,590,933 7,713,298
INVESTING ACTIVITIES
Purchases of held-to-maturity securities and short-term
investments........................................... (1,437) (5,564,135) (300,000)
Maturities of held-to-maturity securities............... -- -- 2,005,793
Purchases of property and equipment..................... (965,099) (1,072,255) (1,068,297)
Payment for businesses acquired and formed.............. -- -- (918,862)
----------- ----------- -----------
Net cash used in investing activities................... (966,536) (6,636,390) (281,366)
FINANCING ACTIVITIES
Payments on long-term debt.............................. (4,509,845) -- --
Dividends paid on preferred stock....................... -- (1,200,000) (600,000)
----------- ----------- -----------
Net cash used in financing activities................... (4,509,845) (1,200,000) (600,000)
----------- ----------- -----------
Net increase in cash and cash equivalents............... 6,514,858 4,754,543 6,831,932
Cash and cash equivalents at beginning of year.......... 98,972 6,613,830 11,368,373
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 6,613,830 $11,368,373 $18,200,305
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest expense...................................... $ 109,720 $ 1,558,424 $ 41,943
=========== =========== ===========
Income taxes.......................................... $ 4,171,806 $ 4,918,000 $ 4,760,795
=========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 270
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Summit Holding Corporation ("SHC"), a Florida corporation, is the sole
stockholder of Summit Consulting, Inc. ("SCI"). SCI and its subsidiaries are
primarily engaged in providing insurance-related administrative services for
five self-insurance funds, including marketing, policy issuance and servicing,
claims processing and administration, loss control, brokerage, audits, financial
and data processing services, and risk management services. Two of these
self-insurance funds are located in Florida and account for approximately 84% of
gross recurring service fees. The remaining gross service fees are generated by
one Kentucky and two Louisiana self-insurance funds.
During 1995, SHC formed an insurance company that began issuing workers'
compensation policies January 1, 1996, and is in the process of establishing a
North Carolina-based health maintenance organization. Effective July 20, 1995,
SHC acquired substantially all of the assets of a software development company
(see Note 2).
Principles of Consolidation
The consolidated financial statements include the accounts of SHC and its
wholly-owned subsidiaries and are collectively referred to herein as SHC. All
material intercompany transactions have been eliminated in consolidation.
Revenue Recognition
Service fee revenue is recognized in proportion to the recognition of
earned premiums by the self-insurance funds' at the contractual service fee
percentage of premiums. Direct expenses are principally costs which SHC is
contractually obligated to provide. Direct expenses principally include agents'
commissions, reinsurance premium costs, association fees, and administrative
taxes. Software consulting fees are recognized as the services are rendered and
invoiced. Maintenance fees are recognized ratably over the period of the
maintenance service contracts which are generally for a one year duration.
During 1994, SHC received $3.3 million in revenues from one of the
Louisiana self-insurance funds related to SHC's payment of reinsurance premiums
on behalf of the fund prior to 1990.
Cash Equivalents
SHC considers all highly liquid investments having a maturity of three
months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets (three to
ten years), or the lease period for leasehold improvements.
Depreciation expense in 1993, 1994 and 1995 was $723,994, $730,454 and
$830,408, respectively.
Income Taxes
SHC files consolidated returns. Deferred income taxes provided in the
financial statements relate principally to expenses charged to income for
financial reporting purposes in one period and deducted for income tax purposes
in other periods.
F-32
<PAGE> 271
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangibles
Intangible assets are stated at cost less accumulated amortization and
include purchased software, customer accounts and contracts, noncompete
agreements, deferred financing costs, and the excess of the purchase price over
the fair value of identifiable net assets acquired (goodwill). Purchased
software, customer accounts and contracts, and noncompete agreements are being
amortized on a straight-line basis over the estimated useful lives and contract
period which range from three to five years. Deferred financing costs relate to
the incurrence of debt acquisition costs, and were completely amortized in 1995.
The excess of cost over the fair value of identifiable net assets acquired is
being amortized on a straight-line basis over 20 years. SHC evaluates the
recoverability of intangible assets through a comparison of forecasted operating
income to the remaining asset balances.
Amortization expense in 1993, 1994 and 1995 was $4,166,681, $4,141,680 and
$4,281,820, respectively.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Adoption for
Statement No. 121 is required for all fiscal years beginning after December 15,
1995. SHC does not anticipate that the adoption of Statement No. 121 will have a
material impact on its financial results.
Aggregate Reserve
Under the terms of SHC's service agreement with the self-insurance funds,
SHC is responsible for providing certain reinsurance coverage through
independent reinsurers. As of December 31, 1993, 1994 and 1995, SHC has recorded
a liability for future premium obligations on these policies of $4,063,719,
$2,277,410, and $1,407,842, respectively, which is the present value, at 2.5%,
7.0% and 7.0%, respectively, of its estimated total liability of approximately
$5.1 million, $2.5 million, and $1.6 million, respectively. As a result of the
change in the discount rate in 1994, the aggregate reserve liability as of
December 31, 1994 was reduced by approximately $120,000.
Deferred Income
SHC defers a portion of its fees to cover future claims servicing costs
pertaining to claims incurred in the year for which SHC received its fee, and
for certain other services which SHC is contractually required to provide
subsequent to the funds' year end.
Major Customers
Significant portions of SHC's gross service fees are derived from three
major customers, Employers Self Insurers Fund ("ESIF"), Florida Retail
Federation Self Insurers Fund ("FRFSIF") and Louisiana Employers Safety
Association Self Insurers Fund ("LESASIF"). Gross service fees for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
ESIF............................................ $25,336,689 $26,829,023 $24,867,269
FRFSIF.......................................... 32,195,587 31,103,771 28,990,003
LESASIF......................................... 8,708,425 11,305,177 6,034,794
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-33
<PAGE> 272
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITION
Effective August 4, 1995, SHC acquired substantially all of the assets and
assumed certain liabilities of a software development company having a total
value of approximately $1,166,000. SHC has accounted for the acquisition as a
purchase. The effects of the tangible assets acquired and the liabilities
assumed have been excluded from the 1995 statement of cash flows. Pro forma
results of operations as if the acquisition had occurred on January 1, 1994,
were not materially different from the results of operations as presented.
3. LEASES
SHC and its subsidiaries lease office premises and automobiles under
noncancelable operating leases which expire at various dates through the year
2000. These leases generally contain renewal options and escalation clauses
based on increases in lessors' operating expenses and other charges. SHC
anticipates that most leases will be renewed or replaced upon expiration. Future
minimum annual payments at December 31, 1995 for all noncancelable leases are:
<TABLE>
<S> <C>
Years ending December 31:
1996................................................................... $1,468,391
1997................................................................... 1,328,374
1998................................................................... 1,276,504
1999................................................................... 1,174,774
2000................................................................... 395,467
----------
Total minimum future lease payments............................ 5,643,510
Income from subleases.......................................... (132,010)
----------
Net minimum future lease payments.............................. $5,511,500
=========
</TABLE>
Rental expense in 1993, 1994 and 1995 for operating leases totaled
$1,429,258, $1,496,790 and $1,693,284, respectively. Sublease income for 1993,
1994 and 1995 totaled approximately $108,000, $71,000 and $31,000, respectively.
4. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1993, 1994 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $3,083,595 $5,124,170 $3,465,492
State.................................... 527,849 868,721 540,208
---------- ---------- ----------
Total current.................... 3,611,444 5,992,891 4,005,700
Deferred:
Federal.................................. 188,568 (375,573) (657,378)
State.................................... 33,276 (63,672) (102,474)
---------- ---------- ----------
Total deferred................... 221,844 (439,245) (759,852)
---------- ---------- ----------
$3,833,288 $5,553,646 $3,245,848
========== ========== ==========
</TABLE>
SHC's taxes are calculated according to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred taxes are provided
for temporary differences between income before taxes reported in the financial
statements and taxable income. Deferred taxes arise principally from
F-34
<PAGE> 273
SUMMIT HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
temporary differences between financial reporting and income tax reporting of
depreciation, aggregate reserves, deferred income and certain start-up costs.
A reconciliation of the differences between the effective income tax rate
and the statutory federal tax rate follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income tax expense at federal statutory rate
(34%)............................................ $3,319,388 $4,994,225 $2,999,133
State income taxes, net of federal benefit......... 370,343 531,332 288,904
Nondeductible goodwill amortization................ 128,922 124,044 127,666
Interest exempt from taxation...................... -- (129,414) (248,508)
Other items, net................................... 14,635 33,459 78,653
---------- ---------- ----------
$3,833,288 $5,553,646 $3,245,848
========= ========= =========
</TABLE>
5. EMPLOYEE BENEFIT PLAN
SHC has a deferred savings and profit-sharing plan (401(k)) covering
substantially all employees. Under the plan, SHC makes contributions equal to
75% of the participant's contributions, not to exceed 6% of the participant's
annual compensation. SHC's contributions to the plan totaled $251,395, $318,955
and $350,410 in 1993, 1994 and 1995, respectively.
6. PREFERRED STOCK
At December 31, 1993, 1994 and 1995, 1,000,000 shares of Series A preferred
stock were outstanding. Each share of Series A preferred stock is entitled to
cumulative cash dividends of $0.60 per year. The dividends are not payable until
declared by the Board of Directors. During October 1993, the Board of Directors
declared a dividend of $1.20 per share (through February 28, 1994) to
stockholders of record as of December 31, 1993, payable January 15, 1994. During
December 1994, the Board of Directors declared a dividend of $0.60 per share
(through February 28, 1995) to stockholders of record as of December 31, 1994,
payable January 20, 1995. During December 1995, the Board of Directors declared
a dividend of $0.50 per share (for the period March 1 through December 31, 1995)
to stockholders of record as of December 31, 1995, payable January 12, 1996. The
Series A preferred stock has a guaranteed value of $3.00 per share. The shares
have a preference in liquidation. The Series A preferred stock has no voting
rights or rights of conversion to any other class of stock of SHC.
7. STOCK OPTION PLAN
In 1992, the Board of Directors approved the 1992 Stock Incentive Plan (the
"Plan"), which provided for the granting of 225,000 options to directors,
officers and key employees. Options to purchase SHC's common stock are
exercisable at a price of $1 per share. Options granted under the Plan generally
vest over a period of five years subject to certain acceleration provisions and
expire not later than 10 years after grant. As of December 31, 1995, 205,000 of
the 225,000 options which have been granted were vested, none of which had been
exercised.
8. SUBSEQUENT EVENT
Effective January 16, 1996, Employers Self Insurers Fund purchased all of
the outstanding stock of SHC. In connection with this transaction, stock options
that were not previously vested became vested.
F-35
<PAGE> 274
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Trustees
Employers Self Insurers Fund
We have audited the consolidated financial statements of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1996 and for the year then
ended and have issued our report thereon dated July 31, 1996 (included elsewhere
in this Registration Statement). Our audits also included the consolidated
financial statement schedules included in the Registration Statement. These
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Jacksonville, Florida
July 31, 1996
F-36
<PAGE> 275
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
Board of Trustees
Employers Self Insurers Fund
We have audited the consolidated financial statements of Employers Self
Insurers Fund and its subsidiaries as of March 31, 1995 and for the years ended
March 31, 1995 and 1994 and have issued our report thereon dated July 26, 1996
(included elsewhere in this Registration Statement). Our audits also included
the consolidated financial statement schedules included in the Registration
Statement. These schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Brinton & Mendez
Certified Public Accountants
Lakeland, Florida
July 26, 1996
F-37
<PAGE> 276
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS
MARCH 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN
IN THE
TYPE OF INVESTMENT COST MARKET BALANCE SHEET
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities:
U.S. Government
Non-mortgage backed................................... $ 57,656 $ 57,233 $ 57,233
Mortgaged backed...................................... 14,320 14,400 14,400
States, municipalities and political subdivisions....... 68,697 69,360 69,360
Corporate obligations................................... 37,258 37,824 37,824
-------- -------- -------------
Total fixed maturities............................. 177,931 178,817 178,817
Equity securities:
Common stocks:
Public utilities...................................... 141 153 153
Banks, trusts and insurance companies................. 579 607 607
Industrial and miscellaneous.......................... 8,855 10,334 10,334
-------- -------- -------------
Total common stocks................................ 9,575 11,094 11,094
Non redeemable preferred stock.......................... 3,167 3,156 3,156
-------- -------- -------------
Total equity securities............................ 12,742 14,250 14,250
Short-term investments....................................... 19,770 19,770 19,770
-------- -------- -------------
Total investments.................................. $210,443 $212,837 $ 212,837
======== ======== ==========
</TABLE>
F-38
<PAGE> 277
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED % OF
CEDED TO FROM AMOUNT
OTHER OTHER ASSUMED
DESCRIPTION DIRECT COMPANIES COMPANIES NET TO NET
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1994
Premiums -- Workers Compensation....... $155,559 $ 7,118 $ 0 $148,441 0%
Year Ended March 31, 1995
Premiums -- Workers Compensation....... 135,033 6,544 0 128,489 0%
Year Ended March 31, 1996
Premiums -- Workers Compensation....... 119,028 4,135 0 114,893 0%
</TABLE>
F-39
<PAGE> 278
EMPLOYERS SELF INSURERS FUND AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING INSURANCE OPERATIONS
<TABLE>
<CAPTION>
CLAIMS & CLAIMS
SETTLEMENT
RESERVES EXPENSES INCURRED
FOR UNPAID RELATED TO
DEFERRED CLAIMS AND -----------------
POLICY CLAIM DISCOUNT NET NET PRIOR
ACQUISITION SETTLEMENT DEDUCTED UNEARNED EARNED INVESTMENT YEARS
SEGMENT COSTS EXPENSES IN COL C PREMIUMS PREMIUMS INCOME CURRENT COLUMN
YEAR ENDED COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G YEAR H
- ---------------------- -------------- ----------- ---------- -------- -------- -------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1994........ Workers' $ 0 $ 392,784 $4,730 $0 $148,441 $ 10,510 $118,889 $10,478
Compensation
Insurance
March 31, 1995........ Workers' 0 367,391 4,875 0 128,489 12,205 94,520 25,404
Compensation
Insurance
March 31, 1996........ Workers' 0 387,632 4,668 0 114,893 13,209 84,058 10,786
Compensation
Insurance
<CAPTION>
AMORTIZATION NET PAID
OF DEFERRED CLAIMS &
POLICY CLAIMS NET
ACQUISITION SETTLEMENT PREMIUMS
COSTS EXPENSES WRITTEN
YEAR ENDED COLUMN I COLUMN J COLUMN K
- ---------------------- ------------ ---------- --------
<S> <C> <C> <C>
March 31, 1994........ $ 10,664 $ 99,642 $156,086
March 31, 1995........ 10,078 90,646 144,427
March 31, 1996........ 9,707 63,400 120,688
</TABLE>
F-40
<PAGE> 279
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................
Risk Factors..........................
The Company...........................
The Special Meeting...................
The Conversion........................
The Offerings.........................
Market for Stock......................
Dividend Policy.......................
Use of Proceeds.......................
Capitalization........................
Selected Financial Data...............
Pro Forma Financial Data..............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management of the Company.............
Certain Transactions..................
Principal Shareholders................
Description of Capital Stock..........
Certain Federal Income Tax
Consequences........................
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Consolidated Financial
Statements..........................
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
5,000,000 SHARES
[LOGO]
SUMMIT HOLDING
SOUTHEAST, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
THE CHICAGO CORPORATION
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 280
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Registrant in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. The
Registrant is paying all of these expenses in connection with the issuance and
distribution of the securities.
<TABLE>
<S> <C>
SEC registration fee............................................................. $ 25,880
NASD filing fee.................................................................. 9,040
Accountants' fee and expense..................................................... *
Legal fees and expenses.......................................................... *
Printing and engraving costs..................................................... *
Blue Sky fees and expenses....................................................... *
Transfer Agent and registrar fees................................................ *
Miscellaneous.................................................................... *
----------
Total.................................................................. $2,000,000
==========
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Florida Business Corporation Act, as amended (the "Florida Act"),
provides that, in general, a business corporation may indemnify any person who
is or was a party to any proceeding (other than an action by, or in the right
of, the corporation) by reason of the fact that he is or was a director or
officer of the corporation, against liability incurred in connection with such
proceeding, including any appeal thereof, provided certain standards are met,
including that such officer or director acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and provided further that, with respect to any criminal action or
proceeding, the officer or director had no reasonable cause to believe his
conduct was unlawful. In the case of proceedings by or in the right of the
corporation, the Florida Act provides that, in general, a corporation may
indemnify any person who was or is a party to any such proceeding by reason of
the fact that he is or was a director or officer of the corporation against
expenses and amounts paid in settlement actually and reasonably incurred in
connection with the defense or settlement of such proceeding, including any
appeal thereof, provided that such person acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made in respect of any
claim as to which such person is adjudged liable unless a court of competent
jurisdiction determines upon application that such person is fairly and
reasonably entitled to indemnity. To the extent that any officers or directors
are successful on the merits or otherwise in the defense of any of the
proceedings described above, the Florida Act provides that the corporation is
required to indemnify such officers or directors against expenses actually and
reasonably incurred in connection therewith. However, the Florida Act further
provides that, in general, indemnification or advancement of expenses shall not
be made to or on behalf of any officer or director if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute: (i) a violation of criminal
law, unless the director or officer had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe it was unlawful; (ii) a
transaction from which the director or officer derived an improper personal
benefit; (iii) in the case of a director, a circumstance under which the
director has voted for or assented to a distribution made in violation of the
Florida Act or the corporation's articles of incorporation; or (iv) willful
misconduct or a conscious disregard for the best interests of the corporation in
a proceeding by or in the right of the corporation to procure a judgment in its
favor or in a proceeding by or in the right of a shareholder. Article Eight of
Summit's Bylaws provides that Summit shall indemnify any
II-1
<PAGE> 281
director, officer, employee or agent or any former director, officer, employee
or agent to the full extent permitted by Florida law.
The underwriters also will agree to indemnify the directors and officers of
Summit against certain liabilities as set forth in Section of the Underwriting
Agreement (see Exhibit 1).
The Company has purchased insurance with respect to, among other things,
any liabilities that may arise under the statutory provisions referred to above.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On November 15, 1996, Summit sold one share of Common Stock at a price of
$11.00 per share to each of the seven directors of Summit. These shares were
issued to accredited investors as defined in Regulation D in a transaction
exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act and Regulation D. On the Effective Date of
the Conversion, the seven shares will be redeemed by Summit for an amount equal
to the original purchase price.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS. See the exhibit index immediately preceding the exhibits for
the page number where each exhibit can be found.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ -----------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement between Summit and Raymond James & Associates, Inc.
and The Chicago Corporation, as Representatives of the several underwriters.*
2.1 -- Amended Plan of Conversion and Recapitalization of Employers Self Insurers Fund.
2.2 -- Recapitalization Agreement between Summit and Employers Self Insured Fund*
2.3 -- Order of the Florida DOI approving the Plan of Conversion.
3.1 -- Articles of Incorporation of Summit.
3.2 -- Bylaws of Summit.
4.1 -- Specimen Stock Certificate of the Common Stock of Summit.*
4.2 -- Specimen Stock Certificate of the Series A Preferred Stock of Summit.*
5.1 -- Opinion of McConnaughhay, Roland, Maida & Cherr, P.A. (including consent).*
8.1 -- Form of Tax Opinion of Alston & Bird, LLP (including consent).*
10.1 -- Form of Employment Agreement between Summit and William B. Bull.
10.2 -- Form of Employment Agreement between Summit and Russell L. Wall.
10.3 -- Letter Agreement with First Union.*
10.4 -- Summit 1996 Long-Term Incentive Plan
10.5 -- The Summit Consulting, Inc. Retirement Plan
10.6 -- Amendment No. 1 to The Summit Consulting, Inc. Retirement Plan
10.7 -- Amendment No. 2 to The Summit Consulting, Inc. Retirement Plan
12.1 -- Statement regarding computation of earnings to combined fixed charges and preferred
stock dividends.
21.1 -- Subsidiaries of the Registrant.*
23.1 -- Consent of McConnaughhay, Roland, Maida & Cherr, P.A. (contained in Exhibit 5.1).*
23.2 -- Consent of Alston & Bird, LLP (contained in Exhibit 8.1).*
23.3 -- Consent of Ernst & Young, LLP.
23.4 -- Consent of Brinton & Mendez.
24.1 -- Power of Attorney with respect to amendments of this Registration Statement
executed by the directors and officers of Summit is included on the signature page
of this Registration Statement appearing on page II-6.
</TABLE>
- ---------------
* To be filed by amendment.
II-2
<PAGE> 282
(b) Financial Statement Schedules.
Schedule I -- Summary of Investments
Schedule IV -- Reinsurance
Schedule VI -- Supplemental Information Concerning Insurance Operation
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously discussed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such posteffective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names as
required by the Representatives of the Underwriters to permit prompt delivery to
each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon
II-3
<PAGE> 283
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 284
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Tampa, State of Florida,
on November 20, 1996.
SUMMIT HOLDING SOUTHEAST, INC.
By:
------------------------------------
Title:
-----------------------------------
II-5
<PAGE> 285
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints William B. Bull and Russell L. Wall, and each of
them, with the power to act without the other, as his true and lawful
attorney-in-fact and agents, with full power of substitution and resubstitution
for him and in his name, place and stead, and in any and all capacities, (i) to
sign any and all amendments (including post-effective amendments) to this
Registration Statement, (ii) to sign any registration statement to be filed
pursuant to Rule 462(b) under the Securities Act of 1933 for the purpose of
registering additional shares of Common Stock for the same offering covered by
this Registration Statement, and (iii) to file any of the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 20, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- ------------------
<C> <S> <C>
/s/ WILLIAM B. BULL President, Chief Executive November 20, 1996
- --------------------------------------------- Officer, and Director
William B. Bull (principal executive
officer)
/s/ GREG C. BRANCH Chairman of the Board of November 20, 1996
- --------------------------------------------- Directors
Greg C. Branch
/s/ C. C. DOCKERY Director November 20, 1996
- ---------------------------------------------
C. C. Dockery
/s/ JOHN A. GRAY Director November 20, 1996
- ---------------------------------------------
John A. Gray
/s/ ROBERT L. NOOJIN, SR. Director November 20, 1996
- ---------------------------------------------
Robert L. Noojin, Sr.
/s/ THOMAS S. PETCOFF Director November 20, 1996
- ---------------------------------------------
Thomas S. Petcoff
/s/ ROBERT SIEGEL Director November 20, 1996
- ---------------------------------------------
Robert Siegel
/s/ RUSSELL L. WALL Vice President of Finance November 20, 1996
- --------------------------------------------- (principal financial and
Russell L. Wall accounting officer)
</TABLE>
II-6
<PAGE> 286
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary...............................
Risk Factors..........................
The Company...........................
The Special Meeting...................
The Conversion........................
The Offerings.........................
Market for Stock......................
Dividend Policy.......................
Use of Proceeds.......................
Capitalization........................
Selected Financial Data...............
Pro Forma Financial Data..............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management of the Company.............
Certain Transactions..................
Principal Shareholders................
Description of Capital Stock..........
Certain Federal Income Tax
Consequences........................
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Consolidated Financial
Statements..........................
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
5,000,000 SHARES
[LOGO]
SUMMIT HOLDING
SOUTHEAST, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES &
ASSOCIATES, INC.
THE CHICAGO CORPORATION
, 1997
------------------------------------------------------
------------------------------------------------------
<PAGE> 1
EXHIBIT A
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
<PAGE> 2
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Background...............................................................................
Purpose of Conversion....................................................................
Article I Definitions...............................................................
Article II Regulatory Approval.......................................................
Article III Policyholder Voting.......................................................
Article IV Process of Conversion.....................................................
Article V Reorganization............................................................
Article VI Consideration for Membership Interests....................................
Article VII Allocation of Policyholder Consideration..................................
Article VIII Allocation of Additional Subscription Rights..............................
Article IX Subscription and Public Offerings.........................................
Article X Stock Incentive Plan for Employees and Directors..........................
Article XI Policyholder Interests....................................................
Article XII Federal Tax Consequences..................................................
Article XIII Conditions to Effectiveness...............................................
Article XIV Failure of Plan to Become Effective.......................................
Article XV Miscellaneous Provisions..................................................
</TABLE>
EXHIBITS TO PLAN OF CONVERSION AND RECAPITALIZATION
EXHIBIT
A Articles of Incorporation of Holding Company
B Bylaws of Holding Company
C Certificate of Designation, Preferences and Rights of Series A Preferred
Stock
D Form of Amended and Restated Articles of Incorporation of Stock Company
E Form of Amended and Restated Bylaws of Stock Company
F Recapitalization Agreement
G Actuarial Contribution Memorandum
H Organizational Chart (after conversion)
<PAGE> 3
AMENDED
PLAN OF CONVERSION
AND RECAPITALIZATION
OF
EMPLOYERS SELF INSURERS FUND
This Amended Plan of Conversion and Recapitalization (the "Plan"), which
has been adopted by the Board of Trustees of Employers Self Insurers Fund at a
meeting duly called and held on , 1996, provides for the ultimate
conversion of Employers Self Insurers Fund to a domestic stock insurance company
in accordance with the requirements of the Florida Insurance Code.
BACKGROUND
Employers Self Insurers Fund ("ESIF") currently exists as a group
self-insurance fund ("GSIF") authorized pursuant to Section 624.4621, Florida
Statutes. In 1995, ESIF's Board of Trustees resolved to effect the conversion of
ESIF from a GSIF to an assessable mutual insurer authorized pursuant to part II
of Chapter 628, Florida Statutes. In January 1996, ESIF purchased Summit
Consulting, Inc., ESIF's management and service company. Due in part to the need
to focus upon that acquisition, the conversion to an assessable mutual was
delayed and has yet to be completed.
Earlier this year, the Board of Trustees reiterated its desire to effect a
conversion of ESIF. The Board determined, however, that conversion to an
assessable mutual would not fully achieve its objectives, and resolved to take
the next step and propose a conversion of ESIF to a domestic stock insurance
company. The stock insurer will be recapitalized and will become a wholly-owned
subsidiary of a holding company whose outstanding shares of common stock are
traded in a public securities market. The reasons and rationale behind the
Board's decisions are set out below under "Purposes of Conversion."
The Board has submitted to the Florida Department of Insurance (the
"Department"), in conjunction with the submission of this Plan, an application
for authorization to become an assessable mutual insurer. The application, if
approved, will convert ESIF to an assessable mutual insurer (the "Mutual
Company"). This Plan, which contemplates the conversion from an assessable
mutual to a stock insurer and recapitalization by the Holding Company, is
predicated upon the approval of the aforementioned application. It is
contemplated that the Department will issue one consent order approving both the
conversion of ESIf from a group self-insurance fund to an assessable mutual and
from an assessable mutual to a stock insurer, and that both conversions will
occur in a single day.
PURPOSE OF CONVERSION
GSIFs such as ESIF have played a significant role in Florida's workers'
compensation insurance marketplace for two decades. During that time, the GSIFs
provided coverage to employers as an alternative to the limited number of
commercial carriers. As a result of the 1993 workers' compensation reforms, the
marketplace has undergone significant change, attracting significant competition
from commercial carriers. Consequently, GSIFs such as ESIF find it increasingly
difficult to maintain their market share and sustain healthy growth as
policyholders move toward more traditional products and non-assessability. In
fact, many of Florida's GSIFs have left the marketplace, either by transferring
their business to commercial carriers or by converting to stock or
non-assessable mutual companies. The Board has concluded that ESIF should join
those GSIFs which have converted to stock insurers.
ESIF's ultimate conversion to a stock company that is wholly owned by a
publicly traded holding company (the "Conversion") is expected to strengthen
ESIF's financial condition by enabling it to obtain capital from sources that
are generally available to a stock company, but not to a policyholder-owned
self-insurance fund or mutual insurer. Formation of the holding company will
provide greater flexibility than ESIF would otherwise have to diversify its
business activities through existing or newly-formed subsidiaries or through
strategic partnerships which could enhance its financial security and diversity
and permit it to grow and eventually expand into other markets. Finally,
Policyholders will be able to realize an economic benefit for
<PAGE> 4
their membership interest which is not currently available to them, in addition
to being relieved of contingent liability for assessment which currently exists
under their insurance contracts, and the Florida Insurance Code.
ARTICLE I
DEFINITIONS
As used in this Plan, the following capitalized terms shall have the
following meanings:
1.1 Special Meeting. "Special Meeting" shall mean the meeting of ESIF,
including adjournments or postponements thereof, at which this Plan is to be
submitted to the Voting Policyholders for approval as provided in Section 3.1 of
this Plan.
1.2 Board of Trustees. "Board of Trustees" shall mean the Board of
Trustees of ESIF.
1.3 Common Stock. "Common Stock" shall mean the shares of the common
stock, no par value, of the Holding Company.
1.4 Department. "Department" shall mean the Department of Insurance of the
State of Florida.
1.5 Effective Date. "Effective Date" shall mean the date on which all the
conditions to the effectiveness as provided in Article XIII of this Plan have
been satisfied. The Effective Date shall not be more than six (6) months from
the date the order of the Department approving the Plan becomes effective;
provided that such period may be extended for such an additional period as may
be requested by the Board of Trustees and approved by the Department.
1.6 Eligible Policyholders. "Eligible Policyholders" shall mean owners of
Policies issued by ESIF, who owned such Policies during the period beginning
August 20, 1993, and ending August 20, 1996, as required by Section
628.6017(1)(f), Florida Statutes.
1.7 ESOP. "ESOP" shall mean the Employee Stock Ownership Plan formed at
the direction of the Board of Trustees of the Holding Company for the benefit of
the employees of the Holding Company and its subsidiaries, including the Stock
Company.
1.8 Financing. "Financing" shall mean a transaction or transactions
resulting in the infusion into the Stock Company of Policyholders' surplus in an
amount: (i) not less than that required of a newly-licensed Florida stock
insurer pursuant to Section 624.407, Florida Statutes; (ii) not less than an
amount sufficient to satisfy the premium-to-surplus requirements of Section
624.4095, Florida Statutes; and (iii) acceptable to the Department. Section
624.4095 provides that an insurer's ratio of actual annual written premiums to
current surplus as to Policyholders must not exceed 10 to 1 for gross written
premiums and must not exceed 4 to 1 for net written premiums. For the purposes
of the foregoing, Section 624.4095 provides that premiums shall be calculated as
the product of the actual or projected premiums and the following: (i) for
property insurance, 0.90; (ii) for casualty insurance, 1.25; (iii) for health
insurance, 0.80; and (iv) for all other kinds of insurance, 1.00.
Notwithstanding the foregoing, the Department may, in practice, require a higher
level of Policyholders' surplus for a domestic insurer after taking into
consideration factors including, but not limited to: (i) the lines of business
underwritten; (ii) the maturity of the insurer and its business; (iii) the
quality of the asset portfolio of the insurer; (iv) the experience and
competence of the management of the insurer; and (v) applicable risk-based
capital requirements.
1.9 Florida Insurance Code. "Florida Insurance Code" shall mean Chapters
624 through 632, 634, 635, 637, 638, 641, 642, 648, and 651 of the Florida
Statutes, and any amendments thereto effective on the Effective Date.
1.10 Holding Company. "Holding Company" shall mean Summit Holding
Southeast, Inc., a Delaware corporation, formed for the purpose of acquiring
100% of the capital stock of the Stock Company and to facilitate the Financing.
The proposed Articles of Incorporation and Bylaws of the Holding Company are
attached as Exhibits A and B, respectively.
2
<PAGE> 5
1.11 In-Force Policy. "In-Force Policy" shall mean a Policy for which a
binder letter has been issued and the effective date noted in such letter has
passed, and such Policy has not been surrendered or otherwise terminated, or
expired by its terms.
1.12 Meeting Record Date. "Meeting Record Date" shall mean a date set by
ESIF, which date shall be no more than seventy days and no less than thirty days
prior to the date on which the Special Meeting is to be convened.
1.13 Member. "Member" shall mean a member of ESIF (as such term is used in
the Florida Insurance Code in reference to members of group self-insurance
funds).
1.14 Membership Interests. "Membership Interests" shall mean the rights of
Members of ESIF arising under the organizational documents thereof, the Florida
Insurance Code and otherwise, including, without limitation, the right to vote
for trustees and on other matters and to participate in any distribution of
surplus on liquidation, but not including contractual rights arising under
Policies, including, without limitation, the right to be paid insurance
benefits. "Membership Interests" shall include all rights of Policyholders of
whatever type in the surplus of ESIF or the Mutual Company.
1.15 Mutual Company. "Mutual Company" shall mean the interim assessable
mutual company resulting from the conversion of ESIF.
1.16 Person. "Person" shall mean an individual, corporation, partnership,
association, joint stock company, trust, unincorporated organization, government
or political subdivision thereof or any other entity not specifically listed in
this definition.
1.17 Plan. "Plan" shall mean this Amended Plan of Conversion and
Recapitalization, as it may be amended from time to time.
1.18 Policies. "Policies" shall mean the indemnity agreements issued by
ESIF.
1.19 Policyholders. "Policyholders" shall mean the owners of Policies.
1.20 Preferred Stock. "Preferred Stock" shall mean the Series A Preferred
Stock of the Holding Company, having the designation, preferences and rights,
and subject to the qualifications, limitations and restrictions as are set forth
in the "Certificate of Designation, Preferences and Rights of Series A Preferred
Stock" attached hereto as Exhibit C.
1.21 Stock Company. "Stock Company" shall mean the stock company resulting
from the conversion of Mutual Company pursuant to the Plan.
1.22 Subscription Rights. "Subscription Rights" shall mean nontransferable
rights to purchase shares of the Common Stock. All such Subscription Rights
granted as described in the Plan shall be exercisable at the same per share
price, and such price shall be determined in accordance with Section 7.2(a)
below.
1.23 Voting Policyholders. "Voting Policyholders" shall mean all Persons
who, as reflected on the records of ESIF, were owners of In-Force Policies of
ESIF at the close of business on the Meeting Record Date.
ARTICLE II
REGULATORY APPROVAL
This Plan is subject to the approval by the Department pursuant to Sections
628.461, 628.6013, and 628.6017, Florida Statutes. The approval of the
Department will constitute approval of all aspects of this Plan under the
Florida Insurance Code.
2.1 Approval of the Plan shall constitute a determination by the Department
that the terms of the Plan are fair and equitable to the Members. However, the
Department's approval of the Plan does not constitute an endorsement or
recommendation thereof.
3
<PAGE> 6
2.2 The Plan contemplates the reorganization of ESIf and its subsidiaries.
Pursuant to that reorganization, the Holding Company will become the parent of
Stock Company and its subsidiaries, either directly or indirectly. Additionally,
the companies within the holding company system shall be reorganized in
accordance with the Organizational Chart attached hereto as Exhibit H.
Accordingly, approval of the Plan will constitute approval of the reorganization
of the holding company system as required under Section 628.461, Florida
Statutes. No separate approval by the Department will therefore be required in
connection with the acquisition of one hundred percent (100%) of the voting
securities of Stock Company or its stock insurer subsidiary by the Holding
Company or the reorganization of the holding company system. The Plan also
contemplates the ESOP purchasing up to ten percent (10%) of the Common Stock.
Approval of this Plan shall constitute approval of said acquisition, or,
alternatively, a determination that no such approval is required.
2.3 The Department may deem it appropriate to conduct a public or
evidentiary hearing in connection with its review of this Plan.
ARTICLE III
POLICYHOLDER VOTING
3.1 Special Meeting. After approval of the Plan by the Department, ESIF
shall provide notice of the 1996 Special Meeting (the "Special Meeting") of its
Members at which the Plan and the Amended and Restated Articles of Incorporation
of the Stock Company (in the form attached hereto as Exhibit D) and the amended
and restated bylaws of the Stock Company (in the form attached hereto as Exhibit
E) reflecting the conversion to the Stock Company (the "Restated Articles of
Incorporation" and "Restated Bylaws," respectively) shall be submitted for the
approval of the Voting Policyholders. Such Special Meeting shall be held at the
home office of the Mutual Company or at such other reasonable location as may be
determined by the Mutual Company. Prior to such Special Meeting, ESIF shall send
to its Voting Policyholders, at their addresses as most recently reflected in
the records of ESIF, such notices, disclosure documents, proxy or ballot forms
and information or explanatory statements as shall be necessary and appropriate.
3.2 Approval. This Plan, the Articles of Incorporation of the Mutual
Company, and the Restated Articles of Incorporation and Bylaws of the Stock
Company shall be approved by the Voting Policyholders if (i) not less than
two-thirds of the votes cast by the Voting Policyholders voting thereon in
person, by proxy, or by mail and (2) not less than a majority of the votes of
Voting Policyholders, are cast in favor of the Plan.
3.3 Supervision by Department. The Department may supervise the tabulation
of votes and may appoint such voting inspectors as it deems necessary or
advisable.
3.4 Certifying and Filing the Approved Plan. If this Plan and the Articles
of Incorporation of the Mutual Company and the Restated Articles of
Incorporation and Bylaws of the Stock Company are approved at the Special
Meeting, then within five days after the Special Meeting, the Mutual Company
shall prepare under its corporate seal a certificate setting forth the date and
results of the vote cast at the Special Meeting and a copy of the Plan as
approved. Such certificate shall be executed by both ESIF's chairman and Mutual
Company's chairman and secretary (or assistant secretary) and duly sworn to by
one of them. The certificate shall be delivered to the Department.
ARTICLE IV
PROCESS OF CONVERSION
The Florida Insurance Code does not currently provide for conversion
directly from a GSIF to a stock insurer. In order to effect such a conversion, a
GSIF must convert first to an assessable mutual. The application process for
conversion to an assessable mutual is separate and distinct from this Plan.
Nevertheless, in the interest of expediting ESIF's transformation to a stock
company, this Plan shall be filed for approval by the Department concurrently
with ESIF's application to convert to an assessable mutual. It is anticipated
that both review and approval processes will run concurrently. It is further
anticipated that ESIF's application to become an assessable mutual and approval
of this Plan will occur simultaneously.
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ARTICLE V
REORGANIZATION
5.1 Restatement of Articles of Incorporation and Bylaws. On the Effective
Date, the Restated Articles of Incorporation and Bylaws of the Stock Company
shall be filed with the Department and the Florida Secretary of State as
required by applicable law. Such Restated Articles of Incorporation and Bylaws
may be further amended after the Effective Date in accordance with their
provisions and the laws of the State of Florida.
5.2 Recapitalization of Stock Company. On the Effective Date, the Restated
Articles of Incorporation of the Stock Company shall authorize it to issue
fifteen thousand (15,000) shares of Common Stock with a par value of one hundred
dollars ($100) per share. On the Effective Date, the Eligible Policyholders will
exchange their Membership Interest for Preferred Stock in the Holding Company,
pursuant to the Recapitalization Agreement attached hereto as Exhibit F, all of
such authorized shares of Common Stock, and in exchange therefor the Holding
Company shall issue and deliver to the Stock Company the Preferred Stock and the
Subscription Rights as described in Sections 6.1 and 6.2 below, and the Holding
Company shall contribute in cash an amount adequate to capitalize Stock Company
in the manner described in Section 13.4 of this Plan.
ARTICLE VI
CONSIDERATION FOR MEMBERSHIP INTERESTS
Upon the Effective Date, Policyholders will cease to have any rights as
Members of ESIF or the Mutual Company, including, without limitation, the right
to elect trustees or directors and vote as to other matters, and any rights to
the distribution of surplus in liquidation, subject to the provisions of
Articles VII and VIII of this Plan. In exchange for their Membership Interests,
Policyholders will (i) no longer be subject to assessment by ESIF or the Mutual
Company during their current Policy year (in the case of those Policyholders who
have In-Force Policies) or for any prior year in which they held a Policy,
unless such assessment was imposed prior to the Effective Date; (ii) be relieved
of all future contingent liabilities of ESIF and the Mutual Company arising
after the Effective Date; (iii) receive that number of shares of Preferred Stock
determined in accordance with Section 7.1 below; and (iv) receive subscription
rights to purchase that number of shares of Common Stock determined in
accordance with Section 7.2.
6.1 Preferred Stock. As consideration for their Membership Interests,
Eligible Policyholders shall receive consideration, the principal component of
which will be shares of Preferred Stock in the Holding Company. Such Preferred
Stock shall be issued to Eligible Policyholders based upon the Allocation of
Policyholder Consideration described in Section 7.1 below and shall be issued as
soon as practicable after the Effective Date. The aggregate number of shares of
Preferred Stock to be given to Eligible Policyholders pursuant to this Plan
shall be 1,640,000 shares with a par value of Ten Dollars ($10.00) per share.
The Preferred Stock is described in detail in the Certificate of Designation,
Preferences and Rights of Service A Preferred Stock, a copy of which is attached
hereto as Exhibit C.
6.2 Subscription Rights. In addition to the Preferred Stock described
above, Eligible Policyholders shall receive Subscription Rights in the Common
Stock to be issued by the Holding Company. The Subscription Rights shall, in the
aggregate, entitle the Eligible Policyholders to purchase eighty percent (80%)
of the Aggregate Common Shares (as defined in Section 7.2(a) below). Thus,
should the Eligible Policyholders determine that it is in their best interests
to capitalize the Stock Company through the purchase of Holding Company Common
Stock, the Eligible Policyholders shall be entitled to retain ownership and
control of the Stock Company and its subsidiaries through their ownership of the
Common Stock. The remaining twenty percent (20%) of the Aggregate Common Shares
shall be reserved for subscription by the ESOP and the officers, directors and
executive employees of the Holding Company and its subsidiaries, including the
Stock Company, pursuant to Article VIII below. It is contemplated that any
portion of the Aggregate Common Shares allocated to, but not issued to, Eligible
Policyholders, the ESOP or the
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Management Group (as defined in Section 8.1(b)) shall be offered for sale to the
public. The procedures for offering the shares of Common Stock pursuant to the
Subscription Rights are set forth in Article IX below.
ARTICLE VII
ALLOCATION OF POLICYHOLDER CONSIDERATION
The allocation of the Preferred Stock and the Subscription Rights,
described in Sections 6.1 and 6.2 above, shall be determined as follows:
7.1 Preferred Stock. Each Eligible Policyholder shall be paid
consideration based upon the allocation to such Policyholder of a number of
shares of Preferred Stock as follows:
(a) Each Eligible Policyholder shall receive a total number of shares
of Preferred Stock equal to the sum of (i) and (ii) below.
(i) A fixed number of shares of Preferred Stock based upon the
number of Policies, and earned premium attributable to each Policy, of
which such Policyholder was the owner of record during the period from
August 20, 1993, through August 20, 1996 (the "Eligibility Period").
Specifically, each Eligible Policyholder shall be entitled to Ten (10)
shares of Preferred Stock for each Policy of which such Policyholder was
the owner of record during the Eligibility Period. Additionally, each
such Policyholder shall be entitled to ( ) share of Preferred
Stock for each Dollars ($ ) of earned premium attributable
to Policies of which such Policyholder was the owner of record during
the Eligibility Period. A Policyholder shall not be entitled to a share
of Preferred Stock for any fraction of earned premium less than
Dollars ($ ).
(ii) A variable number of shares of Preferred Stock based upon an
actuarial formula determining the contribution to surplus attributable
to each Eligible Policyholder during the Eligibility Period. Only
Eligible Policyholders whose policies were "guaranteed cost" shall
receive any shares pursuant to this section 7.1(a)(ii). Subject thereto,
the number of shares of Preferred Stock comprising the variable
component for each Eligible Policyholder shall be determined according
to the Actuarial Contribution Memorandum, attached hereto as Exhibit G.
The actuarial formula explained therein is substantially similar to the
methodology utilized in determining the dividends payable to ESIF
Members during ESIF's existence as a self-insurance fund.
(b) Thirty percent (30%) of the total number of shares of Preferred
Stock that will be issued by the Holding Company pursuant to this Plan
shall be allocated as the aggregate fixed component and the remaining
seventy percent (70%) shall be allocated as the aggregate variable
component.
7.2 Subscription Rights. Each Eligible Policyholder shall receive
Subscriptions Rights based upon the allocation to such Policyholder of
Subscription Rights to purchase Common Stock as follows:
(a) The total number of shares of Common Stock that will be issued by
the Holding Company (the "Aggregate Common Shares") shall be determined by
the Board of Trustees or a committee of the Board of Trustees of the Stock
Company based upon (i) the amount of cash that the Holding Company needs to
fund the Financing, plus any other working capital needs of the Holding
Company, and its subsidiaries, including the Stock Company, and (ii) the
price per share at which the Holding Company actually offers its Common
Stock pursuant to the Subscription Rights and any subsequent sale of Common
Stock to the public (the "Per Share Offering Price"). The amounts described
in items (i) and (ii) shall be determined with the help of professional
advisors and will be agreed upon by the Board of Trustees of the Stock
Company and the Holding Company. A further description of the determination
of the Per Share Offering Price is set forth in Section 9.5.
(b) Each Eligible Policyholder shall receive Subscription Rights to
purchase up to 4.99 percent of Aggregate Common Shares at a price per share
equal to the Per Share Offering Price, with a minimum required purchase of
one hundred (100) shares of Common Stock for each Eligible Policyholder who
chooses to subscribe. In the aggregate, Eligible Policyholders shall be
allocated Subscription Rights to
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one hundred percent (100%) of the Aggregate Common Shares, less the shares
subscribed for by the ESOP and the Management Group, which together shall
not exceed twenty percent (20%) of the Aggregate Common Shares. In the
event that the Eligible Policyholders collectively subscribe to more than
the eighty percent (80%) of the Aggregate Common Shares that has been
initially allocated to them, such eighty percent (80%) of the Aggregate
Common Shares, plus any additional shares that are not subscribed for by
the ESOP and the Management Group (as defined in Section 8.1(b)), shall be
allocated among individual Eligible Policyholders by multiplying the ratio
of the earned premium attributable to Policies of which each Policyholder
was the owner of record during the Eligibility Period to the total premium
earned during the Eligibility Period by the total number of shares
representing the allocation to Eligible Policyholders.
(c) No Person other than the ESOP shall be permitted, individually or
in conjunction with any affiliated Person, to acquire directly or
indirectly more than 4.99 percent of the Common Stock, without Department
approval as required by section 628.461, Florida Statutes.
ARTICLE VIII
ALLOCATION OF ADDITIONAL SUBSCRIPTION RIGHTS
8.1 In order to provide incentives to the directors, officers and executive
employees of the Holding Company and its subsidiaries, including the Stock
Company, in a manner comparable to other publicly-owned companies, and to
encourage these individuals future to become partners in its development, twenty
percent (20%) of the Aggregate Common Shares shall be set aside for subscription
by or on behalf of those individuals, as follows:
(a) The Holding Company shall grant Subscription Rights to the ESOP to
purchase up to ten percent (10%) of the Aggregate Common Shares. The price
to be paid by the ESOP for the purchase of each share of Common Stock
pursuant to such Subscription Rights shall be the Per Share Offering Price.
(b) The Holding Company shall also grant Subscription Rights to
certain officers, directors and executive employees of the Holding Company
and its subsidiaries, including the Stock Company (the "Management Group")
to purchase up to an aggregate of ten percent (10%) of the Aggregate Common
Shares. The price to be paid by each member of the Management Group for the
purchase of each share of Common Stock pursuant to such Subscription Rights
shall be the Per Share Offering Price. Certain members of the Management
Group may also be granted Subscription Rights in accordance with Section
7.2 because they are Eligible Policyholders. However, no member of the
Management Group shall be permitted, individually or in conjunction with
any affiliated Person, to acquire directly or indirectly more than 4.99
percent of the Common Stock, pursuant to all Subscription Rights granted to
such member.
(c) Any shares of the Aggregate Common Shares that are not subscribed
to by the ESOP or the Management Group, as the case may be, shall be
available for purchase by Eligible Policyholders, in the event that the
Eligible Policyholders subscribe for more than the 80% of the Aggregate
Common shares initially allocated for subscription by the Eligible
Policyholders.
ARTICLE IX
SUBSCRIPTION AND PUBLIC OFFERINGS
9.1 Subscription Offering Procedures. The Stock Company and the Holding
Company will prepare a joint proxy statement/prospectus (the "Prospectus"),
pursuant to which each Voting Policyholder will be asked to vote on the
Conversion and other matters set forth in this Plan. In addition, pursuant to
the Prospectus, the Holding Company will offer for sale shares of its Common
Stock pursuant to exercise of the Subscription Rights (the "Subscription
Offering"). Also pursuant to the Prospectus and simultaneously with the
Subscription Offering, the Holding Company will offer its Preferred Stock to
Eligible Policyholders. If the
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requisite number of the Voting Policyholders approve the Conversion, the
Preferred Stock will be distributed to each Eligible Policyholder in
consideration of such Eligible Policyholder's Membership Interest, without any
exercise of Subscription Rights by Eligible Policyholders. As soon as
practicable after the Department has approved this Plan and the Prospectus has
been declared effective by the Securities and Exchange Commission, the
Prospectus will be delivered to each Eligible Policyholder, the ESOP and the
Management Group, along with an order form (the "Order Form") for use by such
Persons in exercising his or its Subscription Rights for Common Stock. Each
Order Form will contain, among other things, the following:
(a) A specified date by which all Order Forms must be received by the
Holding Company, which date shall be not less than twenty (20) nor more
than forty-five (45) days following the date on which the Order Forms are
mailed by the Holding Company, and which date shall constitute the
termination of the Subscription Offering;
(b) The Per Share Offering Price;
(c) A description of the minimum and maximum number of shares of
Common Stock which may be subscribed for pursuant to the exercise of
Subscription Rights;
(d) Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Common Stock for which such Person
elects to subscribe and the available alternative methods of payment;
(e) An acknowledgment that the recipient of the Order Form has
received a copy of the Prospectus prior to the execution of the Order Form;
(f) A statement to the effect that the Subscription Rights are
nontransferable, will be void at the end of the Subscription Offering, and
can only be exercised by the Persons to whom they are granted at least 48
hours prior to timely delivery to the Holding Company of a properly
completed and executed Order Form, together with cash (if delivered in
person) or check or money order in the full amount of the purchase price as
specified in the Order Form for the shares of Common Stock for which the
recipient elects to subscribe in the Subscription Offering; and
(g) A statement that the executed Order Form, once received by the
Holding Company, may not be modified or amended by the subscriber without
the consent of the Holding Company.
9.2 Payments for Subscriptions. (a) All payments for Common Stock
purchased pursuant to the Subscription Rights must be delivered in full to the
Holding Company, together with a properly completed and executed Order Form on
or prior to the expiration date specified on the Order Form, unless such date is
extended by the Holding Company. Notwithstanding the foregoing, if the ESOP
subscribes for shares during the Subscription Offering, the ESOP will not be
required to pay for such shares at the time it subscribes, but rather may pay
for such shares of Common Stock on the Effective Date, provided that there is in
force from the time of its subscription until the Effective Date a loan
commitment from a financial institution reasonably acceptable to the Holding
Company to lend to the ESOP, on the Effective Date, the aggregate Per Share
Offering Price owed by the ESOP pursuant to its subscription.
(b) Payment for Common Stock subscribed for in the Subscription Offering
shall be held by the Holding Company in a segregated, interest-bearing escrow
account (the "Escrow Account"). On the Effective Date, the Holding Company shall
apply each subscriber's proceeds in the Escrow Account to satisfy the applicable
subscription price owed by such subscriber. The Holding Company shall as soon as
practicable thereafter distribute to each subscriber the amount of interest
earned in the Escrow Account on such subscriber's payment, net of any costs to
the Holding Company of maintaining the Escrow Account. If for any reason the
Conversion is not consummated, all payments made by subscribers shall be
refunded to them (with interest net of any costs to the Holding Company of
maintaining the Escrow Account) as soon as practicable after the determination
that no such consummation shall occur.
9.3 Undelivered, Defective or Late Order Forms. In the event that Order
Forms (i) are not delivered and are returned to the Holding Company by the
United States Postal Service, or the Holding Company is unable to locate the
addressee, (ii) are not received back by the Holding Company or are received by
the
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Holding Company after the expiration date specified thereon, (iii) are
defectively filled out or executed, or (iv) are not accompanied by the full
required payment for the shares of Common Stock subscribed for, the Subscription
Rights of the Person to whom such rights have been granted will lapse as
specified thereon; provided, however, that the Holding Company may, but will not
be required to, waive any immaterial irregularity on any Order Form or require
the submission of corrected Order Forms or the remittance of full payment for
subscription shares by such date as the Holding Company may specify. The
interpretation of the Stock Company of terms and conditions of the Plan, and of
the Holding Company of terms and conditions of the Order Forms, will be final,
subject to the authority of the Department.
9.4 Public Offering. The Subscription Offering will include simultaneous
offerings to the Eligible Policyholders, the ESOP and the Management Group. If
feasible, all shares of the Aggregate Common Shares not subscribed for in the
Subscription Offering may be sold in a public or private offering, subject to
such terms, conditions and procedures as may be determined by the Holding
Company. In such offering, no Person, individually or in conjunction with any
affiliated Person, shall be permitted to acquire directly or indirectly more
than 4.99 percent of the Aggregate Common Stock, without approval of the
Department pursuant to section 628.461, Florida Statutes, provided that such
limitation shall not be applicable to underwriters for purposes of such an
offering but shall be applicable to the sales by the underwriters to the public.
The amount to be paid by the underwriters in such a public offering shall be
equal to the Per Share Offering Price less an underwriting discount to be
negotiated among such underwriters and the Holding Company. Such public offering
will be commenced as soon as practicable following the date upon which the
Subscription Offering terminates. If for any reason a public offering of any of
the Aggregate Common Shares not sold in the Subscription Offering cannot be
effected, or in the event that any insignificant number of remaining shares is
not sold in the Subscription Offering or the subsequent public offering, other
purchase arrangements may be made by the Holding Company.
9.5 Per Share Offering Price. All shares of Common Stock sold pursuant to
the Subscription Offering and the subsequent public or private offering shall be
sold for a uniform price. The Per Share Offering Price shall be agreed upon by
the Boards of Directors or a committee of the Board of the Stock Company and the
Holding Company prior to commencement of the Subscription Offering.
ARTICLE X
STOCK INCENTIVE PLAN FOR EMPLOYEES AND DIRECTORS
10.1 Employee Plan. It is anticipated that the Holding Company will
implement the 1996 Employee Incentive Plan (the "Employee Plan"), providing for
stock and stock-based incentive awards to be granted to certain key employees of
the Holding Company and its subsidiaries, including the Stock Company. The
purpose of the Employee Plan is to promote the success, and enhance the value,
of the Holding Company, by linking the personal interests of the Holding
Company's key employees to those of Holding Company shareholders and by
providing the Holding Company's key employees with an incentive for outstanding
performance. Subject to the terms and conditions set forth in the Employee Plan,
a committee of the Holding Company's Board of Trustees, comprised of at least
two directors who are not also employees of the Holding Company, will have
discretion to select the key employees who are eligible to participate and to
determine their awards.
10.2 Director Plan. It is also anticipated that the Holding Company will
implement the 1996 Stock Option Plan for Outside Directors (the "Director
Plan"), providing for the Holding Company to grant to non-employee directors
options to purchase shares of the Holding Company's Common Stock. The purpose of
the Director Plan is to advance the interests of the Holding Company by
encouraging the non-employee directors to own Common Stock of the Holding
Company, thereby giving them an increased incentive to devote their efforts to
the success of the Holding Company. Each non-employee director will be entitled
to receive a number of options determined by a predetermined formula that is set
forth in the Director Plan.
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ARTICLE XI
POLICYHOLDER INTERESTS
Upon Conversion, the Policies held by Policyholders will be converted from
assessable Policies to non-assessable Policies, without any endorsement or
modification thereto. Policyholders will remain liable for all assessments
imposed prior to the Effective Date. Policyholders will be relieved of all
future contingent liabilities arising after the Effective Date from such
Policies held. Insurance coverage under insurance policies issued by ESIF,
including, without limitation, Policy coverages and benefits, will continue
unaffected.
ARTICLE XII
FEDERAL TAX CONSEQUENCES
It is intended that the Conversion, the Subscription Offering and the
public or private offering will be regarded for federal income tax purposes as
one transaction with several discrete steps having the tax consequences outlined
herein. The conversion of ESIF into Mutual Company is intended to be treated for
federal income tax purposes as a tax-free reorganization under section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). The
conversion of Mutual Company into Stock Company is intended to be treated as a
tax-free Code section 368(a)(1)(E) recapitalization. Finally, the exchange by
Eligible Policyholders of their Membership Interests in Mutual Company in return
for the Preferred Stock and the exchange by Eligible Policyholders, the ESOP,
the Management Group and the underwriters of cash for Common Stock is intended
to be treated as a tax-free exchange under Code section 351. This Plan of
Conversion shall constitute a plan to effect a change in the identity of ESIF, a
plan of recapitalization and a plan of exchange under Section 351. Eligible
Policyholders and ESIF, Mutual Company, Stock Company and Holding Company shall
recognize no income, gain or loss as a result of the transaction contemplated by
this Plan. ESIF may seek a ruling from the Internal Revenue Service to confirm
the above described federal income tax consequences. As a condition to closing
the transactions contemplated by this Plan, ESIF shall have received such ruling
or have received an opinion of its counsel substantially to the same effect (in
which event it may withdraw the ruling request to the Internal Revenue Service).
ARTICLE XIII
CONDITIONS TO EFFECTIVENESS
In order for the Plan to become effective, all of the conditions listed
below must be satisfied. No Person shall have any rights or claims against ESIF,
the Mutual Company, the Stock Company, the Holding Company, or any of their
directors, officers, employees or agents, based upon the Plan not becoming
effective due to the failure of one or more of the conditions set forth below to
be satisfied.
13.1 Approval of the Plan by the Department and Policyholders. The Plan
and the Restated Articles of Incorporation and Bylaws of Stock Company shall
have been approved by the Department and by the necessary vote of the Voting
Policyholders.
13.2 Approval of the Application by the Department. ESIF's application for
approval to convert to an assessable mutual insurer shall have been approved by
the Department.
13.3 Financing. The Holding Company must have completed such equity or
debt financing transaction or transactions which is or are adequate to
capitalize Stock Company in the manner described below.
13.4 Capitalization of Stock Company. On the Effective Date, Stock Company
must have surplus as to Policyholders in an amount: (i) not less than that
required pursuant to Section 624.407, Florida Statutes, of a newlylicensed
Florida stock insurer; (ii) not less than an amount sufficient to satisfy the
premium to surplus requirements of Section 624.4095, Florida Statutes; and (iii)
acceptable to the Department. Section 624.4095 provides that an insurer's ratio
of actual annual written premiums to current surplus as to Policyholders must
not exceed 10 to 1 for gross written premiums and must not exceed 4 to 1 for net
written premiums. For the purposes of the foregoing, Section 624.4095 provides
that premiums shall be calculated as the product of the
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actual or projected premiums and the following: (i) for property insurance,
0.90; (ii) for casualty insurance, 1.25; (iii) for health insurance, 0.80; and
(iv) for all other kinds of insurance, 1.00. Notwithstanding the foregoing, the
Department may, in practice, require a higher level of Policyholders' surplus
for a domestic insurer after taking into consideration factors including, but
not limited to: (i) the lines of business underwritten; (ii) the maturity of the
insurer and its business; (iii) the quality of the asset portfolio of the
insurer, (iv) the experience and competence of the management of the insurer;
and (v) applicable risk-based capital requirements.
13.5 Filing of Articles of Incorporation and Bylaws. The Restated Articles
of Incorporation and Bylaws of Stock Company shall be filed in the manner
provided by applicable statute or regulation.
13.6 Policyholder Assessment. No assessments shall have been imposed
against Policyholders.
13.7 Tax Ruling or Opinion. ESIF shall have received the tax ruling or
opinion described in the last sentence of Article XII.
ARTICLE XIV
FAILURE OF PLAN TO BECOME EFFECTIVE
If the Plan does not become effective, the Mutual Company will remain a
group self-insurance fund. ESIF's articles of incorporation and bylaws will not
be restated pursuant to the Plan, the Membership Interests will remain
unchanged, and Policyholders will continue to be liable for assessments for each
year that funds of ESIF are insufficient to satisfy its liabilities as if this
Plan had not been proposed. The expenses incurred in the process of proposing
the Conversion and recapitalization contemplated by the Plan shall be borne
exclusively by ESIF.
ARTICLE XV
MISCELLANEOUS PROVISIONS
15.1 Amendment of Plan. At any time prior to the Effective Date, the Board
of Trustees of ESIF may amend this Plan and any filing made pursuant to this
Plan so long as such amendment is consistent with the intent and purposes of the
Plan as originally filed. If an amendment is adopted after the Plan has been
approved by Voting Policyholders at the Special Meeting, and such amendment is
not, in the judgment of the Board of Trustees of ESIF, materially
disadvantageous to Policyholders, and in conformity with such intent and
purposes, the Plan, as amended, need not be submitted for reconsideration by
Voting Policyholders.
15.2 Continuity of Corporate Existence. Upon the Conversion and
recapitalization of ESIF, as provided for in this Plan, the corporate existence
of ESIF shall continue uninterrupted in the form of Stock Company. All rights,
franchises, licenses and interests of ESIF in and to every type of property,
real, personal and mixed, and all choses in action shall continue unaffected and
uninterrupted by the Conversion and recapitalization and shall accrue to the
Stock Company. This Plan shall not be construed to result in any real or
constructive issuance or exchange of any insurance Policy or any other transfer
of any assets, rights or obligations by ESIF. All obligations and liabilities of
ESIF shall continue unaffected and uninterrupted by the Conversion and
recapitalization in the Stock Company. No action or proceeding pending at the
Effective Date to which ESIF is a party shall be abated or discontinued by
reason of this transaction but may be prosecuted to final judgment by the Stock
Company in the same manner as if the recapitalization and conversion had not
taken place. For all purposes, Stock Company shall be deemed to have been
organized on April 1, 1978, the initial date of organization of ESIF.
15.3 Extensions of Time Periods. In the event that subsequent to the
approval of this Plan by the Department, this Plan or any action contemplated by
this Plan becomes the subject of one or more legal or equitable proceedings in
any state, federal court or administrative agency in the United States, then the
periods referred to in the definition of the "Effective Date" and Article III of
this Plan, respectively, may be
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lengthened by a period of time equal to the pendency of such proceeding or
proceedings plus such previously determined periods.
15.4 Governing Law. This Plan, and the rights and obligations of all
parties under this Plan, will be governed and construed in accordance with the
Florida Insurance Code and other applicable laws of the State of Florida without
regard to principles of conflicts of laws.
15.5 Interpretation of Plan. This Plan and any filing made pursuant to
this Plan shall be interpreted in good faith by ESIF, and, unless objected to by
the Department, such interpretation shall be binding upon all Policyholders and
other Persons.
15.6 Name Change. Immediately upon the Effective Date, the name of Stock
Company will be changed from Employers Self Insurers Fund to a name to be chosen
by the Board of Trustees.
15.7 Oversights. If ESIF complies substantially and in good faith with the
requirements of this Plan, the Department, the Florida Insurance Code and other
applicable laws and regulations with respect to the giving of any notice, proxy,
proxy statement or other materials to the Voting Policyholders or other Persons,
or any other determination or action required by the Plan, then the failure or
inability to comply in every respect with such requirements in any particular
case shall not impair the validity of the actions or proceedings taken under
this Plan or entitle any Person to any injunctive or other equitable relief with
respect thereto.
15.8 Right to Rely upon Documents Deemed Genuine. ESIF, its Board of
Trustees, and its agents, officers and employees shall have the right to rely
upon documents and records deemed in good faith to be genuine, authorized or
properly executed and shall incur no liability or obligation for acting in
reliance thereon.
15.9 Authority to Remedy Errors. Subject to the terms of this Plan and
with the approval of the Department, the Holding Company may issue additional
shares of Preferred or Common Stock and take any other action it deems
appropriate to remedy errors or miscalculations made in connection with this
Plan.
15.10 Corrections. ESIF may make such modifications to the Plan as are
appropriate to correct errors, clarify existing items or make additions to
correct manifest omissions in the Plan; provided, however, that material
modifications must be approved by the Department.
15.11 Costs and Expenses. All reasonable costs, including those costs
attributable to the use of the staff personnel and outside advisors, consultants
and attorneys, relating to the Plan, shall be borne by the Stock Company or the
Holding Company.
15.12 No Preemptive Rights. Other than the Subscription Rights referred to
in the Plan, no Policyholder of ESIF, Mutual Company or Stock Company shall have
any preemptive right to acquire shares of Common or Preferred Stock in the
Holding Company or Common Stock in the Stock Company in connection with or as a
result of this Plan.
IN WITNESS WHEREOF, this Amended Plan of Conversion and Recapitalization
has been executed as of the date first above written.
EMPLOYERS SELF INSURERS FUND
By:
------------------------------------
Name:
----------------------------------
Chairman of the Board of Trustees
ATTEST:
- --------------------------------------
Secretary
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EXHIBIT D
[SEAL]
THE TREASURER OF THE STATE OF FLORIDA
DEPARTMENT OF INSURANCE
BILL NELSON
IN THE MATTER OF:
CASE NO. 17191-96-C
EMPLOYERS SELF INSURERS FUND;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY, AN ASSESSABLE MUTUAL;
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY; AND SUMMIT HOLDING
SOUTHEAST, INC.
- ---------------------------------------------------/
CONSENT ORDER
THIS CAUSE came on to be considered upon an application with attachments
(Collectively referred to herein as the "APPLICATION") filed on behalf of
APPLICANTS, Employers Self Insurers Fund ("ESIF"), Bridgefield Employers
Insurance Company, an Assessable Mutual ("BEIC MUTUAL"), Bridgefield Employers
Insurance Company ("BEIC STOCK"), and Summit Holding Southeast, Inc. ("SUMMIT
SOUTHEAST") with the Florida Department of Insurance (the "DEPARTMENT") on or
about August 20, 1996, pursuant to Sections 624.463, 628.461, 628.6013, and
628.6017, Florida Statutes. After a complete review of the entire record, and
upon consideration thereof and being otherwise fully advised in the premises,
the Treasurer and Insurance Commissioner, as head of the DEPARTMENT, finds as
follows:
1. The Treasurer and Insurance Commissioner, as head of the DEPARTMENT, has
jurisdiction over the subject matter and of the parties herein.
2. The proposed conversion of ESIF from a group self-insurance fund to an
interim domestic assessable mutual insurer, BEIC MUTUAL, is in compliance with
and approved pursuant to Section 624.463 and 628.6013, Florida Statutes, subject
to and contingent upon compliance with the terms of this Consent Order.
3. The proposed formation of BEIC MUTUAL is in compliance with and approved
pursuant to applicable provisions of Chapter 628, Part II, Florida Statutes
including Section 628.6013, Florida Statutes, subject to and contingent upon
compliance with the terms of this Consent Order.
4. The proposed conversion of BEIC MUTUAL from an interim domestic
assessable mutual insurer to a domestic stock insurer, BEIC STOCK, is in
compliance with and approved pursuant to Section 628.6017, Florida Statutes,
subject to and contingent upon compliance with the terms of this Consent Order.
5. The proposed acquisition of all outstanding shares of BEIC STOCK by
SUMMIT SOUTHEAST as outlined in the Amended Plan of Conversion and
Recapitalization of Employers Self Insurers Fund (hereinafter referred to as the
"Amended Plan of Conversion and Recapitalization") submitted to the DEPARTMENT
on November 5, 1996 is in compliance with and approved pursuant to Section
628.461, Florida Statutes, subject to and contingent upon compliance with the
terms of this Consent Order.
6. Pursuant to APPLICANTS' APPLICATION, including the Amended Plan of
Conversion and Recapitalization and the Plan of Operation, APPLICANTS will take
a number of intermediate steps in order to convert from a group self insurance
fund to an assessable mutual insurer and ultimately to a domestic stock insurer
which shall then be acquired by a newly formed holding company. As consideration
for the exchange of membership interests in BEIC MUTUAL, the APPLICATION
provides for the elimination of any liability the members may have for future
assessments, issuance of Preferred Stock of SUMMIT SOUTHEAST, and Subscription
Rights to purchase Common Stock of SUMMIT SOUTHEAST. Further, in
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accordance with the Amended Plan of Conversion and Recapitalization and the Plan
of Operation and pursuant to the provisions of Section 628.161(6)(d), Florida
Statutes, BEIC STOCK shall hold all of ESIF's members harmless from any
assessment for liabilities of ESIF before the effective date. Subject to the
requirements imposed by this Consent Order, the Amended Plan of Conversion and
Recapitalization of ESIF and BEIC MUTUAL has been determined to be equitable to
the members of ESIF and of BEIC MUTUAL pursuant to Sections 624.463, 628.6013,
and 628.6017, Florida Statutes.
7. APPLICANTS have submitted to, and the Department has relied upon, as
part of the APPLICATION, the following:
a) all documents which will be submitted or distributed to members of
ESIF and BEIC MUTUAL in connection with the conversions and acquisition
transactions, including, in draft form, the Proxy Statement with referenced
exhibits, the proxy card. Notice of Meeting of Members of ESIF and BEIC
MUTUAL, and the letter to members, which will accompany the notice, Proxy
Statement, and proxy card;
b) the proposed Amended Plan of Conversion of ESIF and BEIC MUTUAL to
BEIC STOCK, including the proposed Articles of Incorporation and Bylaws of
BEIC MUTUAL and proposed Restated Articles of Incorporation and Restated
By-Laws of BEIC STOCK;
c) the final version of the proposed Articles of Incorporation and
By-Laws of SUMMIT SOUTHEAST;
d) the proposed "Certificates of Designation, Preferences, and Rights
of Series A Preferred Stock" and the "Recapitalization Agreement".
e) the final version of the Plan of Operation of BEIC STOCK.
8. The Department conducted a public hearing in Tallahassee, Florida at
10:00 A.M. on Thursday, October 10, 1996 pursuant to notice in the Florida
Administrative Weekly. Further, APPLICANTS' have represented, and the Department
has relied upon said representation, and the record reflects that notice of the
public hearing was advertised in six major newspapers in six major cities
located throughout Florida in advance of the public hearing and in the form
presented to the Department at the public hearing. The Notices appeared both in
the "Legal Notices" section of each paper and in a standard advertising space
prominently displayed elsewhere in each paper. Pursuant to the notice, the
Department elicited testimony from representatives of APPLICANTS' describing the
proposed transactions and opened the floor to comments, testimony, and evidence
concerning the APPLICATION from those in attendance. The information received
has been considered by the Department in determining to enter into this Consent
Order.
9. APPLICANTS have retained THE CHICAGO CORPORATION to review the fairness
of the consideration to be paid under the Amended Plan of Conversion and
Recapitalization of ESIF and BEIC MUTUAL to the members of BEIC MUTUAL in
exchange for their membership interests, from a financial point of view, and to
render its opinion to ESIF and the Board of Organizers of BEIC MUTUAL. The
written opinion has been filed with, and relied upon by, the DEPARTMENT and is
an attachment to the Proxy Statement. THE CHICAGO CORPORATION's written opinion
states "that the Consideration to be received by the Eligible Policyholders
pursuant to the Plan [of Conversion and Recapitalization] is fair, from a
financial point of view, to the Eligible Policyholders."
10. APPLICANTS have retained the law firm of McCONNAUGHHAY, ROLAND MAIDA, &
CHERR, P.A. to render its opinion as to whether the APPLICATION and the
transactions contemplated by the APPLICATION are in conformance with Florida
law. The written opinion has been filed with, and relied upon by, the DEPARTMENT
and states that "the conversion of ESIF pursuant to the [Amended Plan of
Conversion and Recapitalization] complies with the [Florida Insurance] Code."
11. APPLICANTS have retained the law firm of ALSTON & BIRD to render its
opinion as to the Federal income tax consequences of the APPLICATION and the
transactions contemplated by the APPLICATION. The written opinion has been filed
with, and relied upon by, the DEPARTMENT, relied upon by THE CHICAGO
CORPORATION, and made an attachment to the Proxy Statement. ALSTON &
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BIRD's written opinion concludes that ". . . No gain or loss will be recognized
by the Policyholders on the deemed exchange of their membership interests in
ESIF for membership interests in . . . [BEIC MUTUAL]No gain or loss will be
recognized by . . . [BEIC MUTUAL] . . . on the deemed receipt of the assets and
liabilities of ESIF . . . No gain or loss will be recognized by ESIF on the
deemed transfer of its assets to . . . [BEIC MUTUAL] . . . and the assumption by
. . . [BEIC MUTUAL] . . . of the liabilities of ESIF . . . No gain or loss will
be recognized by the Policyholders on the deemed exchange of their membership
interests in . . . [BEIC MUTUAL] for stock of . . . [BEIC STOCK] . . . No gain
or loss will be recognized by . . . [BEIC STOCK] on its deemed issuance of stock
in exchange for the . . . [BEIC MUTUAL] . . . membership interests of
Policyholders . . . No gain or loss shall be recognized by the
. . . [Policyholders] on their transfer of property to . . . [SUMMIT SOUTHEAST]
solely in exchange for . . . [SUMMIT SOUTHEAST] . . . stock No gain or loss
shall be recognized by . . . [SUMMIT SOUTHEAST] on the issuance of its common
stock and preferred stock in exchange for common stock of . . . [BEIC STOCK]."
12. APPLICANTS have retained THE CHICAGO CORPORATION to render its opinion
as to the financial forecasts for BEIC STOCK after the implementation of the
APPLICATION and the transactions contemplated by the APPLICATION. The written
opinion has been filed with, and relied upon by, the DEPARTMENT, is consistent
with the findings made by THE CHICAGO CORPORATION in conjunction with the
issuance of the fairness opinion in this matter, and will be made an attachment
to the Proxy Statement. THE CHICAGO CORPORATION's written opinion states that
"It is our opinion that the assumptions underlying the pro forma projections
provide a reasonable basis for management's forecasts . . ."
13. APPLICANTS have retained the accounting firm of KPMG PEAT MARWICK to
render its opinion as to the March 31, 1996 statutory-basis loss and loss
adjustment expense reserves for ESIF. The written opinion has been filed with,
and relied upon by, the DEPARTMENT and relied upon by THE CHICAGO CORPORATION.
KPMG PEAT MARWICK's written opinion concludes that ". . . unpaid loss and loss
adjustment expense reserves as of March 31, 1996 described herein are computed
in accordance with accepted loss reserving standards and principles and make
reasonable provision for all unpaid loss and loss adjustment expense obligations
of the Fund under the terms of its policies and agreements." If the Effective
Date does not arise prior to March 31, 1997 APPLICANTS shall promptly submit to
the DEPARTMENT an opinion as to the March 31, 1997 statutory-basis loss and loss
adjustment expense reserves for ESIF.
14. APPLICANTS have retained the reinsurance intermediaries of BRENTWOOD
SERVICES INCORPORATED to render its opinion as to the reinsurance position of
ESIF after its conversion to BEIC STOCK. The written opinion has been filed
with, and relied upon by, the DEPARTMENT and relied upon by THE CHICAGO
CORPORATION. BRENTWOOD SERVICES INCORPORATED's written opinion concludes that
"In the event that . . . [ESIF] converts to an insurance company, we feel that
the existing excess insurance policy would continue to result in actual risk
transfer and is appropriate given the projected liabilities, the solvency
position of the fund, the pro formas and the plan of operations as we now
understand them . . ."
15. APPLICANTS have retained KPMG PEAT MARWICK to render its opinion as to
the solvency position of ESIF after its conversion to BEIC STOCK. The written
opinion has been filed with, and relied upon by the DEPARTMENT. The results of
the "Schedule of Sensitivity Analysis of Projected Statutory Policyholder
Surplus" included in the opinion performed by KPMG PEAT MARWICK indicates that
after the conversion to a stock company and based on assumptions contained in
projected financial statements, ESIF will exceed the minimum capital and surplus
requirements of Florida law in 91.5% of the ten thousand scenarios tested. KPMG
PEAT MARWICK has also concluded that ". . . the underlying assumptions [of the
projected financial statements] provide a reasonable basis for management's
projection . . ."
16. APPLICANTS hereby knowingly and voluntarily waive all rights of any
kind to challenge or to contest this Order, in any forum now available,
including the right to any administrative proceeding, Circuit or Federal Court
action, or any appeal.
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IT IS THEREFORE ORDERED:
17. Subject to the terms and conditions contained herein, the Treasurer and
Insurance Commissioner hereby approves the transactions contemplated by the
APPLICATION to include the proposed conversion of ESIF to BEIC MUTUAL, the
proposed immediately subsequent conversion of BEIC MUTUAL to BEIC STOCK, and the
proposed immediately subsequent acquisition of BEIC STOCK by SUMMIT SOUTHEAST
pursuant to the Amended Plan of Conversion and Recapitalization submitted with
the APPLICATION.
18. APPLICANTS shall not mail the Proxy Statement and related enclosures,
without first obtaining separate written approval of the DEPARTMENT for the
final draft of said documents.
19. BEIC STOCK shall file with the DEPARTMENT all premium growth reports as
required by Section 624.4243, Florida Statutes, in a complete and timely manner.
20. BEIC STOCK shall report Unearned Premiums on all of its financial
statements in compliance with Section 625.051, Florida Statutes.
21. BEIC STOCK shall follow the guidelines of the NAIC Practices &
Procedures Manual and the NAIC Annual Statement Instructions for Property &
Casualty Companies when accounting for retrospective premiums and when
accounting for return premiums on all of its financial statements.
22. Summit Consulting, Inc. shall file annual audited financial statements
with the DEPARTMENT no later than June 1st of each of the first three years
following the Effective Date. In addition, all affiliates of BEIC STOCK shall
provide the DEPARTMENT with access to their books and records, if so requested.
23. For the three year period following the Effective Date (as defined
herein), BEIC STOCK shall not have or enter into any contract or any other
agreement for a fee with an affiliated entity other than a contract or agreement
that has been approved in writing by the DEPARTMENT. For the three year period
following the Effective Date, fees payable under any such contract with an
affiliated entity shall not be materially increased without the prior written
approval of the DEPARTMENT. For the three year period following the Effective
Date, no such contract shall contain any minimum fee provisions. For the three
year period following the Effective Date, BEIC STOCK shall provide written
notice to the DEPARTMENT and receive its written approval prior to executing any
material amendment to any such contract or agreement, thereafter, BEIC STOCK
shall provide written notice to the DEPARTMENT within thirty (30) days of
executing any material amendment to any such contract or agreement.
24. BEIC STOCK shall not use any type of discounting when computing its
loss reserves and shall not report discounted loss reserves on any of its
financial statements, except for the discounting of loss reserves allowed by
Section 625.091, Florida Statutes.
25. As a condition of the granting of approval of the conversion of ESIF to
BEIC MUTUAL and from there to BEIC STOCK, ESIF has placed a $5 million security
and collateral deposit with the DEPARTMENT's Bureau of Collateral Securities. In
addition, ESIF shall immediately take all steps necessary to make the DEPARTMENT
a co-signor on First Union National Bank of Florida account number 4022015600
(hereinafter referred to as the "First Union Account") currently held in the
name of ESIF with all assets deposited therein pledged to the DEPARTMENT for the
protection of ESIF's members. The balance on the First Union Account shall
exceed $45,000,000 at the time of entry of this Order. No withdrawals shall be
made on this account without the prior written approval of the DEPARTMENT.
Furthermore, APPLICANTS shall provide the DEPARTMENT with monthly reporting on
the balance and activity of such account. If the conversion of ESIF to BEIC
MUTUAL and from there to BEIC STOCK is not effectuated within the time frame
allowed by paragraph 33 of this Order, ESIF shall immediately increase the
amount of the security and collateral deposit it has placed with the
DEPARTMENT's Bureau of Collateral Securities from $5 million to $25 million. If
the conversion of ESIF to BEIC MUTUAL and from there to BEIC STOCK is
effectuated, ESIF, by signing this Consent Order authorizes the transfer of the
$5 million security and collateral deposit now being held by the DEPARTMENT's
Bureau of Collateral Securities to the name of BEIC STOCK. APPLICANTS agree to
sign all necessary documents and render other assistance as
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<PAGE> 5
necessary to effectuate such transfer. Both the funds on deposit with the
DEPARTMENT's Bureau of Collateral Securities as well as the funds on deposit in
the First Union Account shall be designated deposits pursuant to section
624.411, Florida Statutes.
26. For the three year period following the Effective Date, BEIC STOCK
shall, for purposes of financial examinations, be classified as an insurer which
is required to be examined in accordance with Section 624.316(2)(f), Florida
Statutes. Thereafter, BEIC STOCK shall remain subject to other applicable
provisions of Section 624.316, Florida Statutes.
27. BEIC STOCK shall not include the following assets on any financial
statement filed with the DEPARTMENT, as such assets shall not be admitted for
purposes of determining BEIC STOCK's compliance with the requirements of the
Florida Insurance Code: (i) Any amount representing ceded reinsurance loss that
is disputed by the reinsurer; (ii) Any amount representing the prepayment of
Income Taxes as required by section 625.031, Florida Statutes; (iii) Any amounts
representing assets that are allowed for self-insurance funds or assessable
mutual insurers that are not assets under accounting standards for domestic
insurers under Florida law; and (iv) Any assets that are hypothecated, pledged,
or otherwise encumbered, excluding real estate and mortgages on such held in the
normal course of business and assets pledged to the DEPARTMENT.
28. Any surplus from the transfer of all of the assets and liabilities of
ESIF to BEIC STOCK under the Amended Plan of Conversion and Recapitalization
submitted to the DEPARTMENT is considered contributed surplus and shall be
reported as such on all financial statements of BEIC STOCK.
29. BEIC STOCK shall maintain all assets physically in the State of Florida
in accordance with Section 628.271, Florida Statutes or in compliance with
Section 628.511, Florida Statutes, for as long as BEIC STOCK is a domestic
insurer.
30. Any material deviation from the three year Plan of Operations submitted
as part of the APPLICATION must be approved in advance and in writing by the
DEPARTMENT. APPLICANTS shall substantially comply with the Plan of Operations as
submitted as part of the APPLICATION. If the DEPARTMENT determines that
APPLICANTS are not acting in substantial compliance with the Plan of Operations
or have materially deviated from the Plan of Operations without prior written
approval from the DEPARTMENT, the DEPARTMENT may take administrative action as
appropriate, including, but not limited to, requiring APPLICANTS to bring their
activities into substantial compliance with the Plan of Operations and eliminate
any material deviation from the Plan of Operations and imposing penalties for
the violation of this Consent Order. In any proceeding resulting from the
DEPARTMENT'S administrative action, APPLICANTS shall have the burden of proving
substantial compliance and absence of material deviation by a preponderance of
evidence.
31. A loan from First Union National Bank of North Carolina (hereinafter
the "Bank") to Summit Holding Corporation (hereinafter the "Loan"), is a subject
of the January 11, 1996 Consent Order in DEPARTMENT case number 13402-95-C-AJL.
Any restructuring of the Loan, including revisions to the Credit Agreement
between the Bank and Summit Holding (hereinafter the "Credit Agreement") shall
be subject to prior approval of the DEPARTMENT. No such restructuring of the
Loan shall create any obligation for repayment by Bridgefield Casualty Insurance
Company (hereinafter BRIDGEFIELD CASUALTY) or BEIC STOCK and no assets of
BRIDGEFIELD CASUALTY or BEIC STOCK shall be pledged as collateral or otherwise
encumbered in conjunction with the Loan. Neither BRIDGEFIELD CASUALTY, BEIC
STOCK, nor U.S. EMPLOYERS INSURANCE COMPANY shall make any direct or indirect
investments in subsidiaries or affiliated entities without the DEPARTMENT's
prior written approval. The DEPARTMENT shall grant such approval if the proposed
investment complies with applicable provisions of the Florida Insurance Code
relating to investments in subsidiaries and affiliates and is made in such a
manner to prevent the investment from being subject to recovery under the Credit
Agreement. Custody of the assets of U.S. EMPLOYERS shall be maintained in
Florida, or in the United States with a financial institution which maintains
banking operations in Florida. The physical form, if any, of the assets shall be
maintained in Florida, or in compliance with section 628.511, Florida Statutes.
BRIDGEFIELD CASUALTY and BEIC STOCK shall record any investments in affiliates
as a non-admitted asset in its statutory financial statements, until such
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time as a valuation of such affiliates is rendered by the Securities Valuation
Office of the National Association of Insurance Commissioners, but in no event
in excess of the amounts allowed pursuant to section 625.151(3), Florida
Statutes. If the Bank imposes any material additional requirements on any member
of the SUMMIT SOUTHEAST holding company system which could reasonably be
expected to have a material adverse effect on the financial condition of
BRIDGEFIELD CASUALTY or BEIC STOCK, SUMMIT SOUTHEAST shall obtain the prior
written approval of the DEPARTMENT prior to the additional requirement's taking
effect. In the event that the transactions contemplated by the APPLICATION are
not consummated or for any reason those transactions are reversed or otherwise
voided, all provisions of the January 11, 1996 Consent Order in DEPARTMENT case
number 13402-95-C-AJL shall be enforceable by the parties thereto.
32. In an attempt to avoid potential policyholder confusion as a result of
the transactions contemplated by the APPLICATION, and to avoid unnecessary
impediments to those transactions, BEIC STOCK may utilize the current rates and
rating plans of ESIF through December 31, 1997. After such time, BEIC STOCK
shall file rates with the DEPARTMENT for its written approval unless using rates
not requiring such approval under the Florida Insurance Code or applicable rules
of the DEPARTMENT. BEIC STOCK shall obtain the prior written approval of the
DEPARTMENT for the use of all forms or endorsements to existing forms. Policies
issued with effective dates on or after January 1, 1998 shall be written only on
forms and with rates approved for use by the DEPARTMENT by written approval
obtained after the filing of this Consent Order.
33. The Effective Date of the APPLICATION and the transactions contemplated
by the APPLICATION shall be the date on which the conversions, acquisition and
recapitalization contemplated by the APPLICATION are effectuated. The Effective
Date shall be within six (6) months of the entry of this Consent Order.
APPLICANTS may apply to the DEPARTMENT for up to a six (6) month extension to
this deadline. The granting or denial of such request is in the sole discretion
of the DEPARTMENT. Each conversion, acquisition and recapitalization
contemplated by the APPLICATION shall follow immediately the prior transaction
without delay and all such conversions, acquisition and recapitalization, shall
be effectuated in a single day. The taking of the vote of members of ESIF and
BEIC MUTUAL and, if authorized by the vote of the members, the conversion of
ESIF to BEIC MUTUAL and of BEIC MUTUAL to BEIC STOCK shall occur in immediate
succession and in a single day. The acquisition of the stock of BEIC STOCK by
SUMMIT SOUTHEAST shall be consummated immediately upon the completion of the
conversion of BEIC MUTUAL to BEIC STOCK. Due to the rapid conversion, no
certificates of authority or permits will be physically issued to BEIC MUTUAL as
it shall not transact insurance or engage in any business activity except that
which is required to implement the transactions contemplated by the APPLICATION.
All authority granted to ESIF and BEIC MUTUAL shall terminate immediately upon
their respective conversions. ESIF shall physically surrender its certificate of
authority immediately upon completion of all transactions contemplated by the
APPLICATION.
34. In accordance with the Amended Plan of Conversion and Recapitalization,
and all attachments thereto, ESIF shall submit the Amended Plan of Conversion
and Recapitalization to its members for a vote. The Amended Plan of Conversion
and Recapitalization must be approved by:
A. an affirmative vote of a majority of the members of ESIF, and
B. an affirmative vote of not less than two-thirds ( 2/3rds) of BEIC
MUTUAL "voting policyholders" as defined in the Proxy Statement.
The Secretary of BEIC MUTUAL shall immediately certify the results of the
vote to the DEPARTMENT. A single vote of the members of ESIF and BEIC MUTUAL
approving both conversions shall satisfy the voting requirements of Sections
628.6013(1) and 628.6017(1)(b), Florida Statutes if the votes obtained are
sufficient to satisfy both the 1/2 of all members and 2/3 of all votes cast
requirements set forth therein. On the Effective Date, the Directors of BEIC
MUTUAL shall promptly ratify the execution of this Consent Order on their behalf
by Mr. William B. Bull, a member of the Board of Organizers of BEIC MUTUAL and
who is anticipated to be a Director and President of BEIC MUTUAL. The Secretary
of BEIC MUTUAL shall immediately certify the ratification to the DEPARTMENT.
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35. If the Amended Plan of Conversion and Recapitalization is not approved
by vote of not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting
policyholders" and the approval of at least a majority of all members of ESIF,
the conversion to BEIC MUTUAL and subsequent conversion to BEIC STOCK shall not
be effectuated and ESIF shall remain a group self-insurance fund pursuant to
Section 624.4621, Florida Statutes.
36. If the Amended Plan of Conversion of BEIC MUTUAL is approved by vote of
not less than two-thirds ( 2/3rds) of BEIC MUTUAL's "voting policyholders" and
at least a majority of all members of ESIF, APPLICANTS shall then, on the
Effective Date, effectuate the acquisition of BEIC STOCK by SUMMIT SOUTHEAST.
Additionally, on the Effective Date, the Directors of BEIC STOCK shall promptly
ratify the execution of this Consent Order on their behalf by Mr. William B.
Bull, who is anticipated to be a Director and President of BEIC STOCK. The
Secretary of BEIC STOCK shall immediately certify the ratification to the
DEPARTMENT. Failure to promptly effectuate the acquisition in accordance with
the Amended Plan of Conversion and Recapitalization of BEIC MUTUAL as disclosed
in the Proxy Statement shall result in the recision of the conversions of BEIC
MUTUAL and ESIF and BEIC STOCK shall revert back to ESIF, a group self-insurance
fund pursuant to Section 624.4621, Florida Statutes.
37. The DEPARTMENT has relied upon various unexecuted and draft documents
submitted as part of the APPLICATION pursuant to the proposed conversions and
acquisition transactions. No later than the close of business on the next
business day following the Effective Date, except as otherwise provided below,
APPLICANTS shall submit and verify to the DEPARTMENT true, correct, and complete
copies of the executed documents supporting the conversions and acquisition
transactions. APPLICANTS shall notify the DEPARTMENT in writing of any revisions
to the documents at the time the revisions are made. If, within 30 days of
submission of the executed documents, the DEPARTMENT determines that the
executed documents vary in any material respect from those submitted to and
reviewed by the DEPARTMENT prior to the entry of this Consent Order, the
DEPARTMENT shall notify APPLICANTS in writing of the material deviation and if
the material deviation is not corrected to the DEPARTMENT's satisfaction within
ten days of the notice, the DEPARTMENT may enter a subsequent Order vacating
this Consent Order. Such Order may disapprove the conversions and acquisition
transactions. In addition, if necessary to protect policyholders or the public,
the DEPARTMENT may enter an Immediate Final Order suspending the license of BEIC
STOCK. The DEPARTMENT's determination as to the existence of a material
variation shall be in the DEPARTMENT's sole discretion and shall not be subject
to Section 120.57, Florida Statutes. APPLICANTS shall continue to promptly
report and provide documentation to the DEPARTMENT with respect to any
transactions or arrangements made or entered into for the purposes of these
conversions and acquisition agreements including, but not limited to, the
following documents to be supplied to the DEPARTMENT, except as otherwise
indicated, by close of business on the Effective Date:
(a) A certified copy of the executed Articles of Incorporation of BEIC
MUTUAL as filed with the Secretary of State as well as the executed By-Laws
of BEIC MUTUAL.
(b) A certified copy of the executed Articles of Restatement and
Certificate of Restatement for BEIC MUTUAL as filed with the Secretary of
State.
(c) A certified copy of the executed Restated Articles of
Incorporation of BEIC STOCK as filed with the Secretary of State as well as
the executed Restated By-Laws of BEIC STOCK.
(d) An original certificate of status from the Secretary of State for
BEIC STOCK.
(e) A certified copy of the executed Amended Plan of Conversion and
Recapitalization of ESIF and BEIC STOCK.
(f) The original Waiver of Hearing From Seller executed by BEIC STOCK.
(g) The original Waiver of Hearing From Buyer executed by SUMMIT
SOUTHEAST.
(h) A certified copy of the executed Certificate of Designation,
Preferences and Rights of Series A Preferred Stock.
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(i) Certified executed copies of the "Recapitalization Agreement"
between ESIF and SUMMIT SOUTHEAST.
(j) Upon mailing to members, a certified copy of the Dear Member
Letter, Notice of Meeting, and Proxy Statement together with attachments,
that were sent to the policyholders of ESIF and BEIC MUTUAL for their
conversion to BEIC STOCK.
(k) Within twenty (20) days of the special meeting of policyholders of
ESIF, certified copies of minutes of the meeting.
(l) When available, and in any event, within 30 days of the Effective
Date, certified copies of the minutes of all meetings of APPLICANTS held on
the Effective Date.
(m) A certified copy of the fidelity bond in the name of BEIC STOCK.
(n) Prior to release to any prospective subscribers, a true and
correct copy of the Prospectus of SUMMIT SOUTHEAST.
38. Except as otherwise provided in this Consent Order, upon conversion of
ESIF and BEIC MUTUAL to BEIC STOCK, APPLICANTS shall comply with all
requirements of the Florida Insurance Code relating to the reporting
requirements applicable to domestic stock insurers.
39. APPLICANTS shall, pursuant to section 624.408, Florida Statutes, at and
after the Effective Date, have and maintain policyholder surplus in an amount
not less than that required of a domestic stock insurer and shall be in and
maintain compliance with the requirements of section 624.4095, Florida Statutes,
regarding the ratio of premium to surplus. If implementation of the Amended Plan
of Conversion and Recapitalization results in, BEIC STOCK having policyholder
surplus in an amount that differs in a material amount from the amount shown on
the pro formas submitted to the DEPARTMENT with the APPLICANTS' APPLICATION,
BEIC STOCK shall submit updated pro formas to the DEPARTMENT reflecting the
correct amount of policyholder surplus.
40. Neither ESIF, BEIC MUTUAL, nor BEIC STOCK shall declare, set aside or
pay any dividends or make or agree to make any other distributions or payment or
enter into any transaction, other than in the ordinary course of business and
consistent with past practices, prior to the Effective Date. After the Effective
Date and prior to the Loan Termination Date, neither BEIC STOCK nor BRIDGEFIELD
CASUALTY shall declare, set aside or pay any dividends or premium refunds, or
make any other distributions of the surplus of BEIC STOCK or BRIDGEFIELD
CASUALTY without the prior written approval of the DEPARTMENT. The DEPARTMENT
shall grant such approval if the proposed dividend or premium refund complies
with applicable provisions of the Florida Insurance Code. The term "premium
refunds" as used in this paragraph does not refer to the return of premiums due
under the retrospectively rated plans offered by ESIF, BEIC MUTUAL, and BEIC
STOCK.
41. For the three year period immediately following the Effective Date,
BEIC STOCK shall not assume reinsurance without the prior written approval of
the DEPARTMENT. In addition, BEIC STOCK shall cede reinsurance only to
authorized reinsurers unless prior written approval has been given by the
DEPARTMENT. Furthermore, BEIC STOCK shall within twenty (20) days from the
effective date of any reinsurance treaty for reinsurance ceded or assumed by
BEIC STOCK, submit to the DEPARTMENT a true and correct copy of the cover notes
of such treaty and shall provide a true and correct copy of the entire treaty to
the DEPARTMENT, if so requested. Further, BEIC STOCK shall notify the DEPARTMENT
of any proposed or prospective changes in its reinsurance prior to implementing
such changes.
42. APPLICANTS hereby represent that they have, in the APPLICATION,
described all material terms and conditions that will constitute the conversions
and acquisition and have disclosed and described all transactions and agreements
related thereto. The representations made in the documents, and herein, are
material to the entry of this Consent Order and the APPLICANTS shall conduct
themselves in accordance with the representations and requirements of such
documents.
8
<PAGE> 9
43. That APPLICANTS have made material representations that none of its
officers and/or directors have been charged with or convicted of a felony or
misdemeanor other than minor traffic violations. If the completed fingerprint
cards of said officers and directors furnished to the DEPARTMENT or other
sources utilized by the DEPARTMENT in its investigation process reveal
otherwise, those individuals involved shall be removed as an officer and/or
director of said APPLICANTS, within thirty (30) days after notification by the
DEPARTMENT and replaced with an officer or a director acceptable to the
DEPARTMENT.
44. APPLICANTS have further represented that they have submitted complete
information on each of the principals. If material information on one or more
principal(s) has not been provided, and the DEPARTMENT would not have approved
this APPLICATION if such information had been provided, those individuals
involved shall be removed within thirty (30) days of receipt of notification
from the DEPARTMENT.
45. With respect to the officers and directors identified in the
APPLICATION, upon receipt of such notification from the DEPARTMENT, as described
under paragraphs 44 and 45 above, if the required corrective action is not
timely taken by APPLICANTS, APPLICANTS agree that such failure to act would
constitute an immediate danger to the public and the DEPARTMENT immediately may
suspend or revoke the license of BEIC STOCK without further proceedings.
APPLICANTS further affirm that the above representations are material to the
issuance of this Consent Order.
46. Within 45 days after the Effective Date, BEIC STOCK shall file an
amended Holding Company Registration Statement with the DEPARTMENT. Thereafter,
BEIC STOCK shall file updates to its Holding Company Registration Statement with
the DEPARTMENT as required by Section 628.801, Florida Statutes, and Rule
4-143.046, Florida Administrative Code.
47. For the three year period following the Effective Date, prior to
conducting business in another state, BEIC STOCK shall notify the DEPARTMENT in
writing and submit a copy of the business plan submitted to that state, the
earlier of 60 days prior to writing business or at the time of filing the
business plan with that state.
48. Any administrative contracts entered into by BEIC STOCK must meet the
requirements of Sections 626.091, 626.7451 and 626.7491, Florida Statutes. Any
contract in which BEIC STOCK contracts, with a managing general agent or
administrator, for services must be subject to writing limitations which may be
exercised at the option of the BEIC STOCK.
49. Upon issuance of this Consent Order, APPLICANTS' failure to adhere to
one or more of the terms and conditions contained herein after having been
provided written notice of the failure by the DEPARTMENT and thirty business
days to cure the deviation (Notice and Opportunity to Cure), except as provided
in paragraph 46 herein, may result, without further proceedings, in the
Treasurer and Insurance Commissioner withdrawing approval of the APPLICATION and
the transactions contemplated by the APPLICATION or in the revocation of BEIC
STOCK's certificate of authority. Compliance by APPLICANTS after being provided
a Notice and Opportunity to Cure shall not foreclose the DEPARTMENT from
pursuing disciplinary proceedings as appropriate. The remedy provided herein for
APPLICANTS' failure to adhere to one or more of the terms and conditions
contained herein is not exclusive and shall not foreclose the DEPARTMENT from
pursuing other enforcement or disciplinary actions as provided for by law or
other provisions of this order and including emergency actions with immediate
effect.
50. The parties agree that this Consent Order will be deemed to be executed
when the Treasurer and Insurance Commissioner or his designee has signed a copy
of this Consent Order which bears the signatures of APPLICANTS or their
authorized representatives, notwithstanding the fact that the copy was
transmitted to the agency by facsimile machine. APPLICANTS further agree that
the original of this Consent Order with original signatures will be forwarded to
the DEPARTMENT within three (3) days of its receipt from the DEPARTMENT. Failure
to forward a signed original within the specified time period shall render this
agreement voidable.
9
<PAGE> 10
WHEREFORE, subject to the terms and conditions herein, the APPLICATION and
the transactions contemplated by the APPLICATION are APPROVED, and FURTHER, all
terms and conditions contained herein are hereby ORDERED.
DONE and ORDERED at Tallahassee, Florida, this 15th day of November, 1996.
/s/ PETE MITCHELL
--------------------------------------
Pete Mitchell
Chief of Staff
By execution hereof, ESIF consents to entry of this Consent Order, agree
without reservation to all of the above terms and conditions and shall be bound
by all provisions herein. The undersigned represents, that he/she has the
authority to bind, ESIF to the terms and conditions of this Consent Order.
EMPLOYERS SELF INSURERS FUND
By: /s/ GREG C. BRANCH
------------------------------------
Greg C. Branch
Chairman
CORPORATE SEAL
By execution hereof, BEIC MUTUAL consents to entry of this Consent Order,
agree without reservation to all of the above terms and conditions and shall be
bound by all provisions herein. The undersigned represents, that he/she has the
authority to bind, BEIC MUTUAL to the terms and conditions of this Consent
Order.
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY, AN ASSESSABLE MUTUAL
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
By execution hereof, BEIC STOCK consents to entry of this Consent Order,
agree without reservation to all of the above terms and conditions and shall be
bound by all provisions herein. The undersigned represents, that he/she has the
authority to bind, BEIC STOCK to the terms and conditions of this Consent Order.
BRIDGEFIELD EMPLOYERS INSURANCE
COMPANY
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
10
<PAGE> 11
By execution hereof, SUMMIT SOUTHEAST consents to entry of this Consent
Order, agree without reservation to all of the above terms and conditions and
shall be bound by all provisions herein. The undersigned represents, that he/she
has the authority to bind, SUMMIT SOUTHEAST to the terms and conditions of this
Consent Order.
SUMMIT HOLDING SOUTHEAST, INC.
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
By execution hereof, SUMMIT CONSULTING, INC. consents to entry of this
Consent Order, agree without reservation to all of the above terms and
conditions and shall be bound by all provisions herein. The undersigned
represents, that he/she has the authority to bind, SUMMIT CONSULTING, INC. to
the terms and conditions of this Consent Order.
SUMMIT CONSULTING, INC.
By: /s/ WILLIAM B. BULL
------------------------------------
William B. Bull
President
CORPORATE SEAL
11
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
SUMMIT HOLDING SOUTHEAST, INC.
The undersigned, being an individual, does hereby act as incorporator in
adopting the following Articles of Incorporation for the purpose of organizing a
corporation for profit, pursuant to the provisions of the Florida Business
Corporation Act.
ARTICLE I
NAME
The corporate name for the corporation (hereinafter called the
"Corporation") is Summit Holding Southeast, Inc.
ARTICLE II
PRINCIPAL OFFICE
The street address and the mailing address of the principal office of the
Corporation is 2310 A-Z Park Road, Lakeland, Florida 33801.
ARTICLE III
BUSINESS AND ACTIVITIES
The purposes for which the Corporation is organized shall include the
authority of the Corporation to engage in any lawful business or activity for
which corporations may be organized under the laws of the United States and of
the State of Florida.
ARTICLE IV
CAPITAL STOCK
4.01 TOTAL NUMBER OF SHARES. The total number of shares of all classes of
capital stock ("Shares") which the Corporation shall have the authority to issue
is Twenty-Five Million (25,000,000), consisting of the following classes:
(a) Twenty Million (20,000,000) Shares of common stock, par value $.01
per share, with unlimited voting rights ("Common Stock"); and
(b) Five Million (5,000,000) Shares of preferred stock, par value $10
per share ("Preferred Stock").
4.02 PREFERRED STOCK. Shares of Preferred Stock may be issued for any
purpose and in any manner permitted by law, in one or more distinctly designated
series, as a dividend or for such consideration as the Board of Directors may
determine by resolution or resolutions from time to time adopted.
The Board of Directors is expressly authorized to fix and state, by
resolution or resolutions from time to time adopted prior to the issuance of any
Shares of a particular series of Preferred Stock, the designations, voting
powers (if any), preferences, and relative, participating, optional or other
special rights, and qualifications, limitations, or restrictions thereof,
including, but without limiting the generality of the foregoing, the following:
(1) The distinctive designation and number of Shares of Preferred
Stock which shall constitute a series, which number may from time to time
be increased (but not above the total number of Shares of Preferred Stock
authorized by these Articles of Incorporation and with respect to which the
powers,
13
<PAGE> 2
designations, preferences and rights have not been set forth in any series)
or decreased (but not below the number of Shares of such series then
outstanding), by like action of the Board of Directors and by a certificate
likewise executed, acknowledged, filed and recorded as specified by the
Florida Business Corporation Act;
(2) The rate or rates and times at which dividends, if any, shall be
paid on each series of Preferred Stock, whether such dividends shall be
cumulative or non-cumulative, the extent of any preference, subordination,
or other relationship to dividends declared or paid, or any other amounts
paid or distributed upon, or in respect of, any other class or series of
Preferred Stock or other Shares of any class or series;
(3) Redemption provisions, if any, including whether or not Shares of
any series may be redeemed by the Corporation or by the holders of such
series of Preferred Stock, or by either, and if redeemable, the redemption
price or prices, redemption rate or rates, and such adjustments to such
redemption price(s) or rate(s) as may be determined, the manner and time or
times at which, and the terms and conditions upon which, Shares of such
series may be redeemed;
(4) Conversion, exchange, purchase, or other privileges, if any, to
acquire Shares of any class or series, whether at the option of the
Corporation or of the holder, and if subject to conversion, exchange,
purchase or similar privileges, the conversion, exchange or purchase prices
or rates and such adjustments thereto as may be determined, the manner and
time or times at which such privileges may be exercised, and the terms and
conditions of such conversion, exchange, purchase or other privileges;
(5) The rights, including the amount or amounts, if any, of
preferential or other payments to which holders of any series are entitled
upon the dissolution, winding-up or voluntary or involuntary liquidation of
the Corporation, or the distribution, sale or lease of all or substantially
all assets of the Corporation; and
(6) The terms of the sinking fund, retirement, redemption or purchase
account, if any, to be provided for such series and the priority, if any,
to which any funds or payments allocated therefor shall have over the
payment of dividends, or over sinking fund, retirement, redemption,
purchase account or other payments on, or distributions in respect of,
other series of Preferred Stock or other classes of Shares.
All Shares of the same series of Preferred Stock shall be identical in all
respects, except there may be different dates from which dividends, if any,
thereon may accumulate, if made cumulative.
Issued Shares of any series of Preferred Stock which are acquired by the
Corporation may, as provided by Board of Directors' resolution or resolutions
and applicable law, be returned to authorized but unissued Preferred Stock,
either of the same or of a different series, or undesignated as to series, and
thereafter reissued. In the event the number of Shares of any series of
Preferred Stock is decreased, the Board of Directors may by resolution or
resolutions cause the Shares representing such decrease to be designated or
undesignated as to series.
4.03 Dividends. Dividends upon all classes and series of Shares shall be
payable only from funds lawfully available therefor, which funds shall include,
without limitation, the Corporation's capital surplus. Dividends upon any class
or series of Shares may be paid in cash, property or Shares of any class or
series of, or other securities or evidences of, indebtedness of the Corporation
or any other issuer, as may be determined by resolution or resolutions of the
Board of Directors.
ARTICLE V
TERM OF EXISTENCE
The effective date upon which the Corporation shall come into existence
shall be the date these Articles of Incorporation are filed with the office of
the Secretary of State and it shall exist perpetually thereafter unless
dissolved according to law.
14
<PAGE> 3
ARTICLE VI
INITIAL REGISTERED OFFICE AND AGENT
The name of the initial registered agent of the Corporation is William B.
Bull, and the street address of the initial registered office of the Corporation
in the State of Florida is 2310 A-Z Park Road, Lakeland, Florida 33801.
The written acceptance of the said initial registered agent, as required by
the Florida Business Corporation Act, is set forth following the signature of
the incorporator and is made a part of these Articles of Incorporation.
ARTICLE VII
DIRECTORS
7.01 The number of directors of the Corporation shall not be less than
three nor more than nine, the precise number to be fixed by resolution of the
Board of Directors.
7.02 The election of directors by the shareholders is approved if a quorum
exists, as provided in the Bylaws of the Corporation, and the votes cast
favoring the election of a director exceeds the votes cast opposing the election
of a director.
7.03 The directors shall be divided into three classes, Class I, Class II
and Class III, as nearly equal in number as possible. The term of office for the
Class I directors shall expire at the first annual meeting of the shareholders
in 1997; the term of office for the Class II directors shall expire at the
annual meeting of shareholders in 1998; and the term of office for the Class III
directors shall expire at the annual meeting of shareholders in 1999. At each
annual meeting of shareholders commencing with the meeting held in 1997, the
successors to the directors whose terms are expiring shall be elected to terms
expiring at the third succeeding annual meeting of shareholders. If the number
of directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting of shareholders for the year
in which his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
7.04 A director of the Corporation may be removed from office only for
cause by the shareholders of the Corporation at any annual or special meeting of
shareholders by the affirmative vote of a majority of the outstanding shares of
Common Stock of the Corporation entitled to vote thereon. Notice of any such
annual or special meeting of shareholders shall state that the removal of a
director or directors for cause is among the purposes of the meeting. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. For purposes of this Section only,
"cause" shall mean final conviction of a felony, request or demand for removal
by any governmental or regulatory authority having jurisdiction over the
Corporation, or a breach of fiduciary duty involving personal profit.
7.05 The liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Florida Business Corporation Act.
If the Florida Business Corporation Act is hereafter amended to further
eliminate or limit the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Florida Business Corporation Act, as so amended.
ARTICLE VIII
ACTION BY SHAREHOLDERS
8.01 If, and only if, the total number of shareholders of all classes of
stock of the Corporation is less than fifty (50), action required or permitted
to be taken at a meeting of shareholders may be taken without a
15
<PAGE> 4
meeting if the action is taken by persons who would be entitled to vote at a
meeting having voting power to cast not less than the minimum number (or
numbers, in the case of voting by groups) of votes that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. Notwithstanding anything else set forth in this
Article VIII, the Bylaws or the Florida Business Corporation Act, if the total
number of shareholders of all classes of stock of the Corporation is equal to or
greater than fifty (50), action required or permitted to be taken at a meeting
of shareholders may be taken without a meeting if the action is taken by all
shareholders entitled to vote on the action. Any action by shareholders without
a meeting must be evidenced by one or more written consents describing the
action taken, signed by shareholders entitled to take action without a meeting
and delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. The Corporation shall give written notice of actions taken as
required by the Act.
8.02 Special meetings of shareholders or a special meeting in lieu of the
annual meeting of shareholders may be called at any time by the Board of
Directors or President, as set forth in the Bylaws, and shall be called by the
Corporation, upon the written request of the holders of twenty-five percent
(25%) of all the votes entitled to be cast on the issue or issues proposed to be
considered at the proposed special meeting.
ARTICLE IX
INCORPORATOR
The name and address of the incorporator signing these Articles of
Incorporation are: Susan J. Wilson, One Atlantic Center, 1201 West Peachtree
Street, Atlanta, Georgia 30309.
THE UNDERSIGNED, being the incorporator named above, for the purpose of
forming a corporation pursuant to the Florida Business Corporation Act, does
make these Articles, hereby declaring and certifying that this is my act and
deed and the facts herein stated are true, and accordingly have hereunto set my
hand as of this day of November, 1996.
--------------------------------------
Susan J. Wilson
ACCEPTANCE OF INITIAL REGISTERED AGENT
Having been named as registered agent and to receive service of process for
the above stated corporation at the place designated in these provisions, I
hereby accept the appointment as registered agent and agree to act in this
capacity. I further agree to comply with the provisions of all statutes relative
to the proper and complete performance of my duties, and I am familiar with and
accept the obligations of my position as registered agent.
--------------------------------------
William B. Bull
Dated: , 1996
16
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
SUMMIT HOLDING SOUTHEAST, INC.
ADOPTED AS OF NOVEMBER , 1996
<PAGE> 2
SUMMIT HOLDING SOUTHEAST, INC.
BYLAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE ONE -- OFFICES AND AGENT
Section 1.1 Registered Office and Agent...........................................
Section 1.2 Other Offices.........................................................
ARTICLE TWO -- SHAREHOLDERS' MEETINGS
Section 2.1 Place of Meetings.....................................................
Section 2.2 Annual Meetings.......................................................
Section 2.3 Special Meetings......................................................
Section 2.4 Notice of Meetings....................................................
Section 2.5 Quorum................................................................
Section 2.6 Vote Required for Action..............................................
Section 2.7 Voting of Shares......................................................
Section 2.8 Proxies...............................................................
Section 2.9 Presiding Officer.....................................................
Section 2.10 Adjournments..........................................................
Section 2.11 Matter to be Acted Upon at Shareholder Meetings.......................
ARTICLE THREE -- THE BOARD OF DIRECTORS
Section 3.1 General Powers........................................................
Section 3.2 Number, Election, Term of Office and Removal..........................
Section 3.3 Vacancies.............................................................
Section 3.4 Compensation..........................................................
ARTICLE FOUR -- MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1 Regular Meetings......................................................
Section 4.2 Special Meetings......................................................
Section 4.3 Place of Meetings.....................................................
Section 4.4 Notice of Meetings....................................................
Section 4.5 Quorum................................................................
Section 4.6 Vote Required for Action..............................................
Section 4.7 Participation by Conference Telephone.................................
Section 4.8 Action by Directors Without a Meeting.................................
Section 4.9 Adjournments..........................................................
Section 4.10 Committees of the Board of Directors..................................
ARTICLE FIVE -- MANNER OF NOTICE AND WAIVER AS TO SHAREHOLDERS AND
DIRECTORS
Section 5.1 Procedure.............................................................
Section 5.2 Waiver................................................................
ARTICLE SIX -- OFFICERS
Section 6.1 Number................................................................
Section 6.2 Election and Term.....................................................
Section 6.3 Compensation..........................................................
Section 6.4 Chairman of the Board.................................................
Section 6.5 President.............................................................
Section 6.6 Vice Presidents.......................................................
Section 6.7 Secretary.............................................................
Section 6.8 Treasurer.............................................................
Section 6.9 Bonds.................................................................
</TABLE>
-i-
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
ARTICLE SEVEN -- SHARES
Section 7.1 Share Certificates....................................................
Section 7.2 Rights of Corporation With Respect to Registered Owners...............
Section 7.3 Transfers of Shares...................................................
Section 7.4 Duty of Corporation to Register Transfer..............................
Section 7.5 Lost, Stolen or Destroyed Certificates................................
Section 7.6 Fixing of Record Date With Regard to Shareholder Action...............
ARTICLE EIGHT -- INDEMNIFICATION
Section 8.1 Definitions...........................................................
Section 8.2 Basic Indemnification Arrangement.....................................
Section 8.3 Advances for Expenses.................................................
Section 8.4 Court-Ordered Indemnification and Advances for Expenses...............
Section 8.5 Authorization of and Determination of Entitlement to
Indemnification.......................................................
Section 8.6 Indemnification of Officers, Employees and Agents.....................
Section 8.7 Limits on Indemnification.............................................
Section 8.8 Liability Insurance...................................................
Section 8.9 Witness Fees..........................................................
Section 8.10 Report to Shareholders................................................
Section 8.11 Security for Indemnification Obligations..............................
Section 8.12 No Duplication of Payments............................................
Section 8.13 Subrogation...........................................................
Section 8.14 Contract Rights.......................................................
Section 8.15 Specific Performance..................................................
Section 8.16 Non-exclusivity, Etc..................................................
Section 8.17 Amendments............................................................
Section 8.18 Severability..........................................................
ARTICLE NINE -- CONTRACTS, CHECKS, BANK ACCOUNTS, ETC.
Section 9.1 Contracts, etc., How Executed.........................................
Section 9.2 Loans.................................................................
Section 9.3 Checks, Drafts, etc...................................................
Section 9.4 Deposits..............................................................
Section 9.5 General and Special Bank Accounts.....................................
ARTICLE TEN -- MISCELLANEOUS
Section 10.1 Inspection of Books and Records.......................................
Section 10.2 Fiscal Year...........................................................
Section 10.3 Corporate Seal........................................................
Section 10.4 Annual Financial Statements...........................................
Section 10.5 Conflict With Articles of Incorporation...............................
ARTICLE ELEVEN -- AMENDMENTS
Section 11.1 Power to Amend Bylaws.................................................
</TABLE>
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<PAGE> 4
ARTICLE ONE
OFFICES AND AGENT
Section 1.1 Registered Office and Agent. Summit Holding Southeast, Inc.
(the "Corporation") shall maintain a registered office in the State of Florida
at such location as may be approved from time to time by the Board of Directors,
and shall have a registered agent approved by the Board of Directors.
Section 1.2 Other Offices. In addition to its registered office, the
Corporation may have offices at any other place or places, within or without the
State of Florida, as the Board of Directors may from time to time select or as
the business of the Corporation may require or make desirable.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
Section 2.1 Place of Meetings. Meetings of shareholders may be held at any
place within or without the State of Florida as set forth in the notice thereof
or in the event of a meeting held pursuant to waiver of notice, as set forth in
the waiver, or if no place is so specified, at the principal office of the
Corporation.
Section 2.2 Annual Meetings. The annual meeting of shareholders shall be
held on a day to be determined by the Board of Directors for the purpose of
electing directors and transacting any and all business that may properly come
before the meeting. Any business, including the election of directors, that
might properly have been acted upon at that meeting may be acted upon at a
special meeting, in lieu of the annual meeting, held pursuant to these Bylaws or
held pursuant to a court order.
Section 2.3 Special Meetings. Special meetings of shareholders or a
special meeting in lieu of the annual meeting of shareholders may be called at
any time by the Board of Directors or the President. In addition, special
meetings of shareholders or a special meeting in lieu of the annual meeting of
shareholders shall be called by the Corporation upon the written request of the
shareholders in accordance with the terms set forth in the Articles of
Incorporation.
Section 2.4 Notice of Meetings. Unless waived as contemplated in Section
5.2, a notice of each meeting of shareholders stating the date, time and place
of the meeting shall be given not less than ten (10) days nor more than sixty
(60) days before the date thereof, by or at the direction of the President, the
Secretary, or the officer or persons calling the meeting, to each shareholder
entitled to vote at that meeting. In the case of an annual meeting, the notice
need not state the purpose or purposes of the meeting unless the Articles of
Incorporation or the Florida Business Corporation Act (the "Act") requires the
purpose or purposes to be stated in the notice of the meeting. In the case of a
special meeting, including a special meeting in lieu of an annual meeting, the
notice of meeting shall state the purpose or purposes for which the meeting is
called.
Section 2.5 Quorum. With respect to any action requiring shareholder
approval at a meeting of shareholders, the presence, in person or by proxy, of a
majority of the votes entitled to be cast on the matter shall constitute a
quorum for action on that matter unless the Articles of Incorporation or the Act
provides otherwise. Once a share is represented for any purpose at a meeting,
other than solely to object to holding the meeting or to transacting business at
the meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of the meeting unless a new record date is or
must be set for the adjourned meeting pursuant to Section 7.6 of these Bylaws.
Section 2.6 Vote Required for Action. Action on a matter by the
shareholders is approved if a quorum exists and the votes cast favoring the
action exceed the votes cast opposing the action, unless the Articles of
Incorporation, provisions of these Bylaws or the Act requires a greater number
of affirmative votes.
Section 2.7 Voting of Shares. Unless the Articles of Incorporation, these
Bylaws or the Act provides otherwise, each outstanding share having voting
rights shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders. Voting on all matters shall be by voice vote or by show
of hands unless any qualified voter, prior to the voting on any matter, demands
vote by ballot, in which case each ballot shall
<PAGE> 5
state the name of the shareholder voting and the number of shares voted by him,
and if the ballot be cast by proxy, it shall also state the name of the proxy.
Section 2.8 Proxies. A shareholder entitled to vote pursuant to Section
2.7 may vote in person or by proxy pursuant to an appointment of proxy executed
in writing by the shareholder or by his attorney-in-fact. An appointment of
proxy shall be valid for only one meeting to be specified therein, and any
adjournments of such meeting, but shall not be valid for more than eleven months
unless expressly provided therein. Appointments of proxy shall be dated and
filed with the records of the meeting to which they relate. If the validity of
any appointment of proxy is questioned, it must be submitted to the secretary of
the meeting of shareholders for examination or to a proxy officer or committee
appointed by the person presiding at the meeting. The secretary of the meeting
or, if appointed, the proxy officer or committee, shall determine the validity
or invalidity of any appointment of proxy submitted and reference by the
secretary in the minutes of the meeting to the validity of an appointment of
proxy shall be received as prima facie evidence of the facts stated for the
purpose of establishing the presence of a quorum at the meeting and for all
other purposes.
Section 2.9 Presiding Officer. The Chairman of the Board shall serve as
the chairman of every meeting of shareholders unless another person is elected
by the shareholders to serve as chairman at the meeting. The chairman shall
appoint any persons he deems required or appropriate to assist with the meeting.
Section 2.10 Adjournments. Whether or not a quorum is present to organize
a meeting, any meeting of shareholders (including an adjourned meeting) may be
adjourned by the holders of a majority of the voting shares represented at the
meeting to reconvene at a specific time and place, but no later than 120 days
after the date fixed for the original meeting unless the requirements of the Act
concerning the selection of a new record date have been met. At any reconvened
meeting within that time period, any business may be transacted that could have
been transacted at the meeting that was adjourned. If notice of the adjourned
meeting was properly given, it shall not be necessary to give any notice of the
reconvened meeting or of the business to be transacted, if the date, time and
place of the reconvened meeting are announced at the meeting that was adjourned
and before adjournment; provided, however, that if a new record date is or must
be fixed, notice of the reconvened meeting must be given to persons who are
shareholders as of the new record date.
Section 2.11 Matters to be Acted Upon at Shareholder Meetings. (a) At a
meeting of shareholders, only such business shall be conducted, and only such
proposals shall be acted upon, as shall have been brought before the meeting (i)
by, or at the discretion of the Board of Directors, or (ii) by any shareholders
of the Corporation who comply with the notice procedures set forth in this
Article Two, unless the Corporation is subject to the requirements of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in which case the
shareholders must comply with the requirements of Rule 14a-8 under the 1934 Act.
(b) For a proposal to be properly brought before a meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to, or mailed and received at, the principal executive offices of the
Corporation not less than 90 days prior to the scheduled meeting, regardless of
any postponements, deferrals, or adjournments of that meeting to a later date.
(c) A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (i) a brief
description of the proposal desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address,
as they appear on the Corporation's books, of the shareholder proposing such
business and any other shareholders known by such shareholder to be supporting
such proposal, (iii) the class and number of shares of the Corporation's stock
that are beneficially owned by the shareholder on the date of such shareholder
notice and by any other shareholders known by such shareholder to be supporting
such proposal on the date of such shareholder notice, and (iv) any financial
interest of the shareholder in such proposal.
(d) The presiding officer of the meeting shall determine and declare at the
meeting whether the shareholder proposal was made in accordance with the terms
of this Article Two. If the presiding officer determines that a shareholder
proposal was not made in accordance with the terms of this Article Two, he shall
so declare at the meeting and any such proposal shall not be acted upon at the
meeting.
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(e) This provision shall not prevent the consideration and approval or
disapproval at the meeting of reports of officers, directors and committees of
the Board of Directors, but in connection with such reports, no new business
shall be acted upon at such meeting unless stated, filed and received as herein
provided.
ARTICLE THREE
THE BOARD OF DIRECTORS
Section 3.1 General Powers. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the Board of Directors. In addition to the
powers and authority expressly conferred upon it by these Bylaws, the Board of
Directors may exercise all powers of the Corporation and do all lawful acts and
things that are not by law, by any legal agreement among shareholders, by the
Articles of Incorporation or by these Bylaws directed or required to be
exercised or done by the shareholders.
Section 3.2 Number, Election, Term of Office and Removal. (a) The number
of directors of the Corporation shall be fixed by resolution of the Board of
Directors from time to time, so long as such number is in accordance with the
requirements set forth in the Articles of Incorporation.
(b) The election, term of office and provisions for removal of directors
shall be as set forth in Article VII of the Articles of Incorporation .
Section 3.3 Vacancies. A vacancy occurring in the Board of Directors,
including a vacancy resulting from an increase in the number of directors, shall
be filled by an affirmative vote of a majority of the remaining directors,
though less than a quorum of the Board of Directors, or by the shareholders for
the unexpired term. If the vacant office was held by a director elected by a
voting group, only the holders of shares of that voting group or the remaining
directors elected by that voting group are entitled to vote to fill the vacancy.
Section 3.4 Compensation. Unless the Articles of Incorporation provide
otherwise, the Board of Directors may determine from time to time the
compensation, if any, directors may receive for their services as directors. A
director may also serve the Corporation in a capacity other than that of
director and receive compensation, as determined by the Board of Directors, for
services rendered in any other capacity.
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1 Regular Meetings. Regular meetings of the Board of Directors
shall be held immediately after the annual meeting of shareholders or a special
meeting in lieu of the annual meeting. In addition, the Board of Directors may
schedule other meetings to occur at regular intervals throughout the year.
Section 4.2 Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board or the President
or by any two directors in office at that time.
Section 4.3 Place of Meetings. Directors may hold their meetings at any
place within or without the State of Florida as the Board of Directors may from
time to time establish for regular meetings or as set forth in the notice of
special meetings or, in the event of a meeting held pursuant to waiver of
notice, as set forth in the waiver.
Section 4.4 Notice of Meetings. No notice shall be required for any
regularly scheduled meeting of the directors. Unless waived as contemplated in
Section 5.2, each director shall be given at least one day's notice (as set
forth in Section 5.1) of each special meeting stating the date, time and place
of the meeting.
Section 4.5 Quorum. Unless a greater number is required by the Articles of
Incorporation, these Bylaws or the Act, a quorum of the Board of Directors
consists of a majority of the total number of directors that has been prescribed
by resolution of the Board of Directors pursuant to Section 3.2.
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Section 4.6 Vote Required for Action. (a) If a quorum is present when a
vote is taken, the affirmative vote of a majority of directors present is the
act of the Board of Directors unless the Act, the Articles of Incorporation or
these Bylaws require the vote of a greater number of directors.
(b) A director who is present at a meeting of the Board of Directors or a
committee of the Board of Directors when corporate action is taken is deemed to
have assented to the action taken unless:
(i) He objects at the beginning of the meeting (or promptly upon his
arrival) to holding it or transacting business at the meeting;
(ii) He votes or abstains from the action.
The right of dissent or abstention is not available to a director who votes
in favor of the action taken.
Section 4.7 Participation by Conference Telephone. Any or all directors
may participate in a meeting of the Board of Directors or of a committee of the
Board of Directors through the use of any means of communication by which all
directors participating may simultaneously hear each other during the meeting.
Section 4.8 Action by Directors Without a Meeting. Unless the Articles of
Incorporation or these Bylaws provide otherwise, any action required or
permitted to be taken at any meeting of the Board of Directors or any action
that may be taken at a meeting of a committee of the Board of Directors may be
taken without a meeting if the action is taken by all the members of the Board
of Directors (or of the committee as the case may be). The action must be
evidenced by one or more written consents describing the action taken, signed by
each director (or each director serving on the committee, as the case may be),
and delivered to the Corporation for inclusion in the minutes or filing with the
corporate records.
Section 4.9 Adjournments. Whether or not a quorum is present to organize a
meeting, any meeting of directors (including an adjourned meeting) may be
adjourned by a majority of the directors present, to reconvene at a specific
time and place. At any reconvened meeting any business may be transacted that
could have been transacted at the meeting that was adjourned. If notice of the
adjourned meeting was properly given, it shall not be necessary to give any
notice of the reconvened meeting or of the business to be transacted, if the
date, time and place of the reconvened meeting are announced at the meeting that
was adjourned.
Section 4.10 Committees of the Board of Directors. (a) The Board of
Directors by resolution shall designate from among its members an audit
committee and a compensation committee and may designate from among its members
an executive committee and one or more other committees, each consisting of one
or more directors all of whom serve at the pleasure of the Board of Directors.
Except as limited by this Section 4.10 and the Act, each committee shall have
the authority set forth in the resolution establishing such committee. The
provisions of this Article Four as to the Board of Directors and its
deliberations shall be applicable to any committee of the Board of Directors.
(b) The Audit Committee of the Board of Directors shall have the
responsibility to oversee the auditing procedures of the Corporation, receive
and accept the reports of the Corporation's internal systems of accounting and
management controls and make recommendations to the full Board of Directors as
to the selection and appointment of auditors for the Corporation. The Audit
Committee shall be responsible for maintaining minutes and records of all
meetings and actions taken by such committee. In addition, the Audit Committee
shall perform whatever duties and have whatever powers the Board of Directors
may from time to time assign.
(c) The Compensation Committee of the Board of Directors shall have the
responsibility to make relevant compensation decisions of the Company and such
additional matters as may be prescribed by the Board of Directors from time to
time. The Compensation Committee shall be responsible for maintaining minutes
and records of all meetings and actions taken by such committee.
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ARTICLE FIVE
MANNER OF NOTICE AND WAIVER AS TO SHAREHOLDERS AND DIRECTORS
Section 5.1 Procedure. Whenever these Bylaws require notice to be given to
any shareholder or director, the notice shall be given in accordance with this
Section 5.1. Any notice to directors may be written or oral. Notice may be
communicated in person; by telephone, telecopy, telegraph, teletype or other
form of wire or wireless communication; or by mail or private carrier. If these
forms of personal notice are impracticable, notice may be communicated by a
newspaper of general circulation in the area where published, or by radio,
television or other form of public broadcast communication. Written notice to
the shareholders, if in a comprehensible form, is effective when mailed, if
mailed with postage prepaid and correctly addressed to the shareholder's address
shown in the Corporation's current record of shareholders. Except as provided
above, written notice, if in a comprehensible form, is effective at the earliest
date of the following:
(a) When received by the addressee;
(b) Five days after its deposit in the United States mail, as
evidenced by the postmark, if mailed with postage prepaid and correctly
addressed; or
(c) On the date shown on the return receipt, if sent by registered or
certified mail, return receipt requested, and the receipt is signed by or
on behalf of the addressee.
Oral notice is effective when communicated if communicated directly to the
person being notified in a comprehensible manner and reasonable under the
circumstances.
In calculating time periods for notice, when a period of time measured in days,
weeks, months, years or other measurement of time is prescribed for the
exercise of any privilege or the discharge of any duty, the first day shall not
be counted but the last day shall be counted.
Section 5.2 Waiver. (a) A shareholder may waive any notice before or after
the date and time stated in the notice. Except as provided below in subsection
5.2(b), the waiver must be in writing, be signed by the shareholder entitled to
the notice, and be delivered to the Corporation for inclusion in the minutes or
filing with the corporate records.
(b) A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting, unless the shareholder at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting; or (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice, unless the shareholder objects to considering the matter when it
is presented.
(c) A director may waive any notice before or after the date and time
stated in the notice. Except as provided below in subsection 5.2(d), the waiver
must be in writing, signed by the director entitled to the notice, and delivered
to the Corporation for inclusion in the minutes or filing with the corporate
records.
(d) A director's attendance at or participation in a meeting waives any
required notice to him of the meeting unless the director at the beginning of
the meeting (or promptly upon his arrival) objects to holding the meeting or
transacting business at the meeting because the meeting is not lawfully called
or convened.
ARTICLE SIX
OFFICERS
Section 6.1 Number. The officers of the Corporation shall consist of a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary and
a Treasurer and any other officers as may be appointed by the Board of
Directors. The Board of Directors shall from time to time create and establish
the duties of the other officers. Any two or more offices may be held by the
same person.
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Section 6.2 Election and Term. All officers shall be appointed by the
Board of Directors and shall serve at the pleasure of the Board of Directors.
All officers may be removed with or without cause by the Board of Directors.
Section 6.3 Compensation. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 6.4 Chairman of the Board. The Chairman of the Board shall serve
as a non-executive officer of the Corporation, shall preside at each meeting of
the shareholders and of the Board of Directors and shall perform all duties
incident to the office of Chairman of the Board and such other duties and have
such other powers as the Board of Directors may from time to time assign. The
Chairman of the Board shall have no responsibility for the day to day affairs
and business of the Corporation.
Section 6.5 President. The President shall be the chief executive officer,
and principal executive officer, of the Corporation and shall have general
supervision of the business of the Corporation. The President shall have
authority to execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation; he shall have power to endorse, when sold,
assigned, transferred or otherwise disposed of by the Corporation, all
certificates for shares, bonds or other securities or evidences of indebtedness
issued by other corporations, associations, trusts, whether public or private,
or by any other government or agency thereof, and owned or held by the
Corporation and to make, execute and deliver all instruments or assignments or
transfers of any such stocks, bonds or other securities. The President shall
perform whatever duties and have whatever powers the Board of Directors may from
time to time assign.
Section 6.6 Vice Presidents. In the absence or disability of the
President, or at the direction of the President, a Vice President (including any
Executive Vice President or Senior Vice President), or any other duly appointed
officer shall perform the duties and exercise the powers of the President, as
the case may be. If the Corporation has more than one Vice President, the one
designated by the Board of Directors shall act in lieu of the President, as the
case may be. Each Executive Vice President shall have authority to execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation; he shall have power to endorse, when sold, assigned, transferred or
otherwise disposed of by the Corporation, all certificates for shares, bonds or
other securities or evidences of indebtedness issued by other corporations,
associations, trusts, whether public or private, or by any other government or
agency thereof, and owned or held by the Corporation and to make, execute and
deliver all instruments or assignments or transfers of any such stocks, bonds or
other securities. Vice Presidents shall perform whatever duties and have
whatever powers the Board of Directors may from time to time assign.
Section 6.7 Secretary. The Secretary shall be responsible for preparing
minutes of the acts and proceedings of all meetings of the shareholders and of
the Board of Directors and any committees thereof. He shall have authority to
give all notices required by law or these Bylaws. He shall be responsible for
the custody of the corporate books, records, contracts and other documents. The
Secretary may affix the corporate seal to any lawfully executed documents and
shall sign any instruments as may require his signature. The Secretary shall
authenticate records of the Corporation. The Secretary shall perform whatever
additional duties and have whatever additional powers the Board of Directors may
from time to time assign. In the absence or disability of the Secretary or at
the direction of the President, any assistant secretary may perform the duties
and exercise the powers of the Secretary.
Section 6.8 Treasurer. The Treasurer shall be responsible for the custody
of all funds and securities belonging to the Corporation and for the receipt,
deposit or disbursement of funds and securities under the direction of the Board
of Directors. The Treasurer shall cause to be maintained full and true accounts
of all receipts and disbursements and shall make reports of the same to the
Board of Directors and the President upon request. The Treasurer shall perform
all duties as may be assigned to him from time to time by the Board of
Directors.
Section 6.9 Bonds. The Board of Directors by resolution may require any or
all of the officers, agents or employees of the Corporation to give bonds to the
Corporation, with sufficient surety or sureties,
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conditioned on the faithful performance of the duties of their respective
offices or positions, and to comply with any other conditions as from time to
time may be required by the Board of Directors.
ARTICLE SEVEN
SHARES
Section 7.1 Share Certificates. The interest of each shareholder in the
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation which shall be in such form as the Board of Directors
from time to time may adopt. Share certificates shall be numbered consecutively,
shall be in registered form, shall indicate the date of issuance, the name of
the Corporation and that it is organized under the laws of the State of Florida,
the name of the shareholder, and the number and class of shares and the
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by any two of the President, a Vice President, the
Secretary or the Treasurer. The corporate seal need not be affixed.
Section 7.2 Rights of Corporation With Respect to Registered Owners. Prior
to due presentation for transfer of registration of its shares, the Corporation
may treat the registered owner of the shares as the person exclusively entitled
to vote the shares, to receive any share dividend or distribution with respect
to the shares, and for all other purposes; and the Corporation shall not be
bound to recognize any equitable or other claim to or interest in the shares on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by law.
Section 7.3 Transfers of Shares. Transfers of shares shall be made upon
the transfer books of the Corporation, kept at the office of the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate, or by an attorney lawfully constituted in writing; and before a
new certificate is issued, the old certificate shall be surrendered for
cancellation or, in the case of a certificate alleged to have been lost, stolen
or destroyed, the requirements of Section 7.5 of these Bylaws shall have been
met.
Section 7.4 Duty of Corporation to Register Transfer. Notwithstanding any
of the provisions of Section 7.3 of these Bylaws, the Corporation is under a
duty to register the transfer of its shares only if:
(a) the certificate is endorsed by the appropriate person or persons;
(b) reasonable assurance is given that the endorsement or affidavit is
genuine and effective;
(c) the Corporation either has no duty to inquire into adverse claims
or has discharged that duty;
(d) the requirements of any applicable law relating to the collection
of taxes have been met; and
(e) the transfer in fact is rightful or is to a bona fide purchaser.
Section 7.5 Lost, Stolen or Destroyed Certificates. Any person claiming a
share certificate to be lost, stolen or destroyed shall make an affidavit or
affirmation of the fact in the manner required by the Board of Directors and, if
the Board of Directors requires, shall give the Corporation a bond of indemnity
in form and amount, and with one or more sureties satisfactory to the Board of
Directors, as the Board of Directors may require, whereupon an appropriate new
certificate may be issued in lieu of the one alleged to have been lost, stolen
or destroyed.
Section 7.6 Fixing of Record Date With Regard to Shareholder Action. For
the purpose of determining shareholders entitled to notice of a shareholders'
meeting, to demand a special meeting, to vote, or to take any other action, the
Board of Directors may fix a future date as the record date, which date shall be
not more than seventy (70) days prior to the date on which the particular
action, requiring a determination of shareholders, is to be taken. A
determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting unless the
Board of Directors fixes a new record date, which it must do if the meeting is
adjourned to a date more than 120 days after the date fixed for the original
meeting. If no record date is fixed by the Board of Directors, the record date
shall be determined in accordance with the provisions of the Act.
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ARTICLE EIGHT
INDEMNIFICATION
Section 8.1 Definitions. As used in this Article, the term:
(a) "Corporation" includes, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent of
a constituent) absorbed in a consolidation or merger, so that any person
who is or was a director, officer, employee or agent of a constituent
corporation, or is or was serving at the request of a constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise is in
the same position under this Section with respect to the resulting or
surviving corporation as he would have with respect to such constituent
corporation if its separate existence had continued.
(b) "Director" or "officer" means an individual who is or was a
director or board-elected officer, respectively, of the Corporation or who,
while a director or officer of the Corporation, is or was serving at the
Corporation's request as a director, officer, partner, trustee, employee,
or agent of another domestic or foreign corporation, partnership, joint
venture, trust, employee benefit plan, or other entity. A director or
officer is considered to be serving an employee benefit plan at the
Corporation's request if his or her duties to the Corporation also impose
duties on, or otherwise involve services by, the director or officer to the
plan or to participants in or beneficiaries of the plan. "Director" or
"officer" includes, unless the context otherwise requires, the estate or
personal representative of a director or officer.
(c) "Expenses" includes counsel fees, including those for appeal.
(d) "Liability" includes the obligations to pay a judgment,
settlement, penalty, fine (including an excise tax assessed with respect to
an employee benefit plan) and expenses actually and reasonably incurred
with respect to a proceeding.
(e) "Official capacity" means:
(i) When used with respect to a director, the office of director in
the Corporation; and
(ii) When used with respect to an officer, the office in the
Corporation held by the officer.
Official capacity does not include service for any other domestic or
foreign corporation or any partnership, joint venture, trust, employee
benefit plan or other entity.
(f) "Party" includes an individual who was, is, or is threatened to be
made a named defendant or respondent in a proceeding.
(g) "Proceeding" includes any threatened, pending or completed action,
suit or other type of proceeding, whether civil, criminal, administrative,
arbitrative or investigative and whether formal or informal.
(h) "Reviewing Party" shall mean the person or persons making the
entitlement determination pursuant to Section 8.5 of this Article, and
shall not include a court making any determination under this Article or
otherwise.
Section 8.2 Basic Indemnification Arrangement. (a) Except as provided in
subsections 8.2(e), 8.2(f) or Section 8.7 below, the Corporation shall indemnify
an individual who is a party to a proceeding because he or she is or was a
director against liability incurred in the proceeding if:
(i) Such individual acted in good faith;
(ii) Such individual reasonably believed:
(A) In the case of conduct in his or her official capacity, that
such conduct was in the best interests of the Corporation; and
(B) In all other cases, that such conduct was at least not opposed
to the best interests of the Corporation; and
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(iii) With respect to any criminal action or proceeding, such
individual had no reasonable cause to believe his or her conduct was
unlawful.
(b) A director's conduct with respect to an employee benefit plan for a
purpose he or she believed in good faith to be in the interests of the
participants in and beneficiaries of the plan is conduct that satisfies the
requirement of subsection 8.2(a)(ii)(B) above.
(c) The termination of a proceeding by judgment, order, settlement, or
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director, officer, employee or agent did not meet
the standard of conduct described in subsection 8.2(a) above.
(d) In the case of a proceeding by or in the right of the Corporation, the
indemnification of a director shall be limited to reasonable expenses,
penalties, fines (including an excise tax assessed with respect to an employee
benefit plan) and amounts paid in settlement incurred in connection with the
proceeding, if it is determined that the director has met the relevant standard
of conduct described in subsection 8.2(a) above. Such amount is not to exceed,
in the judgment of the Board of Directors, the expenses of litigating the
proceeding to conclusion, actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof.
(e) Notwithstanding any other provision of this Article, no person shall be
entitled to indemnification or advance for expenses hereunder with respect to
any proceeding or claim brought or made by him or her against the Corporation,
other than a proceeding or claim seeking or defending such person's right to
indemnification or advancement of expenses pursuant to Section 8.4 hereof or
otherwise.
(f) If any person is entitled under any provision of this Article to
indemnification by the Corporation for some portion of liability incurred by him
or her, but not the total amount thereof, the Corporation shall indemnify such
person for the portion of such liability to which he or she is entitled.
(g) The Corporation shall indemnify a director, officer, employee or agent
who was successful on the merits or otherwise in the defense of any proceeding
to which he or she was a party because he or she was a director, officer,
employee or agent of the Corporation against expenses actually and reasonably
incurred by the director, officer, employee or agent in connection therewith.
Section 8.3 Advances for Expenses. (a) The Corporation shall, before final
disposition of a proceeding, advance funds to pay for or reimburse the
reasonable expenses incurred by a director who is a party to a proceeding
because he or she is a director if he or she delivers to the Corporation a
written undertaking (meeting the qualifications set forth below in subsection
8.3(b)) to repay such amount if he or she is ultimately found not to be entitled
to indemnification by the Corporation pursuant to this Article or the Act.
(b) The undertaking required by subsection 8.3(a) above must be an
unlimited general obligation of the proposed indemnitee but need not be secured
and shall be accepted without reference to the financial ability of the proposed
indemnitee to make repayment. If a director, officer, employee or agent seeks to
enforce his or her rights to indemnification in a court pursuant to Section 8.4
below, such undertaking to repay shall not be applicable or enforceable unless
and until there is a final court determination that he or she is not entitled to
indemnification, as to which all rights of appeal have been exhausted or have
expired.
Section 8.4 Court-Ordered Indemnification and Advances for Expenses. (a) A
director, officer, employee or agent who is a party to a proceeding because he
or she is a director or officer may apply for indemnification or advance for
expenses to the court conducting the proceeding, to the circuit court or to
another court of competent jurisdiction. For purposes of this Article, the
Corporation hereby consents to personal jurisdiction and venue in any court in
which is pending a proceeding to which a director or officer is a party.
Regardless of any determination by the reviewing party that the proposed
indemnitee is not entitled to indemnification or as to the reasonableness of
expenses, and regardless of any failure by the reviewing party to make a
determination as to such entitlement or the reasonableness of expenses, such
court's review shall be a de novo review. After receipt of an application and
after giving any notice it considers necessary, the court may
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order indemnification or advancement of expenses, including expenses incurred in
seeking court ordered indemnification or advancement of expenses, if it
determines that:
(i) The director, officer, employee or agent is entitled to mandatory
indemnification pursuant to subsection 8.2(g) above; or
(ii) In view of all the relevant circumstances, it is fair and
reasonable to indemnify the director, officer, employee or agent, or to
advance expenses to the director, officer, employee or agent even if the
individual has not met the relevant standard of conduct, failed to comply
with the requirements for advance of expenses, or was adjudged liable in a
proceeding referred to in subsection 8.2(d) above (in which case any
court-ordered indemnification need not be limited to reasonable expenses
incurred by the indemnitee but may include expenses, penalties, fines,
judgments, amounts paid in settlement and any other amounts ordered by the
court to be indemnified).
(b) If the court determines that the director, officer, employee or agent
is entitled to indemnification or advance for expenses, the Corporation shall
pay the director's, officer's, employee's or agent's reasonable expenses to
obtain court-ordered indemnification or advance of expenses.
Section 8.5 Authorization of and Determination of Entitlement to
Indemnification. (a) The Corporation acknowledges that indemnification of a
director under Section 8.2 has been preauthorized by the Corporation.
Nevertheless, the Corporation shall not indemnify a director under Section 8.2
unless a determination has been made for the specific proceeding that
indemnification of the director is permissible in the circumstances because he
or she has met the relevant standard of conduct set forth in subsection 8.2(a);
provided, however, that no entitlement decision need be made prior to the
advance of expenses and that, regardless of the result or absence of any such
determination, the Corporation shall make any indemnification mandated by
subsection 8.2(g) above.
(b) The determination referred to in subsection 8.5(a) above shall be made
as follows:
(i) By the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to such proceeding;
(ii) If such quorum is not obtainable or, even if obtainable, by
majority vote of a committee duly designated by the Board of Directors (in
which directors who are parties may participate) consisting solely of two
or more directors not at the time parties to the proceeding;
(iii) By independent legal counsel:
(A) Selected by the Board of Directors in the manner prescribed in
paragraph (i) of this subsection 8.5(b) or the committee prescribed in
paragraph (ii) of this subsection 8.5(b); or
(B) If a quorum of the directors cannot be obtained for paragraph
(i) of this subsection 8.5(b) and the committee cannot be designated
under paragraph (ii) of this subsection 8.5(b), selected by majority
vote of the full Board of Directors (in which directors who are parties
may participate); or
(iv) By the shareholders of the Corporation by a majority vote of a
quorum consisting of shareholders who were not parties to such proceeding
or, if no such quorum is obtainable, by a majority vote of shareholders who
were not parties to such proceeding.
(c) As acknowledged above, the Corporation has pre-authorized the
indemnification of directors hereunder, subject to a determination for a
specific proceeding that the director met the relevant standard of conduct under
subsection 8.2(a). Consequently, no further decision need or shall be made on a
case-by-case basis as to the authorization of the Corporation's indemnification
of directors hereunder. Nevertheless, except as set forth in subsection 8.5(d)
below, evaluation as to reasonableness of expenses of a director for a specific
proceeding shall be made in the same manner as the determination that
indemnification is permissible, as described in subsection 8.5(b) above, except
that if the determination is made by special legal counsel, evaluation as to
reasonableness of expenses shall be made by those specified in subsection
8.5(b)(iii).
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(d) Notwithstanding the requirement under subsection 8.5(c) that the
reviewing party evaluate the reasonableness of expenses claimed by the proposed
indemnitee, any expenses claimed by the proposed indemnitee shall be deemed
reasonable if the reviewing party fails to make the evaluation required by
subsection 8.5(c) within sixty (60) days following the proposed indemnitee's
written request for indemnification or advance for expenses.
Section 8.6 Indemnification of Officers, Employees and Agents. The
Corporation may, subject to authorization in the specific case, indemnify and
advance expenses under this Article to an officer, employee or agent of the
Corporation, who is not a director, to the same extent as to a director, or to
any lesser extent (or greater extent if permitted by law) determined by the
Board of Directors, in each case consistent with public policy and subject to
the limitations described in Section 8.7. In addition, no advancement or
reimbursement of expenses to officers, employees or agents in accordance with
the foregoing sentence shall be made unless the proposed indemnitee furnishes
the Corporation a written affirmation of his or her good faith belief that he or
she has met the standard of conduct set forth in Section 607.0850 of the Act and
that his or her conduct does not constitute behavior that would result in
liability of the kind described in Section 8.7 below, and that he or she
furnishes the Corporation a written undertaking, executed personally or on his
or her behalf, to repay any advances if it is ultimately determined that he or
she is not entitled to indemnification under this Article or Section 607.0850 of
the Act.
Section 8.7 Limits on Indemnification. Regardless of whether a proposed
indemnitee has met the relevant standard of conduct set forth in Section 8.2,
indemnification or advancement of expenses shall not be made to any director,
officer, employee or agent if a judgment or other final adjudication establishes
that his actions, or omissions to act, were material to the cause of action so
adjudicated and constitute:
(a) A violation of the criminal law, unless the director, officer,
employee or agent had reasonable cause to believe his conduct was lawful or
had no reasonable cause to believe his conduct was unlawful;
(b) A transaction from which the director, officer, employee or agent
derived an improper personal benefit;
(c) In the case of a director, a circumstance under which the
liability provisions of Section 607.0834 of the Act are applicable; or
(d) Willful misconduct or a conscious disregard for the best interests
of the Corporation in a proceeding by or in the right of the Corporation to
procure a judgment in its favor or in a proceeding by or in the right of a
shareholder.
Section 8.8 Liability Insurance. The Corporation may purchase and maintain
insurance on behalf of an individual who is or was a director, officer, employee
or agent of the Corporation or who is, or was, serving at the Corporation's
request as a director, officer, employee or agent of another domestic or foreign
corporation, partnership, joint venture, trust, employee benefit plan, or other
entity against any liability asserted against or incurred by him or her in any
such capacity or arising out of his or her status as a director, officer,
employee, or agent, whether or not the Corporation would have power to indemnify
him or her against such liability under the provisions of this Article or the
Act.
Section 8.9 Witness Fees. Nothing in this Article shall limit the
Corporation's power to pay or reimburse expenses incurred by a person in
connection with his or her appearance as a witness in a proceeding at a time
when he or she is not a party.
Section 8.10 Report to Shareholders. To the extent and in the manner
required by the Act from time to time, if the Corporation indemnifies or
advances expenses to a director, officer, employee or agent in connection with a
proceeding by or in the right of the Corporation, the Corporation shall report
the indemnification or advance to the shareholders.
Section 8.11 Security for Indemnification Obligations. The Corporation may
at any time and in any manner, at the discretion of the Board of Directors,
secure the Corporation's obligations to indemnify or advance expenses to a
person pursuant to this Article.
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Section 8.12 No Duplication of Payments. The Corporation shall not be
liable under this Article to make any payment to a person hereunder to the
extent such person has otherwise actually received payment (under any insurance
policy, agreement or otherwise) of the amounts otherwise payable hereunder.
Section 8.13 Subrogation. In the event of payment under this Article, the
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the indemnitee, who shall execute all papers required and
shall do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
Section 8.14 Contract Rights. The right to indemnification and advancement
of expenses conferred hereunder to directors shall be a contract right and shall
not be affected adversely with respect to any director by any amendment of these
bylaws with respect to any action or inaction occurring prior to such amendment;
provided, however, that this provision shall not confer upon any indemnitee or
potential indemnitee (in his or her capacity as such) the right to consent or
object to any subsequent amendment of these bylaws.
Section 8.15 Specific Performance. In any proceeding brought by or on
behalf of a director, officer, employee or agent to enforce specifically the
provisions of this Article, the Corporation hereby waives the claim or defense
therein that the plaintiff or claimant has an adequate remedy at law, and the
Corporation shall not urge in any such proceeding the claim or defense that such
remedy at law exists. The provisions of this Section 8.15, however, shall not
prevent the director, officer, employee or agent from seeking a remedy at law in
connection with any breach of the provisions of this Article.
Section 8.16 Non-exclusivity, Etc. The rights of a director, officer,
employee or agent hereunder shall be in addition to any other rights with
respect to indemnification, advancement of expenses or otherwise that he or she
may have under contract or the Act or otherwise.
Section 8.17 Amendments. It is the intent of the Corporation to indemnify
and advance expenses to its directors and officers at least to the full extent
that a Florida business corporation may, without shareholder approval, indemnify
or advance expenses to its directors under the Act, as amended from time to
time. To the extent that the Act is hereafter amended to permit a Florida
business corporation, without the need for shareholder approval, to provide to
its directors greater rights to indemnification or advances for expenses than
those specifically set forth hereinabove, this Article shall be deemed amended
to require such greater indemnification or more liberal advances for expenses to
the Corporation's directors and officers, in each case consistent with the Act
as so amended from time to time. No amendment, modification or rescission of
this Article, or any provision hereof, the effect of which would diminish the
rights to indemnification or advancement of expenses as set forth herein shall
be effective as to any person with respect to any action taken or omitted by
such person prior to such amendment, modification or rescission.
Section 8.18 Severability. To the extent that the provisions of this
Article are held to be inconsistent with the provisions of Section 607.0850 of
the Act, such provisions of such Act shall govern. In the event that any of the
provisions of this Article (including any provision within a single section,
subsection, division or sentence) is held by a court of competent jurisdiction
to be invalid, void or otherwise unenforceable, the remaining provisions of this
Article shall remain enforceable to the fullest extent permitted by law.
ARTICLE NINE
CONTRACTS, CHECKS, BANK ACCOUNTS, ETC.
Section 9.1 Contracts, etc., How Executed. The Board of Directors may
authorize any officer or officers or agent or agents to enter into any contract
or execute and deliver any instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific instances
and if the Board of Directors so provides may be delegated by the person so
authorized; and, unless so authorized by the Board of Directors or these Bylaws,
no officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable pecuniarily for any purpose or to any amount.
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Section 9.2 Loans. No loan shall be contracted on behalf of the
Corporation, and no negotiable paper shall be issued in its name, unless (i)
authorized by the Board of Directors and (ii) all necessary consents as may be
required under the Articles of Incorporation have been obtained. When so
authorized, the President or a Vice President or the Treasurer may effect loans
and advances at any time for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances the President or a Vice President or the Treasurer shall
make, execute and deliver, with the counter-signature, unless otherwise
authorized by the Board of Directors, of the Secretary or an Assistant
Secretary, bonds, debentures, promissory notes or other evidences of
indebtedness of the Corporation and, when authorized as aforesaid, as security
for the payment of any and all loans, advances, indebtedness and liabilities of
the Corporation, may mortgage, pledge, hypothecate or transfer any real or
personal property at any time held by the Corporation and to that end execute
and deliver instruments of mortgage or pledge or otherwise transfer such
property. Any authority so granted by the Board of Directors may be general or
confined to specific instances, and if the Board of Directors so provides, may
be delegated by the person so authorized.
Section 9.3 Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or officers, or agent or
agents, as shall from time to time be determined by resolution of the Board of
Directors or authorized in these Bylaws.
Section 9.4 Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation or
otherwise as the President or any other officer or officers authorized by the
Board of Directors shall direct in such banks, trust companies or other
depositories as may be selected by the President or any other officer or
officers or agents or agents to whom power in that respect shall have been
delegated by the Board of Directors. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, checks, drafts and
other orders for the payment of money which are payable to the order of the
Corporation may be endorsed, assigned and delivered by such officer or officers
or agent or agents as shall be determined by the President or any other officer
or officers designated by the Board of Directors.
Section 9.5 General and Special Bank Accounts. The Board of Directors or
the President, the Treasurer, or any other officer or officers designated by the
Board of Directors may from time to time authorize the opening and keeping of
general and special bank accounts with such banks, trust companies or other
depositories as may be selected by the Board of Directors. The Board of
Directors may make such special rules and regulations with respect to such bank
accounts, not inconsistent with the provisions of these Bylaws, as it may deem
expedient.
ARTICLE TEN
MISCELLANEOUS
Section 10.1 Inspection of Books and Records. The Board of Directors shall
have power to determine which accounts, books and records of the Corporation
shall be open to the inspection of shareholders, except those as may by law
specifically be made open to inspection, and shall have power to fix reasonable
rules and regulations not in conflict with the applicable law for the inspection
of accounts, books and records which by law or by determination of the Board of
Directors shall be open to inspection.
Section 10.2 Fiscal Year. The Board of Directors is authorized to fix the
fiscal year of the Corporation and to change the same from time to time as it
deems appropriate.
Section 10.3 Corporate Seal. If the Board of Directors determines that
there should be a corporate seal for the Corporation, it shall be in the form as
the Board of Directors may from time to time determine.
Section 10.4 Annual Financial Statements. In accordance with the Act, the
Corporation shall prepare and provide to shareholders such financial statements
as may be required by the Act.
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Section 10.5 Conflict With Articles of Incorporation. In the event that
any provision of these Bylaws conflicts with any provision of the Articles of
Incorporation, the Articles of Incorporation shall govern.
ARTICLE ELEVEN
AMENDMENTS
Section 11.1 Power to Amend Bylaws. Subject to the voting requirements set
forth in the Articles of Incorporation and Section 2.6 herein, the Board of
Directors shall have power to alter, amend or repeal these Bylaws or adopt new
Bylaws, but any Bylaws adopted by the Board of Directors may be altered, amended
or repealed, and new Bylaws adopted, by the shareholders. The shareholders may
prescribe by expressing in the action they take in adopting or amending any
Bylaw or Bylaws that the Bylaw or Bylaws so adopted or amended shall not be
altered, amended or repealed by the Board of Directors.
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EXHIBIT 10.1
EMPLOYMENT AND
CONFIDENTIALITY AGREEMENT
THIS EMPLOYMENT AND CONFIDENTIALITY AGREEMENT (the "Agreement") is made as
of , 1997, between SUMMIT HOLDING SOUTHEAST, INC., a Florida
corporation (the "Company"), and WILLIAM B. BULL, a resident of the State of
Florida ("Executive").
BACKGROUND
Prior to the date hereof, Executive was employed by Summit Holding
Corporation ("SHC"), a wholly-owned subsidiary of Employers Self Insurers Fund
("ESIF"), as its President and Chief Executive Officer. On the date hereof, in
accordance with that certain Amended Plan of Conversion and Agreement of ESIF,
several transactions have occurred: (i) ESIF has converted from a group
self-insurance fund to an assessable mutual insurance company, an interim step
required to satisfy the Florida Insurance Code; (ii) the assessable mutual
company has converted to a stock insurance company with the name Bridgefield
Employers Insurance Company ("Bridgefield"); and (iii) certain policyholders of
ESIF have exchanged their rights to receive common stock of Bridgefield for,
among other things, the Company's Series A Preferred Stock, causing Bridgefield
to become a wholly-owned subsidiary of the Company. The Company desires to
continue the employment of Executive in the capacities and on the terms and
conditions set forth below. Executive desires to accept employment on the terms
and conditions set forth below.
AGREEMENT
NOW, THEREFORE, for and in consideration of the employment and continued
employment of Executive by the Company, the premises, and the mutual agreements
hereinafter set forth, the parties agree as follows:
1. Definitions. The following terms used herein shall have the
definitions set forth below:
(a) "Affiliate" means any person or entity directly or indirectly
controlling, controlled by, or under common control with another person.
(b) "Area" means the States of Florida, Georgia, Kentucky,
Louisiana and North Carolina.
(c) "Business" or "Business of the Company" means the business of
insurance related administrative services for self insurer funds,
including, without limitation, marketing, policy issuance and servicing,
claims processing and administration, loss control, brokerage, audits,
financial and data processing services, and risk management services.
(d) "Cause" means (i) conduct amounting to fraud or dishonesty
against the Company; (ii) willful violation of any directives to
Employee from the Board of Directors of the Company, where such
violation is not cured to the reasonable satisfaction of the Board of
Directors of the Company within five (5) days after written notice of
such violation has been given to Executive; (iii) a conviction or plea
of guilty or nolo contendere to a felony or a crime involving dishonesty
against the Company; or (iv) Executive's failure to observe the
requirements of Sections 2(c), 5 and 6 hereof.
(e) "Competing Enterprise" means any person or any business
organization of whatever form, engaged directly or indirectly within the
Area in the Business of the Company.
(f) "Disability" means (i) the inability of Executive to perform
the duties of Executive's employment due to physical or emotional
incapacity or illness, where such inability is expected to be of
long-continued and indefinite duration or (ii) Executive shall be
entitled to (x) disability retirement benefits under the federal Social
Security Act or (y) recover benefits under any long-
<PAGE> 2
term disability plan or policy maintained by the Company. In the event
of a dispute, the determination of Disability shall be made reasonably
by the Board of Directors of the Company and shall be supported by
advice of a physician competent in the area to which such Disability
relates.
(g) "Excluded Information" means any data or information that is a
Trade Secret hereunder (1) that has been voluntarily disclosed to the
public by the Company or any Affiliate thereof or has become generally
known to the public (except where such public disclosure has been made
by or through the Executive or by a third person or entity with the
knowledge of the Executive without authorization by the Company); (2)
that has been independently developed and disclosed by parties other
than the Executive or the Company or any Affiliate thereof to the
Executive or to the public generally without a breach of any obligation
of confidentiality by any such person running directly or indirectly to
the Company or any Affiliate thereof; or (3) that otherwise enters the
public domain through lawful means.
(h) "Subsidiaries" means Bridgefield, SHC, Summit Consulting, Inc.,
Summit Claims Management, Inc., Summit Loss Control Services, Inc.,
Commercial Insurance of Central Florida, Inc., Bridgefield Casualty
Insurance Company and Summit Healthcare Holdings, Inc.
(i) "Trade Secrets" means information which derives economic value,
actual or potential, from not being generally known and not being
readily ascertainable to other persons who can obtain economic value
from its disclosure or use and which is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy or
confidentiality. Trade Secrets may include either technical or
non-technical data, including without limitation, (1) any useful
process, machine, chemical formula, composition of matter, or other
device which (A) is new or which Executive has a reasonable basis to
believe may be new, (B) is being used or studied by the Company or a
Subsidiary and is not described in a printed patent or in any literature
already published and distributed externally by the Company or such
Subsidiary, and (C) is not readily ascertainable from inspection of a
product of the Company; (2) any engineering, technical, or product
specifications including those of features used in any current product
of the Company or to be used, or the use of which is contemplated, in a
future product of the Company or a Subsidiary; (3) any application,
operating system, communication system, or other computer software
(whether in source or object code) and all flow charts, algorithms,
coding sheets, routines, subroutines, compilers, assemblers, design
concepts, test data, documentation, or manuals related thereto, whether
or not copyrighted, patented or patentable, related to or used in the
Business of the Company or a Subsidiary; or (4) information concerning
the customers, suppliers, products, pricing strategies of the Company or
its Subsidiaries, personnel assignments and policies of the Company, or
matters concerning the financial affairs and management of the Company
or any Affiliate; provided however, that Trade Secrets shall not include
any Excluded Information.
2. Terms of Engagement; Duties. (a) The Company hereby employs Executive
as the President and Chief Executive Officer of the Company and each of its
Subsidiaries. In such capacity Executive shall have general charge of the
management of the business and affairs of the Company and its Subsidiaries,
subject, however, to the direction of the Board of Directors of the Company. In
addition to the duties and responsibilities of the president and Chief Executive
Officer of the Company and its Subsidiaries, Executive shall perform such other
duties and responsibilities relating to the Business of the Company as may be
assigned or delegated to him from time to time by the Board of Directors of the
Company.
(b) Executive accepts such employment and agrees to:
(i) devote substantially all of Executive's effort, time, energy, and
skill (reasonable vacations and reasonable absences due to illness
excepted) during regular business hours to the duties of his employment
hereunder;
(ii) faithfully, loyally, and industriously perform such duties,
subject to the supervision of the Board of Directors of the Company; and
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<PAGE> 3
(iii) diligently follow and implement all lawful management policies
and decisions of the Company and its Subsidiaries that are communicated to
Executive.
(c) During the Term of this Agreement, Executive shall not engage (whether
or not during normal business hours) in any other business or professional
activity, whether or not such activity is pursued for gain, profit or other
pecuniary advantage; but this shall not be construed as preventing Executive
from (i) investing his personal assets in businesses which do not compete with
the Business of the Company in such form or manner as will not require any
services on the part of Executive in the operation or the affairs of the
entities in which such investments are made and in which his participation is
solely that of an investor, (ii) purchasing securities in any corporation whose
securities are regularly traded on a national securities exchange provided that
such purchase shall not result in his collectively owning beneficially at any
time five (5%) percent or more of the equity securities of any corporation
engaged in a business competitive to the Business of the Company, or (iii)
participating in conferences, preparing or publishing papers or books or
teaching so long as the Board of Directors approves of such activities prior to
Executive's engaging in them. Prior to commencing any activity described in
clause (iii) above, Executive shall inform the Board of Directors in writing of
any such activity.
3. Compensation. (a) In consideration of the services rendered by
Executive pursuant to this Agreement, the Company shall pay to Executive a base
salary of Two Hundred Fifty Thousand Dollars ($250,000) per annum (the "Base
Salary"), which Base Salary will be reviewed periodically and may be increased
(but not decreased) by the Company from time to time. The Base Salary shall be
paid in accordance with the Company's standard payroll practices in effect from
time to time, and shall be subject to such deductions and withholdings as are
required by law or by policies of the Company.
(b) In addition to the Base Salary, Executive shall receive an annual bonus
in an amount equal to five percent (5%) of the net earnings after taxes ("Net
Income") of the Company and the Subsidiaries, on a consolidated basis, to the
extent the Net Income exceeds Six Million Dollars ($6,000,000), for each
calendar year or portion thereof ending during the term of this Agreement. Net
Income shall be calculated by the Company's Chief Financial Officer, in
consultation with, and with the approval of, the Audit Committee of the Board
of Directors, after deduction of all expenses, including, without limitation,
taxes, interest, depreciation and amortization, and all salaries and bonuses.
The Company shall pay Executive his annual bonus within ten (10) days after
calculation thereof by the Company's Chief Financial Officer.
(c) Executive shall also have the right to participate in any medical,
hospitalization, dental, disability income, life or other similar insurance
plans maintained by the Company from time to time to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him eligible
to participate, and such other fringe benefits as are provided to the other
senior management employees of the Company, provided that the Company shall not
be required to adopt or continue any insurance plans or fringe benefit plans.
(d) The Company shall reimburse Executive for all reasonable business
expenses (including a $1,000 per month car allowance) incurred by Executive in
connection with the business of the Company subject to compliance with the
expense reimbursement policies established by the Company and in sufficient
detail to comply with Internal Revenue Service Regulations.
(e) The remuneration and benefits set forth in this Section 3 shall be the
only compensation payable to Executive with respect to his employment hereunder,
and Executive shall not be entitled to receive any compensation in addition to
that set forth in this Section 3 for any services rendered by him in any
capacity to the Company or any affiliated corporation unless agreed to in
writing by the Company or such affiliated corporation.
4. Term and Termination of this Agreement. The term of employment of
Executive (the "Term") pursuant to this Agreement shall commence on the date
hereof and shall continue for a term of five (5) years from the date hereof or
until sooner terminated as provided herein.
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<PAGE> 4
(a) Executive's employment hereunder may be terminated only (i) upon the
death or Disability of Executive; and (ii) by the Company for Cause.
(b) Upon termination of Executive's employment hereunder pursuant to this
Section 4, the Company shall have no further obligation to Executive or his
personal representative with respect to remuneration due under this Agreement,
except for Base Salary earned but unpaid at date of termination and, except
where Executive's employment hereunder is terminated pursuant to clauses (i) or
(iii) of the definition of "Cause," a pro rata portion (based on the number of
days of the fiscal year of the Company during which this Agreement was in
effect) of the bonus payable under Section 3(b) with respect to the fiscal year
of the Company in which Executive's employment hereunder was terminated;
provided however, Executive's covenants in Sections 5 and 6 of this Agreement
shall survive the termination of Executive's employment hereunder.
5. Ownership, Non-Disclosure, and Non-Use of Trade Secrets. (a) Executive
acknowledges and agrees that all Trade Secrets, and all physical embodiments
thereof, are confidential to and shall be and remain the sole and exclusive
property of the Company and its Subsidiaries and that any Trade Secrets produced
by the Executive during the period of Executive's employment by the Company
shall be considered "work for hire" as such term is defined in 17 U.S.C. Section
101, the ownership and copyright of which shall be vested solely in the Company.
Executive agrees (i) immediately to disclose to the Company all Trade Secrets
developed in whole or part by Executive during the Term of Executive's
employment by the Company, and (ii) at the request and expense of the Company,
to do all things and sign all documents or instruments reasonably necessary in
the opinion of the Company to eliminate any ambiguity as to the rights of the
Company in such Trade Secrets including, without limitation, providing to the
Company Executive's full cooperation in any litigation or other proceeding to
establish, protect, or obtain such rights. Upon request by the Company, and in
any event upon termination of Executive's employment by the Company for any
reason, Executive shall promptly deliver to the Company all property belonging
to the Company or any of its Affiliates, including, without limitation, all
Trade Secrets (and all embodiments thereof) then in Executive's custody,
control, or possession.
(b) Executive agrees that all Trade Secrets of the Company or its
Subsidiaries received or developed by Executive as a result of Executive's
employment with the Company will be held in trust and strictest confidence, that
Executive will protect such Trade Secrets from disclosure, and that Executive
will make no use of such Trade Secrets, except in connection with Executive's
employment hereunder, without the Company's prior written consent. The
obligations of confidentiality contained in this Agreement will apply during
Executive's employment by the Company and (i) with respect to all Trade Secrets
consisting of scientific or technical data, at any and all times after
expiration or termination (for whatever reason) of such employment; and (ii)
with respect to all other Trade Secrets, for a period of two (2) years after
such expiration or termination, unless a longer period of protection is provided
by law.
6. Non-Compete: Non-Solicitation Covenants. (a) In consideration of the
amounts to be paid to Executive hereunder, Executive covenants that Executive
shall, during the Term of this Agreement, and for such period of time (not to
exceed one (1) year) following the termination or expiration of the Term of this
Agreement or Executive's employment hereunder as such payments continue, observe
the following separate and independent covenants:
(i) Neither Executive nor any Affiliate will, without the prior
written consent of the Company, within the Area, either directly or
indirectly, (1) become financially interested in a Competing Enterprise
(other than as a holder of less than five percent (5%) of the outstanding
voting securities of any entity whose voting securities are listed on a
national securities exchange or quoted by the National Association of
Securities Dealers, Inc. National Market System), or, (2) engage in or be
employed by any Competing Enterprise as a consultant, officer, director, or
executive or managerial employee.
(ii) Neither Executive nor any Affiliate will, without the prior
written consent of the Company, either directly or indirectly, on
Executive's own behalf or in the service or on behalf of others, solicit,
divert, or appropriate, or attempt to solicit, divert, or appropriate, to
any Competing Enterprise within the
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<PAGE> 5
Area, any person or entity whose account with the Company was serviced by
the Company or one of its Subsidiaries during the Term of this Agreement.
(iii) Neither Executive nor any Affiliate will, without the Company's
prior written consent, either directly or indirectly, on Executive's own
behalf or in the service or on behalf of others, solicit, divert, or hire
away, or attempt to solicit, divert, or hire away, to any Competing
Enterprise, any person employed by the Company or one of its Subsidiaries,
whether or not such employee is a full-time or a temporary employee of the
Company or such Subsidiary and whether or not such employment is pursuant
to written agreement and whether or not such employment is at will.
(b) As consideration for Executive's agreements in this Section 6, Company
shall pay to executive the amount of $8,333.33 per month up to a maximum of
twelve (12) consecutive months following the termination or expiration of the
Term. Failure of the Company to make any such payments shall release Executive
from his obligations under this Section 6 from and after the date when such
payments cease to be made. All such monthly payments shall be subject to such
deductions for withholdings and like amounts as required by law, and shall
commence thirty (30) days after the effective date of the termination or
expiration of the Term, with subsequent monthly payments being due on the same
date (or if such date is not a business day of the Company, then on the next
business day) in each of the succeeding eleven (11) months thereafter.
7. Remedies. Executive acknowledges and agrees that the Company is engaged
in the Business of the Company in and throughout the Area, and that by virtue of
the training, duties, and responsibilities attendant with Executive's employment
by the Company and the special knowledge of the Business and operations of the
Company that Executive will have as a consequence of Executive's employment by
the Company, great loss and irreparable damage would be suffered by the Company
if the Executive should breach or violate any of the terms or provisions of the
covenants and agreements set forth herein. Executive further acknowledges and
agrees that each such covenant and agreement is reasonably necessary to protect
and preserve the interest of the Company. Therefore, in addition to all the
remedies provided at law or in equity, Executive agrees and consents that the
Company shall be entitled to a temporary restraining order and a permanent
injunction to prevent a breach of any of the covenants or agreements of
Executive contained herein. The existence of any claim, demand, action or cause
of action of Executive against the Company shall not constitute a defense to the
enforcement by the Company of any of the covenants or agreements herein whether
predicated upon this Agreement or otherwise, and shall not constitute a defense
to the enforcement by the Company of any of its rights hereunder.
8. General Provisions. (a) In the event that any one or more of the
provisions, or parts of any provisions, contained in the Agreement shall for any
reason be held to be invalid, illegal, or unenforceable in any respect by a
court of competent jurisdiction, the same shall not invalidate or otherwise
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
herein. Specifically, but without limiting the foregoing in any way, each of the
covenants of the parties to this Agreement contained herein shall be deemed and
shall be construed as a separate and independent covenant and should any part or
provision of any of such covenants be held or declared invalid by any court of
competent jurisdiction, such invalidity shall in no way render invalid or
unenforceable any other part or provision thereof or any other covenant of the
parties not held or declared invalid.
(b) This Agreement and the rights and obligations of the Company hereunder
may be assigned by the Company to any subsidiary of or successor to the Company,
and shall inure to the benefit of, shall be binding upon, and shall be
enforceable by any such assignee, provided that any such assignee shall agree to
assume and be bound by this Agreement. This Agreement and the rights and
obligations of Executive hereunder may not be assigned by Executive.
(c) The waiver by the Company of any breach of this Agreement by Executive
shall not be effective unless in writing, and no such waiver shall operate or be
construed as a waiver of the same or another breach on a subsequent occasion.
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<PAGE> 6
(d) This Agreement and the rights of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of Florida.
The parties agree that any appropriate state court located in Polk County,
Florida or any Federal Court located in Hillsborough County, Florida shall have
exclusive jurisdiction of any case or controversy arising under or in connection
with this Agreement and shall be a proper forum in which to adjudicate such case
or controversy. The parties hereto consent to the jurisdiction of such courts.
(e) This Agreement embodies the entire agreement of the parties relating to
the employment of Executive by the Company. No amendment or modification of this
Agreement shall be valid or binding upon the Company or Executive unless made in
writing and signed by the parties. All prior understandings and agreements
relating to the employment of Executive by the Company are hereby expressly
terminated.
(f) Any notice, request, demand, or other communication required to be
given hereunder shall be made in writing and shall be deemed to have been fully
given if personally delivered or if mailed by overnight delivery (the date on
which such notice, request, demand, or other communication is received shall be
the date of delivery) to the parties at the following addresses (or at such
other addresses as shall be given in writing by any party to the other party
hereto):
If to Executive:
Mr. William B. Bull
2310 A - Z Park Road
Lakeland, Florida 33801
Telephone: (813) 665-6060
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<PAGE> 7
If to Company:
Summit Holding Southeast, Inc.
c/o Seminole Stores
335 N.E. Watula Avenue
Ocala, Florida 34470
Attention: Mr. Greg Branch
Telephone: (904) 732-4143
Telecopy: (904) 732-4143
with a copy (which shall not constitute notice) to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424
Attention: Sidney J. Nurkin, Esq.
Telephone: (404) 881-7260
Telecopy: (404) 881-7777
(g) This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, and it shall not be necessary for the
same counterpart of this agreement to be signed by all of the undersigned in
order for the agreements set forth herein to be binding upon all of the
undersigned in accordance with the terms hereof.
IN WITNESS WHEREOF, the Company and Executive have each executed and
delivered this Agreement as of the date first above written.
COMPANY:
SUMMIT HOLDING SOUTHEAST, INC.
By:
------------------------------------
GREG BRANCH
CHAIRMAN OF THE BOARD
EXECUTIVE:
--------------------------------------
WILLIAM B. BULL
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<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AND
CONFIDENTIALITY AGREEMENT
THIS EMPLOYMENT AND CONFIDENTIALITY AGREEMENT (the "Agreement") is made as
of , 1997, between SUMMIT HOLDING SOUTHEAST, INC., a Florida
corporation (the "Company"), and RUSSELL L. WALL, a resident of the State of
Florida ("Executive").
BACKGROUND
Prior to the date hereof, Executive was employed by Summit Holding
Corporation ("SHC"), a wholly-owned subsidiary of Employers Self Insurers Fund
("ESIF"), as its Vice President and Chief Financial Officer. On the date hereof,
in accordance with that certain Amended Plan of Conversion and Agreement of
ESIF, several transactions have occurred: (i) ESIF has converted from a group
self-insurance fund to an assessable mutual insurance company, an interim step
required to satisfy the Florida Insurance Code; (ii) the assessable mutual
company has converted to a stock insurance company with the name Bridgefield
Employers Insurance Company ("Bridgefield"); and (iii) certain policyholders of
ESIF have exchanged their rights to receive common stock of Bridgefield for,
among other things, the Company's Series A Preferred Stock, causing Bridgefield
to become a wholly-owned subsidiary of the Company. The Company desires to
continue the employment of Executive in the capacities and on the terms and
conditions set forth below. Executive desires to accept employment on the terms
and conditions set forth below.
AGREEMENT
NOW, THEREFORE, for and in consideration of the employment and continued
employment of Executive by the Company, the premises, and the mutual agreements
hereinafter set forth, the parties agree as follows:
1. Definitions. The following terms used herein shall have the
definitions set forth below:
(a) "Affiliate" means any person or entity directly or indirectly
controlling, controlled by, or under common control with another person.
(b) "Area" means the States of Florida, Georgia, Kentucky,
Louisiana and North Carolina.
(c) "Business" or "Business of the Company" means the business of
insurance related administrative services for self insurer funds,
including, without limitation, marketing, policy issuance and servicing,
claims processing and administration, loss control, brokerage, audits,
financial and data processing services, and risk management services.
(d) "Cause" means (i) conduct amounting to fraud or dishonesty
against the Company; (ii) willful violation of any directives to
Employee from the Board of Directors of the Company, where such
violation is not cured to the reasonable satisfaction of the Board of
Directors of the Company within five (5) days after written notice of
such violation has been given to Executive; (iii) a conviction or plea
of guilty or nolo contendere to a felony or a crime involving dishonesty
against the Company; or (iv) Executive's failure to observe the
requirements of Sections 2(c), 5 and 6 hereof.
(e) "Competing Enterprise" means any person or any business
organization of whatever form, engaged directly or indirectly within the
Area in the Business of the Company.
(f) "Disability" means (i) the inability of Executive to perform
the duties of Executive's employment due to physical or emotional
incapacity or illness, where such inability is expected to be of
long-continued and indefinite duration or (ii) Executive shall be
entitled to (x) disability retirement benefits under the federal Social
Security Act or (y) recover benefits under any long-
<PAGE> 2
term disability plan or policy maintained by the Company. In the event
of a dispute, the determination of Disability shall be made reasonably
by the Board of Directors of the Company and shall be supported by
advice of a physician competent in the area to which such Disability
relates.
(g) "Excluded Information" means any data or information that is a
Trade Secret hereunder (1) that has been voluntarily disclosed to the
public by the Company or any Affiliate thereof or has become generally
known to the public (except where such public disclosure has been made
by or through the Executive or by a third person or entity with the
knowledge of the Executive without authorization by the Company); (2)
that has been independently developed and disclosed by parties other
than the Executive or the Company or any Affiliate thereof to the
Executive or to the public generally without a breach of any obligation
of confidentiality by any such person running directly or indirectly to
the Company or any Affiliate thereof; or (3) that otherwise enters the
public domain through lawful means.
(h) "Subsidiaries" means Bridgefield, SHC, Summit Consulting, Inc.,
Summit Claims Management, Inc., Summit Loss Control Services, Inc.,
Commercial Insurance of Central Florida, Inc., Bridgefield Casualty
Insurance Company and Summit Healthcare Holdings, Inc.
(i) "Trade Secrets" means information which derives economic value,
actual or potential, from not being generally known and not being
readily ascertainable to other persons who can obtain economic value
from its disclosure or use and which is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy or
confidentiality. Trade Secrets may include either technical or
non-technical data, including without limitation, (1) any useful
process, machine, chemical formula, composition of matter, or other
device which (A) is new or which Executive has a reasonable basis to
believe may be new, (B) is being used or studied by the Company or a
Subsidiary and is not described in a printed patent or in any literature
already published and distributed externally by the Company or such
Subsidiary, and (C) is not readily ascertainable from inspection of a
product of the Company; (2) any engineering, technical, or product
specifications including those of features used in any current product
of the Company or to be used, or the use of which is contemplated, in a
future product of the Company or a Subsidiary; (3) any application,
operating system, communication system, or other computer software
(whether in source or object code) and all flow charts, algorithms,
coding sheets, routines, subroutines, compilers, assemblers, design
concepts, test data, documentation, or manuals related thereto, whether
or not copyrighted, patented or patentable, related to or used in the
Business of the Company or a Subsidiary; or (4) information concerning
the customers, suppliers, products, pricing strategies of the Company or
its Subsidiaries, personnel assignments and policies of the Company, or
matters concerning the financial affairs and management of the Company
or any Affiliate; provided however, that Trade Secrets shall not include
any Excluded Information.
2. Terms of Engagement; Duties. (a) The Company hereby employs Executive
as the Vice President and Chief Financial Officer of the Company and each of its
Subsidiaries. In such capacity Executive shall report to the President and Chief
Executive Officer of the Company and shall perform such other duties and
responsibilities relating to the Business of the Company as may be assigned or
delegated to him from time to time by the President and Chief Executive Officer
of the Company.
(b) Executive accepts such employment and agrees to:
(i) devote substantially all of Executive's effort, time, energy, and
skill (reasonable vacations and reasonable absences due to illness
excepted) during regular business hours to the duties of his employment
hereunder;
(ii) faithfully, loyally, and industriously perform such duties,
subject to the supervision of the Board of Directors of the Company; and
(iii) diligently follow and implement all lawful management policies
and decisions of the Company and its Subsidiaries that are communicated to
Executive.
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<PAGE> 3
(c) During the Term of this Agreement, Executive shall not engage (whether
or not during normal business hours) in any other business or professional
activity, whether or not such activity is pursued for gain, profit or other
pecuniary advantage; but this shall not be construed as preventing Executive
from (i) investing his personal assets in businesses which do not compete with
the Business of the Company in such form or manner as will not require any
services on the part of Executive in the operation or the affairs of the
entities in which such investments are made and in which his participation is
solely that of an investor, (ii) purchasing securities in any corporation whose
securities are regularly traded on a national securities exchange provided that
such purchase shall not result in his collectively owning beneficially at any
time five (5%) percent or more of the equity securities of any corporation
engaged in a business competitive to the Business of the Company, or (iii)
participating in conferences, preparing or publishing papers or books or
teaching so long as the President and Chief Executive Officer approves of such
activities prior to Executive's engaging in them. Prior to commencing any
activity described in clause (iii) above, Executive shall inform the President
and Chief Executive Officer in writing of any such activity.
3. Compensation. (a) In consideration of the services rendered by
Executive pursuant to this Agreement, the Company shall pay to Executive a base
salary of Two Hundred Thirty Thousand Dollars ($230,000) per annum (the "Base
Salary"), which Base Salary will be reviewed periodically and may be increased
(but not decreased) by the Company from time to time. The Base Salary shall be
paid in accordance with the Company's standard payroll practices in effect from
time to time, and shall be subject to such deductions and withholdings as are
required by law or by policies of the Company.
(b) In addition to the Base Salary, Executive shall receive an annual bonus
in an amount equal to five percent (5%) of the net earnings after taxes ("Net
Income") of the Company and the Subsidiaries, on a consolidated basis, to the
extent the Net Income exceeds Eight Million Two Hundred Fifty Thousand Dollars
($8,250,000), for 1997, and to the extent the Net Income exceeds Twelve Million
One Hundred Sixty Thousand Dollars ($12,160,000) for each of 1998 and 1999. Net
Income shall be calculated by the Company's Chief Financial Officer, in
consultation with, and with the approval of, the Audit Committee of the Board of
Directors, after deduction of all expenses, including, without limitation,
taxes, interest, depreciation and amortization, and all salaries and bonuses.
The Company shall pay Executive his annual bonus within ten (10) days after
calculation thereof by the Company's Chief Executive Officer.
(c) Executive shall also have the right to participate in any medical,
hospitalization, dental, disability income, life or other similar insurance
plans maintained by the Company from time to time to the extent that Executive's
position, tenure, salary, age, health and other qualifications make him eligible
to participate, and such other fringe benefits as are provided to the other
senior management employees of the Company, provided that the Company shall not
be required to adopt or continue any insurance plans or fringe benefit plans.
(d) The Company shall reimburse Executive for all reasonable business
expenses (including a $1,000 per month car allowance) incurred by Executive in
connection with the business of the Company subject to compliance with the
expense reimbursement policies established by the Company and in sufficient
detail to comply with Internal Revenue Service Regulations.
(e) The remuneration and benefits set forth in this Section 3 shall be the
only compensation payable to Executive with respect to his employment hereunder,
and Executive shall not be entitled to receive any compensation in addition to
that set forth in this Section 3 for any services rendered by him in any
capacity to the Company or any affiliated corporation unless agreed to in
writing by the Company or such affiliated corporation.
4. Term and Termination of this Agreement. The term of employment of
Executive (the "Term") pursuant to this Agreement shall commence on the date
hereof and shall continue for a term of three (3) years from the date hereof or
until sooner terminated as provided herein.
(a) Executive's employment hereunder may be terminated only (i) upon the
death or Disability of Executive; and (ii) by the Company for Cause.
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<PAGE> 4
(b) Upon termination of Executive's employment hereunder pursuant to this
Section 4, the Company shall have no further obligation to Executive or his
personal representative with respect to remuneration due under this Agreement,
except for Base Salary earned but unpaid at date of termination and, except
where Executive's employment hereunder is terminated pursuant to clauses (i) or
(iii) of the definition of "Cause," a pro rata portion (based on the number of
days of the fiscal year of the Company during which this Agreement was in
effect) of the bonus payable under Section 3(b) with respect to the fiscal year
of the Company in which Executive's employment hereunder was terminated;
provided however, Executive's covenants in Sections 5 and 6 of this Agreement
shall survive the termination of Executive's employment hereunder.
5. Ownership, Non-Disclosure, and Non-Use of Trade Secrets. (a) Executive
acknowledges and agrees that all Trade Secrets, and all physical embodiments
thereof, are confidential to and shall be and remain the sole and exclusive
property of the Company and its Subsidiaries and that any Trade Secrets produced
by the Executive during the period of Executive's employment by the Company
shall be considered "work for hire" as such term is defined in 17 U.S.C. Section
101, the ownership and copyright of which shall be vested solely in the Company.
Executive agrees (i) immediately to disclose to the Company all Trade Secrets
developed in whole or part by Executive during the Term of Executive's
employment by the Company, and (ii) at the request and expense of the Company,
to do all things and sign all documents or instruments reasonably necessary in
the opinion of the Company to eliminate any ambiguity as to the rights of the
Company in such Trade Secrets including, without limitation, providing to the
Company Executive's full cooperation in any litigation or other proceeding to
establish, protect, or obtain such rights. Upon request by the Company, and in
any event upon termination of Executive's employment by the Company for any
reason, Executive shall promptly deliver to the Company all property belonging
to the Company or any of its Affiliates, including, without limitation, all
Trade Secrets (and all embodiments thereof) then in Executive's custody,
control, or possession.
(b) Executive agrees that all Trade Secrets of the Company or its
Subsidiaries received or developed by Executive as a result of Executive's
employment with the Company will be held in trust and strictest confidence, that
Executive will protect such Trade Secrets from disclosure, and that Executive
will make no use of such Trade Secrets, except in connection with Executive's
employment hereunder, without the Company's prior written consent. The
obligations of confidentiality contained in this Agreement will apply during
Executive's employment by the Company and (i) with respect to all Trade Secrets
consisting of scientific or technical data, at any and all times after
expiration or termination (for whatever reason) of such employment; and (ii)
with respect to all other Trade Secrets, for a period of two (2) years after
such expiration or termination, unless a longer period of protection is provided
by law.
6. Non-Compete: Non-Solicitation Covenants. (a) In consideration of the
amounts to be paid to Executive hereunder, Executive covenants that Executive
shall, during the Term of this Agreement, and for such period of time (not to
exceed one (1) year) following the termination or expiration of the Term of this
Agreement or Executive's employment hereunder as such payments continue, observe
the following separate and independent covenants:
(i) Neither Executive nor any Affiliate will, without the prior
written consent of the Company, within the Area, either directly or
indirectly, (1) become financially interested in a Competing Enterprise
(other than as a holder of less than five percent (5%) of the outstanding
voting securities of any entity whose voting securities are listed on a
national securities exchange or quoted by the National Association of
Securities Dealers, Inc. National Market System), or, (2) engage in or be
employed by any Competing Enterprise as a consultant, officer, director, or
executive or managerial employee.
(ii) Neither Executive nor any Affiliate will, without the prior
written consent of the Company, either directly or indirectly, on
Executive's own behalf or in the service or on behalf of others, solicit,
divert, or appropriate, or attempt to solicit, divert, or appropriate, to
any Competing Enterprise within the Area, any person or entity whose
account with the Company was serviced by the Company or one of its
Subsidiaries during the Term of this Agreement.
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<PAGE> 5
(iii) Neither Executive nor any Affiliate will, without the Company's
prior written consent, either directly or indirectly, on Executive's own
behalf or in the service or on behalf of others, solicit, divert, or hire
away, or attempt to solicit, divert, or hire away, to any Competing
Enterprise, any person employed by the Company or one of its Subsidiaries,
whether or not such employee is a full-time or a temporary employee of the
Company or such Subsidiary and whether or not such employment is pursuant
to written agreement and whether or not such employment is at will.
(b) As consideration for Executive's agreements in this Section 6, Company
shall pay to executive the amount of $8,333.33 per month up to a maximum of
twelve (12) consecutive months following the termination or expiration of the
Term. Failure of the Company to make any such payments shall release Executive
from his obligations under this Section 6 from and after the date when such
payments cease to be made. All such monthly payments shall be subject to such
deductions for withholdings and like amounts as required by law, and shall
commence thirty (30) days after the effective date of the termination or
expiration of the Term, with subsequent monthly payments being due on the same
date (or if such date is not a business day of the Company, then on the next
business day) in each of the succeeding eleven (11) months thereafter.
7. Remedies. Executive acknowledges and agrees that the Company is engaged
in the Business of the Company in and throughout the Area, and that by virtue of
the training, duties, and responsibilities attendant with Executive's employment
by the Company and the special knowledge of the Business and operations of the
Company that Executive will have as a consequence of Executive's employment by
the Company, great loss and irreparable damage would be suffered by the Company
if the Executive should breach or violate any of the terms or provisions of the
covenants and agreements set forth herein. Executive further acknowledges and
agrees that each such covenant and agreement is reasonably necessary to protect
and preserve the interest of the Company. Therefore, in addition to all the
remedies provided at law or in equity, Executive agrees and consents that the
Company shall be entitled to a temporary restraining order and a permanent
injunction to prevent a breach of any of the covenants or agreements of
Executive contained herein. The existence of any claim, demand, action or cause
of action of Executive against the Company shall not constitute a defense to the
enforcement by the Company of any of the covenants or agreements herein whether
predicated upon this Agreement or otherwise, and shall not constitute a defense
to the enforcement by the Company of any of its rights hereunder.
8. General Provisions. (a) In the event that any one or more of the
provisions, or parts of any provisions, contained in the Agreement shall for any
reason be held to be invalid, illegal, or unenforceable in any respect by a
court of competent jurisdiction, the same shall not invalidate or otherwise
affect any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal, or unenforceable provision had never been contained
herein. Specifically, but without limiting the foregoing in any way, each of the
covenants of the parties to this Agreement contained herein shall be deemed and
shall be construed as a separate and independent covenant and should any part or
provision of any of such covenants be held or declared invalid by any court of
competent jurisdiction, such invalidity shall in no way render invalid or
unenforceable any other part or provision thereof or any other covenant of the
parties not held or declared invalid.
(b) This Agreement and the rights and obligations of the Company hereunder
may be assigned by the Company to any subsidiary of or successor to the Company,
and shall inure to the benefit of, shall be binding upon, and shall be
enforceable by any such assignee, provided that any such assignee shall agree to
assume and be bound by this Agreement. This Agreement and the rights and
obligations of Executive hereunder may not be assigned by Executive.
(c) The waiver by the Company of any breach of this Agreement by Executive
shall not be effective unless in writing, and no such waiver shall operate or be
construed as a waiver of the same or another breach on a subsequent occasion.
(d) This Agreement and the rights of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of Florida.
The parties agree that any appropriate state court located in Polk County,
Florida or any Federal Court located in Hillsborough County, Florida shall have
exclusive jurisdiction of any case or controversy arising under or in connection
with this Agreement and shall be a proper
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<PAGE> 6
forum in which to adjudicate such case or controversy. The parties hereto
consent to the jurisdiction of such courts.
(e) This Agreement embodies the entire agreement of the parties relating to
the employment of Executive by the Company. No amendment or modification of this
Agreement shall be valid or binding upon the Company or Executive unless made in
writing and signed by the parties. All prior understandings and agreements
relating to the employment of Executive by the Company are hereby expressly
terminated.
(f) Any notice, request, demand, or other communication required to be
given hereunder shall be made in writing and shall be deemed to have been fully
given if personally delivered or if mailed by overnight delivery (the date on
which such notice, request, demand, or other communication is received shall be
the date of delivery) to the parties at the following addresses (or at such
other addresses as shall be given in writing by any party to the other party
hereto):
If to Executive:
Mr. Russell L. Wall
2310 A - Z Park Road
Lakeland, Florida 33801
Telephone: (813) 665-6060
If to Company:
Summit Holding Southeast, Inc.
2310 A - Z Park Road
Lakeland, Florida 33801
Attention: William B. Bull
Telephone: (941) 665-6060
Telecopy: (941) 667-1528
with a copy (which shall not constitute notice) to:
Alston & Bird
One Atlantic Center
1201 West Peachtree Street
Atlanta, GA 30309-3424
Attention: Sidney J. Nurkin, Esq.
Telephone: (404) 881-7260
Telecopy: (404) 881-7777
(g) This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, and it shall not be necessary for the
same counterpart of this agreement to be signed by all of the undersigned in
order for the agreements set forth herein to be binding upon all of the
undersigned in accordance with the terms hereof.
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<PAGE> 7
IN WITNESS WHEREOF, the Company and Executive have each executed and
delivered this Agreement as of the date first above written.
COMPANY:
SUMMIT HOLDING SOUTHEAST, INC.
By:
-----------------------------------
WILLIAM B. BULL
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
EXECUTIVE:
--------------------------------------
RUSSELL L. WALL
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<PAGE> 1
EXHIBIT 10.4
SUMMIT HOLDING SOUTHEAST, INC.
1996 LONG-TERM INCENTIVE PLAN
ARTICLE I
PURPOSE
1.1 GENERAL. The purpose of the Summit Holding Southeast, Inc. 1996
Long-Term Incentive Plan (the "Plan") is to promote the success, and enhance the
value, of Summit Holding Southeast, Inc. (the "Corporation") and its
Subsidiaries, by linking the personal interests of their employees, officers
and directors to those of the Corporation's shareholders and by providing the
Corporation's and its Subsidiaries' employees, officers and directors with an
incentive for outstanding performance. The Plan is further intended to provide
flexibility to the Corporation and its Subsidiaries in their ability to
motivate, attract, and retain the services of employees, officers and directors
upon whose judgment, interest, and special effort the successful conduct of the
Corporation's and its Subsidiaries' operations are largely dependent.
Accordingly, the Plan permits the grant of incentive awards from time to time
to selected employees, officers and directors.
ARTICLE 2
EFFECTIVE DATE
2.1 EFFECTIVE DATE. The Plan shall be effective as of the date upon which
it shall be approved by the Board and the Corporation's shareholders (the
"Effective Date").
ARTICLE 3
DEFINITIONS
3.1 DEFINITIONS. When a word or phrase appears in this Plan with the
initial letter capitalized, and the word or phrase does not commence a sentence,
the word or phrase shall generally be given the meaning ascribed to it in this
Section or in Section 1.1 unless a clearly different meaning is required by the
context. The following words and phrases shall have the following meanings:
(a) "Award" means any Option, Stock Appreciation Right, Restricted
Stock Award, Performance Share Award, Dividend Equivalent Award, or Other
Stock-Based Award, or any other right or interest relating to Stock or
cash, granted to a Participant under the Plan.
(b) "Award Agreement" means any written agreement, contract, or other
instrument or document evidencing an Award.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Change in Control" means and includes each of the following:
(1) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of 25% or more of the combined voting power of the then
outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding Voting
Securities"); provided, however, that for purposes of this subsection
(1), the following acquisitions shall not constitute a Change of
Control: (i) any acquisition by a Person who is on the Effective Date
the beneficial owner of 25% or more of the
<PAGE> 2
Outstanding Voting Securities, (ii) any acquisition directly from
the Corporation, (iii) any acquisition by the Corporation, (iv) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Corporation or any corporation controlled by the
Corporation, or (v) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (3) of this definition; or
(2) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the Effective Date whose election, or nomination
for election by the Corporation's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person other than the Board; or
(3) Consummation of a reorganization, merger or consolidation or
sale or other disposition of all or substantially all of the assets of
the Corporation (a "Business Combination"), in each case, unless,
following such Business Combination, (i) all or substantially
all of the individuals and entities who were the beneficial owners of
the Outstanding Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors of the
corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns the Corporation or all or substantially all of the Corporation's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately
prior to such Business Combination of the Outstanding
Voting Securities, and (ii) no Person (excluding any corporation
resulting from such Business Combination or any employee benefit plan
(or related trust) of the Corporation or such corporation resulting
from such Business Combination) beneficially owns, directly or
indirectly, 25% or more of the combined voting power of the then
outstanding voting securities of such corporation except to the extent
that such ownership existed prior to the Business Combination, and
(iii) at least a majority of the members of the board of directors of
the corporation resulting from such Business Combination were members
of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" means the committee of the Board described in Article
4.
(g) "Corporation" means Summit Holding Southeast, Inc., a Florida
corporation.
(h) "Covered Employee" means an individual defined in Code Section
162(m)(3).
(i) "Disability" shall mean any illness or other physical or mental
condition of a Participant that renders the Participant incapable of
performing his customary and usual duties for the Corporation, or any
medically determinable illness or other physical or mental condition
resulting from a bodily injury, disease or mental disorder which, in the
judgment of the Committee, is permanent and continuous in nature. The
Committee may require such medical or other evidence as it deems necessary
to judge the nature and permanency of the Participant's condition.
(j) "Dividend Equivalent" means a right granted to a Participant under
Article 11.
(k) "Effective Date" has the meaning assigned such term in Section
2.1.
(l) "Fair Market Value" on any date, means (i) if the Stock is listed
on a securities exchange or is traded over the Nasdaq National Market, the
closing sales price on such exchange or over such system on such date or,
in the absence of reported sales on such date, the closing sales price on
the immediately preceding date on which sales were reported, or (ii) if the
Stock is not listed on a securities exchange or
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traded over the Nasdaq National Market, the mean between the bid and
offered prices as quoted by Nasdaq for such date, provided that if it is
determined that the fair market value is not properly reflected by such
Nasdaq quotations, Fair Market Value will be determined by such other
method as the Committee determines in good faith to be reasonable.
(m) "Incentive Stock Option" means an Option that is intended to meet
the requirements of Section 422 of the Code or any successor provision
thereto.
(n) "Non-Qualified Stock Option" means an Option that is not an
Incentive Stock Option.
(o) "Option" means a right granted to a Participant under Article 7 of
the Plan to purchase Stock at a specified price during specified time
periods. An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(p) "Other Stock-Based Award" means a right, granted to a Participant
under Article 12, that relates to or is valued by reference to Stock or
other Awards relating to Stock.
(q) "Participant" means a person who, as an employee, officer or
director of the Corporation or any Subsidiary, has been granted an Award
under the Plan.
(r) "Performance Share" means a right granted to a Participant under
Article 9, to receive cash, Stock, or other Awards, the payment of which is
contingent upon achieving certain performance goals established by the
Committee.
(s) "Plan" means the Summit Holding Southeast, Inc. 1996 Long-Term
Incentive Plan, as amended from time to time.
(t) "Restricted Stock Award" means Stock granted to a Participant
under Article 10 that is subject to certain restrictions and to risk of
forfeiture.
(u) "Retirement" means a Participant's termination of employment with
the Corporation or a Subsidiary after attaining any normal or early
retirement age specified in any pension, profit sharing or other retirement
program sponsored by the Corporation, or, in the event of the
inapplicability thereof with respect to the person in question, as
determined by the Committee in its reasonable judgment.
(v) "Stock" means the $0.01 par value common stock of the Corporation
and such other securities of the Corporation as may be substituted for
Stock pursuant to Article 14.
(w) "Stock Appreciation Right" or "SAR" means a right granted to a
Participant under Article 8 to receive a payment equal to the difference
between the Fair Market Value of a share of Stock as of the date of
exercise of the SAR over the grant price of the SAR, all as determined
pursuant to Article 8.
(x) "Subsidiary" means any corporation, limited liability company,
partnership or other entity of which a majority of the outstanding voting
stock or voting power is beneficially owned directly or indirectly by the
Corporation. For Incentive Stock Options, the term shall have the meaning
set forth in Code Section 424(f).
(y) "1933 Act" means the Securities Act of 1933, as amended from time
to time.
(z) "1934 Act" means the Securities Exchange Act of 1934, as amended
from time to time.
ARTICLE 4
ADMINISTRATION
4.1 COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board or, at the discretion of the Board from time to time, by
the Board. The Committee shall consist of two or more
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members of the Board who are (i) "outside directors" as that term is used in
Section 162 of the Code and the regulations promulgated thereunder, and (ii)
"non-employee directors" as such term is defined in Rule 16b-3 promulgated under
Section 16 of the 1934 Act or any successor provision. During any time that the
Board is acting as administrator of the Plan, it shall have all the powers of
the Committee hereunder, and any reference herein to the Committee (other than
in this Section 4.1) shall include the Board.
4.2 ACTION BY THE COMMITTEE. For purposes of administering the Plan, the
following rules of procedure shall govern the Committee. A majority of the
Committee shall constitute a quorum. The acts of a majority of the members
present at any meeting at which a quorum is present, and acts approved
unanimously in writing by the members of the Committee in lieu of a meeting,
shall be deemed the acts of the Committee. Each member of the Committee is
entitled to, in good faith, rely or act upon any report or other information
furnished to that member by any officer or other employee of the Corporation or
any Subsidiary, the Corporation's independent certified public accountants, or
any executive compensation consultant or other professional retained by the
Corporation to assist in the administration of the Plan.
4.3 AUTHORITY OF COMMITTEE. The Committee has the exclusive power,
authority and discretion to:
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to each
Participant;
(c) Determine the number of Awards to be granted and the number of
shares of Stock to which an Award will relate;
(d) Determine the terms and conditions of any Award granted under the
Plan, including but not limited to, the exercise price, grant price, or
purchase price, any restrictions or limitations on the Award, any schedule
for lapse of forfeiture restrictions or restrictions on the exercisability
of an Award, and accelerations or waivers thereof, based in each case on
such considerations as the Committee in its sole discretion determines;
(e) Accelerate the vesting or lapse of restrictions of any outstanding
Award, based in each case on such considerations as the Committee in its
sole discretion determines;
(f) Determine whether, to what extent, and under what circumstances an
Award may be settled in, or the exercise price of an Award may be paid in,
cash, Stock, other Awards, or other property, or an Award may be canceled,
forfeited, or surrendered;
(g) Prescribe the form of each Award Agreement, which need not be
identical for each Participant;
(h) Decide all other matters that must be determined in connection
with an Award;
(i) Establish, adopt or revise any rules and regulations as it may
deem necessary or advisable to administer the Plan;
(j) Make all other decisions and determinations that may be required
under the Plan or as the Committee deems necessary or advisable to
administer the Plan; and
(k) Amend the Plan or any Award Agreement as provided herein.
4.4. DECISIONS BINDING. The Committee's interpretation of the Plan, any
Awards granted under the Plan, any Award Agreement and all decisions and
determinations by the Committee with respect to the Plan are final, binding, and
conclusive on all parties.
ARTICLE 5
SHARES SUBJECT TO THE PLAN
5.1. NUMBER OF SHARES. Subject to adjustment as provided in Section 14.1,
the aggregate number of shares of Stock reserved and available for Awards or
which may be used to provide a basis of
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measurement for or to determine the value of an Award (such as with a Stock
Appreciation Right or Performance Share Award) shall be 5,000,000.
5.2. LAPSED AWARDS. To the extent that an Award is canceled, terminates,
expires or lapses for any reason, any shares of Stock subject to the Award will
again be available for the grant of an Award under the Plan and shares subject
to SARs or other Awards settled in cash will be available for the grant of an
Award under the Plan.
5.3. STOCK DISTRIBUTED. Any Stock distributed pursuant to an Award may
consist, in whole or in part, of authorized and unissued Stock, treasury Stock
or Stock purchased on the open market.
5.4. LIMITATION ON AWARDS. Notwithstanding any provision in the Plan to
the contrary, the maximum number of shares of Stock with respect to one or more
Options and/or SARs that may be granted under the Plan during the ten-year
period following the Effective Date to any one Covered Employee shall be
500,000. The maximum fair market value of any Awards (other than Options
and SARs) that may be received by a Covered Employee (less any consideration
paid by the Participant for such Award) under the Plan during the ten years
following the Effective Date shall be $5,000,000.
ARTICLE 6
ELIGIBILITY
6.1. GENERAL. Awards may be granted only to individuals who are employees,
officers or directors of the Corporation or a Subsidiary.
ARTICLE 7
STOCK OPTIONS
7.1. GENERAL. The Committee is authorized to grant Options to Participants
on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per share of Stock under an
Option shall be determined by the Committee, provided that the exercise
price for any Option shall not be less than the Fair Market Value as of
the date of the grant.
(b) TIME AND CONDITIONS OF EXERCISE. The Committee shall determine
the time or times at which an Option may be exercised in whole or in part.
The Committee also shall determine the performance or other conditions, if
any, that must be satisfied before all or part of an Option may be
exercised. The Committee may waive any exercise provisions at any time in
whole or in part based upon such factors as the Committee may determine in
its sole discretion, so that the Option becomes exerciseable at an earlier
date.
(c) PAYMENT. The Committee shall determine the methods by which the
exercise price of an Option may be paid, the form of payment, including,
without limitation, cash, shares of Stock, or other property (including
"cashless exercise" arrangements), and the methods by which shares of Stock
shall be delivered or deemed to be delivered to Participants. Without
limiting the power and discretion conferred on the Committee pursuant to
the preceding sentence, the Committee may, in the exercise of its
discretion, but need not, allow a Participant to pay the Option price by
directing the Corporation to withhold from the shares of Stock that would
otherwise be issued upon exercise of the Option that number of shares
having a Fair Market Value on the exercise date equal to the Option price,
all as determined pursuant to rules and procedures established by the
Committee.
(d) EVIDENCE OF GRANT. All Options shall be evidenced by a written
Award Agreement between the Corporation and the Participant. The Award
Agreement shall include such provisions as may be specified by the
Committee.
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7.2. INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) EXERCISE. In no event may any Incentive Stock Option be
exercisable for more than ten years from the date of its grant.
(b) LAPSE OF OPTION. An Incentive Stock Option shall lapse under the
earliest of the following circumstances; provided, however, that the
Committee may, prior to the lapse of the Incentive Stock Option under the
circumstances described in paragraphs (3), (4) and (5) below, provide in
writing that the Option will extend until a later date, but if Option is
exercised after the dates specified in paragraphs (3), (4) and (5) above,
it will automatically become a Non-Qualified Stock Option:
(1) The Incentive Stock Option shall lapse as of the option
expiration date set forth in the Award Agreement.
(2) The Incentive Stock Option shall lapse ten years after it is
granted, unless an earlier time is set in the Award Agreement.
(3) If the Participant terminates employment for any reason other
than as provided in paragraph (4) or (5) below, the Incentive Stock
Option shall lapse, unless it is previously exercised, three months
after the Participant's termination of employment; provided, however,
that if the Participant's employment is terminated by the Company for
cause or by the Participant without the consent of the Company, the
Incentive Stock Option shall (to the extent not previously exercised)
lapse immediately.
(4) If the Participant terminates employment by reason of his
Disability, the Incentive Stock Option shall lapse, unless it is
previously exercised, one year after the Participant's termination of
employment.
(5) If the Participant dies while employed, or during the
three-month period described in paragraph (3) or during the one-year
period described in paragraph (4) and before the Option otherwise
lapses, the Option shall lapse one year after the Participant's death.
Upon the Participant's death, any exercisable Incentive Stock Options
may be exercised by the Participant's beneficiary.
Unless the exercisability of the Incentive Stock Option is accelerated
as provided in Article 13, if a Participant exercises an Option after
termination of employment, the Option may be exercised only with respect to
the shares that were otherwise vested on the Participant's termination of
employment.
(d) INDIVIDUAL DOLLAR LIMITATION. The aggregate Fair Market Value
(determined as of the time an Award is made) of all shares of Stock with
respect to which Incentive Stock Options are first exercisable by a
Participant in any calendar year may not exceed $100,000.00.
(e) TEN PERCENT OWNERS. No Incentive Stock Option shall be granted to
any individual who, at the date of grant, owns stock possessing more than
ten percent of the total combined voting power of all classes of stock of
the Corporation or any Parent or Subsidiary unless the exercise price per
share of such Option is at least 110% of the Fair Market Value per share of
Stock at the date of grant and the Option expires no later than five years
after the date of grant.
(f) EXPIRATION OF INCENTIVE STOCK OPTIONS. No Award of an Incentive
Stock Option may be made pursuant to the Plan after the day immediately
prior to the tenth anniversary of the Effective Date.
(g) RIGHT TO EXERCISE. During a Participant's lifetime, an Incentive
Stock Option may be exercised only by the Participant or, in the case of
the Participant's Disability, by the Participant's guardian or legal
representative.
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(h) DIRECTORS. The Committee may not grant an Incentive Stock Option
to a non-employee director. The Committee may grant an Incentive Stock
Option to a director who is also an employee of the Corporation or any
Subsidiary but only in that individual's position as an employee and not
as a director.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1. GRANT OF SARs. The Committee is authorized to grant SARs to
Participants on the following terms and conditions:
(a) RIGHT TO PAYMENT. Upon the exercise of a Stock Appreciation
Right, the Participant to whom it is granted has the right to receive the
excess, if any, of:
(1) The Fair Market Value of one share of Stock on the date of
exercise; over
(2) The grant price of the Stock Appreciation Right as determined
by the Committee, which shall not be less than the Fair Market Value of
one share of Stock on the date of grant in the case of any SAR related
to an Incentive Stock Option.
(b) OTHER TERMS. All awards of Stock Appreciation Rights shall be
evidenced by an Award Agreement. The terms, methods of exercise, methods
of settlement, form of consideration payable in settlement, and any
other terms and conditions of any Stock Appreciation Right shall be
determined by the Committee at the time of the grant of the Award and
shall be reflected in the Award Agreement.
ARTICLE 9
PERFORMANCE SHARES
9.1. GRANT OF PERFORMANCE SHARES. The Committee is authorized to grant
Performance Shares to Participants on such terms and conditions as may be
selected by the Committee. The Committee shall have the complete discretion to
determine the number of Performance Shares granted to each Participant. All
Awards of Performance Shares shall be evidenced by an Award Agreement.
9.2. RIGHT TO PAYMENT. A grant of Performance Shares gives the Participant
rights, valued as determined by the Committee, and payable to, or exercisable
by, the Participant to whom the Performance Shares are granted, in whole or in
part, as the Committee shall establish at grant or thereafter. The Committee
shall set performance goals and other terms or conditions to payment of the
Performance Shares in its discretion which, depending on the extent to which
they are met, will determine the number and value of Performance Shares that
will be paid to the Participant.
9.3. OTHER TERMS. Performance Shares may be payable in cash, Stock, or
other property, and have such other terms and conditions as determined by the
Committee and reflected in the Award Agreement.
ARTICLE 10
RESTRICTED STOCK AWARDS
10.1. GRANT OF RESTRICTED STOCK. The Committee is authorized to make
Awards of Restricted Stock to Participants in such amounts and subject to such
terms and conditions as may be selected by the Committee. All Awards of
Restricted Stock shall be evidenced by a Restricted Stock Award Agreement.
10.2. ISSUANCE AND RESTRICTIONS. Restricted Stock shall be subject to such
restrictions on transferability and other restrictions as the Committee may
impose (including, without limitation, limitations on the right to vote
Restricted Stock or the right to receive dividends on the Restricted Stock).
These restrictions may lapse separately or in combination at such times, under
such circumstances, in such
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installments, upon the satisfaction of performance goals or otherwise, as the
Committee determines at the time of the grant of the Award or thereafter.
10.3. FORFEITURE. Except as otherwise determined by the Committee at the
time of the grant of the Award or thereafter, upon termination of employment
during the applicable restriction period or upon failure to satisfy a
performance goal during the applicable restriction period, Restricted Stock that
is at that time subject to restrictions shall be forfeited and reacquired by the
Corporation; provided, however, that the Committee may provide in any Award
Agreement that restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in the event of terminations resulting
from specified causes, and the Committee may in other cases waive in whole or in
part restrictions or forfeiture conditions relating to Restricted Stock.
10.4. CERTIFICATES FOR RESTRICTED STOCK. Restricted Stock granted under
the Plan may be evidenced in such manner as the Committee shall determine. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock.
ARTICLE 11
DIVIDEND EQUIVALENTS
11.1 GRANT OF DIVIDEND EQUIVALENTS. The Committee is authorized to grant
Dividend Equivalents to Participants subject to such terms and conditions as may
be selected by the Committee. Dividend Equivalents shall entitle the Participant
to receive payments equal to dividends with respect to all or a portion of the
number of shares of Stock subject to an Option Award or SAR Award, as determined
by the Committee. The Committee may provide that Dividend Equivalents be paid or
distributed when accrued or be deemed to have been reinvested in additional
shares of Stock, or otherwise reinvested.
ARTICLE 12
OTHER STOCK-BASED AWARDS
12.1. GRANT OF OTHER STOCK-BASED AWARDS. The Committee is authorized,
subject to limitations under applicable law, to grant to Participants such other
Awards that are payable in, valued in whole or in part by reference to, or
otherwise based on or related to shares of Stock, as deemed by the Committee to
be consistent with the purposes of the Plan, including without limitation shares
of Stock awarded purely as a "bonus" and not subject to any restrictions or
conditions, convertible or exchangeable debt securities, other rights
convertible or exchangeable into shares of Stock, and Awards valued by reference
to book value of shares of Stock or the value of securities of or the
performance of specified Parents or Subsidiaries. The Committee shall determine
the terms and conditions of such Awards.
ARTICLE 13
PROVISIONS APPLICABLE TO AWARDS
13.1. STAND-ALONE, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the
Plan may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for, any other Award granted
under the Plan. If an Award is granted in substitution for another Award, the
Committee may require the surrender of such other Award in consideration of the
grant of the new Award. Awards granted in addition to or in tandem with other
Awards may be granted either at the same time as or at a different time from the
grant of such other Awards.
13.2. EXCHANGE PROVISIONS. The Committee may at any time offer to exchange
or buy out any previously granted Award for a payment in cash, Stock, or another
Award (subject to Section 14.1), based on the terms and conditions the Committee
determines and communicates to the Participant at the time the offer is made.
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13.3. TERM OF AWARD. The term of each Award shall be for the period as
determined by the Committee, provided that in no event shall the term of any
Incentive Stock Option or a Stock Appreciation Right granted in tandem with the
Incentive Stock Option exceed a period of ten years from the date of its grant
(or, if Section 7.2(e) applies, five years from the date of its grant).
13.4. FORM OF PAYMENT FOR AWARDS. Subject to the terms of the Plan and any
applicable law or Award Agreement, payments or transfers to be made by the
Corporation or a Subsidiary on the grant or exercise of an Award may be made in
such form as the Committee determines at or after the time of grant, including
without limitation, cash, Stock, other Awards, or other property, or any
combination, and may be made in a single payment or transfer, in installments,
or on a deferred basis, in each case determined in accordance with rules
adopted by, and at the discretion of, the Committee.
13.5. LIMITS ON TRANSFER. No right or interest of a Participant in any
unexercised or restricted Award may be pledged, encumbered, or hypothecated to
or in favor of any party other than the Corporation or a Parent or Subsidiary,
or shall be subject to any lien, obligation, or liability of such Participant to
any other party other than the Corporation or a Parent or Subsidiary. No
unexercised or restricted Award shall be assignable or transferable by a
Participant other than by will or the laws of descent and distribution;
provided, however, that the Committee may (but need not) permit other transfers
where the Committee concludes that such transferability (i) does not result in
accelerated taxation, (ii) does not cause any Option intended to be an incentive
stock option to fail to be described in Code Section 422(b), and (iii) is
otherwise appropriate and desirable, taking into account any state or federal
securities laws applicable to transferable Awards.
13.6 BENEFICIARIES. Notwithstanding Section 13.5, a Participant may, in
the manner determined by the Committee, designate a beneficiary to exercise the
rights of the Participant and to receive any distribution with respect to any
Award upon the Participant's death. A beneficiary, legal guardian, legal
representative, or other person claiming any rights under the Plan is subject to
all terms and conditions of the Plan and any Award Agreement applicable to the
Participant, except to the extent the Plan and Award Agreement otherwise
provide, and to any additional restrictions deemed necessary or appropriate by
the Committee. If no beneficiary has been designated or survives the
Participant, payment shall be made to the Participant's estate. Subject to the
foregoing, a beneficiary designation may be changed or revoked by a Participant
at any time provided the change or revocation is filed with the Committee.
13.7. STOCK CERTIFICATES. All Stock certificates delivered under the Plan
are subject to any stop-transfer orders and other restrictions as the Committee
deems necessary or advisable to comply with federal or state securities laws,
rules and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Committee may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
13.8. ACCELERATION UPON A CHANGE IN CONTROL. Except as otherwise provided
in the Award Agreement, upon the occurrence of a Change in Control, all
outstanding Options, Stock Appreciation Rights, and other Awards in the nature
of rights that may be exercised shall become fully exercisable and all
restrictions on outstanding Awards shall lapse; provided, however that such
acceleration will not occur if, in the opinion of the Company's accountants,
such acceleration would preclude the use of "pooling of interest" accounting
treatment for a Change in Control transaction that (a) would otherwise qualify
for such accounting treatment, and (b) is contingent upon qualifying for such
accounting treatment. To the extent that this provision causes Incentive Stock
Options to exceed the dollar limitation set forth in Section 7.2(d), the excess
Options shall be deemed to be Non-Qualified Stock Options.
13.9. ACCELERATION UPON CERTAIN EVENTS NOT CONSTITUTING A CHANGE IN
CONTROL. In the event of the occurrence of any circumstance, transaction or
event not constituting a Change in Control (as defined in Section 3.1) but which
the Board of Directors deems to be, or to be reasonably likely to lead to, an
effective change in control of the Company of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of the 1934 Act, the
Committee may in its sole discretion declare all outstanding Options, Stock
Appreciation Rights, and other Awards in the nature of rights that may be
exercised to be fully exercisable, and/or all restrictions on all outstanding
Awards to have lapsed, in each case as of such date as the Committee may, in its
sole discretion, declare, which may be on or
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before the consummation of such transaction or event. To the extent that this
provision causes Incentive Stock Options to exceed the dollar limitation set
forth in Section 7.2(d), the excess Options shall be deemed to be Non-Qualified
Stock Options.
13.10. ACCELERATION FOR ANY OTHER REASON. Regardless of whether an event
has occurred as described in Section 13.8 or 13.9 above, the Committee may in
its sole discretion at any time determine that all or a portion of a
Participant's Options, Stock Appreciation Rights, and other Awards in the nature
of rights that may be exercised shall become fully or partially exercisable,
and/or that all or a part of the restrictions on all or a portion of the
outstanding Awards shall lapse, in each case as of such date as the Committee
may, in its sole discretion, declare. The Committee may discriminate among
Participants and among Awards granted to a Participant in exercising its
discretion pursuant to this Section 13.10.
13.11 EFFECT OF ACCELERATION. If an Award is accelerated under Section
13.8 or 13.9, the Committee may, in its sole discretion, provide (i) that the
Award will expire after a designated period of time after such acceleration to
the extent not then exercised, (ii) that the Award will be settled in cash
rather than Stock, (iii) that the Award will be assumed by another party to the
transaction giving rise to the acceleration or otherwise be equitably converted
in connection with such transaction, or (iv) any combination of the foregoing.
The Committee's determination need not be uniform and may be different for
different Participants whether or not such Participants are similarly situated.
13.12. PERFORMANCE GOALS. The Committee may determine that any Award
granted pursuant to this Plan to a Participant (including, but not limited to,
Participants who are Covered Employees) shall be determined solely on the basis
of (a) the achievement by the Corporation or a Subsidiary of a specified target
return, or target growth in return, on equity or assets, (b) the Corporation's
or Subsidiary's stock price, (c) the achievement by a business unit of the
Corporation or Subsidiary of a specified target, or target growth in, net
income or earnings per share, or (d) any combination of the goals set forth in
(a) through (c) above. Furthermore, the Committee reserves the right for any
reason to reduce (but not increase) any Award, notwithstanding the achievement
of a specified goal. If an Award is made on such basis, the Committee shall
establish goals prior to the beginning of the period for which such performance
goal relates (or such later date as may be permitted under Code Section
162(m)). Any payment of an Award granted with performance goals shall be
conditioned on the written certification of the Committee in each case that the
performance goals and any other material conditions were satisfied.
13.13. TERMINATION OF EMPLOYMENT. Whether military, government or other
service or other leave of absence shall constitute a termination of employment
shall be determined in each case by the Committee at its discretion, and any
determination by the Committee shall be final and conclusive. A termination of
employment shall not occur in a circumstance in which a Participant transfers
from the Corporation to one of its Subsidiaries, transfers from a Subsidiary to
the Corporation, or transfers from one Subsidiary to another Subsidiary.
ARTICLE 14
CHANGES IN CAPITAL STRUCTURE
14.1. GENERAL. In the event a stock dividend is declared upon the Stock,
the shares of Stock then subject to each Award shall be increased
proportionately without any change in the aggregate purchase price therefor. In
the event the Stock shall be changed into or exchanged for a different number or
class of shares of stock or securities of the Corporation or of another
corporation, whether through reorganization, recapitalization, stock split-up,
combination of shares, merger or consolidation, there shall be substituted for
each such share of Stock then subject to each Award the number and class of
shares into which each outstanding share of Stock shall be so exchanged, all
without any change in the aggregate purchase price for the shares then subject
to each Award.
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ARTICLE 15
AMENDMENT, MODIFICATION AND TERMINATION
15.1. AMENDMENT, MODIFICATION AND TERMINATION. The Board or the Committee
may, at any time and from time to time, amend, modify or terminate the Plan
without shareholder approval; provided, however, that the Board or Committee may
condition any amendment or modification on the approval of shareholders of the
Company if such approval is necessary or deemed advisable with respect to tax,
securities or other applicable laws, policies or regulations.
15.2 AWARDS PREVIOUSLY GRANTED. At any time and from time to time, the
Committee may amend, modify or terminate any outstanding Award without approval
of the Participant; provided, however, that such amendment, modification or
termination shall not, without the Participant's consent, reduce or diminish the
value of such Award determined as if the Award had been exercised, vested,
cashed in or otherwise settled on the date of such amendment or termination. No
termination, amendment, or modification of the Plan shall adversely affect any
Award previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 16
GENERAL PROVISIONS
16.1. NO RIGHTS TO AWARDS. No Participant or employee, officer or director
shall have any claim to be granted any Award under the Plan, and neither the
Corporation nor the Committee is obligated to treat Participants and employees,
officers or directors uniformly.
16.2. NO SHAREHOLDER RIGHTS. No Award gives the Participant any of the
rights of a shareholder of the Corporation unless and until shares of Stock are
in fact issued to such person in connection with such Award.
16.3. WITHHOLDING. The Corporation or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to
remit to the Corporation, an amount sufficient to satisfy federal, state, and
local taxes (including the Participant's FICA obligation) required by law to be
withheld with respect to any taxable event arising as a result of the Plan. With
respect to withholding required upon any taxable event under the Plan, the
Committee may, at the time the Award is granted or thereafter, require that any
such withholding requirement be satisfied, in whole or in part, by withholding
shares of Stock having a Fair Market Value on the date of withholding equal to
the amount to be withheld for tax purposes, all in accordance with such
procedures as the Committee establishes.
16.4. NO RIGHT TO EMPLOYMENT. Nothing in the Plan or any Award Agreement
shall interfere with or limit in any way the right of the Corporation or any
Parent to terminate any Participant's employment at any time, nor confer
upon any Participant any right to continue in the employ of the Corporation or
any Subsidiary.
16.5. UNFUNDED STATUS OF AWARDS. The Plan is intended to be an "unfunded"
plan for incentive and deferred compensation. With respect to any payments not
yet made to a Participant pursuant to an Award, nothing contained in the Plan or
any Award Agreement shall give the Participant any rights that are greater than
those of a general creditor of the Corporation or any Parent or Subsidiary.
16.6. RELATIONSHIP TO OTHER BENEFITS. No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or benefit plan of the
Corporation or any Subsidiary unless provided otherwise in such other plan.
16.7. EXPENSES. The expenses of administering the Plan shall be borne by
the Corporation and its Subsidiaries.
16.8. TITLES AND HEADINGS. The titles and headings of the Sections in the
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles or headings, shall control.
11
<PAGE> 12
16.9. GENDER AND NUMBER. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
16.10. FRACTIONAL SHARES. No fractional shares of Stock shall be issued
and the Committee shall determine, in its discretion, whether cash shall be
given in lieu of fractional shares or whether such fractional shares shall be
eliminated by rounding up.
16.11. GOVERNMENT AND OTHER REGULATIONS. The obligation of the Corporation
to make payment of awards in Stock or otherwise shall be subject to all
applicable laws, rules, and regulations, and to such approvals by government
agencies as may be required. The Corporation shall be under no obligation to
register under the 1933 Act, any of the shares of Stock paid under the Plan. If
the shares paid under the Plan may in certain circumstances be exempt from
registration under the 1933 Act, the Corporation may restrict the transfer of
such shares in such manner as it deems advisable to ensure the availability of
any such exemption.
16.12. GOVERNING LAW. To the extent not governed by federal law, the Plan
and all Award Agreements shall be construed in accordance with and governed by
the laws of the State of Florida.
16.13 ADDITIONAL PROVISIONS. Each Award Agreement may contain such other
terms and conditions as the Committee may determine; provided that such other
terms and conditions are not inconsistent with the provisions of this Plan.
The foregoing is hereby acknowledged as being the Summit Holding Southeast,
Inc. 1996 Long-Term Incentive Plan as adopted by the Board of Directors and
shareholders of the Corporation on November , 1996.
SUMMIT HOLDING SOUTHEAST, INC.
By:
-----------------------------------
William B. Bull
President and Chief Executive
Officer
12
<PAGE> 1
EXHIBIT 10.5
SUMMIT CONSULTING, INC. RETIREMENT PLAN
THIS INDENTURE made on the 1st day of May 1992, by SUMMIT CONSULTING, INC.,
a corporation duly organized and existing under the laws of the State of Florida
(hereinafter called the "Primary Sponsor");
WITNESSETH:
WHEREAS, the Primary Sponsor desires to promote in its employees, and the
employees of its Affiliates adopting the plan herein embodied, the strongest
interest in the successful operation of the business of their employer, loyalty
to their employer and increased efficiency in their work; and
WHEREAS, to attain that end the Primary Sponsor desires to enable those
employees who qualify hereunder to participate in the profits of their employer
and to save money on a tax-advantaged basis and accordingly has formulated the
plan herein embodied; and
WHEREAS, this plan is intended to be a profit sharing plan within the
meaning of Treasury Regulations Section 1.401-1(b)(1)(ii) and also contains a
cash or deferred arrangement as described in Section 401(k) of the Internal
Revenue Code of 1986; and
NOW, THEREFORE, the Primary Sponsor does hereby establish the Summit
Consulting, Inc. Retirement Plan (the "Plan"), effective May 1, 1992, to read as
follows:
<PAGE> 2
SUMMIT CONSULTING, INC. RETIREMENT PLAN
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SECTION 1
DEFINITIONS.....................................................................
SECTION 2
ELIGIBILITY.....................................................................
SECTION 3
CONTRIBUTIONS...................................................................
SECTION 4
ALLOCATIONS.....................................................................
SECTION 5
PLAN LOANS......................................................................
SECTION 6
HARDSHIP DISTRIBUTIONS..........................................................
SECTION 7
DEATH BENEFITS..................................................................
SECTION 8
PAYMENT OF BENEFITS ON RETIREMENT OR DEATH......................................
SECTION 9
PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT................................
SECTION 10
ADMINISTRATION OF THE PLAN......................................................
SECTION 11
CLAIM REVIEW PROCEDURE..........................................................
SECTION 12
LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY INCOMPETENT DISTRIBUTEE AND
UNCLAIMED PAYMENTS..............................................................
SECTION 13
PROHIBITION AGAINST DIVERSION...................................................
SECTION 14
LIMITATION OF RIGHTS............................................................
SECTION 15
AMENDMENT TO OR TERMINATION OF THE PLAN AND THE TRUST...........................
SECTION 16
ADOPTION OF PLAN BY AFFILIATES..................................................
SECTION 17
QUALIFICATION AND RETURN OF CONTRIBUTIONS.......................................
SECTION 18
INCORPORATION OF SPECIAL LIMITATIONS............................................
APPENDIX A SPECIAL NONDISCRIMINATION RULES.......................................... A-1
APPENDIX B LIMITATION ON ALLOCATIONS................................................ B-1
APPENDIX C TOP-HEAVY PROVISION...................................................... C-1
</TABLE>
<PAGE> 3
SECTION 1
DEFINITIONS
Wherever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise and the following words and phrases shall, when used herein,
have the meanings set forth below:
1.1 "A & A Plan" means the Thrift Plan for Employees of Alexander &
Alexander Services, Inc. and Subsidiaries
1.2 "Account" means the account established and maintained by the Plan
Administrator to reflect the interest of a Member in the Fund. In addition
to any other accounts as the Plan Administrator may establish and maintain,
the Plan Administrator shall establish and maintain separate accounts (each
of which shall be adjusted pursuant to the Plan to reflect income, gains,
losses and other credits or charges attributable thereto) for each Member
to be designated as follows:
(a) "Tax Saver Account" which shall reflect a Member's interest in
contributions made by a Plan Sponsor under Plan Section 3.1. The Tax
Saver Account shall include a subaccount which shall reflect a Member's
Employee Contribution Account holding Tax Saver Contributions
transferred to the Plan in a trust-to-trust transfer from the A & A
Plan. The Tax Saver Account shall also include a subaccount which shall
reflect a Member's Employee Contribution Account holding Supplemental
Before-Tax Contributions transferred to the Plan in a trust-to-trust
transfer from the A & A Plan.
(b) "Matching Account" which shall reflect a Member's interest in
matching contributions made by a Plan Sponsor under Plan Section 3.2.
The Matching Account shall include a subaccount which shall reflect a
Member's Company Matching Account transferred to the Plan in a trust-to-
trust transfer from the A & A Plan.
(c) "Basic Contribution Account" which shall reflect a Member's
interest in Basic Contributions made by a Member to the Fund pursuant to
Plan Section 3.3. The Basic Contribution Account shall include a
subaccount which shall reflect a Member's interest in his Employee
Contribution Account holding Basic Contributions transferred to the Plan
in a trust-to-trust transfer from the A & A Plan (the "A & A Basic
Contribution Subaccount") and a subaccount which shall reflect a
Member's interest in his Employee Contribution Account holding
Supplemental After-Tax Contributions transferred to the Plan in a
trust-to-trust transfer from the A & A Plan (the "After-Tax
Subaccount"). The Basic Contribution Account shall also include a
subaccount which shall reflect a Member's interest in contributions
recharacterized pursuant to Appendix A hereto (the "Excess
Contribution Subaccount").
(d) "Rollover Account" which shall reflect a Member's interest in
Rollover Amounts.
(e) "Old Thrift Plan Plus Account" which shall reflect a Member's
interest in his Thrift Plan Plus Account transferred to the Plan in a
trust-to-trust transfer from the A & A Plan.
The portion of each Account consisting of that portion of contributions and
Rollover Amounts made under the A & A Plan shall collectively be referred to as
the "A & A Subaccounts."
1.3 "Accrued Benefit" means the balance of a Member's Account.
1.4 "Affiliate" means (a) any corporation which is a member of the
same controlled group of corporations (within the meaning of Code Section
414(b)) as is a Plan Sponsor, (b) any other trade or business (whether or
not incorporated) under common control (within the meaning of Code Section
414(c)) with a Plan Sponsor, (c) any other corporation, partnership or
other organization which is a member of an affiliated service group (within
the meaning of Code Section 414(m)) with a Plan Sponsor, and (d) any other
entity required to be aggregated with a Plan Sponsor pursuant to
regulations under Code Section 414(o).
1.5 "Annual Compensation" means the amount paid to an Employee by a
Plan Sponsor (and Affiliates for purposes of Appendices A and C) during a
Plan Year as compensation that would be
<PAGE> 4
subject to income tax withholding under Code Section 3401(a) (but without
regard to any rules that limit the remuneration included in wages based on
the nature or location of the employment or the services performed, such as
the exception for agricultural labor in Code Section 3401(a)(2)), to the
extent not in excess of $228,860 (for the Plan Year beginning in 1992),
which amount shall be adjusted for changes in the cost of living as
provided in regulations issued by the Secretary of the Treasury.
Notwithstanding the above, Annual Compensation shall be determined as
follows:
(a) in determining with respect to each Plan Sponsor the amount of
contributions under Plan Section 3 and allocations under Plan Section 4
made by or on behalf of an Employee, Annual Compensation shall only
include base salary and overtime pay received for the portion of the
Plan Year during which the Employee was a Member and shall exclude
bonuses, taxable fringes, expense allowances, and other forms of
extraordinary remuneration;
(b) for purposes of applying the provisions of Appendix A hereto
for such Plan Years as the Secretary of the Treasury may allow, Annual
Compensation shall only include amounts received for the portion of the
Plan Year during which the Employee was a Member;
(c) for purposes of applying the $228,860 limit, as adjusted, with
respect to Plan Sections 3 and 4 and Appendix A, the rules contained in
Subsection (b) of the Plan Section containing the definition of the term
"Highly Compensated Employee" shall apply, except that in applying the
rules, the term "family" shall include only the spouse of the Member and
any lineal descendants of the Member who have not attained age 19 before
the close of the Plan Year; and
(d) for all purposes under the Plan except Appendices B and C
hereto, Annual Compensation shall include any amount contributed by a
Plan Sponsor on behalf of an Employee pursuant to a salary reduction
agreement which is not includable in the gross income of the Employee
under Section 125, 402(a)(8), or 402(h) of the Code; and
(e) for purposes of applying the annual addition limits set forth
in Appendix B, the term Plan Sponsor as used in Plan Section 1.4 shall
mean Plan Sponsor as that term is defined in Section 4 of Appendix B.
1.6 "Basic Contribution" means a non-deductible contribution to the
Fund made by the Member pursuant to Plan Section 3.3.
1.7 "Beneficiary" means the person or trust that a Member designated
most recently in writing to the Plan Administrator; provided, however, that
if the Member has failed to make a designation, no person designated is
alive, no trust has been established, or no successor Beneficiary has been
designated who is alive, the term "Beneficiary" means (a) the Member's
spouse or (b) if no spouse is alive, the Member's surviving children, or
(c) if no children are alive, the Member's parent or parents, or (d) if no
parent is alive, the legal representative of the deceased Member's estate.
Notwithstanding the preceding sentence, the spouse of a married Member
shall be his Beneficiary unless that spouse has consented in writing to the
designation by the Member of some other person or trust and the spouse's
consent acknowledges the effect of the designation and is witnessed by a
notary public. A Member may change his designation at any time. However, a
Member may not change his designation without further consent of his spouse
under the terms of the preceding sentence unless the spouse's consent
permits designation of another person or trust without further spousal
consent and acknowledges that the spouse has the right to limit consent to
a specific beneficiary and that the spouse voluntarily relinquishes this
right. Notwithstanding the above, the spouse's consent shall not be
required if the Member establishes to the satisfaction of the Plan
Administrator that the spouse cannot be located, if the Member has a court
order indicating that he is legally separated or has been abandoned (within
the meaning of local law) unless a "qualified domestic relations order" (as
defined in Code Section 414(p)) provides otherwise, or it there are other
circumstances as the Secretary of the Treasury prescribes. If the spouse is
legally incompetent to give consent, consent by the spouse's legal guardian
shall be deemed to be consent by the spouse.
1.8 "Board of Directors" means the Board of Directors of the Primary
Sponsor.
2
<PAGE> 5
1.9 "Break in Service" means the failure of an Employee, in connection
with a termination of employment other than by reason of death or
attainment of a Retirement Date, to complete more than 500 Hours of Service
in any Plan Year.
1.10 "Code" means the Internal Revenue Code of 1986, as amended.
1.11 "Deferral Amount" means a contribution of a Plan Sponsor on
behalf of a Member pursuant to Plan Section 3.1.
1.12 "Disability" means a disability of a Member within the meaning of
Code Section 72(m)(7), to the extent that the Member is, or would be,
entitled to disability retirement benefits under the federal Social
Security Act or to the extent that the Member is entitled to recover
benefits under any long term disability plan or policy maintained by the
Plan Sponsor. The determination of whether or not a Disability exists shall
be determined by the Plan Administrator and shall be substantiated by
competent medical evidence.
1.13 "Elective Deferrals" means, with respect to any taxable year of
the Member, the sum of
(a) any Deferral Amounts;
(b) any contributions made by or on behalf of a Member under any
other qualified cash or deferred arrangement as defined in Code Section
401(k), whether or not maintained by a Plan Sponsor, to the extent such
contributions are not or would not, but for Code Section 402(g)(1) be
included in the Member's gross income for the taxable year; and
(c) any other contributions made by or on behalf of a Member
pursuant to Code Section 402(g)(3).
1.14 "Eligibility Period of Service" means a ninety-day period
beginning on the first day an Employee performs an Hour of Service.
1.15 "Eligible Employee" means any Employee of a Plan Sponsor other
than an Employee who is (a) covered by a collective bargaining agreement
between a union and a Plan Sponsor, provided that retirement benefits were
the subject of good faith bargaining, unless the collective bargaining
agreement provides for participation in the Plan, (b) a leased employee
within the meaning of Code Section 414(n)(2), or (c) deemed to be an
Employee of a Plan Sponsor pursuant to regulations under Code Section
414(o).
1.16 "Employee" means any person who is (a) employed by a Plan Sponsor
or an Affiliate for purposes of the Federal Insurance Contributions Act,
(b) a leased employee within the meaning of Code Section 414(n)(2) with
respect to a Plan Sponsor, or (c) deemed to be an employee of a Plan
Sponsor pursuant to regulations under Code Section 414(o).
1.17 "Employment Date" means the date the Employee first performs an
Hour of Service for a Plan Sponsor or an Affiliate. Notwithstanding the
foregoing, with respect to an Employee who incurs a Break in Service prior
to completion of his Eligibility Period of Service, Employment Date shall
mean the first date on which the Employee again performs an Hour of Service
following, the Break in Service.
1.18 "Entry Date" means the first day of each calendar month.
1.19 "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
1.20 "Fiduciary" means each Named Fiduciary and any other person who
exercises or has any discretionary authority or control regarding
management or administration of the Plan, any other person who renders
investment advice for a fee or has any authority or responsibility to do so
with respect to any assets of the Plan, or any other person who exercises
or has any authority or control respecting management or disposition of
assets of the Plan.
1.21 "Fund" means the amount at any given time of cash and other
property held by the Trustee pursuant to the Plan.
3
<PAGE> 6
1.22 "Highly Compensated Employee" means each Employee who is
described in Subsection (a), unless the Plan Sponsor makes an election
pursuant to Subsection (b).
(a) (1) An Employee who, during the Plan Year immediately preceding
the Plan Year for which the determination is being made:
(A) was at any time an owner of more than five percent (5%) of
the outstanding stock of a Plan Sponsor or Affiliate or more than
five percent (5%) of the total combined voting power of all stock of
a Plan Sponsor or Affiliate; or
(B) received Annual Compensation in excess of $93,518 (for the
Plan Year beginning in 1992) which amount shall be adjusted for
changes in the cost of living as provided in regulations issued by
the Secretary of the Treasury; or
(C) received Annual Compensation in excess of $62,345 (for the
Plan Year beginning in 1992) which amount shall be adjusted for
changes in the cost of living as provided in regulations issued by
the secretary of the Treasury, and who was in the group consisting of
the most highly compensated twenty percent (20%) of the Employees; or
(D) was at any time an officer of the Plan Sponsor or of any
Affiliate whose Annual Compensation was greater than fifty percent
(50%) of the amount in effect under Code Section 415(b)(1)(A) for the
calendar year in which the Plan Year ends, where the term "officer"
means an administrative executive in regular and continual service to
the Plan Sponsor or Affiliate; provided, however, that in no event
shall the number of officers exceed the lesser of Clause (i) or (ii)
of this Subparagraph (D), where:
(i) equals fifty (50) Employees; and
(ii) equals the greater of (I) three (3) Employees or (II)
ten percent (10%) of the number of Employees during the Plan
Year, with any non-integer being increased to the next integer.
If for any year no officer of the Plan Sponsor meets the requirements
of this Subparagraph (D), the highest paid officer of the Plan
Sponsor for the Plan Year shall be considered an officer for purposes
of this Subparagraph (D).
(2) An Employee who during the Plan Year for which the
determination is being made (A) is described in Subsection (a) (1) (A),
or (B) is both (i) described in Subsection (a)(1)(B), (a)(1)(C), or
(a)(1)(D), and (ii) one of the 100 Employees who received the most
Annual Compensation during that Plan Year.
The Plan Administrator may make an election to substitute $62,345
(as adjusted) for $93,518 (as adjusted) in Subparagraph (B) of
Subsection (a)(1) provided that at all times during the Plan Year the
Plan Sponsor and its Affiliates maintain significant business activities
and have Employees in at least two significantly separate geographic
areas and satisfy such other conditions as the Secretary of the Treasury
prescribes.
For purposes of Subparagraphs (C) and (D) of Subsection (a)(1), the
following shall be excluded when determining the number of Employees in
the most highly compensated twenty percent (20%) of the Employees and
the number of officers:
(i) Employees who have not completed six (6) months of service,
(ii) Employees who normally work less than 17-1/2 hours per
week,
(iii) Employees who normally work during not more than six (6)
months during any Plan Year,
(iv) Employees who have not attained age 21,
4
<PAGE> 7
(v) Employees who are included in a unit of employees covered by
an agreement which the Secretary of Labor finds to be a collective
bargaining agreement between employee representatives and the Plan
Sponsor or its Affiliates, provided 90% or more of the Employees are
covered under collective bargaining agreements and the Plan only
covers Employees who are not covered under the collective bargaining
agreements.
(b) Notwithstanding the provisions of Subsection (a), the Primary
Sponsor may elect to determine each Highly Compensated Employee to be
each Employee who during the Plan Year in question is described in
Subsection (a) (determined without regard to the head language of
Subsection (a) (1)), pursuant to the provisions of Treas. Reg. Section
1.414(q)1T, Q&A-14(b).
(c) For purposes of this Section, if any Employee is a member of
the family of a five percent (5%) owner as defined in Subsection (a)(1)
of this Section or of a Highly Compensated Employee whose Annual
Compensation is such that he is among the ten (10) Highly Compensated
Employees receiving the greatest amount of Annual Compensation during
the Plan Year, then (1) the Employee shall not be considered a separate
Employee, and (2) any Annual Compensation paid to the Employee, and any
applicable contribution or benefit on behalf of the Employee, shall be
treated as if it were paid to, or on behalf of, the five percent (5%)
owner or the Employee who is among the ten (10) Highly Compensated
Employees receiving the greatest amount of Annual Compensation during
the Plan Year. For purposes of this Section (b), the term "family" means
with respect to any Employee, the Employee's spouse and lineal
descendants or ascendants and the spouses of lineal descendants or
ascendants.
(d) For purposes of this Section, a former Employee shall be
treated as a Highly Compensated Employee if (1) the former Employee was
a Highly Compensated Employee at the time the former Employee separated
from service with the Plan Sponsor or Affiliate or (2) the former
Employee was a Highly Compensated Employee at any time after the former
Employee attained age 55.
(e) For purposes of this Section, Employees who are nonresident
aliens and who receive no earned income from the Plan Sponsor or an
Affiliate from sources within the United States shall not be treated as
Employees.
(f) For purposes of this Section, Annual Compensation shall include
amounts paid by Affiliates and shall be determined without regard to
the $228,860 limitation, as adjusted.
1.23 "Hour of Service" means:
(a) Each hour for which an Employee is paid, or entitled to
payment, for the performance of duties for a Plan Sponsor or any
Affiliate during the applicable computation period, and such hours shall
be credited to the computation period in which the duties are performed;
(b) Each hour for which an Employee is paid, or entitled to
payment, by a Plan Sponsor or any Affiliate on account of a period of
time during which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation, holiday,
illness, incapacity (including disability), layoff, jury duty, military
duty or leave of absence;
(c) Each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by a Plan Sponsor or any
Affiliate, and such hours shall be credited to the computation period or
periods to which the award or agreement for back pay pertains rather
than to the computation period in which the award, agreement or payment
is made; provided, that the crediting of Hours of Service for back pay
awarded or agreed to with respect to periods described in Subsection (b)
of this Section shall be subject to the limitations set forth in
Subsection (e);
(d) Solely for purposes of determining whether a Break in service
has occurred, each hour during any period that the Employee is absent
from work (1) by reason of the pregnancy of the Employee, (2) by reason
of the birth of a child of the Employee, (3) by reason of the placement
of a child with the Employee in connection with the adoption of the
child by the Employee, or (4) for purposes of caring for such child for
a period immediately following its birth or placement. The hours
5
<PAGE> 8
described in this Subsection (d) shall be credited (A) only in the
computation period in which the absence from work begins, if the
Employee would be prevented from incurring a Break in Service in that
year solely because of that credit, or (B), in any other case, in the
next following computation period; and
(e) The Plan Administrator shall credit Hours of Service in
accordance with the provisions of Section 2530.200b-2(b) and (c) of the
U.S. Department of Labor Regulations or such other federal regulations
as may from time to time be applicable and determine Hours of Service
from the employment records of a Plan Sponsor or in any other manner
consistent with regulations promulgated by the Secretary of Labor, and
shall construe any ambiguities in favor of crediting Employees with
Hours of Service. Notwithstanding any other provision of this Section,
in no event shall an Employee be credited with more than 501 Hours of
Service during any single continuous period during which he performs no
duties for the Plan Sponsor or Affiliate.
(f) In the event that a Plan Sponsor or an Affiliate acquires
substantially all of the assets of another corporation or entity or a
controlling interest of the stock of another corporation or merges with
another corporation or entity and is the surviving entity, then service
of an Employee who was employed by the prior corporation or entity and
who is employed by the Plan Sponsor or an Affiliate at the time of the
acquisition or merger shall be counted in the manner provided, with the
consent of the Primary Sponsor, in resolutions adopted by the Plan
Sponsor authorizing the counting of such service.
1.24 "Investment Committee" means a committee which may be established
to direct the Trustee with respect to investments of the Fund.
1.25 "Investment Manager" means a Fiduciary, other than the Trustee,
the Plan Administrator, or a Plan Sponsor, who may be appointed by the
Primary Sponsor:
(a) who has the power to manage, acquire, or dispose of any assets
of the Fund or a portion thereof; and
(b) who (1) is registered as an investment adviser under the
Investment Advisers Act of 1940; (2) is a bank as defined in that Act;
or (3) is an insurance company qualified to perform services described
in Subsection (a) above under the laws of more than one state; and
(c) who has acknowledged in writing that he is a Fiduciary with
respect to the Plan.
1.26 "Member" means any Employee or former Employee who has become a
participant in the Plan for so long as his vested Accrued Benefit has not
been fully distributed pursuant to the Plan.
1.27 "Named Fiduciary" means only the following:
(a) The Plan Administrator;
(b) The Trustee;
(c) The Board of Directors;
(d) The Investment Committee; and
(e) The Investment Manager.
1.28 "Normal Retirement Age" means age 65.
1.29 "Period of Service" means a period of service commencing on the
Employee's most recent Employment Date and ending on the Employee's
Severance Date thereafter. The following rules shall apply:
(a) A Member shall be credited with one "Month of Service" on each
monthly anniversary date of his most recent Employment Date (or if the
month does not contain that date, on the last day of that month) during
any Period of Service, ending with the ensuing Severance Date.
6
<PAGE> 9
(b) "Years of Service" means, with respect to each Employee, the
number of years and fractions determined by dividing the aggregate
number of Months of Service credited to that Employee under Subsection
(a) above by twelve (12). For those Employees employed by the Plan
Sponsor on the effective date of the Plan, Years of Service shall also
include the Years of Continuous Employment (as defined in the A & A
Plan) credited to the Employee under the A & A Plan.
(c) The period between the first and second anniversaries of an
absence from service for the reasons specified in Plan Section
1.37(b)(2) shall be neither a Period of Service nor a Period of
Severance.
1.30 "Period of Severance" means the period of time commencing on an
Employee's Severance Date and ending when the Employee next performs an
Hour of Service. However, if an Employee performs one Hour of service
within twelve (12) months of (a) a Severance Date described in Subsection
(a) of Plan Section 1.37, or (b) the date the Employee was first absent
from service for any other reason, any Period of Severance which would
otherwise occur shall be ignored and be required to be taken into account
in computing the Employee's Period of Service.
1.31 "Plan Administrator" means the organization or person designated
to administer the Plan.
1.32 "Plan Sponsor" means individually the Primary Sponsor and any
Affiliate or other entity which has adopted the Plan and Trust.
1.33 "Plan Year" means the calendar year.
1.34 "Qualified Annuity Form of Payment" means:
(a) In the case of a Member who is not married on the date payments
to the Member are to commence under the terms of the Plan, a single life
annuity, payable in monthly installments for the life of the Member,
which is the actuarial equivalent to an immediate lump sum payment of
the Member's vested Accrued Benefit attributable to the Member's A & A
Subaccounts;
(b) In the case of a Member who is married on the date payments are
to commence under the terms of the Plan, a fifty percent joint and
survivor annuity, payable in monthly installments, which is an immediate
annuity for the life of the Member with a survivor annuity payable
during the life of Member's spouse and which is the actuarial equivalent
of an immediate lump sum payment of the Member's vested Accrued Benefit
attributable to the Member's A & A Subaccounts;
(c) In the case of a Member who dies while married before payments
are to commence under the terms of the Plan, an immediate single life
annuity, payable in monthly installments for the life of his spouse,
which is the actuarial equivalent of an immediate lump sum payment of
the Member's vested Accrued Benefit attributable to the Member's A & A
Subaccounts.
Any annuity may be purchased from an insurance company designated by
the Plan Administrator in writing to the Trustee, and may be distributed to
the Member, his spouse, or his Beneficiary as the case may be. The
distribution, if any, shall be in full satisfaction of the benefits to
which the Member, his spouse, or his Beneficiary is entitled under the
Plan. For purposes of this Section, actuarial equivalence shall be
determined based on factors employed by the insurance company from which
the annuity is purchased and any commissions or other costs associated with
the purchase.
1.35 "Retirement Date" means the date on which the Member retires on
or after (a) attaining Normal Retirement Age, or (b) becoming subject to a
Disability.
1.36 "Rollover Amount" means any amount transferred to the Fund by a
Member, (a) which amount qualifies as a rollover amount under Code Section
402(a)(5), 403(a)(4), or 408(d)(3)(A)(ii) and any regulations issued
thereunder and (b) any other amounts transferred to the Fund on behalf of a
Member in a trust-to-trust transfer from any plan meeting the requirements
of Code Section 401(a).
7
<PAGE> 10
1.37 "Severance Date" means the earlier of:
(a) the date on which an Employee quits, is discharged, retires or
dies; or
(b) (1) the first anniversary of the first date of a period in
which an Employee remains absent from service (with or without pay) with
the Plan Sponsor for any other reason, such as vacation, layoff, or
leave of absence; or (2) in the case of an Employee who remains absent
from service beyond the first anniversary of the first day of absence by
reason of the Employee's pregnancy, the birth of the Employee's child,
the placement of a child in the Employee's home or adoption by the
Employee, or the caring for the child for the period immediately
following its birth or adoption, the second anniversary of the first day
of absence from service.
1.38 "Termination Completion Date" means the last day of the fifth
consecutive Break in Service computation period, determined under the Plan
Section which defines Break in Service, in which a Member completes a Break
in Service.
1.39 "Trust" means the trust established under an agreement between
the Primary Sponsor and the Trustee to hold the Fund or any successor
agreement.
1.40 "Trustee" means the trustee under the Trust.
1.41 "Valuation Date" means each March 31, June 30, September 30 and
December 31 or any other day which the Plan Administrator declares to be a
Valuation Date.
SECTION 2
ELIGIBILITY
2.1 Each Employee who on the effective date of the Plan is a participant in
the A & A Plan shall become a Member immediately.
2.2 Each other Eligible Employee shall become a Member as of the Entry Date
coinciding with or next following the date he completes his Eligibility Period
of Service.
2.3 Each former Member who is reemployed by a Plan Sponsor shall become a
Member as of the date of his reemployment as an Eligible Employee.
2.4 Each former Employee who completes his Eligibility Period of Service
but terminates employment with a Plan Sponsor before becoming a Member shall
become a Member as of the latest of the date he (a) is reemployed, (b) would
have become a Member if he had not terminated employment, or (c) becomes an
Eligible Employee.
2.5 Solely for the purpose of contributing a Rollover Amount to the Plan,
an Eligible Employee who has not yet become a Member pursuant to any other
provision of this Section 2 shall become a Member as of the date on which the
Rollover Amount is contributed to the Plan.
SECTION 3
CONTRIBUTIONS
3.1 (a) The Plan Sponsor shall make a contribution to the Fund on behalf of
each Member who has elected to defer a portion of Annual Compensation otherwise
payable to him for the Plan Year and to have such portion contributed to the
Fund. The election must be made before the Annual Compensation is payable and
may only be made pursuant to an irrevocable written agreement between the Member
and the Plan Sponsor which shall be in such form and subject to such rules and
limitations as the Plan Administrator may prescribe and shall specify the
percentage of Annual Compensation that the Member desires to defer and to have
contributed to the Fund. A Member may make an election effective as of the first
Entry Date on which they become a Member and as of the first day of each
calendar quarter. Once a Member has made an election, the Member may revoke or
modify his election once each calendar quarter in order to increase or reduce
the rate of future deferrals, effective as of the beginning of the payroll
period coinciding with or next following the
8
<PAGE> 11
Plan Administrator's processing of the revocation or modification pursuant to
normal administrative procedures. An election shall be effective until revoked
or modified. Once an election has been revoked or modified, any subsequent
election by the Member shall be effective as of the first day of the calendar
quarter coinciding with or next following the Plan Administrator's processing of
the election pursuant to normal administrative procedures. The contribution made
by a Plan Sponsor on behalf of a Member under this Section 3.1 shall be in an
amount equal to the amount specified in the Member's deferral agreement, but not
greater than sixteen percent (16%) of the Member's Annual Compensation.
(b) Elective Deferrals shall in no event exceed $8,728 (for 1992) in any
one taxable year of the Member, which amount shall be adjusted for changes in
the cost of living as provided by the Secretary of the Treasury. In the event
the amount of Elective Deferrals exceeds $8,728 (for 1992) as adjusted, in any
one taxable year then, (1) not later than the immediately following March 1, the
Member may designate to the Plan the portion of the Member's Deferral Amount
which consists of excess Elective Deferrals, and (2) not later than the
immediately following April 15, the Plan may distribute the amount designated to
it under Paragraph (1) above, as adjusted to reflect income, gain, or loss
attributable to it through the date of the distribution, and reduced by any
"Excess Deferral Amounts," as defined in Appendix A hereto, previously
distributed or recharacterized with respect to the Member for the Plan Year
beginning with or within that taxable year. The payment of the excess Elective
Deferrals, as adjusted and reduced, from the Plan shall be made to the Member
without regard to any other provision in the Plan. In the event that a Member's
Elective Deferrals exceed $8,728, as adjusted, in any one taxable year under the
Plan and other plans of the Plan Sponsor and its Affiliates, the Member shall be
deemed to have designated for distribution under the Plan the amount of excess
Elective Deferrals, as adjusted and reduced, by taking into account only
Elective Deferral amounts under the Plan and other plans of the Plan Sponsor and
its Affiliates.
3.2 The Plan Sponsor proposes to make contributions to the Fund with
respect to each Plan Year on behalf of each Member entitled to an allocation
under Plan Sections 4.1(b) and (c) in an amount equal to three-fourths of the
contribution made under Plan Section 3.1 for the Member which does not exceed
six percent (6%) of the Member's Annual Compensation.
3.3 Subject to such rules and limitations as the Plan Administrator may
from time to time prescribe, each Member may contribute as a Basic Contribution
to the Fund an amount of his Annual Compensation not in excess of sixteen
percent (16%) of the Member's Annual Compensation for the Plan Year less the
percentage of the Member's Annual Compensation deferred under Plan Section 3.1
for that Plan Year. Basic Contributions shall be made to the Fund through
regular payroll deductions or in such other manner as shall be agreed upon by
each Member and the Plan Administrator. Elections to make Basic Contributions
shall be made, modified and revoked in the same manner and subject to the same
restrictions as provided in Plan Section 3.1(a). Notwithstanding the foregoing,
the Plan Administrator may, at any time, suspend the making of any further Basic
Contributions.
3.4 Forfeitures shall be used to reduce Plan Sponsor contributions and not
to increase benefits.
3.5 Any Member may, with the consent of the Plan Administrator and subject
to such rules and conditions as the Plan Administrator may prescribe, transfer a
Rollover Amount to the Fund; provided, however, that the Plan Administrator
shall, not administer this provision in a manner which is discriminatory in
favor of Highly Compensated Employees.
3.6 Contributions may be made only in cash or other property which is
acceptable to the Trustee. In no event will the sum of contributions under Plan
Sections 3.1, 3.2 and 3.3 exceed the deductible limits under Code Section 404.
SECTION 4
ALLOCATIONS
4.1 As soon as reasonably practicable following the date of withholding by
the Plan Sponsor, if applicable, and receipt by the Trustee, Plan Sponsor
contributions made on behalf of each Member under Plan Sections 3.1 and 3.2, and
Basic Contributions and Rollover Amounts contributed by the Member, shall
9
<PAGE> 12
be allocated to the Tax Saver Account, Matching Account, Basic Contribution
Account and Rollover Account, respectively, of the Member on behalf of whom the
contributions were made. Plan Sponsor contributions made under Plan Section 3.2
shall be allocated to the Matching Account of each Member.
4.2 As of each Valuation Date, the Trustee shall determine the net income
or net loss of each Individual Fund pursuant to the provisions of the Trust. The
net income or loss shall be allocated as of the Valuation Date to each Account
in the proportion that the value of the Account invested in that Individual Fund
as of the preceding Valuation Date, increased by contributions allocated to that
Member's Account which have been invested in that Individual Fund since the
preceding Valuation Date, weighted based on the length of time such
contributions were so allocated, and reduced by any withdrawals including loans
and forfeitures from that Member's Account which were invested in that
Individual Fund since that Valuation Date, weighted based on the date on which
such withdrawals, loans and forfeitures were made, bears to the value of all
Accounts invested in that Individual Fund as of the preceding Valuation Date, as
so increased and reduced.
SECTION 5
PLAN LOANS
5.1 Subject to the provisions of the Plan and the Trust, each Member who is
an Employee shall have the right, subject to prior approval by the Plan
Administrator, to borrow from the Fund. In addition, each "party in interest,"
as defined in ERISA Section 3(14), who is (a) a Member but no longer an
Employee, (b) the Beneficiary of a deceased Member, or (c) an alternate payee of
a Member pursuant to the provisions of a "qualified domestic relations order,"
as defined in Code Section 414(p), shall also have the right, subject to prior
approval by the Plan Administrator, to borrow from the Fund; provided, however,
that loans to such parties in interest may not discriminate in favor of Highly
Compensated Employees.
5.2 In order to apply for a loan, a borrower must complete and submit to
the Plan Administrator documents provided by the Plan Administrator for this
purpose.
5.3 Loans shall be available to all eligible borrowers on a reasonably
equivalent basis which may take into account the borrower's creditworthiness,
ability to repay, and ability to provide adequate security. Loans shall not be
made available to Highly Compensated Employees, officers or shareholders of a
Plan Sponsor in an amount greater than the amount made available to other
borrowers. This provision shall be deemed to be satisfied if all borrowers have
the right to borrow the same percentage of their interest in the Member's vested
Accrued Benefit, notwithstanding that the dollar amount of such loans may differ
as a result of differing values of Members' vested Accrued Benefits.
5.4 Each loan shall bear a "reasonable rate of interest" and provide that
the loan be amortized in substantially level payments, made no less frequently
than quarterly, over a specified period of time. A "reasonable rate of interest"
shall be that rate that provides the Plan with a return commensurate with the
interest rates charged by persons in the business of lending money for loans
which would be made under similar circumstances.
5.5 Each loan shall be adequately secured, with the security for the
outstanding balance of all loans to the borrower to consist of one-half ( 1/2)
of the borrower's interest in the Member's vested Accrued Benefit, or such other
security as the Plan Administrator deems acceptable. No portion of the Member's
Tax Saver Account shall be used as security for any loan hereunder unless and
until such time as the loan amount exceeds the value of the borrower's interest
in the Member's vested Accrued Benefit in all other Accounts.
5.6 Each loan, when added to the outstanding balance of all other loans to
the borrower from all retirement plans of the Plan Sponsor and its Affiliates
which are qualified under Section 401 of the Code, shall not exceed the lesser
of:
(a) $50,000, reduced by the excess, if any, of
(1) the highest outstanding balance of loans made to the borrower
from all retirement plans qualified under Code Section 401 of the Plan
Sponsor and its Affiliates during the one (1) year period immediately
preceding the day prior to the date on which such loan was made, over
10
<PAGE> 13
(2) the outstanding balance of loans made to the borrower from all
retirement plans qualified under Code Section 401 of the Plan Sponsor
and its Affiliates on the date on which such loan was made, or
(b) one-half ( 1/2) of the value of the borrower's interest in the
vested Accrued Benefit attributable to the Member's Account.
For purposes of this Section, the value of the vested Accrued Benefit
attributable to a Member's Account shall be established as of the latest
preceding Valuation Date, or any later date on which an available valuation was
made, and shall be adjusted for any distributions or contributions made through
the date of the origination of the loan.
5.7 Each loan, by its terms, shall be repaid within five (5) years, except
that any loan which is used to acquire any dwelling unit which within a
reasonable time is to be used (determined at the time the loan is made) as the
principal residence of the borrower may, by its terms, be repaid within a longer
period of time.
5.8 Each loan shall be made in an amount of no less than $500.
5.9 A borrower is permitted to have only one loan existing under this Plan
at any one time.
5.10 The entire unpaid principal sum and accrued interest shall, at the
option of the Plan Administrator, become due and payable if (a) a borrower fails
to make any loan payment when due, (b) a borrower ceases to be a "party in
interest," as defined in ERISA Section 3(14), (c) the vested Accrued Benefit
held as security under the Plan for the borrower will, as a result of an
impending distribution or withdrawal, be reduced to an amount less than the
amount of all unpaid principal and accrued interest then outstanding under the
loan, or (d) a borrower makes any untrue representations or warranties in
connection with the obtaining of the loan. In that event, the Plan Administrator
may take such steps as it deems necessary to preserve the assets of the Plan,
including, but not limited to, the following: (1) direct the Trustee to deduct
the unpaid principal sum, accrued interest, and any other applicable charge
under the note evidencing the loan from any benefits that may become payable out
of the Plan to the borrower, (2) direct the Plan Sponsor to deduct and transfer
to the Trustee the unpaid principal balance, accrued interest, and any other
applicable charge under the note evidencing the loan from any amounts owed by
the Plan Sponsor to the borrower, or (3) liquidate the security given by the
borrower, other than amounts attributable to a Member's Tax Saver Account, and
deduct from the proceeds the unpaid principal balance, accrued interest, and any
other applicable charge under the note evidencing the loan. If any part of the
indebtedness under the note evidencing the loan is collected by law or through
an attorney, the borrower shall be liable for attorneys' fees in an amount equal
to ten percent of the amount then due and all costs of collection.
5.11 Each loan shall be made only in accordance with regulations and
rulings of the Internal Revenue Service and the Department of Labor. The Plan
Administrator shall be authorized to administer the loan program of this Section
and shall act in his sole discretion to ascertain whether the requirements of
such regulations and rulings and this Section have been met.
SECTION 6
WITHDRAWALS AND HARDSHIP DISTRIBUTIONS
6.1 Withdrawals from the Basic Contribution Account. As of any Valuation
Date, a Member who is an Employee may elect to withdraw an amount that is not
less than twenty-five percent (25%) and not more than one hundred percent (100%)
(in multiples of twenty-five percent (25%) ) of the balance of his Basic
Contribution Account (except his A & A Basic Contribution Subaccount and his
Excess Contribution Subaccount) by providing not less than fifteen (15) days
prior written notice to the Plan Administrator in such form as the Plan
Administrator requires. If a Member makes a withdrawal in accordance with this
11
<PAGE> 14
Subsection 6.1, no contributions will be permitted to be made to his Basic
Contribution Account by him or on his behalf until the expiration of the
suspension period specified below:
<TABLE>
<CAPTION>
SUSPENSION PERIOD
PERCENT WITHDRAWN (IN MONTHS)
- ----------------- -----------------
<S> <C>
25% 3
50 6
75 9
100 12
</TABLE>
6.2 Withdrawals from the A & A Basic Contribution Subaccount and Matching
Account. As of any Valuation Date, a Member who is an Employee and who has
withdrawn all amounts which could then be withdrawn by him under Section 6.1 may
elect to withdraw an amount from his A & A Basic Contribution Subaccount and his
Matching Account by providing not less than fifteen (15) days prior written
notice to the Plan Administrator in such form as it requires, in accordance with
the following:
(a) A Member who is not fully vested in his Matching Account may
withdraw all of his A & A Basic Contribution Subaccount and the vested
portion of his Matching Account. If the Member's vested interest in his
Matching Account is less than fifty percent (50%), the unvested balance of
that Account shall be forfeited as of the Valuation Date next following the
date of withdrawal as provided in section 6.7. If a Member makes a
withdrawal in accordance with this Subsection (a), no contributions to his
Tax Saver Account or his Basic Contribution Account will be permitted to be
made by him until the expiration of a twelve (12) month suspension period.
(b) A Member who is fully vested in his Matching Account may elect to
withdraw an amount that is not less than twenty-five percent (25%) and not
more than one hundred percent (100%) (in multiples of twenty-five percent
(25%)) of the aggregate of the balance of his A & A Basic Contribution
Subaccount and the balance of his Matching Account in such proportion as he
shall direct. A withdrawal in accordance with this Subsection (b) shall
first be charged to the Member's A & A Basic Contribution Subaccount. A
withdrawal by a Member under this Subsection (b) shall not be permitted if
it would occur within twenty-four (24) months of a previous withdrawal
under this Subsection (b) unless the withdrawal currently being made is for
one hundred percent (100%) of the available vested portion of the Member's
Accounts (except his Old Thrift Plan Plus Account, if any) exclusive of his
Tax Saver Account and his Excess Contribution Subaccount. If a Member makes
a withdrawal in accordance with this Subsection (b), no contributions to
his Tax Saver Account or his Basic Contribution Account will be permitted
to be made by him until the expiration of the suspension period specified
below:
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE WITHDRAWN
FROM THE MEMBER'S A & A BASIC SUSPENSION
CONTRIBUTION SUBACCOUNT, MATCHING PERIOD
ACCOUNT, AND ROLLOVER ACCOUNT (IN MONTHS)
---------------------------------------------------------------------- ----------------
<S> <C>
25% or less 3
50% or less but more than 25% 6
75% or less but more than 50% 9
More than 75% 12
</TABLE>
12
<PAGE> 15
6.3 Withdrawal of Rollover Contributions. As of any Valuation Date, a
Member who is an Employee and who has withdrawn all amounts which could be
withdrawn by him under Section 6.1 may elect to withdrawn an amount that is not
less than twenty-five percent (25%) and not more than one hundred percent (100%)
(in multiples of twenty-five percent (25%)) of the balance of his Rollover
Account by providing not less than fifteen (15) days prior written notice to the
Plan Administrator in such form as the Plan Administrator requires. If a Member
makes a withdrawal, in accordance with this Section, no contributions to his Tax
Saver Account or his Basic Contribution Account will be permitted to be made by
him or on his behalf until the expiration of the suspension period specified
below:
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE WITHDRAWN
FROM THE MEMBER'S A & A BASIC SUSPENSION
CONTRIBUTION SUBACCOUNT, MATCHING PERIOD
ACCOUNT, AND ROLLOVER ACCOUNT (IN MONTHS)
---------------------------------------------------------------------- ----------------
<S> <C>
25% or less 3
50% or less but more than 25% 6
75% or less but more than 50% 9
More than 75% 12
</TABLE>
6.4 Hardship Distributions. The Trustee shall, upon the direction of the
Plan Administrator, distribute all or a portion of a Member's Tax Saver Account
consisting of Deferral Amounts (but not earnings thereon) and a Member's Excess
Contribution Subaccount consisting of recharacterized amounts as defined in
Section 3 of Appendix A hereto (but not earnings thereon) prior to the time such
accounts are otherwise distributable in accordance with the other provisions of
the Plan; provided, however, that any such distribution shall be made only if
the Member is an Employee and demonstrates that he is suffering from "hardship"
as determined herein. For purposes of this Section, a distribution will be
deemed to be an account of hardship if the distribution is on account of:
(a) expenses for medical care described in Section 213 (d) of the Code
incurred by the Member, his spouse, or any dependents of the Member (as
defined in Section 152 of the Code) or necessary for these persons to
obtain medical care described in Code Section 213(d);
(b) purchase (excluding mortgage payments) of a principal residence
for the Member;
(c) payment of tuition and related educational fees for the next
twelve (12) months of post-secondary education for the Member, his spouse,
children, or dependents;
(d) the need to prevent the eviction of the Member from his principal
residence or foreclosure on the mortgage of the Member's principal
residence; or
(e) any other contingency determined by the Internal Revenue Service
to constitute an "immediate and heavy financial need" within the meaning of
Treasury Regulations Section 1.401(k)-l(d).
6.5 In addition to the requirements set forth in Plan Section 6.4, any
distribution pursuant to Plan Section 6.4 shall not be in excess of the amount
necessary to satisfy the need determined under Section 6.4 and shall also be
subject to the requirements of Subsection (a) or (b) of this Section.
(a) (1) The Member shall first obtain all distributions, other than
hardship distributions, and all nontaxable loans currently available under
all plans maintained by the Plan Sponsor;
(2) the Plan Sponsor shall not permit Elective Deferrals or after-tax
employee contributions to be made to the Plan or any other plan maintained
by the Plan Sponsor, for a period of twelve (12) months after the Member
receives the distribution pursuant to this Section; and
(3) the Plan Sponsor shall not permit Elective Deferrals to be made to
the Plan or any other plan maintained by the Plan Sponsor for the Member's
taxable year immediately following the taxable year of the hardship
distribution in excess of the limit under Plan Section 3.1(b) for the
taxable year, less the amount of the Elective Deferrals made to the Plan or
any other plan maintained by the Plan Sponsor for the taxable year in which
the distribution under this Section occurs.
13
<PAGE> 16
(b) (1) The Member shall first obtain all other distributions, other
than hardship distributions, and all nontaxable loans available under all
plans maintained by the Plan Sponsor; and
(2) the Plan Administrator shall determine that it can reasonably rely
on the Member's certification by execution of a form provided by the Plan
Administrator that the need determined under Plan Section 6.4 cannot be
relieved --
(A) through reimbursement or compensation by insurance or
otherwise,
(B) by reasonable liquidation of the assets of the Member, his
spouse and minor children, to the extent that the liquidation would not
itself cause an immediate and heavy financial need and to the extent
that the assets of the spouse and minor children are reasonably
available to the Member,
(C) by cessation of Elective Deferrals, or
(D) by other distributions or nontaxable (at the time of the
distribution) loans from plans maintained by the Plan Sponsor or any
other employer, or by borrowing from commercial sources on reasonable
commercial terms.
Such distribution shall be made only in accordance with such rules, policies,
procedures, restrictions, and conditions as the Plan Administrator may from time
to time adopt. Any determination of the existence of hardship and the amount to
be distributed on account thereof shall be made by the Plan Administrator (or
such other person as may be required to make such decisions) in accordance with
the foregoing rules as applied in a uniform and nondiscriminatory manner;
provided that, unless the Member requests otherwise, any such distribution shall
include the amount necessary to pay any federal, state and local income taxes
and penalties reasonably anticipated to result from the distribution. A
distribution under this Section shall be made in a lump sum to the Member.
6.6 Maximum Suspension Period. No suspension period under Plan Section 6,
whether as a result of single or multiple withdrawals, shall extend longer than
twelve (12) consecutive months.
6.7 Forfeitures. If a Member becomes subject to a forfeiture under Plan
Section 6, the following rules shall apply:
(a) The unvested portion of his Matching Account shall be forfeited as
of the Valuation Date next following the date of withdrawal.
(b) The amount forfeited under Subsection (a) shall be restored,
without adjustment for earnings and losses after the forfeiture, if the
Member elects to repay the full amount of the withdrawals made from his Tax
Saver Account or A & A Basic Contribution Subaccount in such form and
manner as the Plan Administrator shall require; provided, however, that
such repayment shall not be made later than five years after the date of
the withdrawal.
(c) Restoration pursuant to Subsection (b) shall be made first from
current forfeitures, if any, under the Plan, and then, if necessary, from a
special contribution to the Plan by the Plan Sponsor.
SECTION 7
DEATH BENEFITS
7.1 Upon the death of a Member who is an Employee at the time of his death,
his Beneficiary shall be entitled to the full value of his Accrued Benefit.
7.2 Upon the death of a Member who is not an Employee at the time of his
death, prior to the distribution of his vested Accrued Benefit, his Beneficiary
shall be entitled to his vested Accrued Benefit.
7.3 If, subsequent to the death of a Member, the Member's Beneficiary dies
while entitled to receive benefits under the Plan, the successor Beneficiary, if
any, or the Beneficiary listed under Subsection (a), (b) or (c) of the Plan
Section containing the definition of the term "Beneficiary" shall generally be
entitled to receive benefits under the Plan. However, if the deceased
Beneficiary was the Member's spouse at the time of
14
<PAGE> 17
the Member's death, or if no successor Beneficiary shall have been designated by
the Member and be alive and no Beneficiary listed under Subsection (a), (b) or
(c) of the Plan Section containing the definition of the term "Beneficiary"
shall be alive, the Member's unpaid vested Accrued Benefit shall be paid to the
personal representative of the deceased Beneficiary's estate.
7.4 Any benefit payable under this Section 7 shall be paid in accordance
with and subject to the provisions of Plan Section 8 or Section 9, whichever is
applicable, after receipt by the Trustee from the Plan Administrator of notice
of the death of the Member.
SECTION 8
PAYMENT OF BENEFITS ON RETIREMENT OR DEATH
8.1 The Accrued Benefit of a Member who has attained a Retirement Date or
has attained Normal Retirement Age or died while an Employee shall be fully
vested and nonforfeitable. As of a Member's Retirement Date or death while an
Employee, he or his Beneficiary shall be entitled to his Accrued Benefit to be
paid in accordance with this Section 8. The Accrued Benefit of a Member which is
to be paid under this Section 8 shall be determined as of the Valuation Date
coinciding with or immediately preceding the date the Accrued Benefit is valued
for imminent payout purposes pursuant to normal administrative procedures, and
shall be increased by any amounts allocated to the Member's Account after that
Valuation Date and reduced by any distributions or withdrawals made from the
Member's Account after that Valuation Date and the amount necessary to satisfy,
as of the Member's Retirement Date, the unpaid principal, accrued interest, and
penalties on any loan made to the Member. Payments to a Member, or to the
Beneficiary of a deceased Member, shall commence as soon as administratively
feasible following the Retirement Date or death of the Member but not later than
60 days after the end of the Plan Year in which such Retirement Date or death
occurs. If the amount of the payment required to commence on a date cannot be
ascertained by that date, payment shall commence retroactively to that date and
shall commence no later than sixty (60) days after the earliest date on which
the amount of payment can be ascertained.
8.2 (a) The payment of a Member's Accrued Benefit shall be in the form of
one lump sum in cash.
(b) Notwithstanding anything to the contrary contained in the Plan, the
payment of that portion of the Accrued Benefit of a Member which is attributable
to his A & A Subaccounts as of his Retirement Date or death shall be made in a
lump sum payment unless the Member's Accrued Benefit exceeds $3,500, in which
event the Member may select from the alternate forms of payment as follows:
(1) A joint and survivor annuity with or without a period certain; or
(2) A single life annuity.
(c) If a Member selects payment of that portion of his Accrued Benefit
attributable to his A & A Subaccounts in accordance with Subsection (b) (1) or
(b) (2) above, those benefits shall be paid in the Qualified Annuity Form of
Payment unless the Member elects during the applicable election period to
receive a single life annuity rather than the Qualified Annuity Form of Payment
by execution and delivery to the Plan Administrator of a written instrument
provided for the purpose by the Plan Administrator in which the Member
identifies the particular alternate form of payment desired and, if applicable,
the specific nonspouse Beneficiary. For purposes of this Section 8.2, the term
"applicable election period" shall mean, with respect to a Qualified Annuity
Form of Payment described in Subsection (a) or (b) of Plan Section 1.34, the
ninety-day period ending on the first date on which the Member is entitled to
payment from the Fund, and with respect to a Qualified Annuity Form of Payment
described in Subsection (c) of Plan Section 1.34, the period which begins on the
first day of the Plan Year in which an Eligible Employee becomes a Member and
which ends on the date of his death. In the case of a married Member, no
election shall be effective unless spousal consent is obtained in accordance
with the provisions of Plan Section 1.7.
If an election is made, the Member's vested Accrued Benefit attributable to
his A & A Subaccounts shall be paid in the form set forth in Subsection (b) of
this Section chosen by the Member by written instrument delivered to the Plan
Administrator prior to the date payments are otherwise to commence.
15
<PAGE> 18
(d) With respect to each Member who selects payment of the amount
attributable to his A & A Subaccounts in accordance with Subsection (b) (1) or
(b) (2) above, the Plan Administrator shall furnish to the Member a written
explanation of:
(1) the terms and conditions of the Qualified Annuity Form of Payment
including a general description of the eligible conditions and other
material features of the alternate forms of payment under the Plan,
(2) the Member's right to make, and the effect of, an election not to
receive the Qualified Annuity Form of Payment, including a general
description of the conditions and other material features of the alternate
forms of payment under the Plan,
(3) the rights of the Member's spouse as described in-Subsection (c)
of this Section of the Plan, and
(4) the right to make, and the effect of, a revocation of an election
pursuant to this Section.
(e) In the case of a Qualified Annuity Form of Payment described under
Subsection (a) or (b) of Plan Section 1.34, the written explanation shall be
provided to the Member within ninety (90) days prior to the first date on which
he is entitled to payment from the Fund. In the case of a Qualified Annuity Form
of Payment described under Subsection (c) of Plan Section 1.34, the written
explanation shall be provided to the Member in whichever of the following
periods ends last:
(1) the period beginning with the first day of the Plan Year in which
the Member attains age 32 and ending on the last day of the Plan Year
preceding the Plan Year in which the Member attains age 35; or
(2) the period beginning one (1) year before and ending one (1) year
after the Employee first becomes a Member; or
(3) the period beginning one (1) year before and ending one (1) year
after the provisions of this Subsection (e) apply to the Member.
Notwithstanding the foregoing, in the case of a Member who separates from
service before attaining age 35, the written explanation shall be provided in
the period beginning one year before and ending one year after separation from
service occurs.
(f) A Member may revoke any election not to receive payment in the form of
a Qualified Annuity Form of Payment at any time prior to commencement of
payments from the Fund, and may make a new election at any time prior to the
commencement of payments from the Fund.
8.3 If a Member elects the Qualified Annuity Form of Payment, and if the
Member or the Member's spouse dies after the election but before benefit
payments have actually commenced, the election will be void.
8.4 Payments under the Qualified Annuity Form of Payment shall be
determined according to the amount of the Member's Accrued Benefit attributable
to his A & A Subaccounts on the date on which the Member is entitled to
commencement of payments from the Fund.
8.5 Notwithstanding any provision of the Plan to the contrary, (a) if a
Member's vested Accrued Benefit exceeds $3,500, it shall not be distributed
before the Member's Normal Retirement Age or death without the Member's consent;
and (b) the payments to be made to a Member shall satisfy the incidental benefit
requirements under Code Section 401(a) (9) (G) and the regulations thereunder.
8.6 Notwithstanding any other provisions of the Plan,
(a) Prior to the death of a Member, all retirement payments hereunder
shall --
(1) be distributed to the Member not later than the required
beginning date (as defined below) or,
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<PAGE> 19
(2) be distributed, commencing not later than the required
beginning date (as defined below) --
(A) in accordance with regulations prescribed by the Secretary
of the Treasury, over the life of the Member or over the lives of the
Member and his designated individual Beneficiary, if any, or
(B) in accordance with regulations prescribed by the Secretary
of the Treasury, over a period not extending beyond the life
expectancy of the Member or the joint life and last survivor
expectancy of the Member and his designated individual Beneficiary,
if any.
(b) (1) If --
(A) the distribution of a Member's retirement payments have
begun in accordance with Subsection (a)(2) of this Section, and
(B) the Member dies before his entire vested Accrued Benefit has
been distributed to him,
then the remaining portion of his vested Accrued Benefit shall be
distributed at least as rapidly as under the method of distribution
being used under Subsection (a)(2) of this Section as of the date of his
death.
(2) If a Member dies before the commencement of retirement payments
hereunder, the entire interest of the Member shall be distributed within
five (5) years after his death.
(3) If --
(A) any portion of a Member's vested Accrued Benefit is payable
to or for the benefit of the Member's designated individual
Beneficiary, if any,
(B) that portion is to be distributed, in accordance with
regulations prescribed by the Secretary of the Treasury, over the
life of the designated individual Beneficiary or over a period not
extending beyond the life expectancy of the designated individual
Beneficiary, and
(C) the distributions begin not later than one (1) year after
the date of the Member's death or such later date as the Secretary of
the Treasury may by regulations prescribe,
then, for purposes of Paragraph (2) of this Subsection (b), the portion
referred to in Subparagraph (A) of this Paragraph (3) shall be treated
as distributed on the date on which the distributions to the designated
individual Beneficiary begin.
(4) If the designated individual Beneficiary referred to in
Paragraph (3) (A) of this Subsection (b) is the surviving spouse of the
Member, then --
(A) the date on which the distributions are required to begin
under Paragraph (3) (C) of this Subsection (b) shall not be earlier
than the date on which the Member would have attained age 70 1/2, and
(B) if the surviving spouse dies before the distributions to
such spouse begin, this Subsection (b) shall be applied as if the
surviving spouse were the Member.
(5) For purposes of this Section, the term "required beginning
date" means April 1 of the calendar year following the calendar year in
which the Member attains age 70 1/2. However, in the case of a Member
who is not described in Section 1(b)(3) of Appendix C hereto and who has
attained age 70 1/2 before January 1, 1988, the term "required beginning
date" means April 1 of the calendar year following the calendar year in
which the Member retires or otherwise terminates employment.
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<PAGE> 20
SECTION 9
PAYMENT OF BENEFITS ON TERMINATION OF EMPLOYMENT
9.1 Transfer of a Member from one Plan Sponsor to another Plan Sponsor or
to an Affiliate shall not be deemed for any purpose under the Plan to be a
termination of employment of the Member. A Member shall be deemed to have
terminated employment upon his Severance Date.
9.2 In the event of the termination of employment of a Member for reasons
other than death or attainment of a Retirement Date, the Member's Accrued
Benefit shall be determined as of the Valuation Date coinciding with or
immediately preceding the date the Accrued Benefit is valued for imminent payout
purposes pursuant to normal administrative procedures, and shall be increased by
any amounts allocated to a Member's Account after that Valuation Date and
reduced by any distributions or withdrawals made from the Member's Account after
that Valuation Date and the amount necessary to satisfy, as of the Member's
termination of employment, the unpaid principal, accrued interest, and penalties
on any loan made to the Member.
9.3 That portion of a Member's Accrued Benefit in which he is vested shall
be:
(a) his Tax Saver Account, Basic Contribution Account, Rollover
Account and Old Thrift Plus Plan Account which shall be fully vested and
nonforfeitable at all times; and
(b) that portion of the value of his Matching Account computed
according to the following vesting schedule based upon such Member's Years
of Service, as defined in Section 1.29(b), as of his Severance Date:
<TABLE>
<CAPTION>
FULL YEARS PERCENTAGE
OF SERVICE VESTED
----------- ----------
<S> <C>
Less than 3 0%
3 33 1/3%
4 66 2/3%
5 100%
</TABLE>
9.4 The Member shall be entitled to payment in the manner set forth in
Section 8.2. Payment shall be made as soon as administratively feasible after
the end of the calendar quarter in which the Member's termination of employment
occurs; provided, however, if the Member's vested Accrued Benefit exceeds $3,500
it will not be distributed before the Member's Normal Retirement Age or death
without the Member's consent. In no event shall payment be made later than sixty
(60) days after the end of the Plan Year in which the Normal Retirement Age of
the Member occurs. Payment shall be subject to the minimum distribution
requirements set forth in Plan Section 8.
9.5 (a) If any portion of a Member's vested Accrued Benefit derived from
Plan Sponsor contributions is paid prior to his Termination Completion Date, a
portion of his Accrued Benefit equal to his total non-vested Accrued Benefit
derived from Plan Sponsor contributions multiplied by a fraction, the numerator
of which is the amount of the distribution attributable to Plan Sponsor
contributions and the denominator of which is the total vested Accrued Benefit
attributable to Plan Sponsor contributions, shall be immediately forfeited. The
amount forfeited shall not exceed the Member's nonvested Accrued Benefit. Upon
the termination of employment of a Member who is not vested in any part of his
Accrued Benefit, the Member shall be deemed to have received a distribution and
his Accrued Benefit shall be immediately forfeited.
(b) If the Member is reemployed by a Plan Sponsor or an Affiliate prior to
his Termination Completion Date and (1) if the Member's Accrued Benefit was
partially vested and the Member repays to the Fund no later than the fifth
anniversary of the Member's reemployment by the Plan Sponsor or an Affiliate all
of that portion of his vested Accrued Benefit which was paid to him or (2) if
the Member's Accrued Benefit was not vested upon his termination of employment,
then any portion of his Accrued Benefit which was forfeited shall be restored
effective on the Valuation Date coinciding with or next following the repayment
or the Member's reemployment, respectively. The restoration on any Valuation
Date of the forfeited portion of the Accrued Benefit of a Member pursuant to the
preceding sentence shall be made first from forfeitures available for
18
<PAGE> 21
allocation on that Valuation Date, to the extent available, and secondly from a
special contribution to the Plan by the Plan Sponsor.
(c) If a Member who is partially vested in his Accrued Benefit does not
receive, prior to his Termination Completion Date, a distribution of any portion
of his vested Accrued Benefit, then no forfeiture of that Member's nonvested
portion of his Accrued Benefit shall occur until that Member's Termination
Completion Date.
9.6 In the event that a Plan amendment directly or indirectly changes the
vesting schedule, the vesting percentage for each Member in his Accrued Benefit
accumulated to the date when the amendment is adopted shall not be reduced as a
result of the amendment.
SECTION 10
ADMINISTRATION OF THE PLAN
10.1 Trust Agreement. The Primary Sponsor shall establish a Trust with the
Trustee designated by the Board of Directors for the management of the Fund,
which Trust shall form a part of the Plan and is incorporated herein by
reference.
10.2 Operation of the Plan Administrator. The Primary Sponsor shall
appoint a Plan Administrator. If an organization is appointed to serve as the
Plan Administrator, then the Plan Administrator may designate in writing a
person who may act on behalf of the Plan Administrator. The Primary Sponsor
shall have the right to remove the Plan Administrator at any time by notice in
writing. The Plan Administrator may resign at any time by written notice of
resignation to the Trustee and the Primary Sponsor. Upon removal or resignation,
or in the event of the dissolution of the Plan Administrator, the Primary
Sponsor shall appoint a successor.
10.3 Fiduciary Responsibility. (a) The Plan Administrator, as a Named
Fiduciary, may allocate its fiduciary responsibilities among Fiduciaries other
than the Trustee, designated in writing by the Plan Administrator and may
designate in writing persons other than the Trustee to carry out its fiduciary
responsibilities under the Plan. The Plan Administrator may remove any person
designated to carry out its fiduciary responsibilities under the Plan by notice
in writing to such person.
(b) The Plan Administrator and each other Fiduciary may employ persons to
perform services and to render advice with regard to any of the Fiduciary's
responsibilities under the Plan. Charges for all such services performed and
advice rendered may be directly paid by each Plan Sponsor but until paid shall
constitute a charge against the Fund.
(c) Each Plan Sponsor shall indemnify and hold harmless each person
constituting the Plan Administrator or the Investment Committee, if any, from
and against any and all claims, losses, costs, expenses (including, without
limitation, attorney's fees and court costs), damages, actions or causes of
action arising from, on account of or in connection with the performance by such
person of his duties in such capacity, other than such of the foregoing arising
from, on account of or in connection with the willful neglect or willful
misconduct of such person.
10.4 Duties of the Plan Administrator. (a) The Plan Administrator shall
advise the Trustee with respect to all payments under the terms of the Plan and
shall direct the Trustee in writing to make such payments from the Fund;
provided, however, in no event shall the Trustee be required to make such
payments if the Trustee has actual knowledge that such payments are contrary to
the terms of the Plan and the Trust.
(b) The Plan Administrator shall from time to time establish rules, not
contrary to the provisions of the Plan and the Trust, for the administration of
the Plan and the transaction of its business. All elections and designations
under the Plan by a Participant or Beneficiary shall be made on forms prescribed
by the Plan Administrator. The Plan Administrator shall have discretionary
authority to construe the terms of the Plan and shall determine all questions
arising in the administration, interpretation and application of the Plan,
including, but not limited to, those concerning eligibility for benefits and it
shall not act so as to discriminate in favor of any person. All determinations
of the Plan Administrator shall be conclusive and binding on all
19
<PAGE> 22
Employees, Members, Beneficiaries and Fiduciaries, subject to the provisions of
the Plan and the Trust and subject to applicable law.
(c) The Plan Administrator shall furnish Members and Beneficiaries with all
disclosures now or hereafter required by ERISA or the Code. The Plan
Administrator shall file, as required, the various reports and disclosures
concerning the Plan and its operations as required by ERISA and by the Code, and
shall be solely responsible for establishing and maintaining all records of the
Plan and the Trust.
(d) The statement of specific duties for a Plan Administrator in this
Section is not in derogation of any other duties which a Plan Administrator has
under the provisions of the Plan or the Trust or under applicable law.
10.5 Investment Manager. The Primary Sponsor may, by action in writing
certified by notice to the Trustee, appoint an Investment Manager. Any
Investment Manager may be removed in the same manner in which appointed, and in
the event of any removal, the Investment Manager shall, as soon as possible, but
in no event more than thirty (30) days after notice of removal, turn over all
assets managed by it to the Trustee or to any successor Investment Manager
appointed, and shall make a full accounting to the Primary Sponsor with respect
to all assets managed by it since its appointment as an Investment Manager.
10.6 Investment Committee. The Primary Sponsor may, by action in writing
certified by notice to the Trustee, appoint an Investment Committee. The Primary
Sponsor shall have the right to remove any person on the Investment Committee at
any time by notice in writing to such person. A person on the Investment
Committee may resign at any time by written notice of resignation to the Primary
Sponsor. Upon such removal or resignation, or in the event of the death of a
person on the Investment Committee, the Primary Sponsor may appoint a successor.
Until a successor has been appointed, the remaining persons on the Investment
Committee may continue to act as the Investment Committee.
10.7 Action by a Plan Sponsor. Any action to be taken by a Plan Sponsor
shall be taken by resolution or written direction duly adopted by its board of
directors or appropriate governing body, as the case may be; provided, however,
that by such resolution or written direction, the board of directors or
appropriate governing body, as the case may be, may delegate to any officer or
other appropriate person of a Plan Sponsor the authority to take any such
actions as may be specified in such resolution or written direction, other than
the power to amend, modify or terminate the Plan or the Trust or to determine
the basis of any Plan Sponsor contributions.
SECTION 11
CLAIM REVIEW PROCEDURE
11.1 If a Member or Beneficiary is denied a claim for benefits under a
Plan, the Plan Administrator shall provide to the claimant written notice of the
denial within 90 days after the Plan Administrator receives the claim, unless
special circumstances require an extension of time for processing the claim. If
such an extension of time for processing is required, written notice of the
extension shall be furnished to the claimant prior to the termination of the
initial ninety (90) day period. In no event shall the extension exceed a period
of ninety (90) days from the end of such initial period. The extension notice
shall indicate the special circumstances requiring an extension of time and the
date by which the Plan Administrator expects to render the final decision.
11.2 If the claimant is denied a claim for benefits, the Plan Administrator
shall provide, within the time frame set forth in Plan Section 11.1, written
notice of the denial which shall set forth:
(a) the specific reasons for the denial;
(b) specific references to the pertinent provisions of the Plan on
which the denial is based;
(c) a description of any additional material or information necessary
for the claimant to perfect the claim and an explanation of why the
material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
20
<PAGE> 23
11.3 After receiving written notice of the denial of a claim, a claimant or
his representative may:
(a) request a full and fair review of the denial by written
application to the Plan Administrator;
(b) review pertinent documents; and
(c) submit issues and comments in writing to the Plan Administrator.
11.4 If the claimant wishes a review of the decision denying his claim to
benefits under the Plan, he must submit the written application to the Plan
Administrator within sixty (60) days after receiving written notice of the
denial.
11.5 Upon receiving the written application for review, the Plan
Administrator may schedule a hearing for purposes of reviewing the claimant's
claim, which hearing shall take place not more than thirty (30) days from the
date on which the Plan Administrator received the written application for
review.
11.6 At least ten (10) days prior to the scheduled hearing, the claimant
and his representative designated in writing by him, if any, shall receive
written notice of the date, time, and place of the scheduled hearing. The
claimant or his representative may request that the hearing be rescheduled for
his convenience on another reasonable date or at another reasonable time or
place.
11.7 All claimants requesting a review of the decision denying their claim
for benefits may employ counsel for purposes of the hearing.
11.8 No later than sixty (60) days following the receipt of the written
application for review, the Plan Administrator shall submit its decision on the
review in writing to the claimant involved and to his representative, if any;
provided, however, a decision on the written application for review may be
extended, in the event special circumstances such as the need to hold a hearing
require an extension of time, to a day no later than one hundred twenty (120)
days after the date of receipt of the written application for review. The
decision shall include specific reasons for the decision and specific references
to the pertinent provisions of the Plan on which the decision is based.
SECTION 12
LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS
12.1 No benefit which shall be payable under the Plan to any person shall
be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, and any attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge the same shall be
void; and no such benefit shall in any manner be liable for, or subject to, the
debts, contracts, liabilities, engagements or torts of any person, nor shall it
be subject to attachment or legal process for, or against, such person, and the
same shall not be recognized under the Plan, except to such extent as may be
required by law. Notwithstanding the above, this Section shall not apply to a
"qualified domestic relations order" (as defined in Code Section 414 (p)), and
benefits may be paid pursuant to the provisions of such an order. The Plan
Administrator shall develop procedures (in accordance with applicable federal
regulations) to determine whether a domestic relations order is qualified, and,
if so, the method and the procedures for complying therewith.
12.2 If any person who shall be entitled to any benefit under the Plan
shall become bankrupt or shall attempt to anticipate, alienate, sell, transfer,
assign, pledge, encumber or charge such benefit under the Plan, then the payment
of any such benefit in the event a Member or Beneficiary is entitled to payment
shall, in the discretion of the Plan Administrator, cease and terminate and in
that event the Trustee shall hold or apply the same for the benefit of such
person, his spouse, children, other dependents or any of them in such manner and
in such proportion as the Plan Administrator shall determine.
12.3 Whenever any benefit which shall be payable under the Plan is to be
paid to or for the benefit of any person who is then a minor or determined to be
incompetent by qualified medical advice, the Plan Administrator need not require
the appointment of a guardian or custodian, but shall be authorized to cause the
same to be paid over to the person having custody of such minor or incompetent,
or to cause the same to
21
<PAGE> 24
be paid to such minor or incompetent without the intervention of a guardian or
custodian, or to cause the same to be paid to a legal guardian or custodian of
such minor or incompetent if one has been appointed or to cause the same to be
used for the benefit of such minor or incompetent.
12.4 If the Plan Administrator cannot ascertain the whereabouts of any
Member to whom a payment is due under the Plan, the Plan Administrator may
direct that the payment and all remaining payments otherwise due to the Member
be cancelled on the records of the Plan and the amount thereof applied as a
forfeiture in accordance with Plan Section 4.1(a) or (b) as applicable, except
that, in the event the Member later notifies the Plan Administrator of his
whereabouts and requests the payments due to him under the Plan, the Plan
Sponsor shall contribute to the Plan an amount equal to the payment to be paid
to him as soon as administratively feasible.
SECTION 13
PROHIBITION AGAINST DIVERSION
At no time shall any part of the Fund be used for or diverted to purposes
other than the exclusive benefit of the Members or their Beneficiaries, subject,
however, to the payment of all taxes and administrative expenses and subject to
the provisions of the Plan with respect to returns of contributions.
SECTION 14
LIMITATION OF RIGHTS
Membership in the Plan shall not give any Employee any right or claim
except to the extent that such right is specifically fixed under the terms of
the Plan. The adoption of the Plan and the Trust by any Plan Sponsor shall not
be construed to give any Employee a right to be continued in the employ of a
Plan Sponsor or as interfering with the right of a Plan Sponsor to terminate the
employment of any Employee at any time.
SECTION 15
AMENDMENT TO OR TERMINATION OF THE
PLAN AND THE TRUST
15.1 The Primary Sponsor reserves the right at any time to modify or amend
or terminate the Plan or the Trust in whole or in part; provided, however, that
the Primary Sponsor shall have no power to modify or amend the Plan in such
manner as would cause or permit any portion of the funds held under a Plan to be
used for, or diverted to, purposes other than for the exclusive benefit of
Members or their Beneficiaries, or as would cause or permit any portion of a
fund held under the Plan to become the property of a Plan Sponsor; and provided
further, that the duties or liabilities of the Trustee shall not be increased
without its written consent. No such modifications or amendments shall have the
effect of retroactively changing or depriving Members or Beneficiaries of rights
already accrued under the Plan. No Plan Sponsor other than the Primary Sponsor
shall have the right to so modify, amend or terminate the Plan or the Trust.
Notwithstanding the foregoing, each Plan Sponsor may terminate its own
participation in the Plan and Trust pursuant to the Plan.
15.2 Each Plan Sponsor other than the Primary Sponsor shall have the right
to terminate its participation in the Plan and Trust by resolution of its board
of directors or other appropriate governing body and notice in writing to the
Primary Sponsor and the Trustee unless such termination would result in the
disqualification of the Plan or the Trust or would adversely affect the exempt
status of the Plan or the Trust as to any other Plan Sponsor. If contributions
by or on behalf of a Plan Sponsor are completely terminated, the Plan and Trust
shall be deemed terminated as to such Plan Sponsor. Any termination by a Plan
Sponsor, shall not be a termination as to any other Plan Sponsor.
15.3 (a) If the Plan is terminated by the Primary Sponsor or if
contributions to the Trust should be permanently discontinued, it shall
terminate as to all Plan Sponsors and the Fund shall be used, subject to the
payment of expenses and taxes, for the benefit of Members and Beneficiaries, and
for no other purposes, and
22
<PAGE> 25
the Account of each affected Member shall be fully vested and nonforfeitable,
notwithstanding the provisions of the Section of the Plan which sets forth the
vesting schedule.
(b) In the event of the partial termination of the Plan, each affected
Member's Account shall be fully vested and nonforfeitable, notwithstanding
the provisions of the Section of the Plan which sets forth the vesting
schedule.
15.4 In the event of the termination of the Plan or the Trust with respect
to a Plan Sponsor, the Accounts of the Members with respect to the Plan as
adopted by such Plan Sponsor shall be held subject to the instructions of the
Plan Administrator; provided that the Trustee shall not be required to make any
distribution until it receives a copy of an Internal Revenue Service
determination letter to the effect that the termination does not affect the
qualified status of the Plan or the exempt status of the Trust or, in the event
that such letter is applied for and is not issued, until the Trustee is
reasonably satisfied that adequate provision has been made for the payment of
all taxes which may be due and owing by the Trust.
15.5 In the case of any merger or consolidation of the Plan with, or any
transfer of the assets or liabilities of the Plan to, any other plan qualified
under Code Section 401, the terms of the merger, consolidation or transfer shall
be such that each Member would receive (in the event of termination of the Plan
or its successor immediately thereafter) a benefit which is no less than the
benefit which the Member would have received in the event of termination of the
Plan immediately before the merger, consolidation or transfer.
15.6 Notwithstanding any other provision of the Plan, an amendment to the
Plan --
(a) which eliminates or reduces an early retirement benefit, if any,
or which eliminates or reduces a retirement-type subsidy (as defined in
regulations issued by the Department of the Treasury), if any, or
(b) which eliminates an optional form of benefit shall not be
effective with respect to benefits attributable to service before the
amendment is adopted. In the case of a retirement-type subsidy described in
Subsection (a) above, this Section shall be applicable only to a Member who
satisfies, either before or after the amendment, the preamendment
conditions for the subsidy.
SECTION 16
ADOPTION OF PLAN BY AFFILIATES
Any corporation or other business entity related to the Primary Sponsor by
function or operation and any Affiliate, if the corporation, business entity or
Affiliate is authorized to do so by written direction adopted by the Board of
Directors, may adopt the Plan and the related Trust by action of the board of
directors or other appropriate governing body of such corporation, business
entity or Affiliate. Any adoption shall be evidenced by certified copies of the
resolutions of the foregoing board of directors or governing body indicating the
adoption and by the execution of the Trust by the adopting corporation, or
business entity, or Affiliate. The resolution shall state and define the
effective date of the adoption of the Plan by the Plan Sponsor and, for the
purpose of Code Section 415, the "limitation year" as to such Plan Sponsor.
Notwithstanding the foregoing, however, if the Plan and Trust as adopted by an
Affiliate or other corporation or business entity under the foregoing provisions
shall fail to receive the initial approval of the Internal Revenue Service as a
qualified Plan and Trust under Code Sections 401(a) and 501(a), any
contributions by the Affiliate or other corporation or business entity after
payment of all expenses will be returned to such Plan Sponsor free of any trust,
and the Plan and Trust shall terminate, as to the adopting Affiliate or other
corporation or business entity.
SECTION 17
QUALIFICATION AND RETURN OF CONTRIBUTIONS
17.1 If the Plan and the related Trust fail to receive the initial approval
of the Internal Revenue Service as a qualified plan and trust within one (1)
year after the date of denial of qualification (a) the contribution of a Plan
Sponsor after payment of all expenses will be returned to a Plan Sponsor free of
the Plan and Trust, (b) contributions made by a Member shall be returned to the
Member who made the contributions, and (c) the Plan and Trust shall thereupon
terminate.
23
<PAGE> 26
17.2 All Plan Sponsor contributions to the Plan are contingent upon
deductibility. To the extent permitted by the Code and other applicable laws and
regulations thereunder, upon a Plan Sponsor's request, a contribution which was
made by reason of a mistake of fact or which was nondeductible under Code
Section 404, shall be returned to a Plan Sponsor within one (1) year after the
payment of the contribution, or the disallowance of the deduction (to the extent
disallowed), whichever is applicable.
In the event of a contribution which was made by reason of a mistake of
fact or which was nondeductible, the amount to be returned to the Plan Sponsor
shall be the excess of the contribution above the amount that would have been
contributed had the mistake of fact or the mistake in determining the deduction
not occurred, less any net loss attributable to the excess. Any net income
attributable to the excess shall not be returned to the Plan Sponsor. No return
of any portion of the excess shall be made to the Plan Sponsor if the return
would cause the balance in a Member's Account to be less than the balance would
have been had the mistaken contribution not been made.
SECTION 18
INCORPORATION OF SPECIAL LIMITATIONS
Appendices A, B, and C to the Plan, attached hereto, are incorporated by
reference and the provisions of the same shall apply notwithstanding anything to
the contrary contained herein.
IN WITNESS WHEREOF, the Primary Sponsor has caused this indenture to be
executed as of the date first above written.
SUMMIT CONSULTING, INC.
By: /s/
------------------------------------
Title: President
ATTEST:
/s/
- ------------------------------------------
Title: V.P. of Adm. and Corp. Sec.
[CORPORATE SEAL]
24
<PAGE> 27
APPENDIX A
SPECIAL NONDISCRIMINATION RULES
SECTION 1
As used in this Appendix, the following words shall have the following
meanings:
(a) "Eligible Member" means a Member who is an Employee during any
particular Plan Year.
(b) "Highly Compensated Eligible Member" means any Eligible Member who
is a Highly Compensated Employee.
(c) "Matching Contribution" means any contribution made by a Plan
Sponsor to a Matching Account and any other contribution made to a plan by
a Plan Sponsor or an Affiliate on behalf of an Employee on account of a
contribution made by an Employee or on account of an Elective Deferral.
(d) "Qualified Matching Contributions" means Matching Contributions
which are immediately nonforfeitable when made, and which would be
nonforfeitable, regardless of the age or service of the Employee or whether
the Employee is employed on a certain date, and which may not be
distributed, except upon one of the events described under Section
401(k)(2)(B) of the Code and the regulations thereunder.
(e) "Qualified Nonelective Contributions" means contributions of the
Plan Sponsor or an Affiliate, other than Matching Contributions or Elective
Deferrals, which are nonforfeitable when made, and which would be
nonforfeitable regardless of the age or service of the Employee or whether
the Employee is employed on a certain date, and which may not be
distributed, except upon one of the events described under Code Section
401(k)(2)(B) and the regulations thereunder.
SECTION 2
In addition to any other limitations set forth in the Plan, for each Plan
Year one of the following tests must be satisfied:
(a) the actual deferral percentage for the Highly Compensated Eligible
Members must not be more than the actual deferral percentage of all other
Eligible Members multiplied by 1.25; or
(b) the excess of the actual deferral percentage for the Highly
Compensated Eligible Members over that of all other Eligible Members must
not be more than two (2) percentage points, and the actual deferral
percentage for the Highly Compensated Eligible Members must not be more
than the actual deferral percentage of all other Eligible Members
multiplied by two (2).
The "actual deferral percentage" for the Highly Compensated Eligible Members
and all other Eligible Members for a Plan Year is the average in each group of
the ratios, calculated separately for each Employee, of the Deferral Amounts
contributed by the Plan Sponsor on behalf of an Employee for the Plan Year to
the Annual Compensation of the Employee in the Plan Year. In addition, for
purposes of calculating the "actual deferral percentage" as described above,
excess Deferral Amounts as determined pursuant to Plan Section 3.1 shall be
taken into consideration. Except to the extent limited by Treasury Regulation
Section 1.401(k)-1(b)(5) and any other applicable regulations promulgated by
the Secretary of the Treasury, all or part of the Qualified Matching
Contributions and Qualified Nonelective Contributions made pursuant to the Plan
may be treated as Deferral Amounts for purposes of determining the "actual
deferral percentage."
SECTION 3
If the Deferral Amounts contributed on behalf of any Highly Compensated
Eligible Member exceeds the amount permitted under the "actual deferral
percentage" test described in Section 2 of this Appendix A for any given Plan
Year, then before the end of the Plan Year following the Plan Year for which the
Excess Deferral Amount was contributed, (a) the amount of the Excess Deferral
Amount for the Plan Year, as adjusted to reflect income, gain, or loss
attributable to it through the date the Excess Deferral Amount is
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<PAGE> 28
distributed to the Member and reduced by any excess Elective Deferrals as
determined pursuant to Plan Section 3.1 previously distributed to the Member for
the Member's taxable year ending with or within the Plan Year, may be
distributed to the Highly Compensated Eligible Member or (b) to the extent
provided in regulations issued by the Secretary of the Treasury, the Plan
Administrator may permit the Member to elect, within two and one-half months
after the end of the Plan Year for which the Excess Deferral Amount was
contributed, to treat the Excess Deferral Amount, unadjusted for earnings,
gains, and losses, but as so reduced, as an amount distributed to the Member and
then contributed as an after-tax contribution by the Member to the Plan
("recharacterized amounts"); provided, however, that for all other purposes
under the Plan other than this Appendix A recharacterized amounts shall continue
to be treated as Deferral Amounts.
For purposes of this Section 3, "Excess Deferral Amount" means, with respect to
a Plan Year, the excess of:
(a) the aggregate amount of Deferral Amounts contributed by a Plan
Sponsor on behalf of Highly Compensated Eligible Members for the Plan Year,
over
(b) the maximum amount of Deferral Amounts permitted under Section 2
of this Appendix A for the Plan Year, which shall be determined by reducing
the Deferral Amounts contributed on behalf of Highly Compensated Eligible
Members in order of the actual deferral percentages beginning with the
highest of such percentages.
Distribution of the Excess Deferral Amounts for any Plan Year shall be made to
the Highly Compensated Eligible Members on the basis of the respective portions
of the Excess Deferral Amount attributable to each Highly Compensated Eligible
Member.
SECTION 4
The Plan Administrator shall have the responsibility of monitoring the
Plan's compliance with the limitations of this Appendix A and shall have the
power to take all steps it deems necessary or appropriate to ensure compliance,
including, without limitation, restricting the amount which Highly Compensated
Eligible Members can elect to have contributed pursuant to Plan Section 3.1. Any
actions taken by the Plan Administrator pursuant to this Section 4 shall be
pursuant to nondiscriminatory procedures consistently applied.
SECTION 5
In addition to any other limitations set forth in the Plan, Matching
Contributions under the Plan and the amount of nondeductible employee
contributions under the Plan, for each Plan Year must satisfy one of the
following tests:
(a) The contribution percentage for Highly Compensated Eligible
Members must not exceed 125% of the contribution percentage for all other
Eligible Members; or
(b) The contribution percentage for Highly Compensated Eligible
Members must not exceed the lesser of (1) 200% of the contribution
percentage for all other Eligible Members, and (2) the contribution
percentage for all other Eligible Members plus two (2) percentage points.
Notwithstanding the foregoing, if Qualified Matching Contributions are taken
into account for purposes of applying the test contained in Section 2 of this
Appendix A, they shall not be taken into account under this Section 5. In
applying the above tests, the Plan Administrator shall comply with any
regulations promulgated by the Secretary of the Treasury which prevent or
restrict the use of the test contained in Section 2(b) of this Appendix A and
the test contained in Section 5(b) of this Appendix A. The "contribution
percentage" for Highly Compensated Eligible Members and for all other Eligible
Members for a Plan Year shall be the average of the ratios, calculated
separately for each Member, of (A) to (B), where (A) is the amount of Matching
Contributions under the Plan (excluding Qualified Matching Contributions which
are used to apply the test set forth in Section 2 of this Appendix A or
Matching Contributions which are used to satisfy the
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<PAGE> 29
minimum required contributions to the Accounts of Eligible Members who are not
Key Employees pursuant to Section 1 of Appendix C to the Plan) and nondeductible
employee contributions made under the Plan for the Eligible Member for the Plan
Year, and where (B) is the Annual Compensation of the Eligible Member for the
Plan Year. Except to the extent limited by Treasury Regulation Section
1.401(m)-1(b)(5) and any other applicable regulations promulgated by the
Secretary of the Treasury, a Plan Sponsor may elect to treat Deferral Amounts
and Qualified Nonelective Contributions as Matching Contributions for purpose of
determining the "contribution percentage."
SECTION 6
If the Matching Contributions and nondeductible employee contributions and,
if taken into account under Section 5 of this Appendix A, the Deferral Amounts
made by or on behalf of Highly Compensated Eligible Members exceed the amount
permitted under the "contribution percentage test" for any given Plan Year,
then, before the close of the Plan Year following the Plan Year for which the
excess aggregate contributions were made, the amount of the excess aggregate
contributions attributable to the Plan for the Plan Year and any income
allocable to such contributions through the date of the distribution or
forfeiture shall be distributed or, if the excess aggregate contributions are
forfeitable, forfeited. As to any Highly Compensated Employee, any distribution
or forfeiture of his allocable portion of the excess aggregate contributions for
a Plan Year shall first be attributed to any nondeductible employee
contributions made by the Member during the Plan Year for which no corresponding
Plan Sponsor contribution is made and then to any remaining nondeductible
employee contributions made by the Member during the Plan Year and any Matching
Contributions thereon. As between the Plan and any other plan or plans
maintained by the Plan Sponsor in which excess aggregate contributions for a
Plan Year are held, each such plan shall distribute or forfeit a pro-rata share
of each class of contribution based on the respective amounts of a class of
contribution made to each plan during the Plan Year. The payment of the excess
aggregate contributions shall be made without regard to any other provision in
the Plan.
For purposes of this Section 6, with respect to any Plan Year, "excess
aggregate contributions" means the excess of:
(a) the aggregate amount of the Matching Contributions and
nondeductible employee contributions and, if taken into account under
Section 5 of this Appendix A, the Deferral Amounts actually made on behalf
of Highly Compensated Eligible Members for the Plan Year, over
(b) the maximum amount of the contributions permitted under the
limitations of Section 5 of this Appendix A, determined by reducing
contributions made on behalf of Highly Compensated Eligible Members in
order of their contribution percentages beginning with the highest of such
percentages.
Distribution or forfeiture of nondeductible employee contributions or Matching
Contributions in the amount of the excess aggregate contributions for any Plan
Year shall be made with respect to Highly Compensated Employees on the basis of
the respective portions of the excess aggregate contributions attributable to
each Highly Compensated Employee. Forfeitures of excess aggregate contributions
may not be allocated to Members whose contributions are reduced under this
Section 6.
The determination of the amount of excess aggregate contributions under this
Section 6 shall be made after (1) first determining the excess Elective
Deferrals under Section 3.1(b) of the Plan, and (2) then determining the Excess
Deferral Amounts under Section 3 of this Appendix A.
SECTION 7
Except to the extent limited by rules promulgated by the Secretary of the
Treasury, if a Highly Compensated Eligible Member is a participant in any other
plan of the Plan Sponsor or any Affiliate which includes Matching Contributions,
deferrals under a cash or deferred arrangement pursuant to Code Section 401(k),
or nondeductible employee contributions, any contributions made by or on behalf
of the Member to the other plan shall be allocated with the same class of
contributions under the Plan for purposes
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<PAGE> 30
of determining the "actual deferral percentage" and "contribution percentage"
under the Plan; provided, however, contributions that are made under an
"employee stock ownership plan" (within the meaning of Code Section 4975(e)(7))
shall not be combined with contributions under any plan which is not an employee
stock ownership plan (within the meaning of Code Section 4975(e)(7)).
Except to the extent limited by rules promulgated by the Secretary of the
Treasury, if the Plan and any other plans which include Matching Contributions,
deferrals under a cash or deferred arrangement pursuant to Code Section 401(k),
or nondeductible employee contributions are considered as one plan for purposes
of Code Section 401(a)(4) and 410(b)(1), any contributions under the other plans
shall be allocated with the same class of contributions under the Plan for
purposes of determining the "contribution percentage" and "actual deferral
percentage" under the Plan; provided, however, contributions that are made under
an "employee stock ownership plan" (within the meaning of Code Section
4975(e)(7)) shall not be combined with contributions under any plan which is not
an employee stock ownership plan (within the meaning of Code Section
4975(e)(7)).
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<PAGE> 31
APPENDIX B
LIMITATION ON ALLOCATIONS
SECTION 1
The "annual addition" for any Member for any one limitation year may not
exceed the lesser of:
(a) $30,000 (or, if greater, one-quarter of the dollar limitation in
effect under Code Section 415(b)(1)(A)); or
(b) 25% of the Member's Annual Compensation.
SECTION 2
For the purposes of this Appendix B, the term "annual addition" for any
Member means for any limitation year, the sum of certain Plan Sponsor and Member
contributions, forfeitures, and other amounts as determined in Code Section
415(c)(2) in effect for that limitation year.
SECTION 3
In the event that a Plan Sponsor maintains a defined benefit plan under
which a Member also participates, the sum of the defined benefit plan fraction
and the defined contribution plan fraction for any limitation year for any
Member may not exceed 1.0.
(a) The defined benefit plan fraction for any limitation year is a
fraction:
(1) the numerator of which is the projected annual benefit of the
Member under the defined benefit plan (determined as of the close of
such year); and
(2) the denominator of which is the lesser of
(A) the product of 1.25, multiplied by the maximum annual
benefit allowable under Code Section 415(b)(1)(A), or
(B) the product of
(i) 1.4, multiplied by
(ii) the maximum amount which may be taken into account
under Section 415(b)(1)(B) of the Code with respect to the
Member under the defined benefit plan for the limitation year
(determined as of the close of the limitation year).
(b) The defined contribution plan fraction for any limitation year is
a fraction:
(1) the numerator of which is the sum of a Member's annual
additions as of the close of the year; and
(2) the denominator of which is the sum of the lesser of the
following amounts determined for the year and for all prior limitation
years during which the Member was employed by a Plan Sponsor:
(A) the product of 1.25, multiplied by the dollar limitation in
effect under Code Section 415(c)(1)(A) for the limitation year
(determined without regard to Section 415(c)(6) of the Code); or
(B) the product of
(i) 1.4, multiplied by
(ii) the amount which may be taken into account under Code
Section 415(c)(1)(B) (or Code Section 415(c)(7), if applicable)
with respect to the Member for the limitation year.
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<PAGE> 32
SECTION 4
For purposes of this Appendix B, the term "limitation year" shall mean a
Plan Year unless a Plan Sponsor elects, by adoption of a written resolution, to
use any other twelve-month period adopted in accordance with regulations issued
by the Secretary of the Treasury. For purposes of applying the limitations set
forth in this Appendix B, the term "Plan Sponsor" shall mean a Plan Sponsor and
any other corporations which are members of the same controlled group of
corporations (as described in Section 414(b) of the Code, as modified by Code
Section 415(h)) as is a Plan Sponsor, any other trades or businesses (whether or
not incorporated) under common control (as described in Code Section 414(c), as
modified by Code Section 415(h)) with a Plan Sponsor, any other corporations,
partnerships, or other organizations which are members of an affiliated service
group (as described in Section 414(m) of the Code) with a Plan Sponsor, and any
other entity required to be aggregated with a Plan Sponsor pursuant to
regulations under Code Section 414(o).
SECTION 5
For purposes of applying the limitations of this Appendix B, all defined
contribution plans maintained or deemed to be maintained by a Plan Sponsor shall
be treated as one defined contribution plan, and all defined benefit plans now
or previously maintained or deemed to be maintained by a Plan Sponsor shall be
treated as one defined benefit plan.
SECTION 6
In the event that as a result of either the allocation of forfeitures to
the Account of a Member or a reasonable error in estimating the Member's Annual
Compensation, the annual addition allocated to the Account of a Member exceeds
the limitations set forth in Section 1 of this Appendix B or in the event that
the aggregate contributions made on behalf of a Member under both a defined
benefit plan and a defined contribution plan, subject to the reduction of
allocations in other defined contribution plans required by Section 5 of this
Appendix B, cause the aggregate limitation fraction set forth in Section 3 of
this Appendix B to be exceeded, the Plan Administrator shall, in writing, direct
the Trustee to take such of the following actions as the Plan Administrator
shall deem appropriate, specifying in each case the amount or amounts of
contributions involved:
(a) A Member's annual addition shall be reduced by distributing to the
Member Basic Contributions made by the Member which cause the annual
addition to exceed such limitations;
(b) If further reduction is necessary, contributions made by the Plan
Sponsor on behalf of the Member pursuant to Plan Section 3.1 with respect
to which no contribution is made under Plan Section 3.2 shall be reduced in
the amount of the remaining excess and distributed to the Member;
(c) If further reduction is necessary, contributions made by the Plan
Sponsor on behalf of the Member pursuant to Plan Section 3.1 and
contributions of the Plan Sponsor thereon pursuant to Plan Section 3.2
shall be reduced in the amount of the remaining excess. The amount of the
reduction under Plan Section 3.1 shall be distributed to the Member. The
amount of the reduction under Plan Section 3.2 shall be reallocated to the
Matching Accounts of Members who are not affected by the limitation in the
same proportion as the contribution of the Plan Sponsor for the year is
allocated under Plan Section 4.1 to the Accounts of such Members; and
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<PAGE> 33
(d) If the contribution of the Plan Sponsor would cause the annual
addition to exceed the limitations set forth herein with respect to all
Members under the Plan, the portion of such contribution in excess of the
limitations shall be segregated in a suspense account. While the suspense
account is maintained, (1) no Plan Sponsor contributions under the Plan
shall be made which would be precluded by this Appendix B, (2) income,
gains and loses of the Fund shall not be allocated to such suspense account
and (3) amounts in the suspense account shall be allocated in the same
manner as Plan Sponsor contributions and forfeitures under the Plan as of
each Valuation Date on which Plan Sponsor contributions may be allocated
until the suspense account is exhausted. In the event of the termination of
the Plan, the amounts in the suspense account shall be returned to the Plan
Sponsor to the extent that such amounts may not then be allocated to the
Members' Accounts.
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APPENDIX C
TOP-HEAVY PROVISIONS
SECTION 1
As used in this Appendix, the following words shall have the following
meanings:
(a) "Determination Date" means, with respect to any Plan Year, the
last day of the preceding Plan Year, or, in the case of the first Plan
Year, means the last day of the first Plan Year.
(b) "Key Employee" means an Employee or former Employee (including a
Beneficiary of a Key Employee or former Key Employee) who at any time
during the Plan Year containing the Determination Date or any of the four
(4) preceding Plan Years is:
(1) An officer described in the Subsection of the Plan Section
containing the definition of the term "Highly Compensated Employee";
(2) One of the ten (10) Employees owning both (A) more than
one-half percent ( 1/2%) of the outstanding stock of the Plan Sponsor or
an Affiliate, more than one-half percent ( 1/2%) of the total combined
voting power of all stock of the Plan Sponsor or an Affiliate, or more
than one-half percent ( 1/2%) of the capital or profits interest in the
Plan Sponsor or an Affiliate, and (B) the largest percentage ownership
interests in the Plan Sponsor or any of its Affiliates, and whose Annual
compensation is equal to or greater than the amount in effect under
Section 1(a) of Appendix B to the Plan for the calendar year in which
the Determination Date falls; or
(3) An owner of more than five percent (5%) of the outstanding
stock of the Plan Sponsor or an Affiliate or more than five percent (5%)
of the total combined voting power of all stock of the Plan Sponsor or
an Affiliate; or
(4) An owner of more than one percent (1%) of the outstanding stock
of the Plan Sponsor or an Affiliate or more than one percent (1%) of the
total combined voting power of all stock of the Plan Sponsor or an
Affiliate, and who in such Plan Year had Annual Compensation from the
Plan Sponsor and all of its Affiliates of more than $150,000. Employees
other than Key Employees are sometimes referred to in this Appendix as
"non-key employees."
(c) "Required Aggregation Group" means:
(1) each plan of the Plan Sponsor and its Affiliates which
qualifies under Code Section 401(a) in which a Key Employee is a
participant, and
(2) each other plan of the Plan Sponsor and its Affiliates which
qualifies under Code Section 401 (a) and which enables any plan
described in Subsection (a) of this Section to meet the requirements of
Section 401(a)(4) or 410 of the Code.
(d) (1) "Top-Heavy" means:
(A) if the Plan is not included in a Required Aggregation Group,
the Plan's condition in a Plan Year for which, as of the
Determination Date:
(i) the present value of the cumulative Accrued Benefits under
the Plan for all Key Employees exceeds sixty percent
(60%) of the present value of the cumulative Accrued
Benefits under the Plan for all Members; and
(ii) the Plan, when included in every potential combination, if
any, with any or all of:
(I) any Required Aggregation Group, and
(II) any plan of the Plan Sponsor which is not part of any
Required Aggregation Group and which qualifies
under Code Section 401(a)
is part of a Top-Heavy Group (as defined in Paragraph (2) of this
Subsection); and
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(B) if the Plan is included in a Required Aggregation Group, the
Plan's condition in a Plan Year for which, as of the Determination Date:
(i) the Required Aggregation Group is a Top-Heavy Group (as
defined in Paragraph (2) of this Subsection); and
(ii) the Required Aggregation Group, when included in every
potential combination, if any, with any or all of the plans of the
Plan Sponsor and its Affiliates which are not part of the Required
Aggregation Group and which qualify under Code Section 401(a), is
part of a Top-Heavy Group (as defined in Paragraph (2) of this
Subsection).
(C) For purposes of Subparagraphs (A)(ii) and (B)(ii) of this
Paragraph (1), any combination of plans must satisfy the requirements of
Sections 401(a)(4) and 410 of the Code.
(2) A group shall be deemed to be a Top-Heavy Group if:
(A) the sum, as of the Determination Date, of the present value of
the cumulative accrued benefits for all Key Employees under
all plans included in such group exceeds
(B) Sixty percent (60%) of a similar sum determined for all
participants in such plans.
(3) (A) For purposes of this Section, the present value of the accrued
benefit for any participant in a defined contribution plan as
of any Determination Date or last day of a plan year shall be
the sum of:
(i) as to any defined contribution plan other than a simplified
employee pension, the account balance as of the most recent
valuation date occurring within the plan year ending on the
Determination Date or last day of a plan year, and
(ii) as to any simplified employee pension, the aggregate employer
contributions, and
(iii) an adjustment for contributions due as of the Determination
Date or last day of a plan year.
In the case of a plan that is not subject to the minimum funding
requirements of Code Section 412, the adjustment in Clause (iii) of this
Subparagraph (A) shall be the amount of any contributions actually made
after the valuation date but on or before the Determination Date or last
day of the plan year to the extent not included under Clause (i) or (ii) of
this Subparagraph (A); provided, however, that in the first plan year of
the plan, the adjustment in Clause (iii) of this Subparagraph (A) shall
also reflect the amount of any contributions made thereafter that are
allocated as of a date in such first plan year. In the case of a plan that
is subject to the minimum funding requirements, the account balance in
Clause (i) and the aggregate contributions in Clause (ii) of this
Subparagraph (A) shall include contributions that would be allocated as of
a date not later than the Determination Date or last day of a plan year,
even though those amounts are not yet required to be contributed, and the
adjustment in Clause (iii) of this Subparagraph (A) shall be the amount of
any contribution actually made (or due to be made) after the valuation date
but before the expiration of the extended payment period in Code Section
412(c)(10) to the extent not included under Clause (i) or (ii) of this
Subparagraph (A).
(B) For purposes of this Subsection, the present value of the accrued
benefit for any participant in a defined benefit plan as of any
Determination Date or last day of a plan year must be determined as of the
most recent valuation date which is within a 12-month period ending on the
Determination Date or last day of a plan year as if such participant
terminated as of such valuation date; provided, however, that in the first
plan year of a plan, the present value of the accrued benefit for a current
participant must be determined either (i) as if the participant terminated
service as of the Determination Date or last day of a plan year or (ii) as
if the participant terminated service as of such valuation date, but taking
into account the estimated accrued benefit as of the Determination Date or
last day of a plan year. For purposes of this Subparagraph (B), the
valuation date must be the same valuation date used for computing plan
costs for minimum funding, regardless of whether a valuation is performed
that year. The actuarial assumptions utilized in calculating the present
value of the accrued benefit for any participant in a defined benefit plan
for purposes of this Subparagraph (B) shall be established by the Plan
Administrator after consultation
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with the actuary for the plan, and shall be reasonable in the aggregate and
shall comport with the requirements set forth by the Internal Revenue
Service in Q&A T-26 and T-27 of Regulation Section 1.416-1.
(C) For purposes of determining the present value of the cumulative
accrued benefit under a plan for any participant in accordance with this
Subsection, the present value shall be increased by the aggregate
distributions made with respect to the participant (including distributions
paid on account of death to the extent they do not exceed the present value
of the cumulative accrued benefit existing immediately prior to death)
under each plan being considered, and under any terminated plan which if it
had not been terminated would have been in a Required Aggregation Group
with the Plan, during the 5-year period ending on the Determination Date or
last day of the plan year that falls within the calendar year in which the
Determination Date falls.
(D) For purposes of this Paragraph (3), participant contributions
which are deductible as "qualified retirement contributions" within the
meaning of Code Section 219 or any successor, as adjusted to reflect
income, gains, losses, and other credits or charges attributable thereto,
shall not be considered to be part of the accrued benefits under any plan.
(E) For purposes of this Paragraph (3), if any employee is not a Key
Employee with respect to any plan for any plan year, but such employee was
a Key Employee with respect to such plan for any prior plan year, any
accrued benefit for such employee shall not be taken into account.
(F) For purposes of this Paragraph (3), if any employee has not
performed any service for any Plan Sponsor or Affiliate maintaining the
plan during the five-year period ending on the Determination Date, any
accrued benefit for that employee shall not be taken into account.
(G) (i) In the case of an "unrelated rollover" (as defined below)
between plans which qualify under Code Section 401(a),(a) the plan
providing the distribution shall count the distribution as a distribution
under Subparagraph (C) of this Paragraph (3), and (b) the plan accepting
the distribution shall not consider the distribution part of the accrued
benefit under this Section; and
(ii) in the case of a "related rollover" (as defined below)
between plans which qualify under Code Section 401(a),(a) the plan
providing the distribution shall not count the distribution as a
distribution under Subparagraph (C) of this Paragraph (3), and (b) the
plan accepting the distribution shall consider the distribution part of
the accrued benefit under this Section.
For purposes of this Subparagraph (G), an "unrelated rollover" is a
rollover as defined in Code Section 402(a)(5) or 408(d)(3) or a plan-to-plan
transfer which is both initiated by the participant and made from a plan
maintained by one employer to a plan maintained by another employer where the
employers are not Affiliates. For purposes of this Subparagraph (G), a "related
rollover" is a rollover as defined in Code Section 402(a)(5) or 408(d)(3) or a
plan-to-plan transfer which is either not initiated by the participant or made
to a plan maintained by the employer or an Affiliate.
SECTION 2
(a) Notwithstanding anything contained in the Plan to the contrary, except
as otherwise provided in Subsection (b) of this Section, in any Plan Year during
which the Plan is Top-Heavy, allocations of Plan Sponsor contributions for the
Plan Year for the Account of each Member who is not a Key Employee and who has
not separated from service with the Plan Sponsor prior to the end of the Plan
Year shall not be less than 3 percent of the Member's Annual Compensation. For
purposes of this Subsection, an allocation to a Member's Account resulting from
any Plan Sponsor contribution attributable to a salary reduction or similar
arrangement shall not be taken into account.
(b) (1) The percentage referred to in Subsection (a) of this Section for
any Plan Year shall not exceed the percentage at which allocations are made or
required to be made under the Plan for the Plan Year for the Key Employee for
whom the percentage is highest for the Plan Year. For purposes of this
Paragraph, an
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allocation to the Account of a Key Employee resulting from any Plan Sponsor
contribution attributable to a salary reduction or similar agreement shall be
taken into account.
(2) For purposes of this Subsection (b), all defined contribution
plans which are members of a Required Aggregation Group shall be treated as
part of the Plan.
(3) This Subsection (b) shall not apply to any plan which is a member
of a Required Aggregation Group if the plan enables a defined benefit plan
which is a member of the Required Aggregation Group to meet the
requirements of Code Section 401(a)(4) or 410.
SECTION 3
In any limitation year (as defined in Section 4 of Appendix B to the Plan)
which contains any portion of a Plan Year in which the Plan is Top-Heavy, the
number "1.0" shall be substituted for the number "1.25" in Section 3 of Appendix
B to the Plan.
SECTION 4
Notwithstanding anything contained in the Plan to the contrary, in any Plan
Year during which the Plan is Top-Heavy, a Member's interest in his Accrued
Benefit shall not vest at any rate which is slower than the following schedule,
effective as of the first day of that Plan Year:
<TABLE>
<CAPTION>
FULL YEARS PERCENTAGE
OF SERVICE VESTED
-------------------------------------------------------------------------- ----------
<S> <C>
Less than 2 0%
2 20%
3 40%
4 66 2/3%
5 or more 100%
</TABLE>
The Schedule set forth above in this Section 4 shall be inapplicable to a
Member who has failed to perform an Hour of Service after the Determination
Date on which the Plan has become Top-Heavy. When the Plan ceases to be
Top-Heavy, the Schedule set forth above in this Section 4 shall cease to apply;
provided however, that the provisions of the Plan Section dealing with changes
in the vesting schedule shall apply.
C-4
<PAGE> 1
EXHIBIT 10.6
FIRST AMENDMENT TO THE
SUMMIT CONSULTING, INC. RETIREMENT PLAN
THIS FIRST AMENDMENT, made on the day of , 1993, by SUMMIT
CONSULTING, INC., a corporation duly organized and existing under the laws of
the State of Florida (hereinafter called the "Primary Sponsor"):
WITNESSETH:
WHEREAS, the Primary Sponsor maintains the Summit Consulting, Inc.
Retirement Plan (the "Plan") and its related trust agreement (the "Trust"),
effective as of May 1, 1992, and May 15, 1992, respectively; and
WHEREAS, the Plan is being amended in order to comply with the requirements
the Internal Revenue Code of 1986 and the Unemployment Compensation Amendments
of 1992;
NOW, THEREFORE, pursuant to the power reserved to the Primary Sponsor under
Plan Section 15.1, the Plan is hereby amended, effective as of January 1, 1993,
as follows:
1. By adding the following new Plan Section 1.11A:
"1.11A 'Direct Rollover' means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee."
2. By adding the following new Plan Section 1.12A:
"1.12A 'Distributee' means an Employee or former Employee. In addition, the
Employee's or former Employee's surviving spouse and the Employee's or former
Employee's spouse or former spouse who is the alternate payee under a qualified
domestic relations order, as defined in Code Section 414(p), are Distributees
with regard to the interest of the spouse or former spouse."
3. By adding the following new Plan Section 1.15A:
"1.15A 'Eligible Retirement Plan' means an individual retirement account
described in Code Section 408(a), an individual retirement annuity described in
Code Section 408(b), an annuity plan described in Code Section 403(a) or a
qualified trust described in Code Section 401(a) that accepts the Distributee's
Eligible Rollover Distribution. However, in the case of an Eligible Rollover
Distribution to the surviving spouse, an Eligible Retirement Plan is an
individual retirement account or individual retirement annuity."
4. By adding the following new Plan Section 1.15B:
"1.15B 'Eligible Rollover Distribution' means any distribution of all or
any portion of the balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the Distributee's
designated Beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under Code Section
401(a)(9); and the portion of any distribution that is not includible in gross
income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities)."
5. By adding the following sentence at the end of Plan Section 5.2:
"In the event a married Member applies for a loan after electing that his
Accrued Benefit be paid in the form of an annuity under Section 8.2(b) of the
Plan, no loan will be made to such Member unless spousal consent is obtained in
accordance with the provisions of Section 1.7 of the Plan."
<PAGE> 2
6. By adding a (i) after the (a) in Section 6.2 of the Plan.
7. By adding the following new subparagraph (ii) to Plan subsection 6.2(a):
"(ii) If a Member receives a withdrawal from his Matching Account under
Section 6.2(a)(i) above, and the Member's vested interest in his Matching
Account is fifty percent (50%) or more, the Member's future vested interest in
his Matching Account after the distribution shall be equal to an amount ("X")
determined by the formula:
X = P (AB + (R x D)) - (R x D)
For purposes of applying the foregoing formula, P is the vested percentage at
the relevant time; AB is the Matching Account balance at the relevant time; D
is the amount of the withdrawal; and R is the ratio of the Matching Account
balance at the relevant time to the Matching Account balance after
distribution."
8. By adding the following new Plan Section 6.8:
"6.8 Notwithstanding anything to the contrary, any distributions made under
this Section 6 shall be subject to the Eligible Rollover Distribution
requirements set forth in Plan Section 8."
9. By adding the following new Plan Section 6.9:
"6.9 Spousal Consent. In the event a married Member requests a distribution
under this Section 6 after electing that his Accrued Benefit be paid in the form
of an annuity under Section 8.2(b) of the Plan, no distribution will be made
under this Section 6 to such Member unless spousal consent is obtained in
accordance with the provisions of Section 1.7 of the Plan."
10. By adding the following new Plan Section 8.7:
"8.7 Notwithstanding any provisions of the Plan to the contrary that would
otherwise limit a Distributee's election under this Section 8, a Distributee may
elect, at the time and in the manner prescribed by the Administrator, to have
any portion of an Eligible Rollover Distribution paid directly to an Eligible
Retirement Plan specified by the Distributee in a direct rollover so long as all
Eligible Rollover Distributions to a Distributee for a calendar year total or
are expected to total at least $200 and, in the case of a Distributee who elects
to directly receive a portion of an Eligible Rollover Distribution and directly
roll the balance over to an Eligible Rollover Plan, the portion that is to be
directly rolled over totals at least $500."
11. By substituting the following for the last sentence of Plan Section 9.4:
"Payment shall be subject to the minimum distribution requirements and the
Eligible Rollover Distribution requirements set forth in Plan Section 8."
12. By adding the following sentence at the end of the first full paragraph of
Section 3 of Appendix A to the Plan:
"In the event the multiple use of the alternative limitations contained in
Sections 2(b) and 5(b) of this Appendix A, pursuant to Treasury Regulations
section 1.401(m)-2 as promulgated by the Secretary of the Treasury, require a
corrective distribution, such distribution shall be made pursuant to this
Section 3, and not Section 6 of this Appendix A."
13. By adding the following sentence at the end of Section 3 of Appendix A to
the Plan:
"As to any Highly Compensated Employee who is subject to the family
aggregation rules of subsection (c) of Section 1.22 of the Plan, any
distribution of such Highly Compensated Employee's allocable portion of the
excess Deferral Amount for a Plan Year shall be allocated among the family
members of such Highly Compensated Employee who are combined to determine the
actual deferral percentage in proportion to the Deferral Amounts taken into
account under this Section 3."
2
<PAGE> 3
14. By adding the following sentence at the end the first paragraph of Section 6
of Appendix A to the Plan:
"In the event the multiple use of the alternative limitations contained in
Sections 2(b) and 5(b) of this Appendix A, pursuant to Treasury Regulations
section 1.401(m)-2 as promulgated by the Secretary of the Treasury, require a
corrective distribution, such distribution shall be made pursuant to Section 3
of this Appendix A, and not this Section 6."
15. By adding the following sentence at the end of the next to last paragraph of
Section 6 of Appendix A to the Plan:
"As to any Highly Compensated Employee who is subject to the family
aggregation rules of subsection (c) of Section 1.22 of the Plan, any
distribution or forfeiture of such Highly Compensated Employee's allocable
portion of the excess aggregate contributions for a Plan Year shall be allocated
among the family members of such Highly Compensated Employee who are combined to
determine the contribution percentage in proportion to the contributions taken
into account under this Section 6."
Except as specifically amended hereby, the Plan shall remain in full force
and effect as prior to this First Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed as of the day and year first above written.
SUMMIT CONSULTING, INC.
By: /s/
--------------------------------------
Title: President
ATTEST:
/s/
- --------------------------------------
Title: V.P. of Administration and
Corporate Sec.
[CORPORATE SEAL]
3
<PAGE> 1
EXHIBIT 10.7
SECOND AMENDMENT
TO THE
SUMMIT CONSULTING, INC. RETIREMENT PLAN
THIS SECOND AMENDMENT to the Summit Consulting, Inc. Retirement Plan,
effective May 1, 1992, is adopted by Summit Consulting, Inc. (the "Company"),
effective as of the dates set forth herein.
WITNESSETH:
WHEREAS, the Company maintains the Summit Consulting, Inc. Retirement Plan
(the "Plan"), and such Plan is currently in effect; and
WHEREAS, the Company wishes to amend the Plan to comply with Sections
01(a)(17) and 401(a)(31) of the Internal Revenue Code, as amended;
NOW, THEREFORE, the Company hereby amends the Plan as follows:
1.
Section 1.5 is hereby amended to add the following:
"In addition to other applicable limitations set forth in the Plan, and
notwithstanding any other provision of the Plan to the contrary, for Plan
Years beginning on or after January 1, 1994, the annual compensation of
each employee taken into account under the Plan shall not exceed the OBRA
'93 annual compensation limit. The OBRA '93 annual compensation limit is
$150,000, as adjusted by the Commissioner for increases in the cost of
living in accordance with Section 401(a)(17)(B) of the Internal Revenue
Code. The cost-of-living adjustment in effect for a calendar year applies
to any period, not exceeding 12 months, over which compensation is
determined (determination period) beginning in such calendar year. If a
determination period consists of fewer than 12 months, the OBRA '93 annual
compensation limit will be multiplied by a fraction, the numerator of which
is the number of months in the determination period, and the denominator of
which is 12.
For plan years beginning on or after January 1, 1994, any reference in
this Plan to the limitation under Section 401(a)(17) of the Code shall mean
the OBRA '93 annual compensation limit set forth in this provision."
2.
Section 8.7 is amended to add the following:
"If a distribution is one to which Sections 401(a)(11) and 417 of the
Internal Revenue Code do not apply, such distribution may commence less
than 30 days after the notice required under Section 1.411(a)-11(c) of the
Income Tax Regulations is given, provided that:
(1) the Plan Administrator clearly informs the Participant that
the Participant has a right to a period of at least 30 days after
receiving the notice to consider the decision of whether or not to
elect a distribution (and, if applicable, a particular distribution
option), and
(2) the Participant, after receiving this notice, affirmatively
elects a distribution."
<PAGE> 2
3.
Paragraph 1 of this amendment shall be effective as of January 1, 1994.
Paragraph 2 of this amendment shall be effective as of January 1, 1993. Except
as amended herein, the Plan shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned has adopted this Amendment on the date
shown below, but effective as of the date indicated above.
SUMMIT CONSULTING, INC.
By
------------------------------------
Name:
-------------------------------
Title:
------------------------------
Date
---------------------------------
2
<PAGE> 1
EXHIBIT 12.1
COMPUTATION OF RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------------------------- -----------------
1993 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income from continuing operations............ $6,844 $2,953 $ 8,885 $19,163 $ 382 $ 5,374 $ 3,651
Income tax (benefit)............................. 462 (208) 4,534 10,990 (505) 2,390 2,400
------ ------ ------- ------- ------- ------- -------
Income before income taxes....................... $7,306 $2,745 $13,419 $30,153 $ (123) $ 7,764 $ 6,051
====== ====== ======= ======= ======= ======= =======
Fixed charges
Interest expense............................... $ 847 $ -- $ 1,831
Estimated interest factor on operating
leases...................................... 88 -- 195
Dividends on preferred stock.....................
Income tax impact on nondeductibility of
preferred stock dividends................... --
Dividends on preferred stock, grossed up for
tax impact of nondeductibility.............. --
------ ------ ------- ------- ------- ------- -------
Total fixed charges......................... $ -- $ -- $ -- $ -- $ 935 $ -- $ 2,026
====== ====== ======= ======= ======= ======= =======
Earnings:
Income before income taxes..................... $7,306 $2,745 $13,419 $30,153 $ (123) $ 7,764 $ 6,051
Fixed charges.................................. -- -- -- -- 935 -- 2,026
------ ------ ------- ------- ------- ------- -------
Total earnings.............................. $7,306 $2,745 $13,419 $30,153 $ 812 $ 7,764 $ 8,077
====== ====== ======= ======= ======= ======= =======
Ratio of earnings to fixed charges(a)(b)......... -- -- -- -- .87 -- 3.99
PRO FORMA(C)
Net income from continuing operations............ $25,365 $ 3,645 $ 7,791 $ 5,037
Income tax....................................... 15,001 1,484 3,872 3,201
------- ------- ------- -------
Income before income taxes....................... $40,366 $ 5,129 $11,663 $ 8,238
======= ======= ======= =======
Fixed charges
Interest expense............................... $ 3,624 $ 3,978 $ 2,029 $ 1,831
Estimated interest factor on operating
leases...................................... 495 436 225 195
Dividends on preferred stock..................... 656 656 328 328
Income tax impact of nondeductibility of
preferred stock dividends................... 402 402 201 201
------- ------- ------- -------
Dividends on preferred stock, grossed up for
tax impact of nondeductibilty............... 1,058 1,058 529 529
------- ------- ------- -------
Total fixed charges.................... $ 5,177 $ 5,472 $ 2,783 $ 2,555
======= ======= ======= =======
Earnings:
Income before income taxes..................... $40,366 $ 5,129 $11,663 $ 8,238
Fixed charges.................................. 5,177 5,472 2,783 2,555
------- ------- ------- -------
Total earnings......................... $45,543 $10,601 $14,446 $10,793
======= ======= ======= =======
Ratio of earnings to fixed charges(a)............ 8.80 1.94 5.19 4.22
</TABLE>
- ---------------
(a) For purposes of calculating the ratio of earnings to fixed charges (i)
earnings consist of income (loss) from continuing operations before income
tax plus income tax and fixed charges and (ii) fixed charges consist of
interest expense, plus the portion of rent expense under operating leases
deemed by the Company to be representative of the interest factor, as well
as dividends on preferred stock grossed up for the impact of the
nondeductibility of dividends for income tax purposes.
(b) For the year ended March 31, 1996 the Company's earnings were insufficient
to cover fixed charges by $123.
(c) Proforma earnings to fixed charges have been calculated considering the
proforma effects of the Acquisition of SHC and Recapitalization. The
proforma information for the years ended March 31, 1995 and 1996 assume the
Acquisition and Conversion occurred on April 1, 1994 and 1995, respectively.
The proforma information for the six months ended September 30, 1995 assume
the Acquisition and Conversion occurred on April 1, 1995. The proforma
information for the six months ended September 30, 1996 assumes the
Conversion occurred on April 1, 1996.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated July 31, 1996 on the consolidated financial
statements and financial statement schedules of Employers Self Insurers Fund as
of March 31, 1996 and for the year then ended and our report dated February 9,
1996 on the consolidated financial statements of Summit Holding Corporation for
each of the three years ended December 31, 1995 included in the Registration
Statement and related Prospectus of Summit Holding Southeast, Inc. for the
registration of 5,750,000 shares of common stock and 1,639,866 shares of Series
A Preferred Stock.
ERNST & YOUNG LLP
Jacksonville, Florida
November 20, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated July 26, 1996
with regard to the consolidated financial statements of Employers Self Insurers
Fund as of and for the fiscal years ended March 31, 1994 and March 31, 1995,
respectively, in this Registration Statement on Form S-1 of Summit Holding
Southeast, Inc.
/s/ Brinton & Mendez
BRINTON & MENDEZ
Certified Public Accountants
Lakeland, Florida
November 20, 1996
